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LIBERTY MUT. INS. CO. v. MARTY'S EXPRESS

January 2, 1996

LIBERTY MUTUAL INSURANCE COMPANY, LIBERTY MUTUAL FIRE INSURANCE COMPANY and LIBERTY INSURANCE CORPORATION
v.
MARTY'S EXPRESS, INC. and FALCON EXPRESS, INC.



The opinion of the court was delivered by: DALZELL

 Dalzell, J.

 January 2, 1996

 This case presents an issue of first impression in Pennsylvania: in an action for unpaid premiums allegedly due on a retrospectively-rated insurance policy, must an insurer prove that it acted reasonably and in good faith in handling claims subject to such retrospective premium adjustment? We predict that the Pennsylvania Supreme Court, if faced with this issue, would place upon the insured the burden of producing sufficient evidence to suggest that the insurer violated an implied obligation of acting reasonably and in good faith in handling claims, but would place upon the insurer the ultimate burden of persuading the jury that it acted reasonably and in good faith.

 I. Factual History

 Plaintiffs (collectively "Liberty Mutual") are in the business of providing various types of insurance coverage, including the retrospectively-rated workmen's compensation policies that are at issue in this case. Defendants are in the motor freight transportation business, although Marty's Express, Inc. is primarily a U.S. Customs Bonded Carrier operating locally in the Philadelphia area and Falcon Express, Inc. is a regional carrier in the truckload transportation business. *fn1" Sometime before 1986, the parties entered into a series of retrospectively-rated workmen's compensation insurance contracts. Plaintiffs commenced this action on February 17, 1995 against the insureds, Marty's Express, Inc. and Falcon Express, Inc., to collect premiums allegedly due. Defendants counterclaimed on seven counts, claiming that Liberty Mutual breached its obligation to act in good faith in handling claims. We have jurisdiction over this action because the parties are diverse and the amount in controversy far exceeds $ 50,000. *fn2" 28 U.S.C. §§ 1332(a)(1), (c)(1).

 Marty's Express has moved in limine to require plaintiffs to establish as an element of their case-in-chief that their settlements of defendants' claims were made in good faith and were reasonable in amount. Alternatively, defendants ask us to rule that they have only the initial burden of going forward with sufficient evidence to create an issue as to whether plaintiffs complied with their duties of good faith and reasonableness, at which point Liberty Mutual would bear the burden of persuading the jury that it acted in good faith and that each settlement was reasonable. We shall grant the motion.

 II. Legal Analysis

 Our Court of Appeals has previously explained the distinctions between retrospective and standard workmen's compensation policies:

 
A retrospective premium policy, unlike a standard insurance policy, provides for retrospective determination of the insured's premium obligations according to a formula based on the cost of claims actually paid by the insurer under the policy. A standard workmen's compensation policy requires payment of a fixed premium, which may be calculated in part with reference to the insured's past losses; under a retrospective premium policy, the premium varies according to the current, rather than historical, experience. The retrospective policy establishes minimum and maximum premiums to be paid, and it states the standard premium that would be charged under an equivalent standard policy. The minimum is computed as a fraction of the standard premium.

 Alexander & Alexander, Inc. v. Rose, 671 F.2d 771, 773 (3d Cir. 1982). Alexander & Alexander unfortunately did not discuss allocation of burdens of proof, however, and, as the parties recognize, no court in Pennsylvania, either federal or state, has addressed this issue.

 Because our jurisdiction is premised upon the diversity of the parties, under Erie R.R. v. Tompkins, 304 U.S. 64, 82 L. Ed. 1188, 58 S. Ct. 817 (1938), we of course must predict what the Pennsylvania Supreme Court would do if faced with this issue, which occasionally can be a most difficult undertaking as our Court of Appeals recently noted again in Hakimoglu v. Trump Taj Mahal Assocs., 70 F.3d 291, 293 n.1 & 302-03 (3d Cir. 1995) (listing instances where our Court of Appeals incorrectly predicted state law) (citing Dolores K. Sloviter, A Federal Judge Views Diversity Jurisdiction Through the Lens of Federalism, 78 Va. L. Rev. 1671 (1992). Our Erie inquiry is made especially vexing in the absence of any Pennsylvania authority.

 Defendants cite a number of cases from other jurisdictions, including the highest courts in four states, that have imposed upon an insurer the burden of proving that its claims handling of retrospective policies was proper and that its settlements were made in good faith and were reasonable in amount. *fn3" We find their logic generally persuasive and, more importantly, predict that the Pennsylvania Supreme Court would, too. We believe the Pennsylvania Supreme Court would find the Maryland Court of Appeals' opinion in Port East Transfer, Inc. v. Liberty Mutual Insurance Co., 330 Md. 376, 624 A.2d 520 (Md. 1993) as persuasive as we do.

 In Port East, Liberty Mutual Insurance Company, the same insurer involved here, and Port East Transfer, Inc. entered into a number of insurance contracts, some of which provided for retrospective premium adjustments. At the end of the term of the contracts, Liberty Mutual demanded additional premiums based on its retrospective calculations. After the insured balked at paying, Liberty Mutual filed suit in federal district court alleging breach of contract and money due on an account stated between the parties. The insured filed a motion for judgment on the pleadings, contending that "'Liberty Mutual has not alleged that the settlements it made, and upon which the premiums were based, were made in good faith and were reasonable.'" 624 A.2d at 521. The trial court converted the motion to one for summary judgment and, given the dearth of precedent in Maryland, certified the following question to the Maryland Court of Appeals: ...


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