Goodville Mutual Casualty Company v. Hynes et al

UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
In re : Chapter 7
JAMES E. HYNES, JR. and :
FARAH N. HYNES
Debtors : Bankruptcy No. 08-15634bf
____________________________________
GOODVILLE MUTUAL CASUALTY :
COMPANY
:
Plaintiff
v. :
JAMES E. HYNES, JR., FARAH N. :
HYNES, MATTHEW SNYDER
t/a SNYDER SERVICES, and :
Adversary No. 09-0079
Defendants :
.................................................
MEMORANDUM
.................................................
Presently before me are motions for summary judgment filed by plaintiff
Goodville Mutual Casualty Co. and by defendants James and Farah Hynes “by and
through their Chapter 7 Trustee” Christine Shubert, Esq. In addition, Goodville has filed
a motion to strike a “statement” filed by defendant Matthew Snyder dated September 18,
2009. In this statement, defendant Snyder purports to “join in all of the substantive
factual and legal arguments” raised by the chapter 7 trustee. As will be discussed below,
the issue in this adversary proceeding is whether Goodville has a duty to defend and
indemnify defendant Snyder against claims raised by Mr. and Mrs. Hynes in pending state
court litigation, which litigation is part of the debtors’ bankruptcy estate.
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I.
A.
For purposes of the parties’ cross-motions for summary judgment, many of
the facts are undisputed. They follow, in roughly chronological order.
In May 2006, defendant Matthew Snyder, t/a Snyder Services, purchased a
“Tradesman Cover Plus” insurance policy from Goodville Mutual Casualty Company.
Shubert, ex. R. The policy cover sheet identifies the insured as an individual with a
business description of “landscape and carpentry.” Id. Coverage was to begin on July 11,
2006 and terminate on July 11, 2007. Id. The policy was purchased by Mr. Snyder
through the Hornafius Insurance Agency, Inc. Id.
On or about July 22, 2006, Mr. and Mrs. Hynes entered into an agreement
of sale to purchase from Mr. Snyder the real property located at 2119 Cloverleaf Road,
Mount Joy, Pennsylvania, for $182,900. Shubert, ex. A. Mr. Snyder was the record
owner of the real property and it is undisputed that he had constructed a residence on this
realty with the intention of selling it.
At some point after moving into the realty, Mr. and Mrs. Hynes concluded
that the property had major structural defects which had not been disclosed to them by
Mr. Snyder. By November 28, 2007, the Hyneses had engaged a contractor to estimate
repairs and remodeling and they received his report in December 2007, estimating a cost
of more than $138,000. Shubert, ex. C.
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As the debtors’ prepetition claims were property of their bankruptcy estate under1
section 541(a), the chapter 7 trustee, rather than the Hyneses, had the right to prosecute the
litigation commenced prepetition by writ of summons. See generally Schafer v. Decision One
Mortg. Corp., 2009 WL 1532048, at *3-*4 (E.D. Pa. 2009); Lambert v. Fuller Co., 122 B.R. 243
(E.D. Pa. 1990).
3
On June 13, 2008, Mr. and Mrs. Hynes commenced a civil action by filing a
writ of summons against Mr. Snyder and Mr. Michael Biechler (who had inspected the
realty on their behalf prior to transfer of title) in the Pennsylvania Court of Common Pleas
of Lancaster County. Shubert, exs. D, I; see generally Pa. R. Civ. P. 1007(1). According
to the state court docket entries, this writ was served upon these defendants on July 9,
2008. Shubert, ex. I.
On September 4, 2008, Mr. and Mrs. Hynes filed a joint voluntary petition
in bankruptcy under chapter 7. Christine C. Shubert, Esq. became the chapter 7 trustee
under 11 U.S.C. §§ 701, 702.
On September 25, 2008, Mr. and Mrs. Hynes filed a complaint asserting
one claim of negligence against Mr. Biechler and three counts of negligent
misrepresentation, fraud and unfair trade practices against Mr. Snyder. Shubert exs. I, H.
Damages were sought in excess of $400,000. On October 7, 2009, the Hyneses1
dismissed Mr. Biechler as a defendant in this state court civil action. Shubert ex. J. On
November 5, 2008, Mr. Snyder filed an answer contesting liability and damages.
Attorney Thomas G. Klingensmith filed the answer on his behalf. Shubert, ex. K.
On January 26, 2009, Ms. Shubert’s counsel entered an appearance on
behalf of the Hyneses in the state court litigation and the Hyneses’ attorney withdrew his
appearance. Shubert, ex. I.
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On January 28, 2009, Goodville sent a letter to Mr. Snyder, by certified and
first class mail, received by Mr. Snyder on January 31, 2009. Shubert, ex. F. In this
letter, signed by Mr. Michael C. Eby, a Goodville “Sr. Claims Rep,” Goodville states, in
part, that the letter is:
to advise [Mr. Snyder] that Goodville will provide you a
defense for the Hynes Action. However, there appear to be
grounds for which [insurance] coverage may be denied.
Therefore, Goodville reserves all of its rights under the
policy, including the right to disclaim coverage for the
following reasons.
Shubert, ex. F, at 2. This “reservation of rights” letter asserted that the Goodville policy
did not cover faulty workmanship, negligent defects, nor intentional or negligent failure
to disclose those defects in a home built by Mr. Snyder. Id. The Goodville letter ends by
repeating that Goodville will defend Mr. Snyder in the Hynes litigation under a
reservation of rights and without waiving any of its defenses to claims made under the
insurance policy. Id., at 2-3.
On January 30, 2009, Goodville filed a civil action against Mr. and Mrs.
Hynes, Mr. Snyder and Mr. Biechler in the Pennsylvania Court of Common Pleas for
Lancaster County. In this action, Goodville sought a declaratory judgment that it has no
duty to defend Mr. Snyder in the Hynes litigation, nor indemnify him for the claims
asserted against him by the Hyneses, based upon the language of the insurance policy
issued by Goodville in favor of Mr. Snyder effective July 11, 2006. Shubert, ex. M.
On March 18, 2009, the chapter 7 trustee, through her counsel, removed
Goodville’s declaratory judgment action to this bankruptcy court pursuant to 28 U.S.C. §
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By virtue of section 323 and Fed. R. Bankr. P. 6009, the trustee has the right to2
sue and be sued on behalf of the bankruptcy estate. Moreover, she “may intervene as the estate’s
representative . . . as a plaintiff or defendant in suits pending at the time of bankruptcy. . . .” 3
Collier on Bankruptcy, ¶ 323.01[1] (15th ed. rev. 2009). Thus, the trustee succeeded to the
interest of the Hyneses in their state court lawsuit against Mr. Snyder. See generally Martin v.
Monumental Life Ins. Co., 240 F.3d 223, 227 (3d Cir. 2001) (after a party filed a chapter 7
petition, the trustee was substituted as the proper party and the caption amended).
Technically, Goodville should have named the trustee rather than the Hyneses as
defendants in its state court declaratory judgment action. But Goodville was not a creditor of the
Hyneses and probably had no notice of their bankruptcy filing. Similarly, the trustee should have
sought to be substituted as defendant for the Hyneses in this proceeding. See In re Jennings, 378
B.R. 678 (Bankr. M.D. Fla. 2006). Goodville and the trustee are acting as though the trustee did
so substitute and is a defendant.
5
1452(a), and it became the adversary proceeding captioned above. Shubert, ex. L.2
Thereafter, Goodville dismissed Mr. Biechler as a defendant in the removed litigation on
April 17, 2009. The bankruptcy trustee, acting on behalf of defendants Hynes, filed an
answer with affirmative defenses opposing the declaratory relief sought by Goodville.
Shubert, ex. P.
Defendant Snyder did not file any response to Goodville’s complaint;
therefore, on July 20, 2009, Goodville filed a request for entry of default against him
under Fed. R. Bankr. P. 7055 (incorporating Fed. R. Civ. P. 55). Shubert, ex. N.
