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PIZZINI v. AMERICAN INTERNATIONAL SPECIALTY LINES INS.

June 28, 2002

LORIS PIZZINI, ET AL., PLAINTIFFS
V.
AMERICAN INTERNATIONAL SPECIALTY LINES INSURANCE CO., DEFENDANT



The opinion of the court was delivered by: Anita B. Brody, District Judge.

  MEMORANDUM AND ORDER

This action involves an insurance coverage dispute between an insurer and assignees of an insured arising out of the sale of speculative oil well leases. Plaintiffs Loris Pizzini, Donna Pizzini, Leone Pizzini, Tullia Pizzini, Valerio Pizzini, Mirachiara Bache, and Thomas Bache ("the Pizzini-Bache plaintiffs") and plaintiffs Dodie Pettit and Kevin Gray ("the Pettit-Gray plaintiffs") are two groups of people who purchased oil well leases from Stephen Barry Shellington ("Shellington"), an authorized agent for the Equitable Life Assurance Society of the United States ("the Equitable"). Shellington was insured under professional liability policies issued by defendant American International Speciality Insurance Company ("AISLIC") to the Equitable and its agents. The oil ventures failed, and both groups of plaintiffs filed suit against Shellington in Pennsylvania state court. AISLIC agreed to defend Shellington against plaintiffs' claims subject to a reservation of rights. Without the consent of AISLIC, Shellington entered into a settlement agreement with plaintiffs in state court in which he stipulated to the entry of judgment in favor of each plaintiff for a specified amount ("consent judgment") and assigned to plaintiffs his rights under two AISLIC policies: AISLIC policy number 230-76-05, effective January 1, 1995 through January 1, 1996 ("the 1995 policy"), and (2) AISLIC policy number 243-27-99, a renewal of the 1995 policy, effective January 1, 1996 to January 1, 1997 ("the 1996 policy"). AISLIC refused to pay plaintiffs.

Plaintiffs subsequently filed suit in federal court against AISLIC, asserting four causes of action: two counts of breach of contract for failure to indemnify and two counts of bad faith.

AISLIC now moves for partial summary judgment on the breach of contract counts.

I. FACTUAL BACKGROUND*fn1

In 1995, Stephen Barry Shellington, a registered agent of the Equitable and its securities entity, Equico, Inc. ("Equico"), solicited the sale of certificates of interest in various oil wells located in Kentucky. The oil wells interest were being offered by an entity called Goff & Melton, Inc. After being contacted by Shellington, plaintiffs Loris Pizzini, Donna Pizzini, Leone Pizzini, Tullia Pizzini, Valerio Pizzini Mirachiara Bache, Thomas Bache, Dodie Pettit and Kevin Gray purchased oil well interests from Shellington between March and June 1995.

The oil ventures failed. Sometime prior to the end of August 1995, the Pizzini-Bache plaintiffs contacted Shellington seeking repayment of their investments. On August 30, 1995, counsel for the Pizzini-Bache plaintiffs sent a letter to Shellington demanding repayment:

[The Pizzini-Bache plaintiffs] invested differing amounts totaling $349,000.00 in Kentucky oil and gas leases this spring, purchases which you induced them to make in violation of the Pennsylvania Securities Act of 1972, 70 P.S. § 1-101 et seq. . . . On behalf of our clients, we herewith demand from you repayment of the above listed considerations paid for such oil and gas leases and tender to you all of the aforesaid leases our clients obtained in exchange therefor . . . Since you have already failed to acknowledge or accept their verbal offers and tenders, we cannot extend the deadline for acceptance of this offer and tender beyond ten (10) days from the date of delivery hereof. Failure to accept this offer will, of course, cause us to undertake and pursue all available legal remedies against you at the earliest date possible.

(Joint Stipulation of Facts, Ex. E, 1-2).

Presumably in response to the demand letter, Shellington retained the law firm of Stradley Ronon Stevens and Young ("Stradley"). On October 2, 1995, Stradley attorney Stephen Baker sent a letter to counsel for the Pizzini-Bache plaintiffs on behalf of Shellington asking that counsel contact him regarding the August 30, 1995 demand letter.

On October 30, 1995, the Pizzini-Bache plaintiffs filed suit against Shellington in the Court of Common Pleas of Chester County, Pennsylvania, claiming that Shellington (1) had made numerous misrepresentations about the oil well interests and (2) sold unregistered securities in violation of Pennsylvania law ("the Pizzini-Bache lawsuit").*fn2

On January 3, 1996, Shellington was served with a copy of the Pizzini-Bache complaint. On January 17, 1996, Shellington notified AISLIC by letter that he was being sued by the Pizzini-Bache plaintiffs and enclosed a copy of the complaint. In this letter, he also requested that Stradley be appointed as defense counsel.

By letter dated February 29, 1996, AISLIC agreed to provide a defense for Shellington against the Pizzini-Bache action under the 1995 policy of insurance issued by AISLIC to the Equitable, subject to a reservation of rights. AISLIC expressly reserved the right to deny coverage, among other reasons, if he was involved in selling the oil well interests:

[I]f you were in any way involved with selling the [oil well interests], there would be no coverage unless the oil lease wells were products sold through [the Equitable or Equico Securities, Inc.] In the event that it is found that you in any way were involved in selling or soliciting this product, there would be no coverage for this matter.

