United States District Court, Middle District of Pennsylvania
January 16, 2002
KEYSTONE FILLER & MFG. CO., INC., PLAINTIFF
AMERICAN MINING INSURANCE COMPANY, DEFENDANT.
The opinion of the court was delivered by: James F. McCLURE, Jr., United States District Judge.
Keystone Filler & Mfg. Co., Inc. (Keystone) is suing its insurer,
American Mining Insurance Company (AMI). Keystone asserts that AMI
breached an insurance contract when it wrongfully denied coverage for
Keystone's claim for damages sustained by one of its customers, Rutland
Plastic Technologies (Rutland). Keystone asserts an additional claim for
bad faith by an insurer under 42 Pa.C.S.A. § 8371. We have diversity
jurisdiction. 28 U.S.C. § 1332.
Before the court are (1) AMI's motion for summary judgment; and (2)
Keystone's motion for partial summary
judgment, which requests judgment
as a matter of law as to the breach-of-contract claim only. AMI contends
that as a matter of law, Keystone's claim relating to Rutland's damages
was not covered under Keystone's policy. According to AMI, Rutland's
underlying claim against Keystone would have been merely for
breach-of-contract. AMI then points to a body of case law from the
Pennsylvania Superior Court stating that claims against an insured for
breach-of-contract are not covered under a commercial general liability
policy such as the one in question. Keystone attempts to discredit this
line of cases, and it argues in the alternative that AMI should be
estopped from denying coverage because it paid a previous almost
identical claim for Keystone. Keystone also contends that because it
settled the claim with Rutland, and because the claim relating to
Rutland's damages was covered under the policy, AMI must indemnify it for
the settlement. For the following reasons, we will deny Keystone's motion
and grant summary judgment to AMI.
I. ROLE OF A FEDERAL COURT
A federal court sitting in diversity must apply state substantive law
and federal procedural law. Chamberlain v. Giampapa, 210 F.3d 254, 258
(3d Cir. 2000) (citing Erie R.R. v. Tompkins, 304 U.S. 64, 78 (1938)). In
this case, it is undisputed that Pennsylvania law applies. In the absence
of a reported decision by the state's highest court addressing the
precise issue before it, a federal court applying state substantive law
must predict how the state's highest court would rule if presented with
the case. See Nationwide Mutual Ins. Co. v. Buffetta, 230 F.3d 634, 637
(3d Cir. 2000) (citation omitted). A federal court may give due regard,
but not conclusive effect, to the decisional law of lower state courts.
Id. (citation omitted). "The opinions of intermediate appellate state
courts are `not to be disregarded by a federal court unless it is
convinced by other persuasive data that the highest court of the state
would decide otherwise.'" Id. (quoting West v. AT & T Co., 311 U.S. 223,
237 (1940)). "In predicting how the highest court of the state would
resolve the issue, [a federal court] must consider `relevant state
precedents, analogous decisions, considered dicta, scholarly works, and
any other reliable data tending convincingly to show how the highest
court in the state would decide the issue at hand.'" Id. (quoting
McKenna v. Ortho Pharm. Corp., 622 F.2d 657, 663 (3d Cir. 1980)).
II. 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).
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. Celotex, 477
U.S. at 323. It can discharge that burden by "`showing' — that is,
pointing out to the district court — that there is an absence of
evidence to support the nonmoving party's case." Id. at 325.
Once the moving party points to evidence demonstrating that no issue of
material fact exists, the non-moving party has the duty to set forth
specific facts showing that a genuine issue of material fact exists
and that a reasonable factfinder could rule in its favor. Ridgewood Bd. of
Educ. v. N.E., 172 F.3d 238, 252 (3d Cir. 1999) (citing Matsushita Elec.
Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986)). "Speculation
and conclusory allegations do not satisfy this duty." Ridgewood, 172 F.3d
at 252 (citing Groman v. Township of Manalapan, 47 F.3d 628, 637 (3d
III. STATEMENT OF FACTS
Keystone is a company that manufactures carbon-based products made from
finely-ground coal. AMI issued Keystone a general commercial liability
insurance policy with a coverage period from March 1, 1998 to March 1,
1999. (See Policy numbered AMGL002170 (AMI 1998 Policy), attached as
Exhibit A to Defendants' Motion for Summary Judgment, Rec. Doc. No. 19.)
