THE CINCINNATI INSURANCE COMPANY v. STONEBRIDGE FINANCIAL CORPORATION et al

Filing 36

MEMORANDUM AND ORDER THAT JUDGMENT IS IN STONEBRIDGES FAVOR AND AGAINST CINCINNATI. THE CLERK SHALL MARK THIS MATTER CLOSED STATISTICALLY.SIGNED BY HONORABLE LEGROME D. DAVIS ON 6/23/11. 6/24/11 ENTERED AND COPIES E-MAILED.(rf, )

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA

THE CINCINNATI INSURANCE COMPANY
v.
STONEBRIDGE FINANCIAL CORPORATION,
et al.

:
:
:
:
:
:

CIVIL ACTION

NO. 2:10-CV-4131

June 23, 2011
MEMORANDUM AND ORDER
Plaintiff Cincinnati Insurance Company seeks a declaration that no coverage exists for an
underlying suit against its former insureds, Defendants Stonebridge Bank, Joseph Spada, and
David Keller. Presently before the Court are the parties’ cross-motions for summary judgment
(Docs. No. 23 & 24), and responses in opposition (Docs. No. 33 & 34). Upon careful
consideration of the parties’ briefs and applicable case law, the Court DENIES Plaintiff’s Motion
and GRANTS Defendants’.
I.

INTRODUCTION
We are asked to determine whether an errors-and-omissions insurance policy provides

coverage for a lawsuit brought against a bank for its alleged wrongful failure to extend credit.
Stonebridge Bank (“Stonebridge”) entered into an agreement to extend credit to Engel Group,
LLC (“Engel”) but failed to honor that agreement, asserting that it believed the agreement had
expired. Engel brought action against Stonebridge, claiming it suffered damages and lost profits
due to Stonebridge’s breach of contract. Stonebridge, in turn, sought coverage for the lawsuit
from Cincinnati Insurance Company (“Cincinnati”), its errors-and omissions (“E&O”) insurer.
Cincinnati initially recognized a defense obligation, but reserved its right to disclaim coverage at
a later date. On August 16, 2010, Cincinnati filed this action, seeking a declaration that the

insurance policy it issued to Stonebridge does not provide coverage for Engel’s claims against
Stonebridge. Stonebridge filed a counterclaim, seeking a declaration that coverage exists. Both
parties now seek summary judgment.
II.

BACKGROUND
A.

The Policy

In 2007, Cincinnati issued an errors-and-omissions insurance policy—the Financial
Institutions Blue Chip Policy (the “Policy”)—to Stonebridge, covering the period March 25,
2007 to March 25, 2010. Cincinnati undertook to pay all monetary damages that Stonebridge
“become[s] legally obligated to pay on account of any ‘claim’ for a ‘wrongful act.’”1 (Doc. No.
3, Ex. A-1, p. 13-15.) The policy defines “wrongful act” as “any actual or alleged error,
misstatement, misleading statement, act, omission, neglect or breach of duty committed . . . by . .
. [Stonebridge] in the performance of ‘professional services.’” (Doc. No. 3, Ex. A-1, p. 15.)
“Professional services” refers to “activities allowed under the law and regulations governing
financial institutions which are performed for or on behalf of any client or customer of

1

This language is contained in Part I of the Policy, captioned “Directors and Officers
Liability and Company Coverage.” Section I of this Part, titled “Insuring Agreements,”states:
We will pay on behalf of the “company” all “loss” which the “company” is
required to pay resulting from any “claim” first made during the “policy
period,”or any “extended reporting period” included in or endorsed to the policy,
against the “company” for a “wrongful act.”
Section II, titled “Definitions,” indicates that “loss” means:
[T]he total amount of monetary damages which the “insureds” become legally
obligated to pay on account of any “claim” for a “wrongful act” with respect to
which coverage hereunder applies, including damages, judgments, settlements,
and “defense costs.”
2

[Stonebridge].” (Id.)
The policy also features a contractual liability exclusion and an endorsement—two
provisions that are at the heart of the parties’ disagreement. Part V, Section I.I of the Policy (the
“Exclusion”) provides that Cincinnati is not liable to pay, indemnify, or defend any claim:
[b]ased upon, arising out of, directly or indirectly resulting from or in consequence
of, or in any way involving legal liability assumed by any of the “policy insureds”
under the terms, conditions, or warranties of any oral or written agreement, or by
virtue of any waiver or release from liability of any third party . . . .
(Doc. No. 3, Ex. A-2, p. 9.) And, the Financial Institution Coverage Amendatory Endorsement
(the “Endorsement”) adds the following language to the Policy:
It is further understood and agreed that this policy shall be amended to include
coverage for any claim or claims arising out of any “wrongful lending act” related
to an extension of credit or refused extension of credit to a “borrower.”2
(Doc. No. 3, Ex. A-3, p. 11.)
B.

