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BIRD v. PENN CENT. CO.

April 21, 1972

John Basil BIRD et al., Plaintiffs,
v.
The PENN CENTRAL COMPANY et al., Defendants


Joseph S. Lord, III, Chief Judge.


The opinion of the court was delivered by: LORD, III

This is a diversity case governed by Pennsylvania law. Plaintiffs in this action are certain named underwriters trading under the name of Lloyds of London. On July 2, 1968 they issued what we construe as two separate policies *fn1" providing coverage for the defendants. The Directors and Officers Liability policy (hereinafter referred to as D & O policy) provides coverage for the individual defendants, all present or past officers and/or directors of the Penn Central Company. The Company Reimbursement policy provides coverage for the defendant Penn Central Company.

 There was one application *fn2" completed to obtain both policies. This application, which was specifically incorporated as part of the policies, was executed by defendant David C. Bevan, Chairman of the Finance Committee of the defendant corporation. It is alleged by the plaintiffs that defendant Bevan's response to Item 10 of the application was falsely made in bad faith, was material to the risk, and was justifiably relied on so as to entitle them to rescind the policy because of fraud.

 Three of the defendants, Kattau, Kirk and Annenberg, moved for summary judgment under F.R. Civ. P. 56, advancing many arguments. We rejected those arguments in an opinion filed on November 15, 1971 (334 F. Supp. 255) and denied summary judgment. In that opinion, among other things, we said that if the contract of insurance was a unitary one, with Lloyds of London and Penn Central Company the only contracting parties, the officers and directors would all be in the position of third-party beneficiaries, their rights rising no higher than those of their contracting party, Penn Central. Under this construction of the contract of insurance, if defendant Bevan's response on the application was proven fraudulent, this fraud would be imputed to his principal, Penn Central Company, regardless of the innocence of movants or other officers and directors. Gordon v. Continental Casualty Company, 319 Pa. 555, 181 A. 574 (1935); Williams v. Paxson Coal Company, 346 Pa. 468, 31 A. 2d 69 (1943); Zimnisky v. Zimnisky, 210 Pa. Super. 266, 231 A. 2d 904 (1967).

 We said that another construction of the "policy" would consider each officer and director assured as a contracting party rather than a third-party beneficiary. We did not resolve this question of the construction of the "policy" because we said that the result would be the same in any event -- if there was a material fraud in the application, and the other elements of rescission were present, the entire "policy" could be rescinded.

 
(a) Was the contract of insurance a unitary contract with Penn Central as the other contracting party, or a series of individual contracts with each officer and director; (b) if the latter, is the knowledge of Bevan imputed to each individual officer and director?

 Plaintiffs contend that the D & O insurance and the Company Reimbursement insurance are two forms of one policy, with Penn Central being the only contracting party. They point out there was but one application, and that a single lump sum premium was paid by the Penn Central Company. They rely on two old Pennsylvania Supreme Court cases for the proposition that an insurance policy is entire and indivisible when but one premium is paid. Kelly v. Humboldt Fire Ins. Co., Sup., 4 Sadler 99, 6 A. 740 (1886); Gottsman v. Pennsylvania Ins. Co., 56 Pa. 210 (1868). However, both of these cases involved policies issued for the protection of a single insured, unlike the situation presented here. Furthermore, a much more recent decision indicates that the payment of a single premium is no longer to be deemed determinative of whether an insurance contract is entire or severable. Downing v. Erie City School District, 360 Pa. 29, 61 A. 2d 133 (1948). Downing points to a more flexible approach which depends upon the manifest intent of the parties as expressed in the body of the instrument, as well as other circumstances attending the issuance of the insurance.

 We have concluded that the Lloyds insurance package consists of two separate parts: a Company Reimbursement policy, which is a contract between Lloyds and Penn Central, and a D & O policy which is a contract between Lloyds and the directors and officers, insuring severally the distinct insurable interest of each officer and director.

 A comparison of the opening sentence of both forms commands this construction:

 
Company Reimbursement Insurance
 
"In consideration of the payment of the premium and subject to all the terms of this policy, Underwriters agree with the Company (named in Item I of the Declarations) as follows:"
 
D & O Insurance
 
"In consideration of the payment of the premium and subject to all the terms of this policy, Underwriters agree with the Directors and Officers (named in ...

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