Rutland was Keystone's customer at all relevant times. Keystone sold
Rutland a batch of Mineral Black 123, a carbon-based product made from
finely-ground coal. Rutland used Keystone's product as a component of a
material called plastisol, which is used to manufacture other goods such
as automobile filters. Through correspondence with Keystone in February
1999, Rutland claimed that a batch of Mineral Black 123 contained
oversized particles and damaged a certain amount of plastisol, rendering
it useless. According to Rutland, the defective plastisol caused damages
both to Rutland itself and to two of Rutland's customers. Rutland claimed
more than $65,000 in damages.
Keystone filed a claim under its AMI policy in order to be covered for
Rutland's damages. AMI investigated but denied Keystone's claim.
After AMI denied coverage, Keystone and Rutland entered into an
agreement by which Keystone was to sell Mineral Black 123 to Rutland at a
reduced price until Rutland's damages were satisfied.
In 1997, Shiraishi Calcium Kaisha, Ltd., a company located in Japan,
filed a claim against Keystone, complaining of oversized particles in
another one of Keystone's products, Mineral Black 325A. Shiraishi claimed
that its customer, Nishikawa Rubber Company, suffered damages of
$12,690. Keystone submitted the Shiraishi claim to AMI, which adjusted
and settled the claim without reservation under Keystone's 1997 policy.
It is undisputed that Pennsylvania law applies to the analysis of the AMI
policy. The policy states:
b. This insurance applies to "bodily injury" and
"property damage" only if:
(1) The "bodily injury" or "property damage" is
caused by an "occurrence" that takes place
in the "coverage territory"; and
(2) The "bodily injury" or "property damage"
occurs during the policy period.
(AMI 1998 Policy at § 1, ¶ 1(b).) The parties agree that for the
purposes of this case, AMI must indemnify Keystone only in the event of
"`property damage' to a third party if the `property damage' is caused by
an `occurrence.'" (Plaintiffs' Brief in Support of its Motion for
Partial Summary Judgment, Rec. Doc. No. 22, at 9.) AMI contends that
there existed neither property damage nor an occurrence. It also argues
that coverage is barred by either or both of two coverage exclusions
stated in the policy. Keystone contends that there indeed was property
damage caused by an occurrence, and asserts that neither exclusion
applies to its claim. It also contends that because it settled the
claim with Rutland, and because the claim relating to Rutland's damages was
covered under the policy, AMI must indemnify it for the settlement.
First, we state certain general rules under Pennsylvania law relating
to the construction of insurance policies. "First, the court must
`ascertain the intent of the parties as manifested by the language of the
policy.'" Jacobs Constructors, Inc. v. NPS Energy Services, Inc.,
264 F.3d 365, 375-76 (3d Cir. 2001) (quoting Standard Venetian Blind Co.
v. American Empire Ins. Co., 469 A.2d 563, 566 (Pa. 1983)). "In doing
so, an insurance policy must be read as a whole and its terms, when
unambiguous, must be construed according to their plain and ordinary
meaning." Id. at 376 (citing Pennsylvania Mfrs.' Ass'n Ins. Co. v. Aetna
Cas. & Sur. Ins. Co., 233 A.2d 548, 551 (Pa. 1967); see also Koval v.
Liberty Mut. Ins. Co., 531 A.2d 487, 489 (Pa.Super. 1987)). "Where a
provision is ambiguous, it must be construed in favor of the insured."
Id. (citing Standard Venetian Blind Co., 469 A.2d at 566). "A provision
is ambiguous if reasonable persons, after considering the context of the
entire policy, would honestly differ as to its meaning." Id. (citing
Lucker Mfg. v. Home Ins. Co., 23 F.3d 808, 814 (3d Cir. 1994)).
