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CONRAIL v. HARTFORD ACCIDENT & INDEM. CO.

December 17, 1987

Consolidated Rail Corporation
v.
Hartford Accident And Indemnity Company



The opinion of the court was delivered by: LUDWIG

 Ludwig, J.

 Plaintiff Consolidated Rail Corporation moved for summary judgment on the issue of liability. The record consists of the complaint, the answer and a fact stipulation. *fn1" An order was entered on June 16, 1987 denying plaintiff's motion because of the persistence of fact issues. Fed.R.Civ.P. 56(c).

 Conrail's Philadelphia counsel tendered Conrail's defense of the Lubbe action to Hartford by letter dated February 24, 1984. By letter dated April 20, 1984 Hartford declined, stating "since the employee, John Lubbe, does not fit the definition of 'designated employee,' as defined [in the policy], we are unable to take over the defense of Conrail." *fn4" Lubbe was not a designated employee. In response, Conrail's counsel wrote that policy coverage was not limited to "designated employees" and pointed out that it included bodily injury "sustained by any person arising out of acts or omissions at the designated job site which are related to or are in connection with the work described." His letter states that Hartford wrongly denied coverage by focusing on "designated employee" and ignoring the preceding provision as to "any person." See footnote 4. Hartford responded "our position remains unchanged" and again refused to defend Conrail.

 At trial, Wehrli admitted damaging a Conrail crossing gate at Norwich so as to dislodge a signal light. Lubbe testified he was injured when struck by the dangling light. *fn5" The jury's verdict was $ 200,000, with a negligence allocation of 90 percent against Conrail and 10 percent against Wehrli. *fn6" Conrail again tendered its defense to Hartford, reiterated its demand for indemnification and invited Hartford to take over its appeal. Hartford reasserted its earlier position. In November, 1984, the Second Circuit affirmed, and Conrail paid the judgment.

 The issues presented in this action are, first, whether Hartford can now raise a basis or theory of disclaimer different from its original denial of coverage. Second: Is Hartford collaterally estopped from obtaining another trial of the issues decided in Lubbe?

 In its motion for summary judgment, Conrail asserts that Hartford's insurance policy plainly provided coverage for Lubbe's claim. Hartford, it argues, is estopped to assert a new ground for disclaimer and collaterally estopped by the Lubbe action. It objects to Hartford's discovery attempts to gain information to relitigate Conrail's liability and Lubbe's damages.

 While conceding that its prior focus on "designated employee" was mistaken, Hartford contends that it did not thereby waive the coverage issue. This position appears to be well taken. It is correct that waiver cannot operate to expand coverage under an insurance policy. Also, estoppel does not apply because Conrail cannot show that it reasonably relied to its detriment on Hartford's original denial of liability. See Pfeiffer v. Grocers Mut. Ins. Co., 251 Pa. Super. 1, 6-7, 379 A.2d 118, 121 (1977).

 Hartford also asserts that it is not collaterally estopped by the Lubbe action because a potential conflict of interest, between itself and Conrail, prohibited its taking on the latter's defense, particularly after it came to defend Wehrli. Hartford's pecuniary interest, it maintains, would have been best served if the jury found Conrail 100 percent responsible for Lubbe's injuries. Under this view of the policy, if Conrail were adjudged totally at fault, Hartford owed no coverage. Hartford considers itself to have been Conrail's insurer only for bodily injury claims that resulted from Wehrli's negligent conduct. For these reasons, it contends, it could not in good faith have defended Conrail and the result in Lubbe should not be dispositive of the issues here.

 In this diversity action, the issue of collateral estoppel is resolved under Pennsylvania law. 28 U.S.C. ยง 1738. Public Service Mut. Ins. Co. v. Cohen, 616 F.2d 704, 707 (3d Cir. 1980) (approving in diversity action brought in this district application of Pennsylvania law to determine collateral estoppel consequences of prior Maryland state proceeding). See Ranger Ins. Co. v. General Accident Fire & Life Assurance Corp., 800 F.2d 329, 330 (3d Cir. 1986). Under Pennsylvania law, a prior adjudication will estop a party from relitigating an issue if four requirements are met:

 
1. The issue decided in the prior adjudication must be identical with the one presented in the later action,
 
2. There must have been a final judgment on the merits,
 
3. The party against whom the estoppel is asserted must have been a party or in privity with a party to ...

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