United States District Court, Middle District of Pennsylvania
November 14, 1991
FEDERAL KEMPER INSURANCE COMPANY, PLAINTIFF,
DANIEL C. JONES, ET AL., DEFENDANTS.
The opinion of the court was delivered by: McCLURE, District Judge.
Federal Kemper Insurance Company ("Federal Kemper") filed
this declaratory judgment action*fn1 against Frederick Hanes,
individually and t/a Blue Spruce Farms, and Daniel Jones to
ascertain its obligations under a comprehensive general
liability policy issued to Hanes.*fn2 Jones was
injured in a November 25, 1985 farm accident when a modified
tractor-trailer dump truck tipped and fell on him during an
unloading operation. Jones filed a state court action against
Hanes, and others, alleging strict liability, negligence and
breach of warranty.*fn3 Jones alleges that Hanes modified the
truck in a manner which made it unsafe. As Hanes' insurer,
Federal Kemper denies any obligation to defend or indemnify him
in the state court action under policy exclusions which negate
coverage for injuries arising from completed operations or
product hazards or from work performed by independent
contractors. Federal Kemper bases its denial of coverage on the
following undisputed facts.*fn4
Hanes had the truck modified when he purchased it in 1979.
The work, which consisted of lengthening the frame and
installing an engine, was performed by the seller, Peffer
Trucks, before Hanes took delivery. Hanes gave Peffer
specifications, such as the dimensions of the body he intended
to place on the frame and the weight of the gross load, but did
not oversee the work and was not present when it was done.
Immediately after Peffer's work was completed, the truck was
inspected and then taken to Hostetler's Body Shop, where a
dump-hoisted grain body was installed. Again, Hanes did not
oversee the work, but did discuss his requirements, such as the
capacity of the hoist, with Hostetler. Following completion of
Hostetler's modifications, Hanes did not make any further
modifications to the truck and used it on his farm*fn5 for
three or four years without incident. When he no longer had use
for it, he sold it as used equipment. It was subsequently
purchased by Jones' employer, Clark Trucking Company, at an
auction in 1983. (Record document no. 22, filed April 1, 1991,
paras. 10-24; record document no. 28, filed April 30, 1991; and
record document no. 27, filed April 30, 1991, pp. 3-4)
Based on these facts, which are undisputed, and on the
provisions of the policy, Federal Kemper has filed a motion
(record document no. 22, filed April 1, 1991) for summary
judgment. For the reasons which follow, we find that the policy
exclusion negating coverage for work performed by independent
contractors applies and that Federal Kemper is not obligated to
defend or indemnify Hanes in the state court action. Its motion
for summary judgment will therefore be granted.
A. Motion for summary judgment standard
Summary judgment is appropriate if the "pleadings,
depositions, answers to interrogatories, and admissions on
file, together with the affidavits, if any, show that there is
no genuine issue as to any material fact and that the moving
party is entitled to judgment as a matter of law." Fed.R.Civ.P.
56(c) (Emphasis supplied).
. . [T]he plain language of Rule 56(c) mandates
the entry of summary judgment, after adequate time
for discovery and upon motion, against a party who
fails to make a showing sufficient to establish
the existence of an element essential to that
party's case, an on which that party will bear the
burden of proof at trial. In such a situation,
there can be `no genuine issue as to any material
fact,' since a complete failure of proof
concerning an essential element of the nonmoving
party's case necessarily renders all other facts
immaterial. The moving party is `entitled to
judgment as a matter of law' because the nonmoving
party has failed to make a sufficient showing on
an essential element of her case with respect to
which she has the burden of proof.
Celotex v. Catrett, 477 U.S. 317, 323-24, 106 S.Ct. 2548, 2552,
91 L.Ed.2d 265 (1986).
The moving party bears the initial responsibility of stating
the basis for its motions and identifying those portions of the
record which demonstrate the absence of a genuine issue of
material fact. He or she can discharge that burden by "showing
. . . that there is an absence of evidence to support the
nonmoving party's case." Celotex, supra at 323 and 325, 106
S.Ct. at 2552-53 and 2553-54.
Issues of fact are "genuine only if a reasonable jury,
considering the evidence presented, could find for the
non-moving party." Childers v. Joseph, 842 F.2d 689, 694 (3d
Cir. 1988), citing Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 249, 106 S.Ct. 2505, 2510-11, 91 L.Ed.2d 202 (1986).
Material facts are those which will affect the outcome of the
trial under governing law. Anderson, supra, 477 U.S. at 248,
106 S.Ct. at 2510. In determining whether an issue of material
fact exists, the court must consider all evidence in the light
most favorable to the non-moving party. White v. Westinghouse
Electric Company, 862 F.2d 56, 59 (3d Cir. 1988).
