Appeal from the United States District Court for the Eastern District of Pennsylvania, D.C. Civil No. 79-699.
Aldisert, Chief Judge, Gibbons, Circuit Judge, and Diamond, District Judge.*fn*
These complex appeals arise from a declaratory judgment action brought by Pacific Indemnity Company (Pacific) to determine which insurance company, if any, must defend and indemnify claims against Robert Linn, D.O., 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 recommended in the book, and consequently suffered personal injury or death. We are called upon to apply general principles of Pennsylvania insurance law in this diversity action to claims of malpractice, professional negligence, breach of warranty, and products liability brought by readers of the physician's book (hereinafter referred to as bookreader claims). We affirm the district court in all respects. 590 F. Supp. 643 (D. Pa. 1984).
Dr. Linn, an osteopath, specializes in nutritional and family medicine. In 1976, he began writing The Last Chance Diet, a program for a protein-sparing fast diet. The book repeatedly emphasized that the diet was a medical program. Persons following the diet were directed to do so only under medical supervision. Since the book was published, at least eleven lawsuits have been filed against Dr. Linn by persons who read the book but had no personal consultation, examination or treatment by Dr. Linn or his associates. As notice of each of these bookreader claims was given to the insurers, Pacific agreed, under a reservation of rights, to defend Dr. Linn on those cases that fell within its policy period. The other insurers -- Aetna Insurance Company (Aetna), Pennsylvania Professional Liability Catastrophe Loss Fund (CAT fund), Pennsylvania Professional Liability Joint Underwriting Association (JUA), Chicago Insurance Company (Chicago), Interstate Fire and Casualty Company (Interstate) and Nationwide Mutual Fire Insurance Company (Nationwide) -- refused to defend Dr. Linn against any of the claims.
Pacific brought its declaratory judgment action in 1979. In 1981, the district court ruled on various summary judgment motions, denying certification of a nationwide class of bookreader claimants, holding Pennsylvania law applicable, dismissing all claims against Chicago, and resolving issues as to the duties of the insurers to defend against specific bookreader claims. The district court did not reach the duty to indemnify at that time because it did not consider that issue ripe for determination. After a trial in December 1981, the district court resolved the remaining duty to defend issues, which were concerned primarily with the applicability of certain policy exclusions. Aetna, Nationwide and Pacific appealed to this court. We dismissed the interlocutory appeals for lack of jurisdiction without prejudice to the certification by the district court under Rule 54(b), F.R. Civ. P. In the meantime, all but one of the underlying bookreader cases had terminated. The district court therefore deemed the indemnification issues ripe for decision and denied certification under Rule 54(b).
On June 27, 1984, the district court, after argument, entered judgment and issued a memorandum and order on all remaining issues of defense and indemnification. The court reconsidered its previous duty to defend determinations in light of more recent case law, but made no changes. Regarding the duty to indemnify, the court reasoned that because it was impossible to determine in those bookreader cases that were settled on what theories of liability, if any, the claimants would have prevailed, the duty to indemnify must follow the duty to defend. The court then addressed the issues of apportionment, contribution, reimbursement, and prejudgment interest. Finally, the court ordered Nationwide to reimburse the other parties for attorney's fees and costs incurred in maintaining the declaratory judgment action from December 1, 1982 to the date of the judgment for its refusal to defend in any of the bookreader cases after its duty to do so had been determined in the previous opinion. The district court certified the issues for appeal under Rule 54(b). Nationwide and Aetna appealed; Pacific and JUA filed cross-appeals.
These appeals require us to decide if Pacific, JUA, Aetna and Nationwide each had a duty to defend Dr. Linn in the underlying bookreader suits; whether the duty to indemnify followed the duty to defend in those bookreader suits that were settled; whether the court erred in its interpretation and application of the "other insurance" provisions of various policies and its conclusions regarding apportionment and contribution; whether the district court erred in its resolution of the motions for reimbursement; whether the court erred in awarding prejudgment interest at ten percent rather than the six percent legal rate; and whether the district court erred in awarding attorney's fees and costs only against Nationwide and only from December 1, 1982 to June 27, 1984. Because so many issues are presented and vigorously pressed, this opinion is more extensive than we would like, especially in a diversity case that has no binding precedential effect on the Pennsylvania court system.
