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LITTLE v. MGIC INDEM. CORP.

December 23, 1986

JAMES P. LITTLE, Plaintiff,
v.
MGIC INDEMNITY CORPORATION, and AMERICAN CASUALTY COMPANY, a/k/a AMERICAN CASUALTY COMPANY OF READING, a subsidiary of Continental Casualty Company and CNA Financial Corp., Defendants



The opinion of the court was delivered by: COHILL

 I. FACTS

 This case revolves around a Directors and Officers insurance policy ("D&O policy") purchased by Union National Bank of Pittsburgh ("UNB") for the benefit of its directors and officers. The policy was issued by MGIC Indemnity Corp., and subsequently transferred to and assumed by the American Casualty Co. Plaintiff James P. Little was a vice-president of the commercial loan department during the period the policy was in effect.

 Beginning in 1983, UNB was named as defendant in a series of lawsuits brought in this court by five other banks and lending institutions. *fn1" In each case, the underlying transactions were essentially the same; two of UNB's customers had allegedly used fraudulent letters of credit to defraud those banks and lending institutions. Plaintiff Little was named as a third party defendant by UNB in each of the lawsuits.

 Here, Little is seeking a declaratory judgment, ordering defendants to pay the costs of defense and attorneys fees associated with the other ongoing cases. Defendants maintain that the D&O policy allows them complete discretion to decide whether to reimburse directors and officers as their defense expenses are incurred. Defendants have steadfastly refused to advance plaintiff's defense costs. The matter is presently before the court on plaintiff's motion for summary judgment.

 II. ANALYSIS

 A. Case Law from other Jurisdictions

 We begin by noting that this issue has already been addressed by a number of other courts, based on D&O policies containing language essentially identical to the language of the D&O policy in this case. Two recent cases have both held that the D&O policy requires the insurer to reimburse defense costs as they accrue. Okada v. MGIC Indemnity Corp., 795 F.2d 1450, 1453-55 (9th Cir. 1986) (insurer ordered to pay defense costs as they became due, because ambiguous language in the D&O policy must be resolved in favor of the insured under Hawaiian law); PepsiCo, Inc. v. Continental Casualty Co., 640 F. Supp. 656, 659-60 (S.D.N.Y. 1986) (insurer found to have obligation of contemporaneous payment of defense costs, subject to reimbursement in the event that directors or officers are found to have been materially dishonest). Both of these cases were decided on motions for summary judgment.

 Several district courts which have addressed this issue have reached a different conclusion. Enzweiler v. Fidelity & Deposit Company of Maryland, Civil Action No. 85-99, slip op. at 2 (E.D. Ky. May 13, 1986) (the insurer has the option to elect to await "the outcome of the underlying litigation" before advancing payment of defense costs, because the judgment in the underlying actions may be such that there is no coverage"); Clandening v. MGIC Indemnity Corp., CV 83-2432-LTL, Transcript of Proceedings 7-8 (C.D. Cal. May 23, 1983) (insured's claim dismissed on finding that the insurer has no obligation to pay defense costs when incurred during litigation); Bank of Commerce & Trust Co. v. National Union Fire Insurance Co. of Pittsburgh, Pa., 651 F. Supp. 474 (N.D.Okla. 1986) (insurer had no obligation until it was established that the insured officer's actions were (1) made on behalf of the employer who purchased the policy, and not on behalf of the officer's other businesses, and (2) not excluded by the policy). We also note other cases which the defendant has cited in support of its position. Gribaldo, Jacobs, Jones & Assoc. v. Agrippina Versicherunges A.G., 3 Cal.3d 434, 476 P.2d 406, 91 Cal. Rptr. 6 (Cal. S. Ct. 1970); California Chiropractic Association v. CNA, No. C 579 326 (Cal. Super. June 26, 1986); Continental Casualty Co. v. Board of Education, 302 Md. 516, 489 A.2d 536, 539 (Md. Ct. App. 1985); Amrep Corp. v. American Home Assurance Co., 81 A.D.2d 325, 440 N.Y.S. 2d 244, 246 (N.Y. App. Div. 1981).

 B. Insurance Contracts under Pennsylvania Law

 There are well established principles of interpretation for insurance contracts under Pennsylvania law. Gene & Harvey Builders, Inc. v. Pennsylvania Manufacturers' Association Insurance Company, 512 Pa. 420, 517 A.2d 910 (1986) (LEXIS, States library, Pa file); Standard Venetian Blind Co. v. American Empire Insurance, 503 Pa. 300, 304-305, 469 A.2d 563, 566 (1983); Pacific Indemnity Co. v. Linn, 766 F.2d 754, 760-61 (3d Cir. 1985); Houghton v. American Guaranty Life Insurance Co., 692 F.2d 289, 291 (3d Cir. 1982). Insurance contracts are interpreted by the court, not a jury. Gonzalez v. United States Steel Corp., 484 Pa. 277, 398 A.2d 1378 (1979). The court must ascertain the intent of the parties as manifested by the language of the written instrument. Mohn v. American Casualty Co. of Reading, 458 Pa. 576, 326 A.2d 346 (1974).

 1. The Issue of Ambiguity

 Pennsylvania law provides that, if a provision in an insurance contract is ambiguous, it is to be construed in favor of the insured and against the insurer who drafted the agreement. Mohn v. American Casualty Co. of Reading, 458 Pa. 576, 326 A.2d 346 (1974). However, if the language of the contract is clear and unambiguous, the court must give effect to that language, regardless of whether the insured failed to read the contract. Pennsylvania Manufacturers' Ass'n Insurance Co. v. Aetna Casualty & Surety Insurance Co., 426 Pa. 453, 233 A.2d 548 (1967); Olson Estate, 447 Pa. 483, 488, 291 A.2d 95, 98 (1972) (quoting Orner v. T.W. Phillips Gas & Oil Co., 401 Pa. 195, 199, 163 A.2d 880, 883 (1960)).

 2. The Issue of Unconscionability

 The Pennsylvania Supreme Court has enunciated the following principle on the issue of unconscionability:

 
In light of the manifest inequality of bargaining power between an insurance company and a purchaser of insurance, a court may on occasion be justified in deviating from the plain language of a contract of insurance. See 13 Pa.C.S. ยง 2302 (court may refuse to enforce contract or any clause of contract if court as a matter of law deems the contract or any clause of the contract to have been "unconscionable at the time it was made").

 Standard Venetian Blind, 503 Pa. at 307, 469 A.2d at 567. See also Bishop v. Washington, 331 Pa.Super. 387, 398-400, 480 A.2d 1088, 1093-94 (1984) (although the statute cited by the Pennsylvania Supreme Court in Standard Venetian Blind actually governs sales of goods, Bishop applied it to insurance contracts).

 C. The D&O Policy under Pennsylvania Law

 1. Ambiguity and the Issue of Contemporaneous Reimbursement of Defense Costs

 Following Pennsylvania law, our first task is to examine the language of the D&O policy and determine whether or not its provisions are ambiguous. The D&O policy here provides that the defendants "will pay, in accordance with the terms of this policy, on behalf of the Directors and Officers . . . all Loss which the Directors and Officers or any of them shall become legally obligated to pay." D&O Policy, Paragraph (A). The term "Loss" is defined to include

 
Any amount which the Directors and Officers are legally obligated to pay . . . for a claim or claims made against the Directors and Officers for Wrongful Acts and shall include but not be limited to damages, judgments, settlements, costs (exclusive of salaries of officers or employees), and defense of legal actions, claims or proceedings and appeals therefrom. . . provided however, such Loss shall not include fines or penalties imposed by ...

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