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Evans Products Co. v. West American Insurance Co.

June 18, 1984

EVANS PRODUCTS CO. AND HOME BUILDERS MORTGAGE CORP., APPELLEES,
v.
WEST AMERICAN INSURANCE CO., APPELLANT



Appeal from the United States District Court for the Eastern District of Pennsylvania.

Adams and Sloviter, Circuit Judges, and Teitelbaum,*fn* District Judge.

Author: Teitelbaum

Opinion OF THE COURT

TEITELBAUM, Chief Judge.

I

This is an appeal from a judgment entered for Evans Products Co. and Home Builders Mortgage Corp. (Evans) and against West American Insurance Co. (West) in an action on an insurance contract. For the reasons set forth below, we vacate and remand for further proceedings.

II

Steven and Patricia Brooks had obtained a homeowners' insurance policy from West with a loss-payable clause in favor of Evans as mortgagee. The policy provided fire-loss coverage on the dwelling in the maximum amount of $43,000, on personal property in the maximum amount of $21,500, and on loss of use in the maximum amount of $5,600.

A fire subsequently occurred at the Brooks' residence on May 20, 1980. The Brooks' proof of loss statement, claiming $64,500 for total loss of the dwelling and damage to personal property, was rejected by West. An Action in Assumpsit against West subsequently was brought by the Brooks in the Court of Common Pleas of Westmoreland County, Pennsylvania on December 30, 1980. In this action, the Brooks sought recovery for both the real and personal property losses.

Evans then executed and returned a proof of loss statement to West on August 4, 1981. Evans' statement, claiming $43,000 for total loss of the dwelling, also was rejected, whereupon it brought a diversity action in federal district court on December 15, 1981 seeking to recover under the loss-payable clause of the insurance policy.*fn1

On October 14, 1982, while a decision on the merits of the action in federal court was pending, West settled the Brooks' state court action and paid them $7,000 for loss of personal property only. Evans and West subsequently submitted the action below for resolution of the case stated without a jury on the basis of stipulated facts and accompanying memoranda of law. Judgment was entered for Evans.

III

Evans initially sought to recover in the complaint on the theory that it had complied with all conditions precedent to recovery. West denied in its answer that Evans had complied with all conditions precedent to recovery and defended on the theory that Evans' suit was barred for failure to comply with a provision in the insurance contract that any action against West be brought within one year.*fn2

Evans subsequently revised its theory of recovery in its memorandum of law submitted for resolution of the case stated.It contended that it was entitled to recover under the loss-payable clause, despite its failure to bring suit within the required period of time. Specifically, Evans sought recovery on the theory that, under Pennsylvania law, a claimant failing to comply with all the conditions of the policy is barred from recovering only upon a showing by the insurer that it had been prejudiced by the failure to comply. Evans maintained that no such showing of prejudice had been made by West.

West also revised the theory on which it defended in its memorandum of law submitted for resolution of the case stated. West maintained therein that the Pennsylvania Supreme Court had rejected the theory put forth by Evans. An insurer, it argued, does not bear the burden, under Pennsylvania law, of showing any prejudice to itself in order to bar recovery under a policy of insurance for failure to comply with conditions set forth in the policy.

The district court ruled that the failure of Evans to comply with the requirement that action be brought within one year did not bar recovery by Evans. It held that Evans was entitled, by virtue of the loss-payable clause, to rely upon the action by the Brooks in state court as protecting its interest. West then was found in breach of that obligation to Evans when it settled with the Brooks on October 14, 1982.

The basis upon which relief was granted to Evans was an event which occurred more than seven months after West had answered the complaint -- i.e., the settlement on October 14, 1982 of the Brooks' state court action against West. Evans neither amended nor supplemented its complaint to cite this particular event as providing a basis for the relief sought. West made no reference to it in its answer. Moreover, this particular event neither had been cited by Evans as providing a basis for relief nor had been opposed by West in their memoranda submitted for disposition on the merits.

The district court apparently was cognizant that the relief granted to Evans was based on a consideration not addressed by the parties. It held, however, that this did not matter because:

Plaintiff would be permitted to amend its Complaint in the present action to assert that the defendant breached its obligations under the loss-payable endorsement by making settlement directly with ...


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