The state court action against Mr. Snyder was not removed, and so that
litigation continues in the state court forum. On May 5, 2009, attorney Klingensmith
withdrew his appearance on behalf of Mr. Snyder in state court and attorney J. Michael
Flanagan entered his appearance. Shubert, ex. I. On May 12, 2009, Mr. Snyder, through
his new counsel, moved to amend his answer to the complaint and to join Mr. Biechler as
a third-party defendant and assert cross-claims against him. Shubert ex. I. That relief
was granted by the state court on June 12, 2009, and the amended pleadings, including the
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The summary judgment record does not reveal the outcome of that dismissal3
request.
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cross-claims were filed on July 1, 2009. Shubert, ex. I. Mr. Biechler then moved to
dismiss those cross-claims. Id.3
Finally, after Goodville sought the entry of default against Mr. Snyder in
this adversary proceeding, and after the trustee’s motion for summary judgment was filed,
Mr. Snyder signed a statement in which he purports to “join in all the substantive factual
and legal arguments” made by the trustee in this adversary proceeding. There is no
dispute that this statement was prepared by the trustee’s counsel for Mr. Snyder’s
signature. Moreover, the trustee’s counsel acknowledged at oral argument that this
statement was not intended by Mr. Snyder to assign his rights, if any, under the Goodville
policy to the trustee or to the Hyneses.
B.
Although many facts are not in dispute, the parties contest the date that
Goodville first learned of the Hyneses’ claims against Mr. Snyder.
In response to the trustee’s summary judgment motion, Goodville attaches
an affidavit of Charles F. Kidhardt, identified as a “claims supervisor.” Mr. Kidhardt
swears that Goodville “first received notice” of the Hynes claims on November 4, 2008.
This notice came from Mr. Dennis Zubler of the Hornafius Insurance Agency, and
informed Goodville of the pending state court lawsuit and of the Hyneses’ intention to
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The state court dockets reflect an entry on October 27, 2008 that reads:4
“Important Notice . . . to Matthew Snyder” filed by counsel for the Hyneses and certified as
having been served on that date. The content of the notice is not explained. Pa. R. Civ. P. 237.1
requires that a plaintiff provide 10-days notice to a defendant who has not responded to a
complaint before a judgment by default can be entered.
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enter default because Mr. Snyder had failed to answer the state court complaint.
Goodville, ex. B.4
Trustee Shubert contends that Goodville learned of the Hyneses’ claims no
later than August 2008. In support thereof she attaches a portion of a deposition of Mr.
Snyder that occurred in connection with the state court litigation on August 5, 2009. It
was agreed to by all parties that this deposition could be used in this declaratory judgment
action. Shubert, ex. E, at 11-12.
When Mr. Snyder was questioned about notification of the Hyneses’ claims
to Goodville, his deposition responses were as follows:
Q. When did you first give notice to Goodville that there was
a problem with the property?
A. If I remember right, I called my thing in E-town there.
What am I looking for?
MR. FLANAGAN [Snyder’s counsel]: Insurance agent.
THE WITNESS: Yeah. I called my insurance agent to see if
they could do -- in early ‘08 I think.
BY MR. MORICONI [Shubert’s counsel]:
Q. Do you remember any of the –
A. I don’t.
Q. Was it before March of 2008?
A. Honestly, –
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Q. Before June July 2008? Before June 2008?
A. I don’t know when I called them. I went in there and –
Q. It’s whenever it is.
A. I don’t know. And I got a response back. But that wasn’t until. –
Q. You are not sure when?
A. I am not exactly sure.
Q. You sent them notice that there might be a problem with the property?
A. I know it was after I got the first – all of this stuff going on.
Q. It was after you got the Writ of Summons in this case in
the underlying Lancaster County case?
A. I am not sure.
Q. You said it was early ‘08 you might have given notice to
Goodville; is that fair to say?
A. I went in there and said something to my –
Q. Insurance agent?
A. – insurance agent. That’s what I did.
Q. At some point early in 2008?
A. Earlier than this.
Q. What are you referring to by this?
A. 11/20 is the 11th month of ‘08 is when I sent – or my
lawyer sent them something.
Q. Okay. So the 11th month of 2008 is when your lawyer sent
something.
***
Q. Let me make this very simple. I want to know when
Goodville first knew that there was a problem with 2119
Cloverleaf, whether that was by Complaint, Writ of
Summons, or you calling up and saying, I got these purchasers
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who are having problems with the house, Goodville, I want
you to know.
Do you remember when they first knew about any problem –
A. I never said that.
Q. Did you speak to somebody?
A. I spoke to somebody, but I do not remember the dates. But
I told them I was getting – the dude was going after –
Q. Was going to bring suit?
A. Yes.
Q. Did you tell them that before you got sued?
A. I think so, yes. I think so; but dates, I do not know offhand.
Q. But you are relatively certain it was before you got served
with a Complaint? Or was it around that same time?
A. It all happened all at once. I am not sure.
Q Was it before –
A. I don’t know.
Q. – September of 2008?
A. Yeah.
Q. Fair enough.
A. Yes.
Q. They were on notice before September of 2008, that’s your testimony?
A. I called and said something to them, yep. I didn’t. My insurance.
Q. You told your insurance agent?
A. I went in and talked to them. I went in and talked to my
insurance. I said, here is what is going on. What can you
guys do for me? I have all of this freakin’ insurance.
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Q. Right.
A. And, honestly, they talked to them.
Q. Okay. And that was –
A. Date-wise, I am not.
Q. Fair enough. I am not going to pin you down for a date. I
am not trying to back you into a corner.
A. I don’t know.
Q. I understand that. I want to make sure if it’s fair to say if it
was before, for instance, September of 2008?
A. Yes.
Q. Was it before August of 2008?
A. For the life of me, I would say yes, but –
Q. August or September, to your best approximation?
A. Or before.
Q. Or before that?
A. Time-wise, I am not sure, but yes.
Q. I am giving you approximations. I am approximating as
much as you are.
MR. FLANAGAN: For clarity, are you talking about you
spoke with Hornafius?
THE WITNESS: Yes.
BY MR. MORICONI:
Q. You spoke with Hornafius in August or September 2008?
A. Yes.
Q. Your understanding is that Hornafius was the person to go
to to speak with Goodville?
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A. That’s my agent.
Q. Your understanding was that Hornafius had a direct
relationship with Goodville Mutual Casualty Company?
A. They wouldn’t sell their policy, would? [sic] They. [sic]
Q. By going to Hornafius, you reasonably thought that they
would communicate this to Goodville; is that right?
A. Yes.
Q. And Goodville didn’t really respond to your claim until
January 28th, 2009; is that right?
A. That’s when I got this paper.
Shubert ex. E, at 87-96.
Ms. Shubert interprets this testimony by Mr. Snyder as swearing that he
notified Hornafius of the Hyneses’ claims against him no later than August 2008.
Goodville construes this testimony differently, arguing that Mr. Snyder was so uncertain
as to the date he mentioned the litigation to Hornafius that it does not undermine
Goodville’s sworn statement that the insurer was first notified by Hornafius in early
November 2008. Implicitly Goodville suggests that Mr. Snyder first notified Hornafius
immediately after the date that Mr. Snyder received notice of the Hyneses’ intention to
take a default judgment against him in state court.
The other factual dispute involves the role of the Hornafius Insurance
Agency in receiving such notice from Mr. Snyder. Although Mr. Snyder referred to
Hornafius as his agent, trustee Shubert contends that there are sufficient inferences to
establish that Hornafius was acting as the agent of Goodville for purposes of notice of the
Hyneses’ claims. Goodville disputes this, contending that no information is of record in
connection with these cross-motions for summary judgment beyond the location of that
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insurance agency, its role in placing the policy for Mr. Snyder, and the fact that Hornafius
is noted on the declarations page of the policy. Shubert, ex. R. The policy itself has a
provision requiring the insured to provide timely notice in certain instances to the
company or its agent, but the policy does not identify any such agents. Id.
