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July 11, 1986


Cohill, C.J..

The opinion of the court was delivered by: COHILL

Presently before us are the Plaintiff's and Defendant's Motions for Summary Judgment. Beckwith Machinery Company ("Beckwith") filed the instant action against Travelers Indemnity Company ("Travelers") alleging a breach of contract when Travelers withdrew its defense of Beckwith in an underlying lawsuit brought by Trumbull Corporation ("Trumbull") against Beckwith and Caterpillar Tractor Company ("Caterpillar"). The issues presented by the cross-motions are: 1) whether the damages by Trumbull were covered by the insurance policy; and 2) whether Travelers, as insurer, had a duty to defend Beckwith, as insured, in the prior Trumbull litigation. For the reasons which follow, we will grant summary judgment in favor of Beckwith.


 The parties have stipulated to many of the salient facts. Stipulation of Facts, Dkt. No. 48.

 Plaintiff, Beckwith, is a Delaware corporation with its principal place of business in Murrysville, Pennsylvania. Complaint, para. 1. Beckwith is in the business of selling, leasing and repairing Caterpillar earthmoving equipment. Id., P 6; Stipulation of Facts, para. 2. Defendant, Travelers, is a Connecticut corporation with its principal place of business in Hartford, Connecticut. Complaint para. 2.

 Travelers contracted with Beckwith to provide Beckwith with comprehensive general liability insurance pursuant to manuscript insurance policy number TR-NSL-103T891-6-74, which is the controlling policy in this dispute. Id., P 4; Stipulation of Facts, para. 1. Travelers agreed to pay all sums which Beckwith became obligated to pay by reason of liability imposed by law, or assumed by Beckwith under any contract, "for damages because of bodily injury, personal injury or property damage to which the policy applied." Complaint, para. 4. Further, the policy provided that Travelers "agreed to defend any suit brought against Plaintiff within the United States, even if any of the allegations of the suit were groundless, if said suit alleged bodily injury, personal injury or property damage." Id., P 5.

 In 1973, Beckwith recommended, and eventually sold, various Caterpillar tractor scrapers and earthmoving equipment to Trumbull which utilized some of this equipment at a construction job site in the southern part of Florida. Stipulation of Facts, para. 2. This project, which began on or around March 1, 1974, required Trumbull to excavate a reservoir and build a "soil cement" (a mixture of sand and cement) dike to hold water to be used for cooling a power plant, and other related construction. Beckwith's Brief In Support of Motion for Summary Judgment at p. 2; Beckwith's Appendix PX 61.

 However, as early as April, 1975, the tractor scrapers supplied by Beckwith broke down from time to time due to engine and transmission problems; thus, hampering the progress of Trumbull's Florida construction project. Consequently, warranty, maintenance and other repairs were performed on the tractor scrapers by a local Caterpillar dealer as well as by representatives of Caterpillar and Beckwith. Stipulation of Facts, para. 4. Counsel for Trumbull formally notified Beckwith by a letter dated September 27, 1976 of its claim that the Caterpillar tractor scrapers were defective and that their failure to perform caused Trumbull to suffer damages in excess of three million dollars ($ 3,000,000.00). Id., P 5, Beckwith's Appendix PX 71.

 On March 17, 1976, prior to Trumbull's written notification to Beckwith that it intended to file a claim, Beckwith had informed Johnson and Higgins, its insurance broker, which then informed Travelers, of the possibility of a claim by Trumbull. Stipulation of Facts, para. 6.

 On or about April 15, 1977, Trumbull initiated a lawsuit against Beckwith and Caterpillar in the Court of Common Pleas of Allegheny County, GD 76-22608 (hereinafter the "Trumbull" case). The Trumbull case included claims against Beckwith for breach of warranties and misrepresentation of quality (i.e., failure to inform Trumbull of design defects) in thirteen (13) earthmoving tractor scrapers that were manufactured by Caterpillar and sold or rented to Trumbull by Beckwith. Complaint, para. 7.

 In its complaint, Trumbull alleged inter alia that it incurred substantial damages caused by the allegedly defective Caterpillar 651 and 657 tractor scrapers, which included excessive down time, a decrease in their market value and substantial damages in the performance of certain contractual obligations of Trumbull, including, but not limited to, increased project costs for labor, increased machinery down time, impact costs and overall job extension and costs. Complaint, para. 9.

 Travelers, through the law firm of Stein & Winters, assumed the defense of the Trumbull case from the initiation of the lawsuit with respect to all claims except those pertaining to punitive damages. Id., P 10. Based on Stein & Winters' advice that punitive damages might not be covered under the insurance policy, Travelers notified Beckwith in a letter dated June 9, 1977 that it would not provide coverage for the punitive damages claimed by Trumbull and suggested that Beckwith engage counsel to pursue that aspect of its case. Stipulation of Facts, para. 9. At the time, Travelers did not advise Beckwith that any other claims made by Trumbull might not be covered or defended. Thereafter, in response to Travelers' refusal to provide a defense for the claim for punitive damages, Beckwith retained the law firm of Thorp, Reed and Armstrong, which notified Travelers that Beckwith was holding Travelers responsible for coverage and defense of Trumbull's punitive damages claim. Id., P 10.

 The parties have stipulated that the Trumbull Complaint stated claims of property damage which were potentially within the coverage afforded by the policy. Id., PP 13-14. In fact, in its "Claim Experience Review Form" dated September 20, 1977, Travelers stated that the Trumbull Complaint included:

Multiple allegations against our insured re sale of equipment to contractor for Florida project. Complaint contains many areas of covered and noncovered counts. We will have to get into discovery before we will be in a position to make a final determination.