The Underlying Litigation

On May 7, 2007, Stonebridge issued two loan commitment agreements (the
“Commitments”) to Engel, a small home builder. The Commitments, originally set to expire on
September 30, 2008, expressed Stonebridge’s promise to extend credit to Engel in the total
amount of $5,145,000, in exchange for Engel’s compliance with certain conditions. On
2

The term “wrongful lending act” is defined as:

any negligent act or omission, error, mistatement, misleading statement, or neglect
or breach of duty by the Company;
and the term “borrower” is defined as:
any person or entity which is not directly or indirectly affiliated with the Company
in any respect and to which an extension of credit or refusal to extend credit was
made or negotiated.
3

September 24, 2008, Stonebridge and Engel agreed, in writing, to extend the end date to October
31, 2008. (Engel Group, LLC v. Stonebridge Bank, et al., No. 08-cv-6020, Compl. ¶ 13.)
According to Engel, Stonebridge later orally modified the Commitments to further extend them
to November 20, 2008, but then failed to appear at closing on that day. (Id. at ¶¶ 14-21.) Engel
then filed suit in this Court (the “Lawsuit”), (see Engel Group, LLC v. Stonebridge Bank, et al.,
No. 08-cv-6020), alleging that the Commitments induced it to: (1) enter into a contract to
purchase some property from Lehman Brothers; (2) pay a $550,000 deposit; and (3) bear other
costs in preparation for construction on the property. (Id. ¶¶ 11-70.) The Lawsuit advances
alternative theories of liability: breach of contract and promissory estoppel. In response,
Stonebridge and its officers insist that there was no oral modification, and point out that Engel
did not comply with the Commitments’ conditions by the October 31, 2008 end date.
(Stonebridge Ans. ¶¶ 14-58; Stonebridge Pre-trial Memo. p. 3.) Thus, Stonebridge argues, its
refusal to fund and/or renew the expired Commitments was entirely justified. (Id.)
C.

The Present Action

Stonebridge submitted the Lawsuit to Cincinnati for coverage, asserting that: (1) Engel
was a “borrower” as defined in the Policy; and (2) Engel accuses Stonebridge of committing
“wrongful lending acts” related to “an extension of credit” as required by the Policy’s
Endorsement. (See Defs.’ Ans. & Countercl., Doc. No. 10.) Cincinnati counters that because the
Lawsuit arises out of liability “assumed” by Stonebridge under the Commitments, the Policy’s
Exclusion precludes coverage. (Compl. ¶ 47.) Cincinnati filed this action on August 16, 2010

4

pursuant to 28 U.S.C. §§ 2201 & 2202, seeking a declaratory judgment3 that no coverage exists
and there is no duty to defend or indemnify Stonebridge for the Lawsuit’s costs. Stonebridge
filed a counterclaim, seeking a declaration that coverage exists.4 Both parties concede that there
are no genuine factual disputes5 and that the interpretation of the insurance contract is
appropriately resolved as a matter of law.6
III.

ANALYSIS
We must determine whether Engel’s claim is within the Policy’s coverage or is barred by

an exclusion. See Snyder Heating Co. Inc. v. Pa. Mfrs.’ Ass’n. Ins. Co., 715 A.2d 483, 484 (Pa.
Super Ct. 1998) (“A court’s first step in a declaratory judgment action concerning insurance
coverage is to determine the scope of the policy’s coverage.”). First, we resolve the parties’
central dispute—the applicability of the Policy’s provision excluding coverage for “liability
assumed under contract.” Next, we determine the scope of the Policy’s coverage for errors,
misstatements, acts, or omissions committed in the performance of professional services. Then,
once we have ascertained the scope of coverage, we address Cincinnati’s contention that
Stonebridge cannot obtain a declaratory judgment on the existence of coverage and the duty to

3

The Declaratory Judgment Act provides that “[i]n a case of actual controversy within its
jurisdiction . . . any court of the United States . . . may declare the rights and other legal relations
of any interested party seeking such declaration.” 28 U.S.C. § 2201(a).
4

Cincinnati maintains that Stonebridge cannot obtain this relief. See infra, section III.C.