Most of the issues raised in these appeals involve the interpretation of insurance contracts. Determination of the proper coverage of an insurance contract when the facts are not in dispute is a question of law. McDowell-Wellman Engineering Co. v. Hartford Accident & Indemnity Co., 711 F.2d 521, 525 (3d Cir. 1983). Therefore, our review is plenary. Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 102-03 (3d Cir. 1981). Similarly, whether an insurance policy is ambiguous is a legal question over which our review is plenary. Viger v. Commercial Insurance Co., 707 F.2d 769, 774 (3d Cir. 1983); Northbrook Insurance Co. v. Kuljian Corp., 690 F.2d 368, 371 (3d Cir. 1982). Our review of factual disputes is governed by the clearly erroneous standard. Universal Minerals, 669 F.2d at 102; Rule 52(a), F.R. Civ. P.
Each of the appealing insurance companies argues that the district court erred in holding that it had a duty to defend Dr. Linn in the underlying bookreader suits. After discussing general principles of insurance law regarding the duty to defend, we will address each company's arguments seriatim.
Under Pennsylvania law, an insurance company is obligated to defend an insured whenever the complaint filed by the injured party may potentially come within the policy's coverage. Gedeon v. State Farm Mutual Automobile Insurance Co., 410 Pa. 55, 58, 188 A.2d 320, 321-22 (1963); Cadwallader v. New Amsterdam Casualty Co., 396 Pa. 582, 152 A.2d 484 (1959); Wilson v. Maryland Casualty Co., 377 Pa. 588, 105 A.2d 304 (1954); Seaboard Industries, Inc. v. Monaco, 258 Pa. Super. 170, 392 A.2d 738 (1978); see C.H. Heist Caribe Corp. v. American Home Assurance Co., 640 F.2d 479, 483 (3d Cir. 1981). The obligation to defend is determined solely by the allegations of the complaint in the action. Wilson, 377 Pa. at 594, 105 A.2d at 307; see C.H. Heist Caribe Corp., 640 F.2d at 483 ("the factual allegations of [the] complaint against [the insured] are controlling."). The duty to defend remains with the insurer until the insurer can confine the claim to a recovery that is not within the scope of the policy. Cadwallader, 396 Pa. 582, 152 A.2d 484; Seaboard Industries, 258 Pa. Super. 170, 392 A.2d 738.
In construing an insurance policy, if the words of the policy are clear and unambiguous, the court must give the words their plain and ordinary meaning. Northbrook Insurance Co. v. Kuljian Corp., 690 F.2d 368, 372 (3d Cir. 1982). When a term in the policy is ambiguous, however, and the intention of the parties cannot be discerned from the face of the policy, the court, in its attempts to arrive at a reasonable construction of the policy that is in accord with the parties' apparent intention, may look to extrinsic evidence of the purpose of the insurance, its subject matter, the situation of the parties, and the circumstances surrounding the making of the contract. Id. (citing Celley v. Mutual Benefit Health & Accident Association, 229 Pa. Super. 475, 482-83, 324 A.2d 430, 434 (1974)). Where ambiguous, insurance contracts are to be construed strictly against the insurer. Mohn v. American Casualty Co., 458 Pa. 576, 586, 326 A.2d 346, 351 (1974). Hence, any ambiguities are to be resolved in favor of the insured. The language of a policy may not be tortured, however, to create ambiguities where none exist. Houghton v. American Guaranty Life Insurance Co., 692 F.2d 289, 291 (3d Cir. 1982). Exclusions from coverage contained in an insurance policy will be effective against an insured if they are clearly worded and conspicuously displayed, irrespective of whether the insured read the limitations or understood their import. Standard Venetian Blind Co. v. American Empire Insurance Co., 503 Pa. 300, 307, 469 A.2d 563, 567 (1983). We now turn to the provisions of the relevant policies.