"However, the court should read the policy to avoid ambiguities and not
torture the language so as to create them." Id. (citing St. Paul Fire &
Marine Ins. Co. v. United States Fire Ins. Co., 655 F.2d 521, 524 (3d
The inquiry into whether claims are covered under an insurance policy
is usually made in the context of the insurance company's duty to defend
or indemnify the insured in a civil action brought by a third party
against the insured. The analysis is normally done by reference to the
allegations of the civil complaint, and the court accepts the allegations
as true in determining whether a claim could be covered. If the third
party's claim against the insured is one that would be covered under the
policy, the insurance company may be liable to the insured for defense,
indemnification, or both. See, e.g., id. at 376. It is important to note
that Rutland never initiated a lawsuit against Keystone. Rather,
Rutland, through correspondence, informed Keystone of its damages, and
Keystone settled Rutland's informal claim by agreeing to sell Mineral
Black 123 to Rutland at a reduced price. (See Defendant's Exhibits C, D,
attached to its motion for summary judgment, Rec. Doc. No. 19.) We will
treat Rutland's correspondence the way we would have treated a formal
complaint. The correspondence sufficiently lays out Rutland's factual
allegations, and we will not penalize Keystone for settling the claim
before the commencement of formal litigation.
First, we determine whether Rutland's underlying claim was indeed one for
"property damage." The AMI policy defines property damage as:
a. Physical injury to tangible property, including
all resulting loss of use of that property. All
such loss of use shall be deemed to occur at
the time of the physical injury that caused it; or
b. Loss of use of tangible property that is not
physically injured. All such loss of use shall be
deemed to occur at the time of the "occurrence"
that caused it.
(AMI 1998 Policy at § 5, ¶ 15.)
In its correspondence, Rutland claimed that 2,105 gallons of plastisol
were rendered unusable because of Keystone's oversized particles of
Mineral Black 123, which of course were included in the process of
manufacturing the plastisol.
(Exhibit C to Defendant's Motion for Summary
Judgment, Rec. Doc. No. 19.) In analyzing under Pennsylvania law an
indistinguishable clause from another general liability policy, the Third
Circuit has held that property damage occurs when a third party
incorporates the insured's product into a new product having a value in
excess of the original product supplied by the insured, and suffers
damage to more than only the insured's product. See Imperial Casualty and
Indemnity Co. v. High Concrete Structures, Inc., 858 F.2d 128, 134-36 (3d
Cir. 1988). In Imperial Casualty, the court held that a manufacturer of
steel washers sustained "property damage" when it incorporated the
insured's defective steel into a brand new product, the steel washers.
Relying on Pittsburgh Plate Glass Co. v. Fidelity & Casualty Co. of New
York, 281 F.2d 538 (3d Cir. 1960), the court noted that property damage
occurred because "the purchaser created a new product having a value in
excess of the value of the product supplied by the insured, and suffered
damage to more than just the insured's product."
As with the manufacturer's claim in Imperial Casualty, Rutland's claim
was for "property damage" because the purchaser (Rutland) created a new
product (plastisol) presumably in excess of the value of the product
supplied by the insured (Mineral Black 123), and allegedly suffered
damage to more than just the Mineral Black 123.
AMI next argues that coverage is barred by either or both of two of the
policy's exclusions, Exclusion m and Exclusion n. Neither exclusion applies.
Exclusion m, entitled "Damage to Impaired Property or Property Not
Physically Injured," excludes from coverage:
"Property damage" to "impaired property" or property
that has not been physically injured, arising out of:
(1) A defect, deficiency, inadequacy or dangerous
condition in "your product" or "your work"; or
(2) A delay or failure by you or anyone acting on your
behalf to perform a contract or agreement
accordance with its terms.
This exclusion does not apply to the loss of use of
other property arising out of sudden and accidental
physical injury to "your product" or "your work" after
it has been put to its intended use.
(AMI 1998 Policy at § 1, ¶ m.) (emphasis added).
The Imperial Casualty court found that a similar exclusion was "on its
face inapplicable" because the previously mentioned steel washers were
physically injured. Imperial Casualty, 858 F.2d at 136. Similarly, because
Rutland's claim was that the plastisol was physically injured, this
exclusion is "on its face inapplicable." See also Lang Tendons v.