5

The Court grants summary judgment where no genuine issue of material fact exists and
the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56.
6

Under Pennsylvania law, which the parties agree govern, the interpretation of an
insurance contract is a question of law. See Kvaerner Metals Div. of Kvaerner U.S., Inc. v.
Commercial Union Ins. Co., 908 A.2d 888, 897 (Pa. 2006).
5

indemnify.
In analyzing the Policy at issue, the Court abides by Pennsylvania case law which
instructs courts to: (1) construe ambiguous policy provisions in favor of the insured, see Medical
Protective Co. v. Watkins, 198 F.3d 100, 103 (3d Cir. 1999) (applying Pennsylvania law)7; (2)
interpret coverage clauses to “afford the greatest possible protection to the insured,” Westport
Ins. Corp. v. Bayer, 284 F.3d 489, 498 n.7 (3d Cir. 2002) (applying Pennsylvania law); and (2)
require the insurer to prove the applicability of any exclusions or limitations on coverage,
Koppers Co., Inc. v. Aetna Cas. & Sur. Co., 98 F.3d 1440, 1446 (3d Cir. 1996) (applying
Pennsylvania law).
A.

“Contractual liability exclusion”

Cincinnati’s primary contention is that its duties under the Policy are limited by the
Exclusion, a provision that excludes coverage for claims based upon, or arising out of, “liability
assumed under contract.” (See Doc. No. 3, Ex. A, p. 10.) Cincinnati essentially argues, and
Stonebridge concedes, that this phrase excludes coverage for all liability stemming from a
contract—regardless of whether the insured actually assumed such liability in the contract, or
merely incurred a liability pursuant to the contract.
Cincinnati relies on a line of Pennsylvania and Third Circuit cases denying coverage for
breach of contract claims under comprehensive general liability (“CGL”) policies. See Specialty
Surfaces Int’l v. Continential Cas. Co., 609 F.3d 223 (3d Cir. 2010); Nationwide Mut. Ins. Co. v.
CPB Int’l, Inc., 562 F.3d 591 (3d Cir. 2009); Kvaerner Metals, 908 A.2d at 897; Snyder Heating

7

Under Pennsylvania law, a policy provision is ambiguous if it is reasonably susceptible
to two interpretations. See Medical Protective Co., 198 F.3d at 103.
6

Co. Inc. v. Pa. Mfrs.’ Ass’n. Ins. Co., 715 A.2d 483, 484 (Pa. Super. Ct. 1998); Redevelopment
Auth. of Cambria Cnty. v. Int’l Ins. Co., 685 A.2d 581 (Pa. Super. Ct. 1996). CGL policies
provide coverage for personal injury or property damage resulting from an “occurrence,” which
is defined as “an accident, including continuous or repeated exposure to substantially the same
general harmful conditions.” See Specialty, 609 F.3d at 227; Nationwide, 562 F.3d at 594;
Snyder, 715 A.2d at 485; see also Redevelopment Auth., 685 A.2d at 589 (“The purpose and
intent of [a CGL] policy is to protect the insured from liability for essentially accidental injury to
the person or property of another . . . .”)
This line of cases found that CGL policies did not provide coverage for breach of contract
claims because such claims were not “occurrences” or “accidents.” See, e.g., Redevelopment
Auth., 685 A.2d at 589 (holding that insurer had no duty to defend or indemnify because “the
underlying suit arises out of a breach of contract which is not an accident or occurrence
contemplated or covered by the provisions of a general liability insurance policy”); Nationwide,
562 F.3d at 598 (upholding the district court’s finding that a breach of contract did not trigger
coverage under a CGL policy because it “do[es] not arise from a covered ‘occurrence[]’”) None
of these courts based their decisions on a contractual liability exclusion like the one Cincinnati
relies on here.8
8

In fact, only one of those cases—Snyder, 715 A.2d 483—involved an exclusion for
“liability assumed under contract,” but the Snyder court’s decision did not turn on that phrase.
Specifically, the Snyder court analyzed a policy that contained two contract-related exclusions,
respectively precluding coverage for: (1) “‘bodily injury’ or ‘property damage’ for which the
insured is obligated to pay damages by reason of the assumption of liability in a contract or
agreement”; and (2) “a failure [by the insured] to perform a contract or agreement in accordance
with its terms.” Snyder, 715 A.2d at 485. The Snyder court based its denial of coverage for the
insured’s breach of contract claim on the second exclusion. See Snyder, 715 A.2d at 487 (“[T]he
CGL policy clearly excludes from coverage breaches of contract; the policy language provides
7

