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Puritan Insurance Co. v. Canadian Universal Insurance Co.

October 15, 1985


Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. Civ. No. 83-1490).

Author: Weis

Before: ADAMS, GIBBONS, and WEIS, Circuit Judges.

WEIS, Circuit Judge.

An insurance company which had issued an excess policy received a judgment against the primary carrier because of its failure to settle a claim that had resulted in an unfavorable verdict against their common insured. On this appeal we hold that under applicable Pennsylvania law an excess insurer's rights against a primary carrier are based on equitable subrogation to those of the insured. When the decision to try, rather than settle, a personal injury suit is approved by the insured, neither it nor the excess insurer may recover from the primary policy limits. Since the record demonstrates that to be the situation here, we will reverse the district court's judgment.

After a nonjury trial, the district court found that by failing to settle a claim against its insured, defendant primary carrier had acted in bad faith. Plaintiff, as excess insurer, was therefore entitled to a judgment for the sums it had paid over and above primary coverage. Defendant has appealed.

This case had its genesis in a products liability suit brought by Ricky Donahue against the Northwest Engineering Company. Donahue was seriously injured when the boom of a crane manufactured by Northwest fell on him. The case was tried in early 1981 and resulted in a verdict against Northwest in the amount of $1,413,152.35, which was later settled for $1,375,000.

At the time of the accident, defendant Canadian Universal Insurance Company insured Northwest under a primary liability policy with upper limits of $500,000 but subject to a $100,000 deductible. Plaintiff Puritan Insurance Company had issued a separate policy to Northwest with limits of $5,000,000 but excess to that of the primary carrier.

The Donahue trial was bifurcated. Before trial, Canadian refused to offer the $500,000 policy limit but did make such a tender after the jury had found Northwest liable. After settling the case, Puritan sued Canadian for the $850,000 expended above the primary limit and sought punitive damages as well.

In the Donahue litigation, the plaintiff's theory was that the operator of the crane, while turning in his seat to operate a control located behind him, inadvertently hit a pedal which released the boom causing it to fall. Donahue's claim was based on an allegation of design defect attributable to the failure of the manufacturer to provide a guard that would prevent accidental contact with the boom release pedal. The operator of the crane, however, insisted that he had not touched the pedal and disclaimed any responsibility for the accident. No other mishaps had occurred before or after the accident, and the crane was put back in service without any repairs or modifications.

At the Donahue pretrial conference, the trial judge*fn1 suggested a settlement in the amount of $600,000. Neither of the parties had submitted any figures to each other before that point.

Canadian convened a claims committee consisting of a state judge, two vice presidents, the claims manager, assistant claims manager, claim superintendent, and the claims examiner in charge of the case.*fn2 The case summary submitted to the committee contained a verdict range of approximately $1,000,000, a demand of $600,000, and a settlement range of $300,000 to $400,000. The committee decided that the case was one of "no liability," i.e., no offer should be made and the case should be tried. Although he never communicated his decision to Canadian, its counsel, or the trial judge, Donahue's lawyer had concluded that if an offer of $400,000 where made, he would recommend that figure to his client.

About six months before the trial, Puritan's counsel wrote to Canadian, pointing out the dangers of the case, and urged negotiations with Donahue's lawyer. On receiving this letter, Canadian reconvened its claims committee, which held to its previous decision. After that recommendation, the trial lawyer Canadian had retained to defend the Donahue case sent a letter to Northwest's private counsel, advising him of the possibility of an excess verdict. Documentary evidence in the record establishes that Northwest persisted in its belief that the case should be tried and so advised Canadian.

Donahue's lawyer had been informed that Canadian considered the case one of no liability and, based on this statement, submitted no demand for settlement.

In making its findings in the litigation at hand, the district court concluded that the Donahue case had been thoroughly investigated, and at the time of trial the relevant facts were known. The parties realized that the issue would be submitted to the jury and that the injuries were serious. According to the district court, "there were virtually no defenses available" and "there was no alternative theory" to be presented by Northwest. In those circumstances, the district court held that Canadian had an ...

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