Northern Ins. Co. of New York, No. CIV. A. 00-2030, 2001 WL 228920, at *9
(E.D.Pa. March 7, 2001) (finding that an identical exclusion "does not
apply if there is physical injury to property other than the insured's
work itself") (citing Imperial Casualty, 858 F.2d at 136).
Exclusion n, entitled "Recall of Products, Work or Impaired Property,"
excludes from coverage:
Damages claimed for any loss, cost or expense
incurred by you or others for the loss of use,
withdrawal, recall, inspection, repair, replacement,
adjustment, removal or disposal of:
(1) "Your product";
(2) "Your work"; or
(3) "Impaired property";
if such product, work, or property is withdrawn or
recalled from the market or from use by any person or
organization because of a known or suspected
defect, deficiency, inadequacy or dangerous condition in it.
(AMI 1998 Policy at § 1, ¶ n.) "This exclusion [is] called the
`sistership exclusion' because it applies where products are recalled
because of known defects in their sister products[.]" Imperial
Casualty, 858 F.2d at 136. "The product to look to . . . is that sold by
[the insured]." Id. at 137. If the damages claimed have nothing to do
with a withdrawal from the market or from use, the exclusion is
inapplicable. Id. Because Rutland's damage claims have nothing to do with
the withdrawal from the market or from use of Mineral Black 123, the
exclusion does not apply. See id. (concluding that exclusion did not
apply where underlying dam age did not concern a withdrawal from the
market or from use of the insured's steel).
Finally, we examine whether Rutland's claims demonstrated the existence
of an "occurrence" under the policy. The policy defines an "occurrence"
as "an accident, including continuous or repeated exposure to
substantially the same general harmful conditions." (AMI 1998 Policy at
§ 5, ¶ 12.) The Pennsylvania Superior Court has held that the
existence of an "occurrence" under similar policies depends on whether
the underlying damage was caused by a tort or was caused by a
breach-of-contract, and has dismissed cases in which the underlying
damage claim — that is, the claim brought by a third party against
the insured — was one for breach-of-contract. The seminal case is
Redevelopment Authority of Cambria County v. International Insurance
Co., 685 A.2d 581 (Pa.Super. 1996) (en banc). In that case, the
Redevelopment Authority had entered into a contract with a municipality
in which the Redevelopment Authority would supervise improvements to the
municipal water system. Id. at 583. In an underlying state-court action,
the municipality claimed that the Redevelopment Authority "had failed to
`properly perform' the duties it had assumed under the contract, had been
negligent, and had been unjustly enriched as a result of the retention of
the monies paid to it to administer the project." Id. at 584. The
Redevelopment Authority requested that the insurance company defend and
indemnify it. The insurance company asked the court to declare that it
had no duty to defend or indemnify, arguing that there was no
"occurrence" under the policy.
The Superior Court analyzed the insurer's argument. It noted that
"[t]he purpose and intent of [a general liability] insurance policy is to
protect the insured from liability for essentially accidental injury to
the person or property of another rather than coverage for disputes
between parties to a contractual undertaking." Id. (citing, inter alia,
Phico Insurance Co. v. Presbyterian Medical Services Corp., 663 A.2d 753,
756-57 (Pa.Super. 1995); Ryan Homes, Inc. v. Home Indemnity Co.,
647 A.2d 939, 942 (Pa.Super. 1994)). Quoting Phico, the court reasoned
that allowing coverage for breaches-of-contract would unfairly make the
insurance company into a party to the contract:
To allow indemnification under [a breach of contract
theory] would have the effect of making the insurer a
sort of silent business partner subject to great risk
in the economic venture without any prospects of
sharing in the economic benefit. The expansion of the
scope of the insurer's liability would be enormous
without corresponding compensation. There is simply no
reason to expect that such a liability would be
covered under a comprehensive liability policy which
has, as its genesis, the purpose of protecting an
individual or entity from liability for essentially
accidental injury to another individual, or property
damage to another's possessions, even if, perhaps, the
coverage of the policy has been expanded to cover
other non-bodily injuries that sound in tort.
