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Charter Oak Insurance Co. v. Maglio Fresh Food

United States District Court, E.D. Pennsylvania

September 9, 2014

Charter Oak Insurance Co., Plaintiff,
v.
Maglio Fresh Food d/b/a Maglio's Sausage Co., et al., Defendants

Page 462

For Charter Oak Insurance Company, Plaintiff: FRANCIS J. DEASEY, LEAD ATTORNEY, DEASEY, MAHONEY VALENTINI, NORTH, LTD, Philadelphia, PA USA; HENRI MARCEL, WARD A. RIVERS, DEASEY, MAHONEY, VALENTINI, NORTH LTD, Philadelphia, PA USA.

For Maglio Fresh Food, doing business as MAGLIO'S SAUSAGE COMPANY, Defendant: ERIC L. KEEPERS, KANE & SILVERMAN PC, Philadelphia, PA USA; HOWARD G. SILVERMAN, HAGGERTY & SILVERMAN, Philadelphia, PA USA.

For American Guarantee And Liability Insurance Company, Defendant, Cross Claimant: REX F. BRIEN, JR., CHRISTIE PABARUE MORTENSEN & YOUNG, Philadelphia, PA USA; JAMES CHRISTIE, CHRISTIE PABARUE & YOUNG, Philadelphia, PA USA.

For Maglio Fresh Food, Cross Defendant, Cross Claimant,: ERIC L. KEEPERS, KANE & SILVERMAN PC, Philadelphia, PA USA; HOWARD G. SILVERMAN, HAGGERTY & SILVERMAN, Philadelphia, PA USA.

For American Guarantee And Liability Insurance Company, Cross Defendant: REX F. BRIEN, JR., CHRISTIE PABARUE MORTENSEN & YOUNG, Philadelphia, PA USA; JAMES CHRISTIE, CHRISTIE PABARUE & YOUNG, Philadelphia, PA USA.

For Charter Oak Insurance Company, Counter Defendant: FRANCIS J. DEASEY, WARD A. RIVERS, LEAD ATTORNEYS, DEASEY, MAHONEY VALENTINI, NORTH, LTD, Philadelphia, PA USA.

Page 463

MEMORANDUM RE CONCLUSIONS OF LAW AND VERDICT

MICHAEL M. BAYLSON, UNITED STATES DISTRICT JUDGE.

I. Introduction

This complex insurance dispute involves claims between Maglio Fresh Food (" Maglio" ) and its insurers, Charter Oak Insurance Company (" Charter Oak" ), the primary insurer, and American Guarantee Liability and Insurance Company (" American Guarantee" ), the excess insurer.[1]

Upon agreement of the parties, this Court first decided the issue of the insurers' duty to indemnify Maglio for damages resulting from two distinct claims and two adverse jury verdicts in the underlying action brought by Maglio's competitor, Leonetti's. Those claims and verdicts are referred to here, and in prior opinions, as the " Maglio brand" claim or verdict and the " Forte brand" claim or verdict. Each party submitted a Motion for Summary Judgment on this issue. On October 24, 2013, in a detailed Memorandum, this Court found that neither insurer owed indemnity to Maglio for either verdict and/or the resulting judgment. Charter Oak Ins. Co. v. Maglio Fresh Food, 979 F.Supp.2d 581 (E.D. Pa. 2013).

With respect to the Maglio brand claim, this Court concluded that " Maglio ha[d] not pointed to any evidence in the underlying trial record that shows that Maglio disparaged Leonetti's or its products in its sale of Maglio brand stromboli; rather, it merely misrepresented its own product." Id. at 594. As a result, Maglio could not meet its burden to show that the policies provided coverage for the Maglio brand verdict.

As for the Forte brand claim, this Court found that " Maglio [could not] demonstrate the extent to which the jury awarded damages based on Leonetti's disparagement theory as opposed to any other theory," thus " Maglio [would] not be able to meet its burden at trial to show that the claim falls within the scope of coverage." Id. at 595.