B. Pennsylvania insurance law
Interpretation of the policy and resolution of the question
of Federal Kemper's duty to defend and indemnify are governed
by Pennsylvania insurance law.*fn6 The presumptions which
apply depend upon whether the policy language at issue is
ambiguous or unambiguous. In deciding this question, courts
should read the policy with an eye toward avoiding ambiguities
and take care not to torture policy language to create
uncertainties where none exist. Northbrook Insurance Co. v.
Kuljian Corp., 690 F.2d 368, 372 (3d Cir. 1982), (applying
Policy language is ambiguous if reasonable persons could
honestly differ as to its meaning, i.e. if it is susceptible of
more than one meaning. If found to be ambiguous, the
ambiguities are to be resolved in favor of the insured and in
a manner consistent with his reasonable expectations when he
contracted for coverage. This precludes insurers from
insulating themselves from their contractual obligations by
inserting "overly-subtle or technical interpretations" in an
unfair attempt to defeat the reasonable expectations of
the insured. Harford Mutual Insurance Co. v. Moorhead,
396 Pa. Super. 234, 578 A.2d 492, 495 (1990),*fn7 alloc. denied,
527 Pa. 617, 590 A.2d 757 (1991). This rule favoring the
insured applies even if the insured is a commercial or business
entity, and therefore, presumably knowledgeable about contracts
and their legal implications. Acands, Inc. v. Aetna Casualty
and Surety Co., 764 F.2d 968, 973 (3d Cir. 1985).
On the other hand, if policy language is found to be
unambiguous, these presumptions do not come into play.
Imperial Casualty & Indemnity Co. v. High Concrete Structures,
Inc., 858 F.2d 128 (3d Cir. 1988) (applying Pennsylvania law).
The law gives effect to the plain language of the policy as
written. Harford, supra, 578 A.2d at 495. In keeping with that
principle, plainly-worded coverage exclusions are given effect
so long as they are conspicuously displayed. There is no
concomitant requirement that the insured have read or
understood such exclusions. Pacific Indemnity Co. v. Linn,
766 F.2d 754, 761 (3d Cir. 1985) and Berne v. Aetna Insurance Co.,
604 F. Supp. 958, 960-61 (D.V.I. 1985), aff'd per curiam,
782 F.2d 1026 (3d Cir. 1985). Policy language which is otherwise
clear is not rendered ambiguous because it requires the insured
to read thoroughly and carefully to grasp the coverage
received. Viger v. Commercial Insurance Company of Newark, New
Jersey, 707 F.2d 769, 774 (3d Cir. 1983).
Linked to policy interpretation on the question of coverage
is the derivative question of the duty to defend and indemnify
the insured. The insurer is obligated to defend an action filed
against its insured if the allegations may potentially come
within policy coverage unless and until the insurer can confine
the claim to a recovery outside the bounds of coverage.
Imperial Casualty, supra, 858 F.2d at 131-32; Harford, supra,
578 A.2d at 494. Any doubts regarding the insurer's duty to
defend must be resolved in favor of the insured. American
Contract Bridge v. Nationwide Mutual Fire Insurance,
752 F.2d 71, 76 (3d Cir. 1985) and D'Auria v. Zurich Insurance Company,
352 Pa. Super. 231, 507 A.2d 857 (1986).
Independent contractors' exclusion
The independent contractor exclusion in the Federal Kemper
policy excludes coverage for injuries which arise out of
"operations performed for the named insured by independent
contractors or acts or omissions of the named insured in
connection with his general supervision of such operations",
with two exceptions not relevant here. The policy language is
clear, and Hanes does not contend otherwise. Nor does he
contend that the work performed at his behest by Peffer's and
Hostetler's was done under his direct supervision.
Although Hanes did not admit in response to plaintiff's
statement of undisputed facts that Peffer and Hostetler acted
as independent contractors, he alleges that to be the case in
his answer to Jones' complaint in the state court action.*fn8
admission in the underlying action precludes him from taking a
different position in this action, and he does not seriously
contest that issue, but takes a different tack in arguing that
the exclusion does not apply.
Hanes argues that coverage exists because Jones' allegations
can be construed as directed not only to the manner in which
the modifications were made, but also to Hanes' own actions in
hiring the contractors. As support for this argument, Hanes
relies on Jones' allegation that Hanes was negligent in failing
to consult "competent people to determine or otherwise insure"
that the modified vehicle would be safe for its intended
The Federal Kemper policy excludes coverage for injuries
caused by acts or omissions of independent contractors as well
as alleged acts or omissions of the named insured "in
connection with his general supervision of such operations".