Id. at 590 (quoting Phico, 663 A.2d at 757-758).
The Redevelopment Authority court went on to enunciate the test for
distinguishing between claims that sound in tort (and therefore are an
"occurrence" within the scope of policy coverage) and claims that sound
in contract (and therefore are outside the scope of policy coverage).
"[T]o be construed as a tort action, the wrong ascribed to the defendant
must be the gist of the action with the contract being collateral." Id.
(quoting Phico, 663 A.2d at 757) (other citations omitted). The court
made it clear that "a contract action may not be converted into a tort
action simply by alleging that the conduct in question was done
wantonly." Id. (quoting Phico, 663 A.2d at 757) (other citations
omitted). The court then stated that "the important difference between
contract and tort actions is that the latter lie from the breach of
duties imposed as a matter of social policy while the former lie for the
breach of duties imposed by mutual consensus." Id. (quoting Phico, 663
A.2d at 757) (other citations omitted).
The Redevelopment Authority court decided that these considerations
were consistent with those followed by other jurisdictions, including New
Jersey, Wyoming, and Alaska. Id. at 590-92. Applying this test, the court
concluded that the underlying action sounded in contract and was outside
the scope of the policy's coverage, even though the complaint included a
claim for negligence. The rule in Redevelopment Authority — that
there is no "occurrence" if the underlying claim is one merely for
breach-of-contract — has been followed by numerous state and
federal courts sitting in Pennsylvania. See, e.g., Snyder Heating Co.,
Inc. v. Pennsylvania Mfr. Ass'n Ins. Co., 715 A.2d 483
, 485 (Pa.Super.
1998); Pro Dent, Inc. v. Zurich U.S., No. CIV. A. 99-5479, 2001 WL
474413, at *2 (E.D.Pa. April 30, 2001); Augenblick v. Nationwide
Insurance Co., No. Civ.A. 99-3419, 1999 WL 975118, at *3-*5; Jerry
Davis, Inc. v. Maryland Insurance Co., 38 F. Supp.2d 387, 390-92
AMI contends that any claim brought by Rutland would necessarily have
been for breach-of-contract — specifically, a simple
breach-of-warranty claim under Article 2 of the Uniform Commercial Code.
Keystone does not deny that Rutland's claim is akin to one of
breach-of-contract or warranty; rather, it attempts to discredit
Redevelopment Authority and its progeny. Keystone argues two points.
First, it contends that a footnote in Imperial Casualty, the
above-mentioned Third Circuit case, is binding precedent stating that
courts, when determining the existence of an "occurrence" under
commercial general liability policies, are to focus not on the
distinction between tort liability and contract liability, but on the
interpretation of the specific insurance policy in question. See Imperial
Casualty, 858 F.2d at 134 n. 7. Second, it asserts that a principal case
that Redevelopment Authority cites for support has been abrogated, and
that therefore Redevelopment Authority lacks a sound foundation.
In Imperial Casualty, a general liability insurer, USF & G, brought a
declaratory judgment action regarding its obligation to defend a
Pennsylvania state court breach-of-contract action against its insured,
High Steel. USF & G argued a position similar to the Redevelopment
Authority contract/tort distinction, but the court rejected USF & G's
Another argument pressed by USF & G is that because
Pennsylvania law does not permit a person complaining
injury to the defective product itself to
recover in tort, and only contract remedies are
available against High Steel, tort-oriented
comprehensive general liability insurance "is not
available to protect High Steel." Appellee-Cross
Appellant's Brief at 26-28. What is at issue here,
however, is not the distinction between tort and
contract liability but a specific insurance contract
that must be interpreted according to well-established
rules of construction.
Imperial Casualty, 858 F.2d at 134 n. 7. Analyzing the policy, the Third
Circuit eventually found that USF & G had a duty to defend High Steel in
the state action. Keystone argues that footnote seven of Imperial
Casualty is directly in opposition to Redevelopment Authority; that is,
that it instructs that in determining the existence of an "occurrence," a
court is to look not at whether the underlying claim is one of tort or
contract, but at the specific terms of the policy.
