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June 26, 1984


The opinion of the court was delivered by: SHAPIRO



 This is a declaratory judgment action by Pacific Indemnity Company ("Pacific") to determine which insurance company, if any, must defend and indemnify claims against Robert Linn, D.O. ("Dr. Linn") which have been or may be asserted on behalf of persons who read Dr. Linn's book, The Last Chance Diet, followed the diet program it recommended, and consequently suffered personal injury or death. Liability was asserted for malpractice, professional negligence, breach of warranty and/or products liability arising out of the purchase of Dr. Linn's book and/or a dieting protein product called "Prolinn." As notice of each of these "bookreader" claims was given to the insured, Pacific agreed to defend Dr. Linn under a reservation of rights in cases falling within its policy period. The other insurers refused to defend Dr. Linn against any of the claims. By Memorandum and Order dated July 24, 1981, and by Opinion filed December 1, 1982, the court determined obligations to defend Dr. Linn against these underlying claims and now disposes of remaining indemnity issues and motions for reimbursement filed by the parties.

 The matter first came before the court on cross-motions for summary judgment by all insurance companies that were defendants to the amended complaint. Nationwide Mutual Fire Insurance Company ("Nationwide"), a third-party defendant, did not move for summary judgment. The Joint Underwriting Association ("JUA") was then a defendant; it challenged the jurisdiction of the court because JUA is an unincorporated association with some corporate members in the state of citizenship of plaintiff. The court determined that JUA was a legal entity separate from its members and a citizen only of Pennsylvania but then reconsidered. By Memorandum of September 14, 1981, the court dismissed JUA as a party defendant with leave to join JUA as a third-party defendant; JUA was subsequently so joined by agreement of the parties.

 In a Memorandum and Order of July 24, 1981 on the motions, the court: denied certification of a nationwide defendant class of claimants who had not yet asserted claims against Dr. Linn; held the issues of insurance coverage were determined by Pennsylvania law; dismissed defendant Chicago Insurance Company ("Chicago") because it did not provide coverage either at the time the alleged torts occurred or at the time the claims were made; and decided issues as to the duty of the insurance companies to defend to the extent there were no material issues of fact. The complaint in each underlying case of record was analyzed in regard to each insurance policy then before the court.

 But in deciding the cross-motions for summary judgment, the court limited its decision to the duty to defend and declined to determine each insurer's duty to indemnify Dr. Linn for judgments that might be entered against him. The duty to defend is distinct from the duty to indemnify; an insurance company must defend the action if the factual allegations of the underlying complaint on their face state a claim against the insured to which the policy potentially applies. C.H. Heist Caribe Corp. v. American Home Assurance Company, 640 F.2d 479, 483 (3d Cir. 1981). Because factual findings not yet made in the underlying actions would affect the insurer's obligations to indemnify, this court was of the opinion that decision on the obligation to indemnify was premature and must await further developments.

 By agreement of Dr. Linn and all insurance companies other than Nationwide, and in accordance with an order entered by this court on October 2, 1981, Aetna Insurance Company ("Aetna") and Interstate Fire & Casualty Company ("Interstate") each contributed the sum of $20,000 and JUA contributed $5,000 to a fund to be disbursed by counsel for Dr. Linn in payment of costs and counsel fees expended in defense of the lawsuits pending against him.

 On December 14, 1981, following trial on December 7-11, 1981 of the issues remaining as to the duty to defend, in consideration of the parties' request for a prompt decision and with the agreement of all parties hereto, the court filed a Memorandum of Decision that stated its opinion of the parties' duty to defend defendants Robert Linn, D.O., Stephen D. Moses, D.O. and Robert Linn Medical Associates. Attorneys' fees, costs and expenses incurred to that date were to be awarded accordingly. Attorneys' fees, costs and expenses in the action for declaratory judgment were not awarded to that date but the court informed the parties that it might award such fees and costs from that time forward.

 With the encouragement of the court considerable discussion ensued among the parties as to a modus vivendi prior to a final, appealable order. On December 4, 1981, a stipulation of procedure was filed that provided that in the event one or more of the parties was held liable to reimburse reasonable defense and investigation fees, costs and expenses incurred either in the defense of the underlying claims or the declaratory judgment itself, any dispute on the reasonableness of the amounts would be referred to final, binding Defense Research Institute Arbitration. However, all parties continued to seek final determination not only of the obligation to defend but also of the obligation to indemnify. The court granted leave to the parties to move to amend the complaints, cross-claims and third-party complaints to assert claims only as to the obligation to defend and to delete claims as to indemnification without prejudice to their reassertion in a subsequent action or actions for indemnification, but only defendant Linn so moved and his motion was opposed by others.