II.
The purpose of summary judgment is to avoid the expense and delay of an
unnecessary trial because no material facts are in dispute and one of the parties is entitled
to prevail on the merits. See, e.g., Goodman v. Mead Johnson & Co., 534 F.2d 566, 573
(3d Cir. 1976), cert. denied, 429 U.S. 1038 (1977). In general, the standard for entry of
summary judgment under Federal Rule of Civil Procedure 56, incorporated into
bankruptcy adversary proceedings by Federal Rule of Bankruptcy Procedure 7056, is well
established. As the Third Circuit Court of Appeals explained:
Summary judgment is appropriate when the moving party is
entitled to judgment as a matter of law and there is no genuine
dispute of material fact. . . . In order to defeat “a properly
supported summary judgment motion, the party opposing it
must present sufficient evidence for a reasonable jury to find
in its favor.” Groman v. Township of Manalapan, 47 F.3d
628, 633 (3d Cir. 1995) (citing Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 250-52, 106 S.Ct. 2505, 2511-12, 91
L.Ed.2d 202 (1986)). In essence, the non-moving party must
demonstrate a dispute over facts that might affect the outcome
of the suit. Id. Moreover, in reviewing the record, we must
give the non-moving party the benefit of all reasonable
inferences. . . .
Hampton v. Borough of Tinton Falls Police Dept., 98 F.3d 107, 112 (3d Cir. 1996).
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The application of these general principles is affected by the allocation of
the evidentiary burden of persuasion were the dispute to proceed to trial. That is, a trial
court’s approach to summary judgment is dependent upon whether the party seeking
summary judgment would have the burden of persuasion at trial. See generally 11
Moore’s Federal Practice 3d, §§ 56.03[4], 56.13[3] (2006). This approach was well
summarized in Adams v. Consolidated Rail Corp., 1994 WL 383633, at *1-*2 (E.D. Pa.
1994):
The Supreme Court articulated the allocation of burdens
between a moving and nonmoving party in a motion for
summary judgment in Celotex Corp. v. Catrett, 477 U.S. 317
(1986). The Court held that where the movant is the
defendant, or the party without the burden of proof on the
underlying claim, the movant still has the initial burden of
showing the court the absence of a genuine issue of material
fact, but that this does not require the movant to support the
motion with affidavits or other materials that negated the
opponent’s claim. Id. at 323. In contrast, where, as here, “the
party moving for summary judgment is the plaintiff, or the
party who bears the burden of proof at trial, the standard is
more stringent.” National State Bank v. Federal Reserve
Bank [of New York], 979 F.2d 1579, 1582 (3d Cir.1992). To
sustain its initial burden under such circumstances, the
movant must:
“support its motion with credible evidence . . .
that would entitle it to a directed verdict if not
controverted at trial. In other words, the
moving party must show that, on all the
essential elements of its case on which it bears
the burden of proof at trial, no reasonable jury
could find for the non-moving party.”
Fitzpatrick v. City of Atlanta, 2 F.3d 1112, 1115 (11th Cir.
1993). . . . If the movant makes such an affirmative showing,
it is entitled to summary judgment unless the nonmoving
party, in response, comes forward with significant, probative
evidence demonstrating the existence of a triable issue of fact.
. . .
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Of course, the issue of subject matter jurisdiction is defined by federal law.5
Section 1452(a) of title 28 authorizes removal to the district court of claims or causes of action,
but only “if such district court has jurisdiction of such claim or cause of action under [28 U.S.C.]
section 1334 . . . .” Accordingly, if there is no bankruptcy subject matter jurisdiction to hear a
removed proceeding, the removal notice is defective and the civil action must be remanded as
never properly removed. See, e.g., Textron Inv. Management Co., Inc. v. Struthers
Thermo-Flood Corp., 169 B.R. 206, 211 (D. Kan. 1994); In re Hotel Mt. Lassen, Inc., 207 B.R.
935 (Bankr. E.D. Cal. 1997); see also Things Remembered, Inc. v. Petrarca, 516 U.S. 124
(1995).
As the outcome of this proceeding could conceivably affect the assets available
for distribution to the Hyneses’ creditors in this bankruptcy case, there is no dispute that this
proceeding falls within the scope of section 1334 jurisdiction.
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(citations omitted); accord In re White, 243 B.R. 498, 501 n.4 (Bankr. N.D. Ala. 1999).
C.
In deciding whether either party is entitled to summary judgment, I note that
they both agree that Pennsylvania substantive law governs this removed adversary
proceeding. See, e.g., In re Jarjisian, 314 B.R. 318, 325 (Bankr. E.D. Pa. 2004). By
virtue of Fed. R. Bankr. P. 9027(g), however, the bankruptcy procedural rules apply.5
In addition, the trustee conceded in open court at oral argument that the
Goodville insurance policy does not cover the Hyneses’ claims against Mr. Snyder as
alleged in the state court complaint. In other words, although the trustee’s opposition to
Goodville’s summary judgment motion did dispute the scope of the insurance policy and
argued that the Hyneses’ claims fell within the policy’s ambit, the trustee now
acknowledges that the nature of the Hyneses’ asserted claims against Mr. Snyder fall
outside the scope of his liability policy.
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That being so, the only ground that the trustee now asserts for holding
Goodville liable to defend Mr. Snyder in the pending state court litigation, and to
indemnify him if a monetary judgment is rendered on those claims, is estoppel. That legal
issue will be discussed in detail below. However, for purposes of summary judgment,
Pennsylvania law places the evidentiary burden to establish estoppel on the party
asserting it. See, e.g., Blofsen v. Cutaiar, 460 Pa. 411, 417 (1975) (“It is well-established,
however, that the burden rests on the party asserting the estoppel to establish such
estoppel by clear, precise and unequivocal evidence.”); Pizzini v. American Intern.
Specialty Lines Ins. Co., 107 Fed. Appx. 266, 268 (3d Cir. 2004) (non-precedential);
Transportation Ins. Co. v. C.F. Bordo, Inc., 2009 WL 839366, at *5 (M.D. Pa. 2009); see
also Insurance Co. of North America v. McCleave, 462 F.2d 587 (3d Cir. 1972).
Accordingly, in applying the above-mentioned standard to these cross-
motions for summary judgment, “[the court must] view the underlying facts and all
reasonable inferences therefrom in the light most favorable to the party opposing the
motion.” Pennsylvania Coal Ass’n v. Babbitt, 63 F.3d 231, 236 (3d Cir. 1995); see also
Helen L. v. DiDario, 46 F.3d 325, 329 (3d Cir.), cert. denied sub nom. Pennsylvania
Secretary of Public Welfare v. Idell S., 516 U.S. 813 (1995); Valhal Corp. v. Sullivan
Associates, Inc., 44 F.3d 195, 200 (3d Cir. 1995); Goodman v. Mead Johnson & Co., 534
F.2d at 573. Moreover, the moving party bears the burden of proving that no genuine
issue of material fact is in dispute. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio
Corp., 475 U.S. 574, 586 n.10 (1986). Once the movant has carried its initial burden,
however, the nonmoving party “must come forward with ‘specific facts showing that
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there is a genuine issue for trial.’” Id. at 587 (quoting Fed. R. Civ. P. 56(e)). As
explained by the Third Circuit:
At the summary judgment stage of proceedings, if the movant
—in this case the Defendants—can point to the absence of
any factual support for one of [the] essential elements [of the
complaint], then the non-movant, bearing the burden of
persuasion at trial, must introduce specific facts showing a
need for trial, pursuant to Fed. R. Civ. P. 56(e). See Celotex,
477 U.S. at 322-24, 106 S. Ct. 2548. If the non-moving party
fails to go beyond conclusory allegations in its pleadings and
to produce specific facts indicating that there is a genuine
issue for trial, summary judgment will be granted in favor of
the moving party.