Unlike the policies addressed in these cases, Cincinnati’s policy provides errors-and
omissions (E&O) professional liability insurance. E&O policies differ substantially from CGL
policies. While CGL policies provide coverage for losses due to bodily injury and/or property
damage caused by an accident, E&O policies provide coverage for “liability resulting from
covered acts, errors or omissions in the performance of ‘professional services.’” 4 NEW
APPLEMAN INSURANCE LAW PRACTICE GUIDE §§§ 38.05, 38.02, & 38.04 (Jeffrey E. Thomas et
al. eds., LexisNexis 2011 ed.); see also, 4 NEW APPLEMAN ON INSURANCE LAW LIBRARY EDITION
§ 25.01 (Jeffrey E. Thomas & Aviva Abramovsky eds., LexisNexis 2010) (“Unlike general
comprehensive insurance, E&O insurance insures against a special risk inherent in the practice of
[a] profession, such as negligence, omissions, mistakes, and errors.”). The coverage distinction
between CGL and E&O policies is clear: bodily injury and/or property damage do not include
claims for economic loss resulting from malpractice; and rendering or failing to render
professional services generally does not fit the definition of an accident. See Thomas et al. eds.,
4 NEW APPLEMAN INSURANCE LAW PRACTICE GUIDE , supra, at § 38.05. Thus, Cincinnati’s
reliance on cases involving CGL policies9 is misplaced. Breaches of contract are not, and cannot

that the insurance contract will not apply to [the insured’s] failure to perform a contract or
agreement in accordance with its terms.”)
9

Cincinnati cites one non-CGL case—Cont’l Cas. Co. v. Cnty. of Chester, 244 F. Supp.
2d 403 (E.D. Pa. 2003)—which involved a Public Officials Liability Policy covering “those sums
that the insured becomes legally obligated to pay as compensatory civil damages arising out of a
‘wrongful act’ to which insurance applies.” Id., at 408. That policy included an exclusion for
“any claim arising out of a breach of contract, or out of liability assumed by an insured under any
contract or agreement.” Id., at 409. The Chester court found that “because the insurance policy
excludes from coverage any claim arising out of a breach of contract, [the insurer] has no
obligation to defend any contract claim.” However, as we explain in this opinion, the phrase
“arising out of a breach of contract” is conceptually and legally distinct from “liability assumed
under contract.”
8

be, automatically excluded from coverage in all types of insurance policies simply because they
are excluded in CGL policies (which require injury caused by an “accident”).
We also reject Cincinnati’s related suggestion that public policy considerations prohibit
construing insurance policies to provide coverage for breach of contract claims. To support this
position, Cincinnati relies on another inapposite line of cases. See HK Systems, Inc. v. Eaton
Corp., 553 F.3d 1086, 1091 (7th Cir. 2009) (finding that “without express language[,] an
indemnitor will not be found to have agreed to indemnify an indemnitee against the
consequences of the breach of a contract that the latter signs after the indemnity contract or the
formal insurance contract goes into effect”) (emphasis in original); Waste Corp. of Am. v.
Genesis Ins. Co., 382 F. Supp. 2d 1349 (S.D. Florida 2005) (concluding that a directors-andofficers policy did not cover liability for intentional misconduct by the insured company); Jerry
Davis, Inc. v. Md. Ins. Co., 38 F. Supp. 2d 387 (E.D. Pa. 1999) (CGL policy precluded coverage
for damages arising from a “delay or failure [by the insured] to perform a contract or agreement
in accordance with its terms”). None of these cases pronounce a policy rule barring any type of
insurance coverage for breach of contract claims. Indeed, these cases implicitly recognize that
insurance policies could cover breach-of-contract claims. See, e.g. Waste Corp., 382 F. Supp. 2d
at 1356 (acknowledging that “notwithstanding the foregoing [public policy considerations], the
question of coverage must still be decided on the basis of the [particular] policy provisions”).
Thus, while we agree with Cincinnati that policy considerations may sometimes counsel against
construing an insurance policy to cover a breach-of-contract claim, we cannot infer a sweeping
public-policy rule from a set of factually and legally distinct cases. See Verticalnet, Inc. v. U.S.
Specialty Ins. Co., 492 F. Supp. 2d 452, 460 (E.D. Pa. 2007) (refusing to “extrapolate from
9