Next, Keystone points out that one of the cases relied on by the
Redevelopment Authority court has been discredited. The Redevelopment
Authority court cited a holding by the Wyoming Supreme Court, in which
the Wyoming court analyzed a provision in a general liability policy
stating that the insurer will pay damages that the insured becomes
"legally obligated to pay." The Wyoming court cited a California case,
International Surplus Lines Ins. Co. v. Devonshire Coverage Corp.,
93 Cal.App.3d 601 (1979):
Courts universally have interpreted
liability-coverage provisions, identical to that found
in appellants' policy, as referring to liability
sounding in tort, not in contract. International
Surplus Lines Ins. Co. v. Devonshire Coverage Corp.,
93 Cal.App.3d 601, 155 Cal.Rptr. 870 (1979), is a
Redevelopment Authority, 685 A.2d at 591 (citing Action Ads Inc. v. Great
American Insurance Co., 685 P.2d 42, 43-45 (Wyo. 1984)). The
Redevelopment Authority court went on to summarize International
Surplus, which embraced the contract/tort distinction in general
liability policies. Keystone points to a California Supreme Court case
— decided after Redevelopment Authority — that expressly
abrogated International Surplus. See Vandenburg v. Superior Court,
982 P.2d 229 (Cal. 1999). Vandenburg disapproved of distinguishing
between contract actions and tort actions when deciding coverage, and
held that the term "legally obligated to pay" could refer to either tort
law or contract law:
The nature of the damage and the risk involved, in
light of particular policy provisions, control
coverage. Moreover, we reject the ex contractu/ex
delicto distinction, which derives from a misreading
of the seminal case, Ritchie v. Anchor Casualty Co.
(1955) 135 Cal.App.2d 245, 286 P.2d 1000 (Ritchie). In
Ritchie, the court analyzed whether the term
"liability imposed by law," the precursor to "legally
obligated to pay," included coverage for liability
arising from contract. (Id. at p. 254, 286 P.2d 1000.)
This phrase had usually been construed to mean
liability imposed in a definite sum by a final
judgment against the assured. (Ibid.) But the policy
before the Ritchie court contained a distinction;
coverage A applied to "`liability imposed . . . by
law or by written contract,'" whereas coverage B
applied to "`liability imposed . . . by law.'" (Ibid.)
The court concluded that the omission of the term "`or
by written contract'" in coverage B, the portion at
issue in Ritchie, "is persuasive that the phrase
`imposed upon him by law'" as used in this policy . . .
relates to the nature of the liability to be
defended rather than the result of the lawsuit . . . ."
(Ibid., italics added.)
In International Surplus, supra, 93 Cal.App.3d 601,
at page 611, 155 Cal.Rptr. 870, the phrase at issue
was "`legally obligated to pay as damages'" which the
court found synonymous with "`damages for a liability
imposed by law,'" the coverage language in the Ritchie
case. Without further discussion, the court then held
that the "latter phrase has been uniformly interpreted
as referring to a liability arising ex delicto as
distinguished from ex contractu." (Ibid., citing
Ritchie, supra, 135 Cal.App.2d 245, 286 P.2d 1000,
italics added.) This brief statement led to a string
of cases relying upon International Surplus for the
purported distinction between tort and contract
damages. These later cases fail to consider, however,
the particular and explicit coverage language before
the Ritchie court, and thus create an arbitrary
distinction that ignores otherwise settled principles
of insurance contract interpretation.
Vandenburg, 982 P.2d at 239. Keystone argues that based on Redevelopment
Authority's reliance on International Surplus and the California Supreme
Court's subsequent abrogation of International Surplus, the tort/contract
distinction is a fallacy. Thus, according to Keystone, Redevelopment
Authority is invalid and should not apply in the instant case. As a
corollary, Keystone also attempts to distinguish each of the other
non-Pennsylvania cases cited in Redevelopment Authority.
