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United States District Court, Middle District of Pennsylvania

November 14, 1991


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 Pennsylvania law).

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 Hanes' 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 use.*fn9

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
argument, stating

   . . 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, stating:

  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 insurer.

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 liability.

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 (1989).

  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 context.

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