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05/07/97 VOLUNTEER FIREMEN'S INSURANCE SERVICES v.

May 7, 1997

VOLUNTEER FIREMEN'S INSURANCE SERVICES, INC., FOUNDRY INSURANCE AGENCY, INC., AMBULANCE INSURANCE SERVICES, INC., MUNICIPAL SERVICES AGENCY INC., AND ARTHUR J. GLATFELTER INC.
v.
CIGNA PROPERTY AND CASUALTY INSURANCE AGENCY, ALASKA PACIFIC ASSURANCE COMPANY, ATLANTIC EMPLOYERS INSURANCE COMPANY, BANKERS STANDARD INSURANCE COMPANY, CIGNA FIRE UNDERWRITERS INSURANCE, CIGNA INSURANCE COMPANY, CIGNA INSURANCE COMPANY OF ILLINOIS, CIGNA INSURANCE COMPANY OF THE MIDWEST, CIGNA INSURANCE COMPANY OF OHIO, CIGNA INSURANCE COMPANY OF TEXAS, CIGNA INSURANCE OF NORTH AMERICA PACIFIC EMPLOYERS INSURANCE COMPANY, AND CENTURY INDEMNITY COMPANY, APPELLANTS



Appeal from the DECREE September 26, 1996 In the Court of Common Pleas, Civil Division York County, No. 96-SU-01294-07. Before MILLER, J.

Before: Cavanaugh, Johnson And Eakin, JJ. Opinion BY Cavanaugh, J.

The opinion of the court was delivered by: Cavanaugh

OPINION BY CAVANAUGH, J.:

FILED May - 7 1997

This is an appeal from a final decree which enjoined Cigna Property and Casualty Insurance Company ("CIGNA") *fn1 from: (1) competing with Volunteer Firemen's Insurance Service, Inc. ("VFIS") *fn2; (2) directly or indirectly soliciting, selling or issuing a voluntary property/casualty policy to any volunteer fire business for a period of three years; and (3) directly or indirectly using, disclosing or retaining any trade secrets or confidential information of VFIS. After careful review, we affirm.

Beginning in 1969, Arthur Glatfelter, chairman of the Glatfelter Insurance Group, developed a series of coverages designed especially for emergency service organizations ("ESO"). *fn3 The efforts of Mr. Glatfelter, and later VFIS, led not only to the creation of a distinctive program of coverages for the specialty market of ESO coverage, but also to the development of a national marketing and distribution system for this coverage. Presently, VFIS is the largest agent/distributor in the specialty insurance market of ESO coverage, accounting for approximately 40% of the national market.

The relationship between VFIS and CIGNA began in 1972 when CIGNA's predecessor, the Insurance Company of North America, became the exclusive insurer/underwriter for the Glatfelter Agency and VFIS. Two-thirds of the total premium volume for CIGNA's special programs unit was business generated by VFIS. Under its agreement with CIGNA, VFIS received commissions, service fees and a percentage of profits. VFIS was responsible for marketing, product development, distribution, limited underwriting and claims processing. CIGNA acted as the exclusive insurer and its responsibilities included systems Support, claims, underwriting and loss control services. During the course of their business relationship, CIGNA had access to VFIS confidential information and other information not readily attainable through public sources.

The parties' relationship was governed by two written agreements. In 1990, CIGNA cancelled the first of these agreements. Thereafter, negotiations began regarding a new agreement between the parties. A new agreement and addendum were not executed until 1994. *fn4 During negotiations, VFIS insisted that a noncompetition provision be included in the addendum. CIGNA initially resisted the inclusion of such a provision, but later relented and agreed to the inclusion of a noncompetition provision. The effective date of the agreement and addendum was made retroactive to January 1, 1993 and was to run until December 31, 1995, with automatic renewal for successive one year terms unless timely notice was given.

