Indemnity contends that Twin City assumed the defense of The Latham without an obligation to do so and that it is a "volunteer" under Pennsylvania law and is precluded from recovering the costs of defense. Tugboat Indian Co. v. A/S Ivarans Rederi, 334 Pa. 15, 5 A.2d 153 (1939).
Twin City did have an obligation to assume the defense. Twin City provided general liability insurance to The Latham. At the time it received a copy of the Redford complaint, it could not unequivocally state that some exclusion to its coverage applied. The Redford claims potentially came within the coverage of the Twin City policy. Twin City had a duty to defend and was not a volunteer under Pennsylvania law. Both Home Indemnity and Twin City had a duty to defend under Pacific Indemnity.
The remaining issue is the allocation of the cost of defense between the two. Home Indemnity contends that it is not required to pay any costs incurred in connection with the Redford action prior to Twin City's demand on June 4, 1984. But Home Indemnity's obligation to defend commenced in March, 1982, when it received notice of the Redford action, not in June, 1984, when a formal demand was made.
Home Indemnity also contends that because the policies provide concurrent coverage, its obligation to pay for the costs of defense is limited to a pro rata portion of those costs. The insurance agreements do not provide concurrent coverage. Where there is no concurrent coverage, "each insurer owing . . . a defense . . . is required to contribute to the costs of defense in equal shares with any other insurer also obligated to defend . . . in that case." Pacific Indemnity, 766 F.2d at 768. Home Indemnity is liable for one-half of the reasonable costs and expenses that have been or will be incurred in connection with the Redford action.
COUNT IV - FEES AND COSTS INCURRED IN CONNECTION WITH THE INSTANT DECLARATORY JUDGMENT ACTION
Twin City seeks to recover costs expended, including attorneys' fees, in bringing this declaratory judgment action. Whether it can recover these costs depends on state law. Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240, 259 n. 31, 44 L. Ed. 2d 141, 95 S. Ct. 1612 (1975); Montgomery Ward & Co., Inc. v. Pacific Indemnity Co., 557 F.2d 51 (3d Cir. 1977). In general, Pennsylvania follows the American rule precluding the award of attorneys' fees in the absence of statutory or contractual obligation. Fidelity-Philadelphia Trust Co. v. Philadelphia Transportation Co., 404 Pa. 541, 548, 173 A.2d 109, 113 (1961); Smith v. Equitable Trust Co., 215 Pa. 413, 417, 64 A. 591, 592 (1906). However, a court may require a party to pay another party's counsel fees if that party's conduct during the pendency of the matter was "dilatory, obdurate, or vexatious." 42 Pa.C.S.A. § 2503(7). See Brenckle v. Arblaster, 320 Pa. Super. 87, 466 A.2d 1075 (1983).
But even absent statutory authority, a Pennsylvania insured who is forced to bring a declaratory judgment action to establish the insurer's duty to defend a third-party action may recover attorneys' fees for defending the action and for prosecuting the declaratory judgment action if the insurer has refused to defend the insured in bad faith. Kelmo Enterprises v. Commercial Union Ins., 285 Pa. Super. 13, 21, 426 A.2d 680, 684-85 (1981). This exception to the general rule as a matter of public policy is in order to prevent an insurer from frustrating the rights of the insured by forcing the insured to bring a declaratory judgment action when the refusal to defend was unreasonable and in bad faith.
Although Home Indemnity had a duty to defend when it received notice of the state action, Home Indemnity's failure to defend cannot be considered in bad faith prior to June, 1984, when the first demand on Home Indemnity in connection with the action was made. The only issue is whether Home Indemnity acted in bad faith when it refused to assume the defense in August, 1984 in response to Twin City's demand.
Relying on Federal Rice, Home Indemnity reasonably (but erroneously) believed it had no obligation to defend or indemnify The Latham. Because of the timing of Twin City's demand (subsequent to the adverse verdict at trial), Home Indemnity reasonably (but erroneously) believed that the doctrines of estoppel and/or waiver barred Twin City from claiming that Home Indemnity had a duty to defend or indemnify The Latham. Under these circumstances, the court finds that Home Indemnity's refusal to defend was not in bad faith. As to Count IV, summary judgment is entered in favor of defendant.
COUNT V - PUNITIVE DAMAGES
Twin City contends it is entitled to punitive damages as a result of Home Indemnity's alleged bad faith in denying its contractual obligation to defend The Latham. But Twin City is not in contractual privity with Home Indemnity nor was it a third-party beneficiary of Home Indemnity's insurance contract, so that it cannot seek damages for breach of contract. The Latham cannot seek damages because it is no longer a party to this action. In any event, punitive damages are inappropriate; for the reasons stated previously, Home Indemnity's failure to defend was not in bad faith.
Plaintiff contends that it is entitled to prejudgment interest on the costs of defense. Home Indemnity's failure to defend The Latham constituted a breach of contract but Twin City is neither a party nor a third-party beneficiary to the Home Indemnity-Latham agreement so that it cannot seek damages for a breach of contract. The Latham moved for its dismissal from this action so that this declaratory judgment could remain in federal court. That dismissal precludes awarding it prejudgment interest.
AND NOW, this 30th day of December, 1986, upon consideration of cross-motions for summary judgment filed by the parties, memoranda in support thereof and in opposition thereto, oral argument on the cross-motions, and post-argument memoranda submitted by both parties, and for the reasons set forth in the foregoing Memorandum, it is ORDERED that:
1. On Count I of plaintiff's complaint, summary judgment is GRANTED in favor of plaintiff and against defendant.
2. On Count II of plaintiff's complaint, summary judgment is GRANTED in favor of plaintiff and against defendant. Home Indemnity must indemnify The Latham for any final adverse judgment in the Redford case to a maximum of $ 100,000; Twin City must indemnify The Latham for any final adverse judgment in the Redford case in excess of $100,000.
3. On Count III of plaintiff's complaint, Home Indemnity is liable for one-half the reasonable costs and expenses that have been or will be incurred in connection with the Redford action.
4. On Count IV of plaintiff's complaint, summary judgment is GRANTED in favor of defendant and against plaintiff.
5. On Count V of plaintiff's complaint, plaintiff's demand for relief in the form of punitive damages is DENIED.
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