 In accordance with and pursuant to the court's December 14, 1981 Memorandum, and following a pretrial conference, Aetna undertook to defend and settle the James, Bass, Lehman, Silberlicht, Cochran, Hudgens, Harmon, and Hunton,1 cases without prejudice to its right to seek reimbursement and without question, objection or contest regarding the necessity or reasonableness of the sums paid by Aetna in defense or settlement; Aetna did undertake the defense of those cases, reimbursed Pacific for Aetna's proportionate shares of defense costs in the James and Bass cases, and expended certain sums in settlement of the Lehman and Silberlicht cases and in defense of the Lehman, Silberlicht, Cochran, Hudgens, Harmon, and Hunton cases.

 Upon due notice to and refusal by Nationwide to advance 50% of those settlement and defense expenditures, Aetna paid and was assigned the claims of Dr. Linn against Nationwide for costs in defense of the lawsuits brought against him. Aetna filed its first motion for reimbursement in November, 1982; it was opposed by Nationwide in part on the ground that there had been no judgment filed by the court.

 Thereafter, on December 1, 1982, the court filed Findings of Fact and Conclusions of Law as to the parties' duty to defend only. The court reconsidered whether it should decide the duty to indemnify because subsequent to decision on the summary judgment motions, the Court of Appeals, in ACandS Casualty and Surety Co. v. The Travelers Indemnity Co., 666 F.2d 819 (3d Cir. 1981), had reversed a district court's determination of non-justiciability in a declaratory judgment action to determine which of two insurance companies had the obligation to defend and indemnify asbestos lawsuits. It held an actual case or controversy present with respect to that indemnity obligation notwithstanding uncertainty as to the amount of the insured's liability; determining the insurers' respective liabilities would permit settlement of the underlying lawsuits and avoid unnecessary costs and the risk of litigation. Id. at 823.

 In ACandS, the insurance dispute was "real and concrete," because "the factors that will determine the relative duties and benefits under the insurance contracts are independent of the underlying claims." Id. at 822-23. But here not only the amount of potential liability but the factual predicate for determining coverage itself was missing; the insurers' obligations to indemnify Dr. Linn were not independent of the underlying claims. The underlying complaints stated claims for personal and professional negligence, strict products liability, breach of warranty, and misrepresentation; if a particular suit were to result in a judgment for that plaintiff against Dr. Linn, the indemnity obligation of his insurers could depend on which theory or theories might prevail at trial. ACandS was inapposite because each insurer's contractual duty to indemnify Dr. Linn was dependent on development of factual records in the underlying cases.

 As in Heist, supra, which was neither referred to nor overruled by the panel in ACandS, "[the] obligation to indemnify . . . cannot be determined merely on the basis of whether the factual allegations of [each] complaint potentially state a claim against the insured. Actual indemnification depends upon the existence or nonexistence of facts not yet established." Id. at 483. Therefore, the court held the obligation of Pacific, Aetna, JUA and Nationwide to indemnify Dr. Linn, Dr. Moses and Linn Associates could not yet be determined. In the view of the court, there was no actual controversy under the Declaratory Judgment Act because the question of indemnification as to the policies in suit was not ripe for decision. But this holding was clearly without prejudice to later determination of the right of indemnification upon final disposition of the underlying claims, whether by settlement or judgment. Cf., Sandoz, Inc. v. Employer's Liability Assurance Corp., 554 F. Supp. 257 (D.N.J. 1983) (plaintiff, having incurred costs in settlement in underlying cases, presented issue as to indemnification sufficiently concrete, immediate and adverse to defendant insurance companies to constitute a justiciable controversy on partial summary judgment; factual disputes as to date of onset and manifestation of injuries precluded allocation of liability among the defendants prior to trial).

 Aetna and Pacific moved for reimbursement but Nationwide moved for amendment of the judgment or in the alternative for new trial. Then Nationwide withdrew its motion and appealed the judgment, as did Aetna and Pacific.