Annulli v. Panikkar, 200 F.3d 189, 198-99 (3d Cir. 1999) (overruled on other grounds by
Rotella v. Wood, 528 U.S. 549 (2000)) (citations omitted).
Therefore, by conceding that Mr. Snyder’s insurance policy with Goodville
did not cover the claims asserted against him by Mr. and Mrs. Hynes, the chapter 7
trustee, in opposing Goodville’s demand for summary judgment, must come forward with
specific facts that, if proven, would allow her to prevail at trial on her estoppel defense.
If not, then summary judgment must be entered on behalf of the insurer. See, e.g., Pizzini
v. American International Specialty Lines Insurance Co., 107 Fed. Appx. 266, 268 (3d
Cir. 2004) (non-precedential); Continental Insurance Co. v. Kovach, 2007 WL 2343771
(W.D. Pa. 2007); see also Nationwide Mutual Insurance Co. v. Nixon, 453 Pa. Super. 70
(1996); Phico Insurance Co. v. Presbyterian Medical Services Corp., 444 Pa. Super. 221
(1995). To prevail on her own motion for summary judgment, the trustee must
demonstrate that the undisputed facts demonstrate that estoppel is appropriate, with all
reasonable inferences construed in favor of Goodville. See generally Beckwith
Machinery Co. v. Travelers Indemnity Co. 638 F.Supp. 1179, 1188 (W.D. Pa. 1986);
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Aetna Life and Casualty Co. v. McCabe, 556 F. Supp. 1342, 1353-55 (E. D. Pa. 1983)
(summary judgment granted against insurer when the undisputed facts demonstrated its
failure to timely and adequately reserve its rights).
Before applying Pennsylvania law to the summary judgment record made
by the parties, I also note that Goodville and the chapter 7 trustee have filed a stipulation,
wherein they consent to the entry of a final judgment in this bankruptcy court and waive
any right to trial by jury. Accordingly, if either party is entitled to summary judgment,
such a final order can be entered in this bankruptcy forum.
III.
A.
In Pennsylvania, the use of a “reservation of rights” letter stems from this
premise:
[I]t is the general rule that an insurance company may not
undertake the defense of a suit which entails the defendant’s
relinquishing to the company the management of the case and
then turn around and deny liability under its policy. As stated
in Basoco v. Just, 154 Pa. Super. 294, 297 . . . (1944), “When
(the insurance company) substitute(s) itself and its judgment
for that of the defendant, both plaintiff and defendant have a
right to insist that the final judgment establishes the liability
and debt of the company to the assured.”
Brugnoli v. United National Insurance Co., 284 Pa. Super. 511, 516-517 ( 1981); see, e.g.,
Draft Systems, Inc. v. Alspach, 756 F.2d 293, 296 (3d Cir. 1985). “The undertaking to
defend is of no value and may be of great danger to an insured where the insured
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18
abandons all control of the suit to the insurer without a guaranty that whatever liability is
established will be discharged.” 14A Summary of Pennsylvania Jurisprudence, § 18.27
(2d ed 2009); see also Malley v. American Indemnity Corporation, 297 Pa. 216, 222
(1929). Indeed, as well expressed by the Arizona Court of Appeals:
The normal liability policy imposes upon an insurer several
distinct and separate duties, one of which is the duty to
defend. . . . An insured is entitled to know early in the
litigation process whether the insurer intends to honor that
duty in order that the insured may take steps to defend
himself. . . . If in fact the insurer undertakes that defense the
insured may reasonably rely upon the non-existence of policy
defenses. To hold otherwise would allow the insurer to
conduct the defense of the action without the knowledge of
the insured that a conflict of interest exists between itself and
the insurer. The conflict is that the insurer retains a policy
defense which would relieve the insurer of all liability while
simultaneously depriving the insured of the right to conduct
his own defense. . . . It is the reliance of the insured upon the
insurer’s handling of the defense and the subsequent prejudice
which gives rise to an estoppel in the first instance against the
insurer from raising policy defenses.
Equity General Ins. Co., Inc. v. C & A Realty Co., Inc., 148 Ariz. 515, 518, (Ariz. App.
1985); see also Rogovitz v. Guiras, 2 Phila. Co. Rptr. 193, 197 (C.P. Phila. Co. 1979)
(“An insurer, because of a substantial and obvious conflict of interest, breaches its
fiduciary duty if it controls the insured’s defense while intending to disclaim liability
under the insurance contract without notice to the insured.”).
Pennsylvania (and other jurisdictions) recognizes, however, that an insurer
may not know at the outset of litigation whether an insured has a valid indemnity claim
under the relevant insurance policy, and so run some risk if it declines participation in the
insured’s defense:
If coverage is not determined at the time the claimant files
suit, both the insured and the carrier are at a disadvantage. If
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19
the insurance company fails to provide a defense, the claimant
may enter a default judgment against the insured. If,
however, the company affords representation without some
understanding with the insured, the carrier may later be
estopped to assert an otherwise valid coverage defense. See
Appleman, §§ 4689 & 4694. From the insured’s standpoint,
the prospect of a default judgment is unacceptable, as is the
perhaps unnecessary expense of retaining competent counsel
on short notice.
To accommodate the concerns of both the insured and the
carrier, the practice of using a non-waiver agreement has
developed. See Appleman, § 4689; M. Rhodes, Couch on
Insurance § 51:88 (1982). Through this device, the carrier
informs the insured of various factors which cast doubt on
coverage, reserves the right to assert those matters at a later
date, but agrees to provide a defense in the interim. This
practice not only serves the interests of the parties to the
insurance policy but is helpful to claimants and the courts as
well because the claimant’s tort litigation may proceed
expeditiously.
Draft Systems, Inc. v. Alspach, 756 F.2d at 296. Perhaps the leading Pennsylvania case
to articulate this balance of interests via an insurer’s reservation of rights in conjunction
with defending the insured is Brugnoli v. United National Insurance Co., wherein the
intermediate state appellate court observed:
It is generally recognized that
[a] liability insurer will not be estopped to set up the defense
that the insured’s loss was not covered by the insurance
policy, notwithstanding the insurer’s participation in the
defense of an action against the insured, if the insurer gives
timely notice to the insured that it has not waived the benefit
of its defense under the policy. However, a reservation of
rights in this respect, to be effective, must be communicated
to the insured. It must fairly inform the insured of the
insurer’s position and must be timely, although delay in
giving notice will be excused where it is traceable to the
insurer’s lack of actual or constructive knowledge of the
available defense.
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When an insured has assigned all of his rights to a claimant, courts appear to6
recognize the claimant’s standing to raise an estoppel defense. See generally Pizzini v. American
International Specialty Lines Insurance Co., 107 Fed. Appx. 266, 267 (3d Cir. 2004) (estoppel
issued raised by claimants alleging that they were assignees of the insured); Merchants Mutual
Insurance Co. v. Artis, 907 F. Supp. 886, 889 (E.D. Pa. 1995) (same); see also Pueblo Santa Fe
Townhomes Owners’ Ass’n v. Transcontinental Insurance Co., 218 Ariz. 13, 19-20 (Ariz. App.
2008). In this proceeding, however, the trustee acknowledged that she received no such
assignment from Mr. Snyder.
20
284 Pa. Super. at 518 (quoting 14 G. Couch, Cyclopedia of Insurance Law § 51:83 (2d
ed. 1965)); see, e.g., Gross v. Kubel, 315 Pa. 396, 401 (1934); Transportation Insurance
Co. v. C.F. Bordo, Inc., 2009 WL 839366, at *5 (M.D. Pa. 2009); Titan Indemnity Co. v.
Cameron, 2002 WL 242346, at *2 (E.D. Pa. 2002); 27 P.L.E. § 224 (2d ed. 2002); 14A
Summary of Pennsylvania Jurisprudence, § 18.29 (2009).
Here, there is no dispute that Goodville sent a reservation of rights letter.
