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.
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.
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., ...