The parties then conducted discovery on Maglio's counterclaims and cross-claims for bad faith. Following discovery, each party submitted a Motion for Summary Judgment on these claims. On July 18, 2014, this Court denied those Motions due to the presence of lingering factual disputes and in recognition of the lack of appellate guidance on the relevant issues, which counseled in favor of a full trial record. Charter Oak Ins. Co. v. Maglio Fresh Food, CIV.A. 12-3967, 2014 WL 3600383 (E.D. Pa. July 18, 2014).[2]

After the denial of the Motions for Summary Judgment on the bad faith issue, Maglio and Charter Oak agreed to a settlement. The terms of the settlement are not known to the Court.

The Court then held a bench trial, beginning on July 28, 2014, to decide Maglio's claims against American Guarantee.

After three days of testimony, the Court held argument on August 1, 2014, at which time it gave counsel an opportunity to present any closing arguments and asked a series of questions. At the conclusion of argument, this Court issued a series of verbal findings as to the credibility of various

Page 464

witnesses. ECF 220, pp. 60-63. One week later, on August 8, 2014, the Court issued written factual findings. ECF 212. The legal conclusions below assume familiarity with the verbal and written factual findings, and all of these constitute the Court's compliance with Rule 52(a) of the Federal Rules of Civil Procedure.

On August 29, 2014, both Maglio and American Guarantee submitted Post-Trial Memoranda. ECF 223-225. In a letter dated on the same day, counsel for American Guarantee notified this Court of a dispute between the parties as to Maglio's deposition designations of Amy Baker, a representative of Charter Oak. The Court will overrule the objections to the designations; however, those designations do not affect the Court's disposition.

II. Contentions of the Parties

A. Maglio

Maglio's contentions have been summarized in prior opinions. At the trial, Maglio made two basic contentions. The first is that American Guarantee breached its obligations and is liable for bad faith because of its denial of coverage. Based on the Court's verbal and written factual findings and interpretation of the law and the American Guarantee policy, the Court has concluded that Maglio has failed to prove this claim by the applicable burden of proof.

The second contention of Maglio is that American Guarantee breached its obligations and is liable for bad faith due to its refusal to secure an appellate bond for Maglio so that Maglio could appeal the denial of post-trial motions and the adverse verdicts at the two trials. The Court's prior findings, both verbal and in writing, summarize the evidence on this point.

As noted in those findings, the Court found that Anthony Maglio, the owner of Maglio, was very concerned about the fate of his company, following the jury's determination against Maglio in the first trial. Following that verdict, Mr. Maglio privately retained Joseph Turchi, Esquire to represent Maglio's interest on insurance coverage issue, apart from, and in addition to, Maglio's trial representation being provided by Edward Kelbon, Esquire.

The key period under the facts starts after the second verdict and reaches its most crucial point when Judge Bernstein denied Maglio's post-trial motions. Following this denial, Maglio's options were to file an appeal of the judgment, to allow execution on the judgment (which would have put Maglio out of business), or to enter a settlement agreement with Leonetti.

Maglio had made clear that it did not want to file for bankruptcy. Rather, Maglio wanted to appeal, but the Pennsylvania Rules of Civil Procedure (similar to the federal rules and that of virtually all other jurisdictions), would have required a supersedeas bond to be posted in at least the amount of the adverse judgment, or $3.16 million, in order for execution to be stayed pending the appeal. Mr. Turchi's own investigation revealed that Maglio's poor financial condition prevented it from obtaining funding for a bond from a surety company. Mr. Turchi thus began a series of negotiations designed to persuade both Charter Oak and Maglio to post an appellate bond to enable Maglio to continue its defense on appeal.

