Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

In this latest case, the Pennsylvania Superior Court ruled in American & Foreign Ins. Co. v. Jerry’s Sport Center, Inc., 2008 PA Super. 1994 (Pa. Super. May 5, 2008), that a trial court erred in holding  that Royal was entitled to reimbursement for the cost of defending various class action gun cases that it was later held not to have any obligation to defend because the NAACP case did not allege or involve “bodily injury.”

Whereas the trial court had found that an implied contract existed between the parties in light of the fact that the insured had accepted Royal’s defense pursuant to a reservation of rights letter that included an asserted right to recoupment of fees, the Superior Court held that such an analysis undercut the focus of the duty to defend on the possibility of coverage as distinguished from such facts as might ultimately be adjudicated.

The appellate court also took note of the fact that it was Royal’s suggestion that the insured retain independent counsel as opposed to participating in a joint defense involving multiple defendants that would have resulted in substantially lower legal costs to the policyholder. Where the insurer had a contractual duty to defend and had obtained various benefits by exercising that right to defend, the Superior Court refused to find that an implied contractual right to reimbursement existed or that the insured was unjustly enriched by the defense that Royal had provided so as to entitle Royal to reimbursement of attorney’s fees under a theory of quantum meruit.

Plainly the outcome of this case was influenced by its unique facts.  At the same time, the court was clearly persuaded by the Illinois Supreme Court's 2005 opinion in Gainsco (which also involved recoupment claims in the context of the NAACP gun suits).  It will be interesting to see whether the case proceeds to the Pennsylvania Supreme Court.

The claim arose from a shooting spree that took place within a period of just two hours. The insureds’ son drove to four nearby townships and shot and killed or injured six victims. He was later convicted of first degree murder with respect to the five victims who had died, and aggravated assault and attempted homicide for the victim who had been seriously injured. The victims and their representatives then sued the family, alleging the parents were negligent in failing to procure adequate mental health treatment for their son; failing to take possession of his handgun; and, failing to notify authorities.

The court was unanimous in its holding that the claims against the insured parents, when viewed from their perspective, had the necessary degree of fortuity to qualify as an accident. The court explained, “[t]he extraordinary shooting spree embarked upon by [the insureds’ son] resulting in injuries to Plaintiffs cannot be said to be the natural and expected result of Parents alleged acts of negligence. Rather, Plaintiffs injuries were caused by an event so unexpected, undesigned and fortuitous as to qualify as accidental within the terms of the policy.” The court concluded that because the alleged negligence resulted in accidental injuries, the insurer was required to defend the parents.

The court, however, did not reach consensus on the number of occurrences. The majority chose to apply the “cause” test, focusing on the cause of the damage, rather than the number of resulting claimants or injuries, in determining the occurrence limits applicable to the claims. This approach, the court reasoned, “recognizes that the question of the extent of coverage rests upon the contractual obligation of the insurer to the insured. Since the policy was intended to insure Parents for their liabilities, the occurrence should be an event over which Parents had some control.” Applied to this case, the court concluded the parents' negligence in failing to remove the weapon and/or alert authorities was the occurrence that began the sequence of events that resulted in the injuries. Thus, the court held the parents' alleged negligence resulted from a single “occurrence.”

Two justices filed separate concurring and dissenting opinions. Although they agreed with the majority that the claims qualified as an accident, neither could agree (either with the majority or each other) as to the number of occurrences. In Chief Justice Cappy’s view, the number of occurrences should have been determined based on the number of unexpected or fortuitous events. He concludes in this case that the shooting spree resulted from six separate occurrences.

Justice Cappy does not define what qualifies as the unexpected or fortuitous event; it is either the shootings or the resulting injuries. If it is the unexpected or fortuitous injuries, he adopts the “effect” test rejected by the majority, and a majority of other jurisdictions considering the issue. On the other hand, he may have intended to apply a test similar to New York’s “unfortunate event” test, which focuses not on the number of victims or the negligent acts or omissions, but on the event for which the insured is ultimately held liable, in this case each separate shooting.

Justice Baer attempts to find middle ground by combining the approaches employed by the majority and Justice Cappy, concluding instead that the shooting spree produced four occurrences. Justice Baer would have had no trouble applying the “effect” test apparently approved by Justice Cappy, but for one sentence in the policy, which provided: “This limit is the same regardless of the number of ‘insureds,’ claims made[,] or persons injured.” If the number of occurrences was always determined by the number of victims, he reasoned, this unambiguous limit could never be applied. To give effect to the clause, he adopts an approach that attempts to account for both the negligent act and the bodily injuries, while acknowledging that the number of resulting injuries is irrelevant. Applied to this case, Justice Baer concludes that each stop on the shooting spree constituted a separate event uniting an allegedly negligent act and injury, triggering a completed act of negligence, and, therefore, a new occurrence.

Justice Baer’s approach seems unsatisfactory, since the number of stops has no relationship to either the negligent acts or resulting injuries. Interestingly, had Justice Baer applied the “unfortunate event” test, a finding of six occurrences would have been consistent with his attempts to produce a result that had some bearing on the insured’s actual liability, while still giving effect to the policy language.

The case highlights the conceptual difficulties in determining the number of occurrences potentially applicable to claims resulting in multiple injuries stemming from some common cause. The tests employed by the courts (“cause,” “effect” and “unfortunate event”) each focus on different points in the causal chain, from the negligent act or omission to the resulting injury, and all points in between. The question obviously continues to confound.

The Sixth Circuit first affirmed the district court’s grant of summary judgment to PMA as to the 1967 to 1972 policies, finding that the policyholder failed to establish by clear and convincing evidence the existence and terms of the lost policies under Pennsylvania law. Relying only on a document filed with the district court by PMA which indicated the policyholder had coverage in 1967 (which PMA disputed as a typo in its filings), PMA’s computer records which indicate the 1972 policy was a "renewal" and the testimony of a former PMA employee that stated the pollution exclusion was not approved by the Pennsylvania Commissioner of Insurance until 1970, the court found the policyholder failed to meet its burden of proving the terms and conditions of the policies under Pennsylvania law.

As to the 1972 to 1978 policies, the policyholder argued that the underlying lawsuit fell within the “sudden and accidental” exception to the pollution exclusion. Agreeing with PMA that under Pennsylvania law “sudden and accidental” encompasses discharges which are both unexpected and "abrupt in time," the court affirmed the district court’s grant of summary judgment to PMA as the evidence produced by the policyholder could only be interpreted by a reasonable jury that discharges were “frequent, continuous and highly predictable.” As to the bad faith claim, the Sixth Circuit similarly affirmed the district court judgment finding that, under Pennsylvania law a bad faith claim may not be stated unless the “insurer lacked a reasonable basis for denying benefits.” Because the court affirmed the finding that the underlying lawsuit did not fall within the scope of the policies, PMA had a reasonable basis for denying benefits and did not act in bad faith.