We find that notwithstanding Keystone's assertions to the contrary, the
tort/contract distinction is valid. Keystone painstakingly attempts to
distinguish or otherwise discredit a large number of cases cited in
Redevelopment Authority, but it ignores Phico, the Pennsylvania Superior
Court case that sets out the rationale for excluding coverage for
contract claims. Phico was one of the principal cases cited in
Redevelopment Authority, and its reasoning — that allowing coverage
for breach-of-contract claims unfairly renders the insurer a party to the
contract — remains valid and unaffected by Vandenburg's rejection
of International Surplus. Phico arrived at its conclusion independently
of International Surplus, and Redevelopment Authority relies on Phico
without any connection to International Surplus or any other
non-Pennsylvania case. Thus, recognition of Phico — a case decided
by the Pennsylvania Superior Court, whose reasoning we may not ignore
under these circumstances — is a separate and independent reason to
uphold the validity of Redevelopment Authority.
Imperial Casualty, the Third Circuit case purportedly in conflict with
Redevelopment Authority, is distinguishable. In that case, while the
court rejected USF & G's argument relating to the tort/contract
distinction, neither party disputed the existence of an "occurrence"
under the policy. Imperial Casualty, 858 F.2d at 134. In Redevelopment
Authority and its progeny, the issue of what constitutes an "occurrence"
was explicitly discussed and decided. Because the issue before this court
is the existence of an "occurrence," we believe that the Pennsylvania
courts' more well-developed law is properly applied.
Implementing the analysis dictated by Redevelopment Authority, we find
that any potential claim by Rutland would have been solely for
breach-of-contract. The main focus of the relationship between Keystone
and Rutland was the sales agreement relating to the Mineral Black 123.
The Mineral Black 123 was manufactured in a way that did not conform to
Rutland's requirements for the manufacture of the plastisol; any
negligence or product defect
was not the "gist" of Rutland's concerns.
Indeed, Rutland's claims did not indicate that Keystone's conduct was
tortious, accidental, or non-contractual in nature; Rutland alleged
merely that the Mineral Black 123 was inadequate for the manufacture of
plastisol. See Snyder, 715 A.2d at 487. Further, while Keystone may have
manufactured a product that did not meet Rutland's expectations, Keystone
was under no duty imposed by social policy to make the Mineral Black 123
a certain size. Rather, Keystone breached a duty imposed by mutual
consensus with Rutland. See id., Pro-Dent, 2001 WL 474413, at *2
(engaging in a similar analysis). Because Rutland's only remedy was for
breach-of-contract or breach-of-warranty under the U.C.C., there was no
"occurrence," and Keystone's claim is not covered under the AMI policy.
Keystone argues in the alternative, however, that AMI should be
equitably estopped from denying coverage because it settled Keystone's
"identical" 1997 claim relating to Shiraishi, but did not assert that
claims such as that one were not covered under Keystone's substantially
similar 1997 policy.
"The essential elements of estoppel are `an inducement by the party
sought to be estopped to the party who asserts the estoppel to believe
certain facts exist — and the party asserting the estoppel acts in
reliance on that belief.'" Artkraft Strauss Sign Corp. v. Dimeling,
631 A.2d 1058, 1061 (Pa.Super. 1993) (quoting Sabino v. Junio,
272 A.2d 508, 510 (Pa. 1971)). In order for an insurer to be estopped
from denying coverage, the insured "must establish that `he relied upon
the company's actions to his detriment." Nationwide Mutual Fire Ins.
Co. v. Salkin, 163 F. Supp.2d 512, 517 (E.D.Pa. 2001) (quoting Turner v.
Federal Ins. Co., No. CIV. A. 94-3393, 1995 WL 33096, at * 2 (E.D.Pa.
Jan.25, 1995)). The reliance by the party asserting estoppel must be
justifiable. McConnell v. Berkheimer, 781 A.2d 206, 210 (Pa.Super. 2001)
(citing Bahl v. Lambert Farms, Inc., 773 A.2d 1256, 1260 (Pa.Super.
2001); Curran v. Eberharter, 521 A.2d 474, 479-80 (Pa.Super. 1987)).
