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January 16, 2002


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.



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)).


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 Cir. 1995)).


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., ...

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