Nor does the trustee argue that this letter failed to fairly inform Mr. Snyder of Goodville’s
position. Instead, Ms. Shubert contends that this letter, sent on January 28, 2009, was
untimely and thus Goodville is estopped from denying coverage to Mr. Snyder.
B.
Before addressing the issue of timeliness, I note that Goodville asserts that
this estoppel contention can only be raised by the insured, Mr. Snyder. But Mr. Snyder,
as noted above, defaulted by failing to file a response to Goodville’s declaratory judgment
complaint. In other words, Goodville maintains that under Pennsylvania law a claimant
of an insured has no standing to assert estoppel against an insurer, and its insured is now
precluded from doing so.6
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Indeed, the trustee appears to recognize that the basis for estopping an insurer7
from denying liability coverage is to protect the interests of the insured. See Trustee’s
Memorandum in Support of Summary Judgment, at 19.
21
Neither party refers to decisions under Pennsylvania law that decide this
precise issue. Goodville’s position, though, is supported inferentially by the concern of
prejudice to the insured, mentioned earlier, that may occur if the insurer defends without
asserting a reservation of rights. The interests of the claimant against the insured are not
implicated in the potential conflict of interest if an insurer assumes a defense on the part
of its insured and much later is able to disclaim coverage. Moreover, the reservation of7
rights letter here is addressed only to the insured, not to the claimant, thereby suggesting
that only the rights of the former are entitled to protection via estoppel.
Nonetheless, the issue of a claimant’s right to assert estoppel against an
insurer under Pennsylvania law is unclear for a number of reasons.
Upon sending a reservation of rights letter, insurers in Pennsylvania may
bring a declaratory judgment action (as Goodville did here) to determine whether they
have any duty to defend and/or indemnify their insureds. See, e.g., Nationwide Mutual
Insurance Co. v. Nixon, 453 Pa. Super. 70, 73 (1996). In Vale Chemical Co. v. Hartford
Accident and Indemnity Co., 512 Pa. 290 (1986), the Pennsylvania Supreme Court held,
under state law, that a claimant of the insured (along with the insured) is an indispensable
party to the declaratory judgment action.
If the claimant is indispensable to the adjudication of the declaration of the
insurer’s obligations to its insured, then arguably the claimant is entitled to raise all
defenses, including estoppel, to defeat the relief sought by the insurer. For example, in
Wasilko v. Home Mutual Casualty Co., 210 Pa. Super. 322 (1967), the state appellate
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As will be discussed, there is no record of discovery regarding the scope of8
insurance coverage here.
22
court adjudicated an estoppel issue raised by claimants who previously had obtained a
judgment against the insured.
I appreciate that in Liberty Mutual Insurance Co. v. Treesdale, Inc., 419
F.3d 216, 229 (3d Cir. 2005), the Third Circuit Court of Appeals instructed that the Vale
decision involved an interpretation of Pennsylvania procedural law and state court
jurisdiction, and thus need not be followed by federal courts in diversity cases. Moreover,
upon removal of a state court case to bankruptcy court, jurisdictional issues are a matter
of federal law, as are procedural issues. See Fed. R. Bankr. P. 9027(g). Nonetheless, the
Treesdale court, in considering a declaratory judgment action between an insurer and its
insured brought in federal court, implied in distinguishing New Hampshire Insurance Co.
v. Greaves, 110 F.R.D. 549 (D.R.I. 1986), that a claimant may have a right to intervene in
federal litigation when the insured is insolvent and thus would be unable to pay any
adverse judgment absent such insurance. Id., at 226. Here, the trustee maintains that Mr.
Snyder is insolvent.
Futhermore, Pa. R. Civ. P. 4003.2 permits a tort plaintiff to obtain pre-trial
discovery from a defendant regarding the scope of insurance coverage. The purpose
behind permitting such pre-judgment discovery, see Szarmack v. Welch, 456 Pa. 293
(1974), suggests that the issuance and timing of a reservation of rights letter may be of
recognizable importance to claimants as well as to insureds.8
Two other factors further complicate the standing issue in this adversary
proceeding.
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Goodville contends that Mr. Snyder’s statement goes beyond the estoppel issue9
and contains language that may concede the trustee’s state law claims against him. Goodville
argues that it was improper for trustee’s counsel to have approached Mr. Snyder directly,
bypassing Mr. Snyder’s state court counsel. In response, the trustee’s counsel asserts that the
statement was not intended to undermine Mr. Snyder’s state court defenses and that Mr. Snyder’s
counsel was consulted. I leave the issue of the effect of this statement, if any, upon the state
court litigation for the state court to consider.
It is also debatable whether, by virtue of his default, Mr. Snyder had standing to10
file a pleading in this case, if this statement can be construed as such.
23
The right of a claimant to raise the estoppel defense, if such a right exists,
may only be derivative of the right held by the insured. In this proceeding, defendant
Snyder never responded to Goodville’s complaint and the latter sought the entry of
default under Fed. R. Bankr. P. 7055. Rule 7055 incorporates Fed. R. Civ. P. 55,
governing defaults. Under Rule 55, upon a showing that an answer was not timely filed,
the clerk must enter default. See Orange Theatre Corp. v. Rayherstz Amusement Corp.,
130 F.2d 185 (3d Cir. 1942) (when the defendant has failed to file a timely responsive
pleading, the entry of default under Rule 55 is ministerial). Mr. Snyder’s default may
thus deprive the trustee of any such derivative standing.
In an attempt to finesse this issue, the trustee obtained Mr. Snyder’s
signature on a document purporting to adopt the trustee’s estoppel assertion. However,9
the Hyneses have not obtained a judgment against Mr. Snyder nor an assignment of all of
his rights against Goodville. Thus, the effect of Mr. Snyder’s statement of support is
debatable.10
In addition, under Pennsylvania law, a successful assertion of estoppel
requires a showing of prejudice by the party asserting it. See, e.g., Continental Insurance
Co. v. Kovach, 2007 WL 2343771, at *8 (W.D. Pa. 2007); Mendel v. Home Insurance
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24
Co., 806 F. Supp. 1206, 1215 (E.D. Pa. 1992). In United Nat. Specialty Ins. Co. v.
Gunboat, Inc., 2006 WL 2627713, at *3 (Pa. Com. Pl. 2006), a state court trial judge
assumed, without deciding, that prejudice to a claimant, rather than to the insured, can
serve as grounds to estop an insurer:
Anderson [claimant] does not claim that Gunboat [insured]
was prejudiced in any way by the timing of the second
reservations of rights letter. Anderson argues that he, rather
than Gunboat, was prejudiced by UNSIC’s [insurer] second
reservation of rights letter because he submitted to an
Independent Medical Examination (“IME”) after the
discovery deadline had passed and he expended $30,000 in
prosecuting the underlying action. Even if the court were to
deem prejudice to the party who obtained a substantial verdict
a factor, in this case Anderson has not demonstrated any
prejudice by UNSIC’s reservation of rights except for
UNSIC’s legitimate refusal to pay.
(footnote omitted); see also Wasilko v. Home Mutual Insurance Co., 210 Pa. Super. at
329 (discussing estoppel in the context of prejudice to claimants). Here, the bankruptcy
trustee argues that prejudice arose both as to Mr. Snyder and the Hyneses from
Goodville’s alleged delay in issuing its reservation of rights letter. If a claimant has
standing to assert estoppel against an insurer based upon prejudice to the claimant, then
Mr. Snyder’s default would not be dispositive.
Given the unsettled nature of Pennsylvania law on the standing issue, for
purposes of determining these cross-motions for summary judgment I shall assume,
without deciding, that the trustee has standing to raise estoppel and that the prejudice
from an untimely reservation of rights letter may arise to either Mr. Snyder or the
Hyneses. See Continental Insurance Co. v. Kovach, 2007 WL 2343771, at *9 (W.D. Pa.
2007) (court declines to address the standing of the claimant of the insured to raise
estoppel). I do so because, as will be detailed below, the trustee has not met her burden
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25
either to demonstrate that grounds for estoppel exist on this record, or that the issue
should be preserved for trial.