This language brings Jones' allegations within the bounds of
the exclusion, regardless of whether the culpable conduct is
alleged to be acts of independent contractors or Hanes' own
alleged negligence in failing to exercise proper supervision.
Moreover, the courts have rejected similar arguments
attempting to differentiate between the results of the
insured's conduct and the conduct allegedly responsible for
such results. In St. Paul Surplus Lines Insurance Co. v. 1401
Dixon's, Inc., 582 F. Supp. 865, 867 (E.D.Pa. 1984), the insurer
argued that an assault and battery exclusion in the defendant's
comprehensive liability policy applied to preclude coverage for
allegations that business was negligent in failing "to prevent
or stop" the fight in
which a patron was injured, in failing to summon the police and
in generally failing to "maintain order in and around the
premises". St. Paul, supra, 582 F. Supp. at 867. The insured
argued that the exclusion did not apply, since the injured
patron was alleging that the insured was negligent in allowing
the assault and battery to occur. The court rejected this
. . Dixon's argument that under some set of
facts the claim would be reduced to one for
negligent supervision does not obtain the desired
result. A cause of action based upon negligent
supervision is functionally indistinguishable from
the claims of negligence found in Baylock's
complaint. Liability based upon either theory will
be barred by . . . that portion of the clause
excluding injuries occasioned by the failure to
stop or prevent an assault and battery.
St. Paul, supra, 582 F. Supp. at 868.
Sauter v. Ross Restaurants, Inc., No. 80-1202 (E.D.Pa. May
21, 1981) stands for the same proposition. Restaurant patrons
were assaulted by defendant's "bouncer", and sued defendant in
negligence for failing to supervise security personnel and for
employing personnel with violent tendencies. The court held
that an assault and battery exclusion precluded coverage. In so
ruling, the court rejected defendant's argument that
negligence, not assault and battery, caused the injury,
It is undoubtedly true that for plaintiffs to
recover in this suit, they must demonstrate that
their injuries were caused by the allegedly
negligent acts. But, although the injuries must,
in this sense, have been caused by Ross' negligent
acts, it does not follow that these same did not
`aris[e] out of assault and battery.' Plaintiffs'
real contention is that their injuries arose out
of an assault and battery which, in its turn,
arose out of Ross' negligence. Thus, plaintiffs'
injuries are unambiguously excluded from coverage
by the assault and battery exclusion.
St. Paul, supra, 582 F. Supp. at 867, quoting Sauter, supra,
slip op. at 6. See also: Terra Nova Insurance Co. v. Thee Kandy
Store, Inc., 679 F. Supp. 476, 478 (E.D.Pa. 1988).
Jones' injury arose out of a claimed defect in the truck.
Phrasing his claim against Hanes in part in terms of a failure
to supervise does not alter that fact, nor does it negate
application of the independent contractor exclusion.
Although the policy presents the exclusions in the
disjunctive, such that if a single exclusion applies, coverage
is negated, we will, in the interest of completeness, address
the applicability of the second exclusion raised by the
Products hazard exclusion
Products hazard coverage is intended
to protect the manufacturer or seller of goods
from claims for injury and damage arising out of
the use of the insured's products. The risk which
is being insured is that the product will not
perform in the manner expected. If the product
works as it is supposed to, but through other
negligence the insured the insured's product
causes injury or damage, there is no coverage.
Thus, where Products Hazard Coverage is excluded,
the insurer is not responsible for the failure of
the insured's products or goods to work as
Harford, supra, 578 A.2d at 496, quoting Brewer v. Home
Insurance Co., 147 Ariz. 427
, 710 P.2d 1082, 1086 (1985).
Federal Kemper's policy excludes coverage for injuries
arising out of completed operations and product hazard. It
defines "products hazard" as encompassing claims for injuries
. . out of the named insured's products or
reliance upon a representation or warranty made at
any time with respect thereto but only if the
bodily injury or property damage occurs away from
premises owned by or rented to the named insured
and after physical possession of such products has
been relinquished to others.
The policy defines "named insured's products" as:
. . goods or products manufactured, sold,
handled or distributed by the named insured or by
others trading under his name, including any
container thereof (other than a vehicle), but
`named insured's products' shall not include a
vending machine, any property other than such
container, rented to or located for use of others
but not sold.
