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General Star National Insurance Co. v. Liberty Mutual Insurance Co.

argued: January 27, 1992.

GENERAL STAR NATIONAL INSURANCE COMPANY, APPELLANT,
v.
LIBERTY MUTUAL INSURANCE COMPANY



Appeal from the United States District Court for the Eastern District of Pennsylvania. (D.C. Civ. No. 88-08786)

Before: Mansmann, Hutchinson and Rosenn, Circuit Judges.

Author: Mansmann

Opinion OF THE COURT

MANSMANN, Circuit Judge.

The dispute in this case concerns an insurance company's duty of good faith in conducting a defense and settlement negotiations on behalf of its insured. We conclude that New York law governed this dispute brought by a Connecticut excess insurer against a Massachusetts primary insurer, alleging a breach of the primary insurer's duty of good faith owed to its insured, a New York corporation. Although the district court incorrectly applied Pennsylvania law in deciding that the primary insurer did not breach its duty, we conclude that the application of New York law to the facts requires the same result. We will therefore affirm the judgment of the district court.

I.

This litigation arises out of an underlying case in which Liberty Mutual, a Massachusetts insurer, undertook to defend Choice Courier, Inc., a New York corporation, in a diversity action brought in the United States District Court for the Eastern District of Pennsylvania by Richard D. Gormley. Florence Gormley, his wife, had died as a result of injuries sustained in a head-on collision with a van driven by an agent of Choice Courier. The agent had been driving the van with bald tires; he had also been driving many hours in excess of the regulatory limits. The jury returned a verdict in favor of the estate and in favor of Mr. Gormley in his own right in the amount of $1.8 million in compensatory damages and $3.9 million in punitive damages. In settlement, Mr. Gormley and the estate relinquished the $3.9 million in punitive damages in exchange for prompt payment of the full $1.8 million in compensatory damages. As Choice Courier's excess insurer, General Star contributed $765,000 to the settlement.

After the post verdict settlement of the Gormley case, General Star filed its complaint against Liberty Mutual in the United States District Court for the Eastern District of Pennsylvania. General Star, as Choice Courier's equitable subrogee, sought to recover the $765,000 it paid in settlement on the theory that Liberty Mutual either breached its duty to settle in good faith, or recklessly disregarded the interests of its insured, Choice Courier.

On General Star's motion in limine, the district court decided that the dispute would be governed by Pennsylvania law, General Star Nat'l Ins. Co. v. Liberty Mutual Ins. Co., No. 88-8786 (E.D. Pa. filed Nov. 1, 1990) (General Star I). Then, after a non-jury trial, the district court concluded that Liberty Mutual was not liable under Pennsylvania's bad faith standard, and entered judgment in Liberty Mutual's favor. General Star Nat'l Ins. Co. v. Liberty Mutual Ins. Co. (General Star II), No. 88-8786 (E.D. Pa. filed May 15, 1991) (mem. op.) (citing Cowden v. Aetna Casualty and Surety Company, 389 Pa. 459, 134 A.2d 223 (Pa. 1957)).

On appeal, General Star seeks application of New York law, challenges the district court's finding that an excess verdict was not reasonably foreseeable, and argues that Liberty Mutual's conduct was in bad faith under New York law.

We have jurisdiction over this appeal from a final order of the district court sitting in diversity. 28 U.S.C. §§ 1291, 1332. Our review of the district court's Conclusions of law and application of law to the facts is plenary. Mellon Bank v. Metro Communications, Inc., 945 F.2d 635, 642 (3d Cir. 1991). The "clearly erroneous" standard governs our review of findings of fact. Leeper v. United States, 756 F.2d 300, 308 (3d Cir. 1985).

II.

We first address the choice of law question. As this is a diversity case, we apply the forum state's choice of law rule. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 85 L. Ed. 1477, 61 S. Ct. 1020 (1941). Pennsylvania's rule requires examination of the significant contacts as they relate to the states' public policies underlying the issue in question. Cipolla v. Shaposka, 439 Pa. 563, 267 A.2d 854, 856 (Pa. 1970); see also Melville v. American Home Assurance Co., 584 F.2d 1306, 1312-15 (3d Cir. 1978) (predicting Pennsylvania would apply the combination of significant contacts and interest analysis to contract actions).

The district court concluded that the significant contacts were with Pennsylvania because the Gormley trial took place in Pennsylvania. The district court therefore held that Pennsylvania had a greater interest than did New York in having its law applied. General Star I, at 5.

For purposes of the choice of law decision, the district court characterized the legal issue as the reasonableness vel non of Liberty Mutual's conduct in litigating the case. While this issue of reasonableness is common to both Pennsylvania and New York law, the central issue for choice of law purposes was the duty owed by Liberty Mutual to Choice Courier and General Star. If New York law were to impose a higher duty, the reasonableness of Liberty Mutual's actions might be irrelevant.*fn1

Although the underlying trial and settlement negotiations took place in Pennsylvania, all of the parties to this litigation reside elsewhere, and the contract of insurance was presumably delivered in New York. Because the protection of insured parties is the primary public policy behind laws governing duties owed by an insurer to an insured, Pennsylvania has little interest in furthering the primary public policy implicated here: protection of a New York insured and a Connecticut excess insurer by means of regulating the conduct of a Massachusetts primary insurer.*fn2 As between New York and Pennsylvania law, New York law should regulate the relations between these parties.*fn3

This is not to say that Pennsylvania law and customs are irrelevant. For example, burdens of proof are determined by reference to Pennsylvania law. See Foley v. Pittsburgh-Des Moines Co., 363 Pa. 1, 68 A.2d 517, 521 (Pa. 1949) (law of the forum governs burdens of proof). Furthermore, the foreseeability of a Pennsylvania verdict is properly determined by reference to applicable Pennsylvania law and practice. Thus it was sound judgment for the district court to rely on opinions of Pennsylvania attorneys to resolve whether "the underlying case did not present a realistic, reasonably foreseeable threat to Liberty Mutual's primary coverage of $1 million." General Star II, para. 59 at 11-12.

III.

We next examine New York's law to determine whether the district court's application of law to the facts may be upheld even ...


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