of the aerial platforms, there was no "'occurrence' in terms of an 'accident', i.e., an unexpected and unintended act", and that coverage exists "only if [Devich's] injuries resulted from an accident." Defendant's Memorandum of Law in Support of Motion for Summary Judgment, p.13. Defendant also asserts that the injuries to Devich were "expected or intended" by Maverick because Bajek knew of the defective condition of the platforms. The Commercial Union policy excludes coverage for bodily injury which is "expected or intended from the standpoint of the insured." Policy, § I, P2(a).
We reject both arguments because they rely on theories of intentional misconduct on the part of Maverick. Such reliance is misplaced because the state court has already concluded that the cause of Mike Devich's injuries "was the negligence of [Maverick]. . . in failing to warn [Coop or Mike Devich] of [the] defects [in the platform]. Special Interrogatory for the Court, No. 6 (emphasis added). As a result, we agree with plaintiffs that Commercial Union is estopped from asserting intent as a defense.
In sum, we hold that plaintiffs' claim of negligent failure to warn does not fit within any of the express exclusions and is therefore covered by the defendant's policy.
II. BAD FAITH DUTY TO DEFEND
Our finding of coverage does not completely resolve the instant action because the policy limit ($ 500,000.00) is less than the judgment that the state court awarded to plaintiffs ($ 859,078.30). Plaintiffs assert that Commercial Union is liable for the entire judgment, regardless of the policy limits, because it acted in bad faith in refusing to defend Maverick in the personal injury action.
It is settled under Pennsylvania law and elsewhere that an insurer owes the insured a duty to act in good faith. See, e.g., Cowden v. Aetna Casualty and Surety Co., 389 Pa. 459, 134 A.2d 223 (Pa. 1957). Moreover, an insurer has a duty to defend its insured against any claims which could potentially fall within the coverage of the policy. Gedeon v. State Farm Mutual Automobile Ins. Co., 410 Pa. 55, 188 A.2d 320 (Pa. 1963). Plaintiffs contend that Commercial Union, in bad faith, breached its obligation to defend Maverick.
Our finding of coverage mandates a holding that defendant also breached its duty to defend. As rehearsed, an insurer is obligated to defend against claims made against the insured if the claims are potentially within the coverage of the policy. Thus, if the complaint asserts a claim "which may fall within the coverage of the policy, the insurer is obligated to defend." Stidham v. Millvale Sportsmen's Club, 421 Pa. Super. 548, 618 A.2d 945, 953 (Pa.Super. 1992). Because we have concluded that the claim against Maverick for negligent failure to warn falls within the policy's coverage, we also hold that Commercial Union breached its duty to defend.
Our holding that Commercial Union breached its duty to defend is, within the context of this case, unimportant. Where an insurer is found to have breached its duty to defend, the insured may recover the costs of hiring substitute counsel and other costs of the defense. However, such a finding does not, without more, require the insurer to indemnify plaintiffs for the entire amount of the judgment. Id. Because Maverick did not defend against the personal injury claims and incurred no defense costs, plaintiffs cannot claim damages from a finding of breach.
Commercial Union may be required to indemnify beyond the limits of the policy only if its decision not to defend was made in bad faith. As stated, an insurer owes the duty to act in good faith in handling the claim of the insured and failure to do so may subject the insurer to liability for the entire amount of the judgment against the insured, regardless of the policy limitation. Cowden, 389 Pa. 459, 134 A.2d 223, 227. Bad faith must be proven by clear and convincing evidence. Id. at 229.
We hold that Commercial Union did not act in bad faith in denying a defense to Maverick. Although we find that defendant's conduct was impractical with respect to risk management, the facts establish that the carrier acted in good faith based upon a firm belief that the claims were not covered. Immediately after receiving notice of the claim from Maverick, defendant undertook an investigation of the claim, which included interviewing Bajek, to determine the underlying facts relevant to the coverage issue. Once it determined that the injuries to Mike Devich were caused by defects in the aerial platform, defendant denied coverage on the basis that the claim fell within the products-completed operations hazard exclusion. Although we have determined that this was a faulty basis for coverage denial, it was not unreasonable for Commercial Union to rely on the exclusion in view of the status of the law in Pennsylvania with respect to the scope of the exclusion.
Prior to the decisions of the Superior Court in Harford and Kaminski Lumber, no Pennsylvania appellate court had directly addressed the question whether the products hazard exclusion applied to claims for negligent failure to warn. Moreover, the authorities in other jurisdictions favored exclusion of such claims where the injuries were caused by a defect in the product itself. See Brewer v. Home Ins. Co., 147 Ariz. 427, 710 P.2d 1082 (Ariz. 1985) (citing cases). Although we have held that the Superior Court decisions establish that, under Pennsylvania law, the products hazard exclusion does not apply to negligent failure to warn claims, we recognize that those decisions contain language which could lead to another conclusion. For example, in Harford, the court quoted with approval the following passage from Brewer:
The foregoing cases establish the following principles. Products Hazard coverage is intended to protect the manufacturer or seller of goods from claims for injury or 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'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 anticipated.
Harford, 578 A.2d at 496 (quoting Brewer at 1086) (emphasis in the original). Under these circumstances, we hold that the refusal of Commercial Union to defend Maverick does not constitute bad faith.
We note that, although defendant did not act in bad faith, it refusal to defend was, in our judgment, imprudent. It is settled that an insurer that refuses to defend an insured does so at its peril. Cadwallader v. New Amsterdam Casualty Co., 396 Pa. 582, 152 A.2d 484 (Pa. 1959). In view of the clear allegations of negligence in the underlying complaint and the state of Pennsylvania law on the issue, defendant should have been aware that a court could conclude that the claim was covered. Under the circumstances, its failure to defend Maverick under a "reservation of rights" or seek a declaratory judgment for a determination as to coverage was a high-risk gamble taken in the face of a potentially large judgment. Moreover, by failing to choose either of these options, Commercial Union lost any chance to challenge the merits of plaintiffs' underlying claims.
We hold that plaintiffs are entitled to summary judgment against Commercial Union in the amount of $ 500,000.00. We further hold that defendant did not engage in bad faith in refusing to defend Maverick against the plaintiffs' claims and, therefore, the carrier is not obligated to indemnify plaintiffs for a sum that exceeds the policy limits.
Dated: November 10, 1994
Donald E. Ziegler
ORDER OF COURT
AND NOW, this 10th day of November, 1994,
IT IS ORDERED that the motion (document no. 33) of plaintiffs, Mike Devich, Jr. and Margaret Devich, for summary judgment be and hereby is granted in part and denied in part. The motion be and hereby is granted with respect to the claim of coverage and judgment be and hereby is entered in favor of plaintiffs in the amount of $ 500,000.00.
IT IS FURTHER ORDERED that the motion be and hereby is denied with respect to the claim of bad faith and judgment be and hereby is entered in favor of defendant, Commercial Union Insurance Company, on that claim.
IT IS FURTHER ORDERED that the motion of defendant (document no. 27) for summary judgment be and hereby is denied.
Donald E. Ziegler