general liability insurance . . . a sweeping public policy that liability insurance of any type cannot
cover otherwise valid claims if they also arise from a breach of contractual duty”).10
Moreover, courts have consistently interpreted the contractual liability exclusion at issue
here—a preclusion of coverage for “liability assumed under contract”—to apply only to instances
where the insured agrees to “assume” the tort liability of a third party, such as in indemnification
and hold harmless agreements. See 1 HANDBOOK ON INSURANCE COVERAGE DISPUTES § 7.05
(Barry R. Ostrager & Thomas R. Newman eds., Aspen Publishers 14th ed. 2008) (“This phrase
does not refer to the insured’s breaches of its own contracts.”); Homeowners Mgmt. Enters., Inc.
v. Mid-Continent Cas. Co., 294 Fed. App’x 814, 820, n.21 (5th Cir. 2008) (noting that the
exclusion for liability “assumed in a contract or agreement” denies coverage where “the insured
assumes responsibility for the conduct of a third party”); Provident Bank of Md. v. Travelers
Prop. Cas. Corp., 236 F.3d 138, 147 (4th Cir. 2000) (finding that the phrase “liability assumed by
the insured under any agreement” applies “only if [the insured’s] liability arises secondarily from
an agreement to be responsible for a third party’s primary liability”); Musgrove v. Southland
Corp., 898 F.2d 1041, 1044 (5th Cir. 1990) (“The assumption by contract of the liability of
another is distinct conceptually from the breach of one’s contract with another. Liability on the
part of the insured for the former is triggered by contractual performance; for the latter[,] liability
is triggered by contractual breach.”); Dreis & Krump Mfg. Co. v. Phoenix Ins. Co., 548 F.2d 681

10

Underlying Cincinnati’s arguments is the idea that without a public policy against
breach-of-contract coverage, insureds may enter into a contract with no intention of ever abiding
by it. However, errors-and-omissions policies generally contain exclusions for claims arising out
of deliberately fraudulent, dishonest, criminal or malicious acts or omissions. Cincinnati’s Policy
contained such an exclusion (see Doc. No. 3, Ex. A-2, p. 8), but neither party contends that it
applies in this case.
10

(7th Cir. 1977) (noting that “liability assumed [by the insured] under any written contract” means
“a specific written agreement between the insured and some third party whereby the insured
agrees to indemnify the third party”).
We find this interpretation compelling, particularly in the context of an E&O policy
designed to insure against the special risks inherent in the lending business. Here, the Policy not
only insures errors, omissions, or acts committed by Stonebridge in the performance of
professional services—defined to encompass all of Stonebridge’s activities on behalf of its
clients—it also specifically covers “claims arising out of any ‘wrongful lending act’ related to an
extension of credit or refused extension of credit to a ‘borrower.’” (See Doc. No. 3, Ex. A-3, p.
14). Stonebridge points out that as “all lender liability actions arise out of a contractual
relationship” (Doc. No. 25, p. 18), it reasonably expected the Policy to cover “all lender liability
practices,” whether asserted in negligence or breach of contract.11 Id. Cincinnati concedes that a
bank’s lending relationship “is almost always contractual in nature,” (see Doc. No. 23, p. 17),
but fails to explain the significance of the Endorsement in the context of a policy that excludes
all breach-of-contract claims. In other words, Cincinnati fails to answer this crucial question: if
the Policy excludes all breach-of-contract claims, then what is the significance of the
Endorsement? Thus, Cincinnati has not met its burden of proving the applicability of the
Exclusion here. See Koppers Co., Inc. v. Aetna Cas. & Sur. Co., 98 F.3d 1440, 1446 (3d Cir.
1996).12

11

We discuss reasonable expectations more fully in III.B.

12

We note that even if we do not reach the issue of the applicability of the Exclusion,
Cincinnati’s Policy is ambiguous at best, and must be construed in favor of the insured.
11

B.

Scope of coverage

Having concluded that the Exclusion does not apply in this case, we move on to
determine whether Stonebridge’s conduct falls within the Policy’s definition of “professional
services.”13 Courts consider an insured’s conduct a “professional service” if it: (1) arises out of
the insured’s day-to-day business operations, Bank of California v. Opie, 663 F.2d 977, 982 (9th
Cir. 1981)14; (2) involves specialized knowledge or skill, Marx v. Hartford Accident & Indem.
Co., 157 N.W.2d 870, 872 (Neb. 1986); or (3) implicates a special risk inherent in the practice of
the insured profession, Opie, 663 F.2d 981.
The conduct at issue here—Stonebridge’s failure to extend credit pursuant to an
agreement it believed had expired—falls into all three of these categories. As a financial
institution engaged in lending activities, extending or failing to extend credit is part of
Stonebridge’s usual day-to-day business operations. See Opie, 663 F.2d 977 (finding that a
mortgage broker’s misapplication of loan proceeds in breach of its contract with a commercial
bank was part of broker’s “day-to-day business operations” and thus constituted a professional
service). Stonebridge’s actions—negotiating a conditional agreement to extend credit to a
borrower, determining whether those conditions were met, and deciding whether to extend the