IV.
A.
The trustee’s initial argument is that Goodville’s reservation of rights letter
is conclusively untimely, because it was allegedly sent in violation of the Pennsylvania
Administrative Code governing unfair insurance practices. Specifically, Ms. Shubert
relies upon 31 Pa. Code § 146.6, which states:
Every insurer shall complete investigation of a claim within
30 days after notification of claim, unless the investigation
cannot reasonably be completed within the time. If the
investigation cannot be completed within 30 days, and every
45 days thereafter, the insurer shall provide the claimant with
a reasonable written explanation for the delay and state when
a decision on the claim may be expected.
The trustee contends in this proceeding that this administrative regulation
establishes an enforceable 30-day deadline for the issuance of all insurer reservation of
rights letters, unless there is a written explanation for the delay. As there was no such
explanation, the trustee maintains that even if Goodville first learned of the Hyneses’
claim in November 2008, as it asserts, its January 28, 2009 letter is untimely and
Goodville should be estopped from denying coverage to Mr. Snyder.
For the following reasons, I find the trustee’s contention unpersuasive.
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First, this administrative provision is part of Chapter 146 of the
Pennsylvania Administrative Code. Section 146.1 explains the purpose of this code
chapter as follows:
This chapter defines certain minimum standards which, if
violated with a frequency that indicates a general business
practice, will be deemed to constitute unfair claims settlement
practices.
Therefore, whether an insurer is committing an unfair practice is not dependent upon a
single violation of the regulations, such as an improper reservation of rights letter, but
upon the frequency of such violations.
Moreover, the regulations themselves are intended to be enforced by the
Pennslyvania Insurance Commissioner, see generally D’Ambrosio v. Pennsylvania Nat.
Mut. Cas. Ins. Co., 494 Pa. 501 (1981), and therefore they create no private cause of
action. See Smith v. Nationwide Mutual Fire Insurance Co., 935 F. Supp. 616, 619-20
(W.D. Pa. 1996).
Indeed, although these insurance regulations were adopted in 1978, the
trustee cites no decision holding that a reservation of rights letter sent more than 30 days
after notification of a claim was untimely because it violated 31 Pa. Code § 146.6. On the
contrary, a number of courts applying Pennsylvania law after 1978 have held that no
particular delay by an insurer in sending a reservation of rights letter presumptively gives
rise to estoppel:
Pennsylvania courts have “refused to apply a strict waiver
theory or a theory of presumptive prejudice.” Mendel v.
Home Ins. Co., 806 F. Supp. 1206, 1215 (E.D. Pa. 1992)
(holding that a delay of nearly four years between the date of
filing of the complaint and issuance of the reservation of
rights letter did not conclusively establish prejudice). C.F.
Bordo argues that a two and a half year delay in TIC issuing a
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Notice to the insurer had been provided “seven days after commencement of the11
underlying lawsuit.” Id., 2002 WL 59333, at *2. The underlying lawsuit was filed on March 11,
1999. Id., 2002 WL 59333, at *1. The insurer sent its reservation of rights notice on June 25,
1999. Id., 2002 WL 59333, at *2.
The trustee, nonetheless, cites to this state court decision in support of her12
estoppel argument.
27
reservation of rights letter is presumptively prejudicial.
Prejudice to the insured, however, will not be presumed nor
may an insured “expand the coverage for which it paid
through waiver.” Rock-Epstein v. Allstate Ins. Co., Civ. A.
No. 07-2917, 2008 WL 4425059, at *4 (E.D. Pa. 2008) (citing
Consol. Rail Corp. v. Hartford Accident & Indem. Co., 676
F.Supp. 82, 85 (E.D. Pa. 1987)). Pennsylvania courts thus
impose estoppel “only when there is actual prejudice, that is,
when the failure to assert all possible defenses causes the
insured to act to his detriment in reliance thereon.” Id.
Transportation Ins. Co. v. C.F. Bordo, Inc., 2009 WL 839366, at *6 (M.D. Pa. 2009).
For example, in Rector, Wardens and Vestryman of St. Peter’s Church in
City of Philadelphia v. American National Fire Ins. Co., 2002 WL 59333 (E.D. Pa. 2002),
an insurer was found to have timely issued an effective reservation of rights more than
three months after notification of the claim. In United Nat. Specialty Ins. Co. v.11
Gunboat, Inc., 2006 WL 2627713, at *3 (Pa. Com. Pl. 2006), a seven month delay in
notification was held to be timely. Also, in Brugnoli v. United National Insurance Co.,12
284 Pa. Super. at 514, the insurer sent a reservation of rights letter four months after the
insurer was given notice of the service of a writ of summons upon the insured and one
week after service of a complaint. This conduct was held to be timely. Id., at 519.
Accordingly, Goodville is not estopped from denying coverage to Mr.
Snyder based upon 31 Pa. Code § 146.6.
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B.
Alternatively, the trustee contends that Goodville had notice of the
Hyneses’ claims against Mr. Snyder in August 2008 and waited until January 28, 2009 to
send a reservation of rights letter. The trustee contends that this purported five-month
delay was prejudicial. As mentioned earlier, Goodville disputes its notification date.
Furthermore, a component of the trustee’s contention is that notice given by Mr. Snyder
to the Hornafius agency is the equivalent of notice to Goodville. Goodville responds that
there is no basis for treating Hornafius as its agent and thus its assertion of first receiving
notice in November 2008 is unrebutted. Goodville also maintains that even if it had
received notice in August 2008, no prejudice has been demonstrated to either Mr. Snyder
or the Hyneses by receipt of a January 2009 reservation of rights notice.
I shall consider both contentions, without deciding any factual disputes.
First, under Pennsylvania law an insurance broker is not always treated as
an agent of an insurer, even though the broker may obtain the policy for the insured. As
explained by the Pennsylvania Supreme Court almost forty years ago:
On the basis of this testimony, we agree with the trial court
that the case comes squarely within the law enunciated in
Taylor v. Liverpool & L & G Ins. Co., 68 Pa. Super. 302, 304
(1917):
‘Where a person desiring to have his property
insured applies not to any particular company or
its known agent, but to an insurance broker,
permitting him to choose which company shall
become the insurer, a long line of decisions has
declared the broker to be the agent of the
insured; not of the insurer.’
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29
Our conclusion is supported by the discussion found in Couch
on Insurance, 2d, Section 25:95:
‘A broker may be found to have acted on behalf
of the insurer in negotiations between the latter
and the insured so as to be deemed the agent of
the insurer and not the insured * * * but there
must be some evidence of an authorization, or
some fact from which a fair inference of an
authorization by the company might be deduced
to make an insurance broker the agent of the
company. * * *’
Here, there was no evidence of authorization by the
companies that Crowe act as their agent.
Taylor v. Crowe, 444 Pa. 471, 475 (1971).
This common-law standard was recently affirmed by the Pennsylvania
Superior Court:
Pennsylvania courts have typically adhered to the general rule
in Taylor v. Crowe, concluding that an insurance broker
unaffiliated with a particular insurance company is not the
agent of the insurer in the absence of evidence to the contrary.
See, e.g., Kairys v. Aetna Casualty and Surety Co., 314 Pa.
Super. 502, 461 A.2d 269, 276 (1983) (“We find that Tripp
was not an agent of Aetna. This finding is based upon the
fact that Tripp was not held out as being an ‘authorized
representative’ of Aetna and that the appellant did not request
any particular company where his insurance was to be
placed.”). . . .
In the cases where the broker was found to be the agent of the
insurer, the insured was able to produce specific evidence to
support an inference of an agency relationship between the
broker and the insurer. In Sands v. Granite Mut. Ins. Co., 232
Pa. Super. 70, 331 A.2d 711 (1974), for example, the policy at
issue in the case identified the broker as an “authorized
representative” of the insurer. Id. at 715. The evidence
further demonstrated that the broker and the insurer had a
“unique relationship,” including the broker’s exclusive right
to set rates for the insurer and to deduct its commissions
directly from the premiums as it received them. Id. at 715.