Mr. Turchi acted reasonably at the time, particularly given Mr. Maglio's refusal to file for bankruptcy. When Turchi's efforts to reach an accommodation with American Guarantee were unsuccessful, Turchi then advised Maglio to reach the best arrangement possible with Leonetti's, the plaintiff

Page 465

in the claims against Maglio, which resulted in the settlement agreement.[3]

Maglio argues that American Guarantee had a duty under its policy to defend Maglio, including posting the appellate bond. First, Maglio contends that American Guarantee's policy required it to defend Maglio. This argument is based on Charter Oak's decision to tender its full policy limits so that Maglio could negotiate a global settlement of all claims, including both the Maglio and the Forte brand claims. Ultimately, Charter Oak paid its limits into court, via an equitable interpleader action. Maglio contends that Charter Oak's payment was an admission of coverage and also exhausted the Charter Oak policy limits, thus triggering American Guarantee's duty to defend under the terms of the American Guarantee policy.

Although Maglio acknowledges Charter Oak continued to provide counsel to Maglio, negating American Guarantee's obligation to do the same, Maglio argues that American Guarantee remained obligated to cover other aspects of its defense, including the payment for the appellate bond. Testimony at trial was uncontradicted that Maglio would not have been able to obtain an appellate supersdeas bond by merely paying a premium, because of its tenuous financial condition. Rather, the only way for Maglio to post a bond, unless American Guarantee agreed to do so, would have been to post assets as security for the bond -- assets that Maglio did not have.

Maglio relies on the basic principle of Pennsylvania law which makes clear (1) that an insurer must defend a claim against its insured, until and unless it is clear that there is no possible coverage under the claim, and (2) that this duty to defend is broader than the duty to indemnify.[4]

Maglio contends that in the underlying litigation, both Charter Oak and American Guarantee admitted coverage for the Forte brand verdict, and because Charter Oak subsequently voluntarily tendered and paid its policy limits into court (which limits are larger than the Forte brand verdict), Charter Oak has thereby tacitly admitted coverage for the Maglio brand claim, as well as the Forte brand claim, and therefore, that Charter Oak's payment of the policy limits into court " triggered" American Guarantee's obligation to defend Maglio. Maglio further contends that given the policy language and the circumstances, " defense" must include the cost of a supersedeas bond.

Maglio asserts that without the supersedeas bond being filed, it could not appeal the verdict, and thus it lost its ability to defend against the verdict and the judgment entered on the verdict. Thus, the next best alternative was the settlement agreement with Leonetti's.

B. American Guarantee

American Guarantee has argued, relatively simply and consistently, that under

Page 466

the terms of its " follow form" policy, it had no duty to defend until Charter Oak, as the primary carrier, exhausted its policy limits via payment for a covered claim. In other words, American Guarantee has maintained that its policy only provides that its excess insurance will come into play if there is coverage of the claim and if the payment for that claim exceeds $1 million. American Guarantee contends that the only covered claim was the Forte brand claim, which was a claim for $660,000, and that Charter Oak's payment of that claim therefore did not exhaust the policy limits. American Guarantee characterizes the additional $440,000 that Charter Oak paid into court as a " voluntary payment."

American Guarantee also contends that it appropriately and adequately reviewed Maglio's requests for indemnification and payment of the appellate bond, and its refusal to do so was reasonable.

III. Legal Standard

Maglio has brought two separate claims in its Amended Cross-Claims against American Guarantee: one for bad faith under the Pennsylvania statute, 42 P.S.A. § 8371; and the second for breach of contract via violation of the breach of the implied covenant of good faith and fair dealing

The Court will address these in turn.

A. Statutory Bad Faith

Maglio brings a claim under a Pennsylvania statute, 42 P.S.A. § 8371 for bad faith in an insurance policy. Maglio must prove this claim by clear and convincing evidence, which of course, is a higher standard than preponderance of the evidence.

Under Pennsylvania law, an insurance company must act with the utmost good faith and fair dealing toward its insured, and give the interests of its insured the same faithful consideration that it gives its own interests. This heightened duty arises because of the special relationship between an insurer and its insured and the nature of the insurance contract.

An insurance company acts in bad faith if it: (1) does not have a reasonable basis for what it does; and (2) knows or recklessly disregards its lack of a reasonable basis. Put another way, bad faith occurs if an insurer knowingly or recklessly ...


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