In May, 1994, before the new agreement was reached with CIGNA, VFIS began strategic planning for an alternative risk structure. Among VFIS's concerns were increased competition in the ESO market, control over costs, pricing and risks, and CIGNA's financial stability rating. VFIS also formed an offshore reinsurance company and consulted with an insurance consultant, Tillinghast, regarding future strategic planning. VFIS did not advise CIGNA of these actions or its plans. On October 28, 1994 (after the new agreement and addendum had been executed) VFIS retained Tillinghast to assist in identifying potential insurance and reinsurance companies which could act as a replacement carrier for CIGNA. Tillinghast created a request for proposal ("RFP") to send to companies it thought suitable to VFIS's plans. The RFP discussed the arrangement, structure and role that each company would have in the new venture.

In the meantime, CIGNA's insurer rating was downgraded to B on December 21, 1994. The addendum entered into by CIGNA and VFIS provided that VFIS could terminate the governing addendum for cause after a downgrade of CIGNA's insurer rating below A-. VFIS did not exercise this option, but rather, informed CIGNA that it was willing to aid CIGNA in its attempts to restore its prior rating. It did, however, send the RFP to several selected insurers/reinsurers. CIGNA was not initially among the insurers to which the RFP was sent. Once CIGNA's rating was restored to A-, on February 10, 1995, the RFP was sent to CIGNA by VFIS. CIGNA, unaware of the RFP process until this point in time, established a response team to consider its alternatives, including: maintaining the current contractual relationship with VFIS; submission of a proposal in conformity with the requirements outlined in the RFP; and entry directly into the ESO market in competition with VFIS. CIGNA ultimately submitted a proposal in response to the RFP. VFIS subsequently informed CIGNA that another company had been selected and that its proposal had been rejected. Although this action did not formally terminate the addendum, it would have been clear to CIGNA at this point that its relationship with VFIS would end in the near future.

In June, 1995, CIGNA and VFIS agreed to an extension of the addendum until May 31, 1996, with an agreed ninety days notice of nonrenewal, in order to create an orderly transition. In early 1996, CIGNA decided to enter the ESO market in competition with VFIS. On February, 16, 1996, VFIS sent written notice of its intent not to renew the addendum for another one year term. CIGNA then informed VFIS of its intention to enter the ESO market. In response, VFIS filed a "motion for preliminary injunction" and "complaint for declaratory judgment and equity." Following a hearing at which extensive testimony was taken and hundreds of exhibits were admitted, the trial court enjoined CIGNA from competing with VFIS in the volunteer fire business for a period of three years and from retaining or disclosing VFIS's trade secrets and confidential information. *fn5 This appeal by CIGNA followed.

CIGNA first contends that Pennsylvania does not recognize the legality of a noncompete provision that would prohibit an insurer from selling insurance to policyholders. More specifically, CIGNA argues: (1) the trial court impermissibly extended Pennsylvania law based on § 188(2) of the Restatement (Second) of Contracts; and (2) the noncompete provision is contrary to the public interest because it stifles competition and leaves current VFIS and CIGNA policyholders no option to either choose or remain with CIGNA. *fn6

With respect to the first of these contentions, CIGNA asserts that Pennsylvania has traditionally enforced covenants not to compete in only two contexts: employment and the sale of a business. It maintains that a covenant not to compete in an insurer/agent agreement does not fall within either of these categories and is thus unenforceable. *fn7 The trial court noted that the CIGNA/VFIS relationship was not a typical insurer/agent arrangement, but rather, was a unique business arrangement akin to a joint venture or partnership. The court further stated that although no Pennsylvania case addressed the validity of a restrictive covenant in this circumstance, it was "satisfied that Pennsylvania law recognizes the relationship of joint venturers as a proper one to support an enforceable restrictive covenant." In support of its Conclusion that a noncompetition covenant would be appropriate and enforceable in the instant business relationship, the trial court cited the Restatement (Second) of Contracts. § 188(2), which states in pertinent part:

(2) Promises imposing restraints that are ancillary to a valid transaction or ...


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