(AISLIC Statement of Facts, Tab 14, 3). The letter further stated:

[AISLIC] reserves all rights and defenses it may have under the policy and at law, including the right to examine and raise other issues which might affect coverage.

(See id. at 4). The letter also informed Shellington that it had appointed Keith Dutill of Stradley as defense counsel in the matter.

In March 1996, plaintiffs Pettit and Gray, represented by the same counsel as the Pizzini-Bache plaintiffs, also filed suit against Shellington in the Chester County Court of Common Pleas ("the Pettit-Gray lawsuit") raising the same claims as in the Pizzini-Bache lawsuit. Shellington notified AISLIC of the Pettit-Gray lawsuit.

By letter dated April 8, 1996, AISLIC agreed to defend Shellington against the Pettit-Gray lawsuit under the 1995 policy, subject to a reservation of rights, and appointed Stradley as defense counsel. Like the February 29, 1996 reservation of rights letter, this letter also informed Shellington that:

[I]f you were in any way involved with selling the [oil well interests], there would be no coverage unless the oil lease wells were products sold through [the Equitable or Equico Securities, Inc.] In the event that it is found that you in any way were involved in selling or soliciting this product, there would be no coverage for this matter.

(AISLIC] Statement of Facts, Tab 15, 3). The April 8, 1996 letter contained the identical reservation of rights statement as in the February 29, 1996 letter:

[AISLIC] reserves all rights and defenses it may have under the policy and at law, including the right to examine and raise other issues which might affect coverage.

(See id. at 4).

Soon thereafter, the Court of Common Pleas of Chester County consolidated the Pizzini-Bache and Pettit-Gray lawsuits (referred to as "the state action").

At or about this time, Federal law enforcement officials initiated an investigation of Shellington's involvement in the sale of the oil well interests. Shellington retained personal counsel in connection to this investigation.

During discovery in the state action, plaintiffs sought to obtain a copy of all insurance policies under which an insurance company may be liable to satisfy part or all of any judgment which may be entered against Shellington in the action. On June 27, 1996, in response to an order to compel, counsel for Shellington, William Mahoney of Stradley, sent plaintiffs a copy of the 1996 AISLIC policy.

On July 12, 1996, plaintiffs' counsel sent a letter to Mahoney in which he stated his belief that Mahoney had sent plaintiffs the wrong AISLIC policy:

Thank you for your letter of June 27, 1996 (which was not received by my office until July 11, 1996) and its enclosure, a copy of the Errors and Omissions policy issued by American International Specialty Lines Insurance Company to [the Equitable] and Agents of the Equitable . . . I was very disappointed to find, however, that the enclosed policy is for a period subsequent to the filing of the Pizzini's complaint: namely, commencing January 1, 1996. As you know, the Pizzinis' complaint was filed in 1995. As you also know, the enclosed policy is a claims made policy. Therefore, this policy does not cover the Pizzini's claim; it did not go into effect until after the claim had been made and it is not retroactive.

(AISLIC Statement of Facts, Tab 9).

According to an affidavit prepared by plaintiffs' counsel, Mahoney telephoned plaintiffs' counsel upon receipt of the letter. Mahoney informed counsel that "his conclusion that the [1996] policy was not applicable to the claims of the plaintiffs against Shellington in the State Action was wrong and that just the opposite was true." (Pl. Statement of Facts, Tab 22, ¶¶ 6, 7.

Based on Mahoney's representation, plaintiffs' counsel advised his clients that:

[T]here appeared to be enough insurance on Shellington, which covered plaintiffs' claims, notwithstanding the reservation of rights that [Shellington's] counsel advised had been issued by AISLIC, that if they could prevail on their claims, they appeared collectible from [the 1996] policy.

(See id. at ¶ 8).

On February 13, 1997, plaintiffs in the state action noticed Shellington's deposition. Shellington attended the deposition but declined to answer any questions "at the advice of counsel." Plaintiffs' counsel filed a motion to compel Shellington to answer in state court. Stradley, on behalf of Shellington, opposed the motion. On May 2, 1997, the Court of Common Pleas of Chester County issued an order granting the motion to compel and providing that Shellington would be precluded from testifying at trial regarding any matter about which he refused to answer questions in pretrial depositions.

Plaintiffs notice another deposition of Shellington. Shellington again attended the deposition but continued to assert his constitutional privilege and declined to answer any questions at the deposition.

On October 14, 1998, AISLIC sent Shellington a supplemental reservation of rights letter in which it identified the 1996 policy as the policy governing plaintiffs' claims. In this letter, AISLIC informed Shellington:

We have been advised that you have refused to testify in defense of these claims, invoking your Fifth Amendment right. It is our understanding that the court, while not compelling you to submit to deposition, has ordered that if you do not submit to deposition, you will be unable to testify at time of trial . . . As your refusal to testify will make it impossible for you [sic] to testify at the time of trial, you are in violation of condition 7 of your policy and AISLIC will not be obligated to indemnify you for any resulting judgment.

(AISLIC Statement of Facts, Tab 17, 6). AISLIC expressly reserved its rights to deny coverage on grounds not specifically identified in the letter: "[T]his reservation of rights should not be construed as a waiver of any other terms or conditions of the policy not mentioned in this letter." (See id. at 8). The letter concluded:

AISLIC [sic] has on several occasions advised you that, for the reasons stated above, any judgments entered against you as a result of this claim would not be covered under your AISLIC [sic] policy. Under these circumstances, AISLIC [sic] would again inquire as to whether you are prepared to ...

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