Based upon the facts of record, we concluded that the broker
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In the trustee’s reply memorandum, she contends that as Hornafius “sold the13
policy to Mr. Snyder,” as the policy itself permits notice to Goodville or its agent, and as Mr.
Snyder did not testify that Hornafius informed him that it was not Goodville’s agent, therefore
Hornafius must be considered Goodville’s agent. Trustee’s Reply Memorandum, at 6. The
contention is unpersuasive. It is equally likely, as Mr. Snyder stated in his deposition, quoted at
10-11, that Hornafius was Mr. Snyder’s “agent.”
30
“had apparent, if not actual, authority to bind” the insurer.
Id.; see also Joyner v. Harleysville Ins. Co., 393 Pa. Super.
386, 574 A.2d 664, 669 (1990) (where broker was identified
as the “producer of record” on the application for insurance
and allowed to collect premiums, the broker had apparent
authority to collect premiums on behalf of insurer), appeal
denied, 527 Pa. 587, 588 A.2d 510 (1991).
Regis Ins. Co. v. All American Rathskeller, Inc., 976 A.2d 1157, 1168 (Pa. Super. 2009)
(citations omitted).
Upon my review of all of the exhibits proffered by the trustee in support of
her summary judgment motion, and in opposition to such relief filed by Goodville, I find
no basis to conclude that Hornafius should be treated as Goodville’s agent for purpose of
notice of the Hyneses’ claim. There was no evidence that Hornafius was either affiliated
with Goodville or was held out as the latter’s authorized representative. Furthermore,
there was no evidence regarding payment of premiums, or Hornafius’ efforts in placement
of insurance for Mr. Snyder.13
Absent such a finding of agency, upon which the trustee would have the
evidentiary burden at trial, see generally Fisher v. Aetna Life Insurance & Annuity Co.,
39 F. Supp. 2d 508, 514 (M.D. Pa. 1998), there are no grounds to refute Goodville’s
averment that it first learned of the Hyneses’ claims against Mr. Snyder in early
November 2008. Even if the trustee could prove at trial that Hornafius was notified in
August 2008, notice to Hornafius at that time would not constitute notice to Goodville.
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31
See Nations First Mortgage, LLC v. Tudor Insurance Co., 2009 WL 3182967, at *8
(M.D. Pa. 2009).
Second, and more significant, even if the trustee had established that she
could prove at trial that Hornafius acted as agent for Goodville for purposes of notice, and
therefore Goodville in effect knew of the Hyneses’ writ of summons against Mr. Snyder
in August 2008, the absence of demonstrated prejudice in this proceeding would not
change.
Under Pennsylvania law, an insurer’s duty to defend its insured “is separate
from and broader than the duty to indemnify[.]” General Accident Insurance Co. of
America v. Allen, 547 Pa. 693, 706 (1997). Both duties, however, “flow from a
determination that the complaint triggers coverage.” Id.
If the complaint against the insured avers facts that would
support a recovery covered by the policy, then coverage is
triggered and the insurer has a duty to defend until such time
that the claim is confined to a recovery that the policy does
not cover. The duty to defend also carries with it a
conditional obligation to indemnify in the event the insured is
held liable for a claim covered by the policy.
Id. Indeed, as the Third Circuit has instructed:
Pennsylvania law on the question of an insurer’s duty to
defend its insured is well settled. In consideration for
premiums paid, the insurer contractually obligates itself to
defend its insured. This obligation arises whenever
allegations against the insured state a claim to which the
policy potentially applies even if the allegations are
“groundless, false or fraudulent.”
American Contract Bridge League v. Nationwide Mut. Fire Ins. Co., 752 F.2d 71, 75 (3d
Cir. 1985); see, e.g., Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union
Ins. Co., 589 Pa. 317, 329-330 (2006).
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A writ of summons simply notifies the defendant that a civil action has been14
commenced, but does not set forth any claims. See Shubert, ex. D (a copy of the writ of
summons issued against Mr. Snyder). The writ’s purpose is to toll the applicable statute of
limitations. See generally Witherspoon v. City of Philadelphia, 564 Pa. 388 (2001); Miller v.
Philadelphia Geriatric Center, 2002 WL 1608223, at *9 (E.D. Pa. 2002).
32
Thus, when, as here, the liability policy clearly was in force at the time the
claims arose, it was reasonable for an insurer to delay sending a reservation of rights letter
until the claimant’s complaint has been served and the nature of the claims against the
insured have been specified. See United Nat. Specialty Ins. Co. v. Gunboat, Inc., 2006
WL 2627713, at *2 (Pa. Com. Pl. 2006) (insurer “could not determine whether coverage
should have been afforded until the close of discovery”). The writ of summons served
upon Mr. Snyder did not specify any of the Hyneses’ particular claims. See Shubert ex.
D.14
Accordingly, for purposes of resolving these cross-motions for summary
judgment, the record presented reflects that a reservation of rights letter was issued less
than 60 days after the Hyneses filed and served their complaint against Mr. Snyder. After
service of the complaint, Mr. Snyder’s counsel filed an answer in the state court litigation
thereby preventing entry of default judgment against him.
In the context of estoppel against an insurer, imposed because of an
untimely reservation of rights letter, Pennsylvania has established the following standard:
To work an estoppel, there must be such conduct on the part
of the insurer as would, if the insurer were not estopped,
operate as a fraud on some party who has taken or neglected
to take some action to his own prejudice in reliance thereon.
Accordingly, an insurer is not estopped to deny liability on a
policy where the plaintiff was not misled by the defendant’s
conduct. 16 Appleman, Insurance Law § 9088 at 626.
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33
Wasilko v. Home Mutual Casualty Co., 210 Pa. Super. at 328; see, e.g., Insurance Co. of
North America v. McCleave, 462 F.2d 587, 588 (3d Cir. 1972); United National Specialty
Insurance Co. v. Gunboat, Inc., 2006 WL 2627713, at *2 n.13. Indeed, “Pennsylvania
courts thus impose estoppel ‘only when there is actual prejudice, that is when the failure
to assert all possible defenses causes the insured to act to his detriment in reliance
thereon.’” Transportation Ins. Co. v. C.F. Bordo, Inc., 2009 WL 839366, at *6 (quoting
Rock-Epstein v. Allstate Insurance Co., 2008 WL 4425059, at *4 (E.D. Pa. 2008)). See
also Continental Insurance Co. v. Kovach, 2007 WL 2343771, at *8:
A party seeking to establish an estoppel must show “an
inducement by the party sought to be estopped . . . to the party
who asserts the estoppel ... to believe certain facts to
exist—and the party asserting the estoppel acts in reliance on
that belief.” Sabino v. Junio, 441 Pa. 222, 225 . . . (1971). A
determination of whether the insured relied to its detriment on
an insurer’s conduct requires an analysis of the facts relating
to whether the party asserting estoppel has been prejudiced by
the conduct of the insurer. . . . Thus, courts may apply an
estoppel only when there is actual prejudice, such as when an
insurer’s failure to assert all possible defenses in a reservation
of rights letter causes an insured to act to his detriment in
reliance thereon.
(citations omitted).
Thus, prejudice may be found when, upon the insured’s reasonable reliance
of insurance coverage, there has been a failure by the insured to assert all possible
defenses, see Transportation Ins. Co. v. C.F. Bordo, Inc., 2009 WL 839366, at *6, or a
failure to join appropriate parties. Id. Prejudice may also be found if counsel engaged by
the insurer failed in some manner to provide adequate representation, see generally Titan
Indemnity Co. v. Cameron, 2002 WL 242346, at *3, such as a failure to engage in
discovery, see generally Rector, Wardens and Vestryman of St. Peter’s Church in City of
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Philadelphia v. American National Fire Ins. Co., 2002 WL 59333, at *8, or a failure to
“conduct a proper investigation or a thorough discovery.” Beckwith Machinery Co. v.
