MEMORANDUM AND ORDER
In this action, two insurance companies seek declaratory judgment regarding their obligation to defend a state court action instituted by Keystone Stamping, Inc. ("Keystone") against High Steel Service Center, Inc. ("High Steel"). There being no material facts in dispute, summary judgment is appropriate.
The relevant facts, which are not in dispute, may be summarized as follows. Plaintiff Imperial Casualty & Indemnity Company ("Imperial") issued policy No. AE30287 to High Concrete Structures, Inc. The Imperial policy provides professional liability coverage. There is no dispute that this policy was in effect at the time of the events underlying the Keystone suit.
Defendant United States Fidelity & Guaranty Company ("USF&G") issued policy No. MP036926054 to High Industries, Inc., et al. The USF&G policy is a comprehensive general liability policy. There is no dispute that this policy was in effect at the time of the events underlying the Keystone suit.
Sometime after February, 1984, High Steel Structures, Inc., doing business under the registered fictitious name of High Steel Service Center, Inc., began to supply Keystone with hot rolled carbon steel. High Steel purchased large rolls of steel from Republic Steel Company.
High Steel then slit the rolls into widths of approximately three to four inches. No other change was made to the steel by High Steel before it was shipped to Keystone. Keystone then stamped its product (washers) out of these rolls.
No other change was made to the steel by Keystone, which then shipped its product to Nice Bearing Products Division, SKF Industries, Inc. ("Nice"). Nice was to process the washers through a heat treatment, and expected to sell the processed washers to Chrysler Corporation for use in automobiles. However, the treatment process brought to the surface defects, inclusions, burrs, pitmarks and laminations which made the steel unacceptable for its intended use. Keystone brought a state court action asserting claims for breach of contract and breach of warranty. Keystone seeks damages for lost sales as a result of decreased production and cancelled orders, additional overtime costs, additional freight charges, and injury to reputation.
At all times relevant to this action, High Steel did not employ any metallurgical engineers or have any "in-house" metallurgical engineering capability. At the request of High Steel, Thomas C. Dudas, a metallurgical engineer employed by Republic Steel, had visited Keystone's plant, evaluated their needs and made recommendations to High Steel concerning the specifications of the steel to be provided to Keystone. High Steel relied on those recommendations, and on later recommendations by Dudas, in selecting the steel to be supplied to Keystone.
Before addressing the specific contentions of the parties, it is helpful to review the settled principles of insurance law which govern this action. As succinctly stated by the Third Circuit:
Under Pennsylvania law, an insurance company is obligated to defend an insured whenever the complaint filed by the injured party may potentially come within the policy's coverage. The obligation to defend is determined solely by the allegations of the complaint in the action. The duty to defend remains with the insurer until the insurer can confine the claim to a recovery that is not within the scope of the policy.