 On February 22, 1983, the Court of Appeals dismissed the interlocutory appeals for lack of jurisdiction without prejudice to certification by the district court under Fed.R.Civ.P. 54(b); Aetna and Nationwide moved for certification to the appellate court. But while the interlocutory appeals were pending, all the underlying cases except for Harmon had been terminated. All underlying actions except for Harmon2 having been determined, the indemnification issues had become ripe for decision by this court. Therefore, by Memorandum and Order dated November 9, 1983, this court denied the motions for certification of appeal as not in the interest of sound judicial administration. But the motions for reimbursement were denied until presented in a manner enabling resolution consistent with the court's determination of the legal issues.

 The court held argument on all remaining issues, particularly with regard to certain recent cases decided by the Third Circuit subsequent to the court's Opinion filed December 1, 1982. *fn3"


 The court determined the various obligations to defend Dr. Linn against the underlying complaints by Memorandum and Order of July 24, 1981 and an Opinion filed December 1, 1982, incorporated by reference herein. Since then, two cases, Selected Risks, supra, and Standard Venetian Blind Co. v. American Empire Insurance Co., 503 Pa. 300, 469 A.2d 563 (Pa. 1983), have limited the insurer's obligation to explicitly inform a prospective insured of policy exclusions. In Hionis v. Northern Mutual Insurance Co., 230 Pa. Super 511, 327 A.2d 363 (1974), the Pennsylvania Superior Court had held that "where a policy is written in unambiguous terms, the burden of establishing the applicability of the exclusion or limitation involves proof that the insured was aware of the exclusion or limitation and that the effect thereof was explained to him." 230 Pa. Super at 517, 327 A.2d at 365. The Third Circuit subsequently held in Selected Risks that Hionis protected only reasonable expectations, so that an exclusion, even if not explained to the insured, is effective against the insured's unreasonable expectations. But Standard Venetian Blind, a later decision of the Pennsylvania Supreme Court, rejected Hionis entirely so long as the exclusion clause is clear, unambiguous, and prominently displayed, whether or not the insured had reasonable expectations of coverage; to the extent that Selected Risks is inconsistent, it is Standard Venetian Blind that now provides the basis for decision:


Hionis, which would permit an insured to avoid the application of a clear and unambiguous limitation clause in an insurance contract, is not to be followed. . . . We hold only that where, as here, the policy limitation relied upon by the insurer to deny coverage is clearly worded and conspicuously displayed, the insured may not avoid the consequences of that limitation by proof that he failed to read the limitation or that he did not understand it.

 469 A.2d at 567 (emphasis added). However, neither Selected Risks nor Standard Venetian Blind alters the court's prior rulings as to duty to defend.

 The relevant exclusion in the JUA professional liability policy states that the policy does not cover liability arising out of "ownership, operation or supervision by the Insured . . . of . . . any business enterprise." The court has previously decided that the meaning of "business enterprise," not defined in the policy, and the intent of the parties as to the scope of the exclusion were unclear and were therefore strictly construed against the insurer. (Memorandum and Order of July 24, 1981 at 28). The insured physician could have reasonably expected that a professional liability policy would provide coverage for lawsuits alleging medical malpractice or professional negligence even though they arise from the publication and sale of a book. Because the exclusion is not clear and unambiguous, this court's decision does not deviate from the plain language of the insurance contract in disregard of Standard Venetian Blind.

 Aetna's commercial insurance policy contains a "products hazard" exclusion which denies coverage for "bodily injury . . . arising out of the named insured's products." *fn4" The "named insured's product" is defined as "goods or products manufactured, sold, handled or distributed by the named insured, . . . including any container thereof." The court has held this exclusion ineffective because the insured was unaware of it, and even if he "had . . . read the 140-page Aetna commercial package policy and been made aware of the products hazard exclusion clause prior to writing the book, [he] would not have understood that manufacture or distribution of a product referred to writing a book. . . . The ordinary person does not consider that an author 'manufacturers' book in writing it." (Opinion filed December 1, 1982 at 7, 14).

 Standard Venetian Blind does not change the inapplicability of this exclusion. While Aetna may in fact have intended the clause to exclude the instant occurrences from coverage, that intent is certainly not clearly worded nor prominently displayed in the 140-page policy. The clause is ambiguous; it cannot be ascertained from its undefined terms whether or not writing a book is manufacturing a product within the meaning of the exclusion. Even if Dr. Linn were fully aware of the products hazards exclusion, he would not necessarily have understood that manufacture or distribution of a product referred to and included writing a book. Neither would most people. It is not unreasonable to expect that a commercial insurance policy will cover liability incurred by writing a book.