Pacific provided Dr. Linn with a professional liability policy. Pursuant to that policy, Pacific was obligated as follows:
I. Professional Liability. To pay in the name of and on behalf of the insured or his estate all damages for which the insured or his estate may be legally liable because of professional services rendered or which should have been rendered by the insured or any assistant in the practice of the named insured's profession of osteopathic physician or surgeon.
II. Defense, Settlement, Supplementary Payments. With respect to such insurance as is afforded by this policy for liability for damages, the company shall: (a) defend any suit against the insured alleging such damages, even if such suit is groundless, false or fraudulent . . . .
App. at 1180. Relying on the principle that the factual allegations in the complaint determine the duty to defend, the district court concluded that Pacific was obligated to defend the Bass, Smith, Weiss and James complaints. In each of those, the claimants alleged medical malpractice or professional negligence. The district court reasoned that such claims are potentially within the scope of a professional liability policy. See app. at 282-83.
Pacific contends, however, that the district court erred because it did not make a determination as to whether the writing of The Last Chance Diet was the rendering of professional services as that term is used in the policy. Pacific asserts on appeal that it has no duty to defend Dr. Linn because the writing of the book is not a professional service, and therefore it is impossible for a claimant to recover within the scope of the policy. Cf. Cadwallader, 396 Pa. 582, 152 A.2d 484; Seaboard Industries, 258 Pa. Super. 170, 392 A.2d 738. Pacific misconstrues the relevant case law. The district court correctly focused on the factual allegations of the underlying bookreader complaints in determining the extent of Pacific's duty to defend. To focus on whether the writing of the book was a professional service would be tantamount to deciding that the bookreaders could never recover on the theories stated in their complaints. Such a decision could lead to an untenable result; that is, a claimant could conceivably recover in one court on a professional negligence theory and yet Dr. Linn would not be indemnified by Pacific under its professional liability policy because of the district court decision that the policy does not cover such claims. Neither decision would have a collateral estoppel effect on the other.
Further, the Pacific policy expressly provided that Pacific would defend any suit alleging damages within its professional liability scope even if groundless, false or fraudulent. The proper forum for determining whether Dr. Linn was guilty of malpractice or professional negligence is in the underlying bookreader suits. The district court did not err in determining that Pacific was obligated to defend the Bass, Smith, Weiss and James suits.*fn1
Like Pacific, JUA also provided Dr. Linn with a professional liability policy. That policy provides in relevant part:
In Consideration of the payment of the premium, and subject to the limits of liability and the other terms of this policy, the Association hereby agrees to defend and pay damages, in the name and on behalf of the Insured or his estate.
A. In any claim for damages, at any time filed, based on professional services rendered or which should have been rendered, by the Insured or any other person for whose acts or omissions the Insured is legally responsible, in the practice of the Insured's profession during the term of this policy.
App. at 1484. The district court concluded that, by the terms of the policy, JUA had a duty to defend Dr. Linn in the Bass, Smith, and James cases because each alleged medical malpractice or professional negligence. For the reasons discussed above regarding Pacific, the district court did not err.
JUA contends, however, that an exclusion from coverage is operable, and therefore it is relieved of its duty to defend. Specifically, JUA cites its "business enterprise" exclusion, which provides:
This policy does not cover
A. any liability growing out of the ownership, operation or supervision by the Insured or an employee of the Insured of . . . (b) any business enterprise, whether or not related to patient care and/or treatment . . . .
Id. The district court decided that the meaning of "business enterprise," a term not defined in the policy, and the intent of the parties as to the scope of the exclusion were unclear, and therefore it strictly construed the terms of the policy against JUA. See id. at 468. As written, there do not appear to be any limits on this exclusion. Without rendering a tortured reading of the clause, one conceivably could conclude that all liability arising from Dr. Linn's profession as an osteopathic physician is excluded. Yet such a reading makes no sense because it totally eliminates all coverage. Recognizing the absurdity of this position, however, the clause gives no indication of precisely what is and what is not excluded from coverage. The insured physician reasonably could have expected that a professional liability policy would provide coverage for lawsuits ...