(Record document no. 21, Exhibit "C".) It does not define what
constitutes "goods" or "products manufactured, sold, handled or
distributed" in this context. The usual interpretation of those
terms would encompass goods sold or distributed by the insured
in the ordinary course of business, but not incidental sales of
used equipment, office furniture and the like.
The issue before us is whether this exclusion applies to used
equipment not sold in the ordinary course of business.
Pennsylvania National Mutual Casualty Insurance Company v.
Kaminski Lumber Co., 397 Pa. Super. 484, 580 A.2d 401 (1990), is
directly on point. Kaminski Lumber Co. ("Kaminski") had a
comprehensive liability policy with Pennsylvania National
Mutual Casualty Insurance Company ("Pennsylvania National").
When Kaminski was sued for negligent failure to warn by an
individual, Danny Toney, injured while operating a used saw
purchased by his employer, which had formerly belonged to
Kaminski, Pennsylvania National denied any obligation to defend
or indemnify Kaminski, relying on a policy products hazard
exclusion in his policy. The trial court rejected Pennsylvania
National's argument, finding, inter alia, that the policy
language was ambiguous since the term "product" was not clearly
defined and that the exclusion did not apply since the claims
made against Kaminski were grounded in negligence, not products
The Pennsylvania Superior Court affirmed for the following
reasons: (1) policy language delimiting the exclusion was
ambiguous in failing to define what constitutes a product under
the terms of the policy; (2) this ambiguity requires strict
construction of the exclusion against the insurer in a manner
consistent with the reasonable expectations of the insured; (3)
the insured would reasonably have expected the exclusion to
apply only to lumber, his stock in trade; and (4) sale of a
used saw did not fall within the confines of the exclusion as
construed. See also: Friestad v. Travelers Indemnity Company,
260 Pa. Super. 178, 393 A.2d 1212 (1978).
The Superior Court's findings in Kaminski offer a parallel
for resolving the issue before us. All of the pertinent facts
are the same. Federal Kemper's policy does not define what
constitutes "goods" or "products manufactured, sold, handled or
distributed" by the insured, rendering that portion ambiguous
and meaning that it must be construed in a manner favorable to
the insured and consistent with his reasonable expectations in
contracting for coverage. We find, as did the Kaminski
court,*fn10 that an insured would reasonably expect a products
hazard exclusion to apply only to items sold in the ordinary
course of business, i.e. his stock-in-trade, and not to the
sale of used equipment or other items which are not his stock
in trade and are sold only on an incidental basis. Since it is
undisputed that used equipment was not Hanes' stock-in-trade,
the products hazard exclusion does not apply in this context.
Completed operations exclusion
Completed operations coverage is a service company's
equivalent of product hazard coverage. Companies in the
business of providing services or performing contracts at
premises other than their own, e.g. construction contractors or
repair services, purchase such coverage to insure against
liability arising from the services they perform for their
customers. United States Fidelity and Guaranty Company v.
Greater Essex Security, Inc., 248 N.J. Super. 105,
590 A.2d 262, 266-67 (1991) and Pacific Indemnity, supra, 766 F.2d at
764. See also: "Liability Coverage for Toxic Hazardous Waste
Disposal and Other Pollution Exposures", 25 Idaho L.Rev. 567
Conversely, comprehensive policies which exclude such
coverage do not insure against problems arising from work
performed by the insured for a customer after completion of the
work. The Federal Kemper policy excludes coverage for:
. . operations or reliance on a representation
or warranty made at any time with respect thereto
. . . if . . . bodily injury . . . occurs after
such operations have been completed or abandoned
and occurs away from the premises owned by or
rented to the named insured . . .*fn11
Federal Kemper's policy does not define what "operations"
performed by the insured fall within the confines of the
exclusion. It does not specify whether the term "operations"
includes only activities carried out by the insured in the
normal course of business, e.g. services which the insured
provides in the ordinary course of business, or whether its
scope is broader. Because the provision is reasonably subject
to more than one interpretation, it must be strictly construed
in accordance with the reasonable expectations of the insured
in contracting for coverage. Much the same rationale applies
here as applied in construction of the products hazard
exclusion. We find that an insured would reasonably expect a
completed operation exclusion to apply only to services he
provides or work he performs in the ordinary course of his
business, and not to the modification of equipment done only on
an incidental basis for purposes of rendering the equipment
usable at his business. A more expansive interpretation would
virtually negate coverage. The exclusion would swallow the
policy if we were to construe "completed operations" as
applying to any work performed by or at the request of the
named insured. Since it is undisputed that Hanes was not in the
business of modifying trucks or any other equipment, we find
that the completed operations exclusion does not apply in this