 Id., P 15. Moreover, in an internal memorandum authored by Associate Manager Charles E. Michaux, and dated April 10, 1978, Travelers noted the possibility that Beckwith, as a joint tortfeasor, could be liable for as much as 50% of the Trumbull claims. Stipulation of Facts, para. 21; Beckwith's Appendix PX 5. Referring to an opinion from outside counsel, Mr. Michaux stated his belief that Travelers was estopped from withdrawing its defense and coverage at this point. Id. Several other internal memoranda and/or letters were circulated among Travelers' personnel, which reflected the insurer's vacillation and confusion over potential coverage of the Trumbull claims. Beckwith's Appendix PX 3, 6, 9, 11.

 Despite the existing differences among Travelers' employees over what course of action to take regarding the Trumbull claims, by letter dated May 19, 1978, thirteen months after the initiation of the Trumbull lawsuit and Travelers' defense of Beckwith for all compensatory damage claims, Travelers suddenly denied coverage and withdrew its defense of Beckwith. Complaint, para. 11. In its letter to Beckwith, Travelers stated that it "can no longer afford you defense for any of the causes of action sued upon." Stipulation of Facts, para. 17.

 On July 24, 1978, Thorp, Reed and Armstrong notified Travelers that Beckwith had instructed them to take over the entire defense of the Trumbull case. Stipulation of Facts, para. 17. Subsequently, in October of 1978, Stein & Winters petitioned and received leave of this Court to withdraw as Beckwith's counsel. Id., P 18. Moreover, Travelers was put on notice that Beckwith intended to proceed against Travelers for all costs and expenses it incurred in the defense of the Trumbull lawsuit. Id., P 20.

 The record discloses that after continued discovery and defense by Beckwith's counsel, the Trumbull case was eventually settled on November 12, 1982, with Beckwith's portion of the settlement payment to Trumbull being $ 100,000.00. Id., P 22. The instant lawsuit followed.

 Count One of Beckwith's Complaint alleges that Travelers breached the terms of the manuscript insurance policy by withdrawing its defense of Beckwith and also by refusing to defend the punitive damages claims. Complaint, paras. 14-15. Count Two alleges that Travelers refused to participate in settlement discussions with Trumbull and breached the terms of the policy by not paying the $ 100,000.00 to Trumbull since said payment was tendered for damages allegedly covered by the insurance policy. Id., PP 16-20. Count Three, which is based on an estoppel theory, alleges that Travelers assumed the complete defense of all compensatory damage claims of Trumbull for over one year, which prevented Beckwith from discovering witnesses, documents and facts relevant to its defense for that time period, and that Beckwith relied on Travelers to defend those claims for the entire duration of the Trumbull case and to pay any damage claims or settlements. Id., PP 21-24. The damages which Plaintiff seeks to recover on Counts 1-3 include the $ 100,000.00 which it paid to settle the Trumbull case plus the costs, expenses and attorneys' fees related to the Trumbull case. Count Four of Plaintiff's complaint, which sought punitive damages for Travelers' alleged bad faith withdrawal of its defense and refusal to settle, was dismissed by a Memorandum Order of this Court dated September 21, 1983.

 In its motion for summary judgment, Beckwith requests this Court to enter judgment against Travelers for the attorneys' fees and costs of defending the Trumbull case, for the $ 100,000.00 paid by Beckwith in settlement of that case and for attorneys' fees and costs related to the instant litigation. Beckwith contends that Travelers breached its contractual obligations under the insurance policy issued to Beckwith by failing to indemnify and defend the Trumbull claims, which were covered under Travelers' policy. Alternatively, Beckwith claims that even if the Trumbull claims were not covered under the policy, Travelers is responsible and liable for coverage and defense under the doctrine of estoppel.

 Travelers, in its motion for summary judgment, argues that it did not breach any contractual obligations under the insurance policy issued to Beckwith, nor is it liable for coverage and defense of the claims made by Trumbull under any legal theory. Further, Travelers asserts that Beckwith was not prejudiced by any act or omission of Travelers, that Travelers did not act in bad faith and that Travelers is not liable for attorneys' fees and costs incurred by Beckwith.

 Summary Judgment

 When considering a Motion for Summary Judgment, the court must evaluate the evidence as presented by the pleadings, depositions, answers to interrogatories, admissions and affidavits submitted and determine whether, when viewed in the light most favorable to the nonmoving party, there are material facts in dispute. Fed. R. Civ. P. 56; Goclowski v. Penn Central Transportation Co., 571 F.2d 747, 751 (3d Cir. 1977). The moving party bears the burden of proving that no genuine issues of fact exist. Butz v. Hertz Corp., 554 F. Supp. 1178, 1181 (W.D. Pa. 1983). However, the party opposing summary judgment must not rest upon the mere allegations of its pleadings. If the responding party does not reply to the motion with specific facts showing the existence of a genuine issue for trial, summary judgment, where appropriate, will be granted against it. Fed. R. Civ. P. 56(e); Ness v. Marshall, 660 F.2d 517, 519 (3d Cir. 1981). Any doubts must be resolved in favor of the nonmoving party. Gans v. Mundy, 762 F.2d 338, 341 (3d Cir. 1985).


 I. Choice of Law

 This Court has diversity jurisdiction over the subject matter of this action. 28 U.S.C. § 1332 (1982). Applying Pennsylvania choice of law rules, it is clear that Pennsylvania substantive law must be applied to the present controversy. American Contract Bridge League v. ...

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