Keystone points to no evidence that it justifiably or detrimentally
relied on AMI's payment of the 1997 claim. It merely argues that it
reasonably expected the Rutland claim to be covered based on the coverage
of the earlier claim. While this may or may not be true, without
justifiable and detrimental reliance on the settlement of the prior
claim, Keystone may not successfully assert equitable estoppel. See
Atlantic Mutual Insurance Co. v. Nicoletti Beer Distrbiutors, No. CIV.A.
94-3699, 1995 WL 639823, at *6 (E.D.Pa. October 30, 1995) (rejecting the
insured's estoppel argument where there was no evidence of reliance on
Any reliance on the payment of the Shiraishi claim would not have been
justifiable in any event. The policy states: "We may, at our
discretion, investigate any `occurrence' and settle any claim or `suit'
that may result." (AMI 1998 Policy at § 1, ¶ 1(a).) The
Shiraishi claim arose in Japan and was for significantly less money than
was the instant claim; rather than conducting a costly investigation
overseas, AMI exercised its discretion to settle the claim and dispense
with any other expense. The instant claim, however, was local and for far
more money than was the Shiraishi claim. Even though AMI did not provide
Keystone with a coverage opinion on the Shiraishi claim, Keystone's
reliance on the payment of the Shiraishi claim as proof of coverage for
the instant claim would not have been reasonable, given the difference in
character between the two claims. The District of Columbia
noted that the payment of a single claim "should not, without more, bind
[a comprehensive general liability] insurer to an interpretation under
which the insured is covered for all similar claims." Charter Oil Co.
v. American Employers' Insurance Co., 69 F.3d 1160, 1168 (D.C. Cir.
1995). The court reasoned that otherwise, before paying a modest claim,
the insurer would be forced to "conduct an investigation in far greater
depth than the amount at stake would justify, simply to avoid the risk of
massive exposure down the road." Id. We agree with this reasoning and
will not issue a holding that discourages insurance companies from
engaging in sound cost-benefit practices.
Moreover, "the courts of most jurisdictions agree that [estoppel is]
not available to broaden the coverage of a policy so as to protect the
insured against risks not included therein or expressly excluded
therefrom." 26 Am. Jur. Proof of Facts 2d 137 (1981); see also 14 Summ.
Pa. Jur.2d Insurance § 10:4 (1994) ("The doctrines of waiver and
estoppel do not apply where no contract exists, and they cannot create an
insurance contract where none existed, nor can they create a liability
for benefits not contracted for.") (footnotes omitted). As we discussed
above, the AMI policy does not cover claims such as the one relating to
Rutland's damages; thus, estoppel is not appropriate.
One point remains. Keystone points out that on a previous occasion,
Rutland made a similar claim against Keystone, and Keystone's subsequent
insurance claim was paid by Fireman's Fund Insurance Company, Keystone's
insurer at the time. Keystone apparently argues that the payment of that
claim made it reasonable to expect AMI to pay the instant Rutland claim.
Keystone cites no law to support its position, and we find no merit to
Keystone's claim for damages to Rutland was based on a simple breach of
a contract or warranty. Therefore, there was no "occurrence" under
Keystone's AMI general liability insurance policy, and the policy does
not provide for coverage. Further, AMI is not estopped from denying
coverage; Keystone points to no evidence that it relied on AMI's previous
conduct, and any reliance would not have been justifiable. Moreover,
estoppel is not properly used to create liability for nonexistent
AMI's motion for summary judgment will be granted, and Keystone's
motion for partial summary judgment will be denied. We predict that if
the Pennsylvania Supreme Court were faced with the identical case, it
would hold as we do. An appropriate order follows.
For the reasons stated in the accompanying memorandum,
IT IS ORDERED THAT:
1. Defendant American Mining Insurance Company's motion for summary
judgment (Rec. Doc. No. 19) is granted.
2. Plaintiff Keystone Filler & Mfg. Co., Inc.'s motion for partial
summary judgment (Rec. Doc. No. 20) is denied.
3. The clerk is directed to enter final judgment in favor of defendant
and against plaintiff.
4. The clerk is directed to close the case file.
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