Travelers Indemnity Co., 638 F. Supp. at 1188. In Rogovitz v. Guiras, 2 Phila. Co. Rptr.
193, 198 (C.P., Phila. Co. 1979), prejudice was found owing to the insurer’s failure to
promptly seek to open a default judgment entered against the insured.
Whether the trustee could prove at trial that notice to Goodville was first
provided in August 2008 or, as Goodville asserts, in November 2008, the trustee points to
no evidence in opposing summary judgment that Mr. Snyder was prejudiced in not
receiving a reservation of rights letter prior to January 31, 2009 by, for example, a loss of
defenses or inadequate representation. Instead, the trustee simply asserts that Mr. Snyder
and the Hyneses reasonably relied upon Goodville’s silence after notice of the claims was
provided. Trustee’s Memorandum in Support of Summary Judgment, at 21. As to
prejudice, she only maintains:
All the parties, especially Snyder, have been under the
impression that Goodville was the insurance company who
would indemnify Snyder. Snyder has lost substantial rights.
He has no resources to rehire a lawyer and Goodville is well
aware of this. It is seeking Default Judgment against Snyder
right now. If it had noticed him of its coverage denial over a
year ago, as it had a duty to do, then he may not be in this
prejudicial situation. Snyder’s appointed counsel has already
indicated that he will not produce Snyder in the Lancaster
Civil Action. See Ex. E at 11:22-12:3. If Goodville obtains a
Declaratory Judgment, Snyder will not be represented at all.
Trustee’s Memorandum in Support of Summary Judgment, at 23-24.
The “prejudice” above-argued by the trustee merely reflects Mr. Snyder’s
poor financial condition. Other than a conclusory statement that Mr. Snyder lost
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In her reply memorandum, the trustee contends that if Mr. Snyder had known15
earlier that Goodville would deny coverage, he “could have settled with the Hynes’ [sic] or
figured out an alternative course of action rather than lengthy, time-consuming and expensive
litigation.” Trustee’s Reply Memorandum, at 7. But there is no evidence that Mr. Snyder has
incurred any costs connected with the state court litigation; nor that he is now precluded from
settling the litigation with the trustee.
The trustee also suggests that Goodville should be precluded from denying
coverage because Mr. Snyder, according to the trustee’s interpretation of his deposition, assumed
that any claim against him arising from his business activities would be covered by his insurance
policy. Trustees’ Memorandum in Support of Summary Judgment, at 24. Such an argument
involves an analysis of the language of the policy coverage, or possibly representations made by
Hornafius or Goodville at the time the policy was issued. To the extent these issues are a
component of this declaratory judgment action, I consider them waived by the trustee’s
concession that the Hyneses’ claims fell outside the scope of the liability policy purchased by Mr.
Snyder from Goodville.
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“substantial rights,” there is no specification that Mr. Snyder’s legal position would be
different had a reservation of rights letter been sent earlier by Goodville.15
As for prejudice to the Hyneses, the trustee argues:
Relying on Snyder’s insurance coverage, the Hynes [sic] paid
over $24,000.00 to their previous counsel to litigate these
claims with the understanding that Snyder would be insured.
Then, still operating under that guise, the Hynes’ [sic]
Chapter 7 Trustee appointed this law firm to prosecute the
claims. If Goodville somehow escapes liability, the Hynes
[sic] will lose all hope of recovering any amount after
reasonably believing Goodville was the indemnitor. The
Hynes’ [sic] creditors will continue to go unpaid and the
Hynes family will continue to struggle. Unfortunately, the
Hynes will be the real victim of prejudice in this case if
Goodville has its way.
Trustee’s Memorandum in Support of Summary Judgment, at 24.
If the trustee contends that she, or the bankruptcy estate of Hynes, was
prejudiced by a delay in Goodville’s notification because she engaged counsel to litigate,
and assuming such prejudice were relevant, the trustee overlooks that she engaged
counsel on a contingency basis only and thus has incurred no out-of-pocket expense. See
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main case docket entry #32, dated December 29, 2008. If she is arguing that the Hyneses
or their creditors were prejudiced because, without insurance coverage from Goodville,
they will be unable to execute on any judgment issued by the state court in their favor,
such a result may occur in every instance of lack of coverage and does not warrant
imposition of estoppel. See United Nat. Specialty Ins. Co. v. Gunboat, Inc., 2006 WL
2627713, at *3 (Pa. Com. Pl. 2006):
Even if the court were to deem prejudice to the party who
obtained a substantial verdict a factor, in this case Anderson
has not demonstrated any prejudice by UNSIC’s reservation
of rights except for UNSIC’s legitimate refusal to pay.
The trustee also asserts, without affidavits or other corroboration, that the
Hyneses spent significant funds in prosecuting their lawsuit against Mr. Snyder, and
would not have incurred such expenses had they known that Goodville would disclaim
coverage. This argument founders for a number or reasons:
First, the trustee assumes that such expenditures may constitute prejudice
for which an insurer is responsible and estoppel warranted. However, in United Nat’l
Specialty Ins. Co. v. Gunboat, Inc., 2006 WL 2627713, at *3 (Pa. Com. Pl. 2006), an
affidavit that a claimant had spent $30,000 in prosecuting the tort action against the
insured was held not to estop the insurer. The trustee cites no decision applying
Pennsylvania law that grounds estoppel against an insurer based upon litigation expenses
incurred by a claimant.
Second, not only are the Hyneses’ alleged expenditures not verified by the
record in these cross-motions, there also is no basis to determine when these alleged
expenditures occurred. For example, the Hyneses obtained an expert property inspection
report, with cost estimates, in December 2007, see Shubert ex. B, long before a writ of
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summons was even filed. Such an expenditure could not have been incurred upon
justifiable reliance that Goodville would indemnify Mr. Snyder. Indeed, as noted earlier,
until the Hyneses’ complaint was filed in September 2008, the precise nature of their
claims were not known or knowable to Goodville.
Furthermore, there is no basis in the summary judgment record to conclude
that the Hyneses sought discovery from Mr. Snyder regarding his insurance coverage; if
such discovery had been sought, the record is silent as to its date and the information
regarding the existence of insurance, if any, that was obtained from Mr. Snyder. Absent
such discovery, the earliest that the Hyneses could possibly know of the existence of an
insurance policy in favor of Mr. Snyder would be from the entry of appearance of any
attorney engaged by Goodville. If I assume (as the record is silent) that attorney
Klingensmith was engaged by Goodville to represent Mr. Snyder, and the Hyneses were
aware of this engagement, this attorney entered his apperance in the state court litigation
on November 5, 2008.
In Pennsylvania, a finding of estoppel against an insurer should be based
upon “unequivocal evidence” of reasonable reliance upon the existence of insurance for
the claims asserted against the insured. See, e.g., Transportation Ins. Co. v. C.F. Bordo,
Inc., 2009 WL 839366, at *5. The trustee has not met her evidentiary burden to
demonstrate that the Hyneses’ reasonably believed that Goodville would insure Mr.
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Indeed, between September 25, 2008 when the complaint was filed and January16
26, 2009 when trustee’s counsel took over the litigation, the docket entries in the state court
litigation reflect no hearings or even motions filed. The only docket entries are Mr. Snyder’s
answer, notice of intention to take default, and a praecipe to dismiss defendant Biechler.
Furthermore, as mentioned earlier, the Hyneses had no right to prosecute this
litigation after they filed a voluntary chapter 7 bankruptcy petition on September 4, 2008.
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Snyder against their claims, and relied upon that belief to thereafter incur $24,000 in
expenses. See generally id., 2009 WL 839366, at *2.16
Accordingly, Goodville is entitled to summary judgment in this declaratory
action. This result renders Goodville’s motion to strike Mr. Snyder’s statement in support
of the trustee’s position moot.
An appropriate order shall be entered.
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