 Finally, Nationwide's "personal negligence" policy excludes liability arising from "any errors or omissions in the rendering of a professional service, . . . [and] activities in connection with a business solely owned by an Insured or owned by a partnership of which an Insured is a partner." The court previously held that even if these exclusionary clauses were not rendered inapplicable by Hionis, they did not exclude coverage for the bookreader claims. (See, Opinion filed December 1, 1982 at 16-17). The former exclusion applied only to professional acts; Nationwide was not required to defend Dr. Linn against complaints alleging negligent professional rather than personal acts. The latter exclusion applied only to "activities in connection with a business solely owned by an Insured or owned by a partnership of which the Insured is a partner," and not to income-producing endeavors which are not part of a business operating with assets of the insured. Because Hionis had no material effect on Nationwide's exclusions, its subsequent limitation is not relevant to the applicability of its exclusions.

 The only other exclusion the applicability of which might be affected by the Standard Venetian Blind and Selected Risks cases is the "business or business products" exclusion in Interstate's professional and personal liability excess policy. But it is now clear that the excess coverage of the Interstate policy will not be called upon by any of the bookreader cases with the possible (although highly unlikely) exception of Harmon. The exclusion would affect Interstate's obligation to indemnify and not its obligation to defend; the court has not yet determined whether the exclusion precludes coverage although Hionis would have made the clause inapplicable. There is no need to determine now whether Standard Venetian Blind or Selected Risks have affected the applicability of the Interstate exclusion. Should the Interstate policy in fact be implicated by Harmon, the court will then deal with the exclusionary clause.


 The underlying bookreader claims, excepting Harmon, have all now been terminated by settlement or final judgment in favor of Dr. Linn. The obligation to indemnify in each case (except Harmon) is now ripe for decision. *fn5" Unlike the duty to defend, the duty to indemnify "cannot be determined merely on the basis of whether the factual allegations of [the underlying] complaint potentially state a claim against the insured." Heist, supra at 483. Rather, there must be a determination that the insurer's policy actually covers the claimed incident.

 Here, the various insurers were obligated to defend Dr. Linn because the underlying complaints stated causes of action on which there was potential liability. The court deferred deciding which insurers were obligated to indemnify Dr. Linn until the final disposition of each underlying case presented a factual basis for determining which insurers had indemnity obligations. However, because those cases implicating the duty to indemnify were terminated by settlement rather than final judgment, *fn6" it is now impossible to determine on what theories of liability, if any, the underlying plaintiffs would have prevailed. There are no factual findings to consider in determining which insurers are obligated to indemnify Dr. Linn. As a result, the duty to indemnify must follow the duty to defend.

 Where a complaint alleges facts supporting more than one theory of recovery from an insured, including a claim potentially covered by the insured's policy, "it [is] the duty of the [insurer] to undertake the defence, until it [can] confine the claim to a recovery that the policy [does] not cover." Lee v. Aetna Casualty & Surety Co., 178 F.2d 750, 753 (2d Cir. 1949). See also, Pittsburgh Plate Glass Co. v. Fidelity and Casualty Co. of N.Y., 281 F.2d 538 (3d Cir. 1960) (insurer obligated to defend must do so until claim is narrowed to one outside policy coverage); Cadwallader v. New Amsterdam Casualty Co., 396 Pa. 582, 152 A.2d 484 (1959) (same). Thus, the duty to defend in effect carries with it the conditional obligation to indemnify until such time as it becomes clear that there can be no recovery within the insuring clause. See, Cadwallader, supra. Since all the relevant underlying cases (except Harmon) have been settled and there are no factual findings establishing those claims, if any, on which the bookreader plaintiffs would have prevailed, the insurers cannot confine potential claims to those clearly outside the scope of coverage. *fn7" Those insurers found obligated to defend Dr. Linn are therefore also responsible for any payments made in settling the bookreader cases. See, Ripepi v. American Insurance Companies, 349 F.2d 300 (3d Cir. 1969); Cadwallader, supra.8 Accordingly, the following carriers are initially obligated to indemnify the insured up to the amounts of their respective policy limits: James: Pacific, JUA, Aetna Smith: Pacific, JUA, Aetna, Nationwide Lehman: Aetna, Nationwide Silberlicht: Aetna, Nationwide Bass: Pacific, JUA, Aetna


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