13

As noted earlier, the Policy defines “professional services” as “activities allowed under
the law and regulations governing financial institutions which are performed for or on behalf of
any client or customer of [Stonebridge].” (Doc. No. 3, Ex. A, p. 15). As this broad definition
offers little guidance, we turn to case law.
14

Several federal district and courts of appeals have cited and applied the standard
articulated in Opie. See, e.g., Home Ins. Co. v. Bullard, 850 F.2d 692, 1988 WL 71192, at *4
(6th Cir. 1988) (table); Curtis Ambulance of Fla., Inc., v. Bd. of Cnty. Comm’rs, 811 F.2d 1371,
1379 (10th Cir. 1987); Am. Cas. Co. of Reading, Pa. v. Kemper, No. 07-1149, 2008 WL
2783272, at *5 (D. Ariz. July 16, 2008); Horizon West, Inc. v. St. Paul Fire & Marine Ins. Co.,
214 F. Supp. 2d 1074, 1078 (E.D. Cal. 2002).
12

end date for that agreement—also involve specialized knowledge and skill. Contra Massamont
Ins. Agency, Inc. v. Utica Mut. Ins. Co., 489 F.3d 71 (1st Cir. 2007) (finding that an insurance
agency’s diversion of its business in breach of an exclusivity agreement did not constitute
professional service but was merely a business decision); Zurich Am. Ins. Co. v. O’Hara Reg’l
Cntr. for Rehab., 529 F.3d 916 (10th Cir. 2008) (concluding that a health facility’s billing
practices for medicare and medicaid claims did not qualify as “professional services”). Finally,
liability for ultimately refusing to extend credit is clearly a “special risk” inherent in the lending
business. Thus, Stonebridge’s conduct qualifies as a “professional service” within the meaning
of the Policy.
Next, we determine the meaning and effect of the Endorsement on the scope of the
Policy’s coverage for errors, misstatements, acts, or omissions. The Endorsement adds coverage
for claims arising out of “any negligent act or omission, error, misstatement, or neglect or breach
of duty” related to an extension of credit or refused extension of credit to a “borrower”
(emphasis added). This addition both elucidates and complicates the original Policy. By adding
the phrase, “related to an extension of credit or refused extension of credit,” the Endorsement
expressly clarifies—to the extent that it may have been unclear—that the Policy provides
coverage for claims stemming from a faulty rendition of, or a failure to render, credit services.15
However, the Endorsement’s definition of “wrongful lending act” conflicts with the original
Policy’s definition of “wrongful act.” Specifically, the Endorsement adds the term “negligent act
or omission” to the original Policy’s definition of a “wrongful act,” but explicitly notes that the

15

See Dep. of Ted Doughman, Senior Underwriting Manager for Cincinnati, Doc. No. 29,
p. 27 (“That endorsement is intended to provide some clarity . . . .”)
13

definitions set forth in the Endorsement “shall apply to this ‘endorsement’ only and shall not
apply to the policy to which this ‘endorsement’ is attached.” Because the Endorsement does not
provide any new coverage16—it only further delineates coverage that is already afforded by the
original Policy—its language creates ambiguity regarding which definition of “wrongful act”
controls.17 In accordance with Pennsylvania law, we resolve this ambiguity in favor of
Stonebridge and find the original Policy’s definition controlling. See Medical Protective Co.,
198 F.3d at103. Thus, Stonebridge’s error—its failure to extend credit pursuant to an agreement
it believed had expired—falls within the Policy’s coverage, regardless of whether it was
negligent or not. If Cincinnati wanted to limit coverage to only negligent acts, negligent errors,
or negligent omissions, it should have written the Policy and Endorsement to make this clear. It
did not. Cincinnati, not Stonebridge, bears the consequences of this lack of clarity.
We note that Pennsylvania’s reasonable expectations doctrine bolsters our interpretation
of the Policy and Endorsement. See UPMC Health System v. Metro. Life Ins. Co., 391 F.3d 497,
502 (3d Cir. 2004) (“[T]he reasonable expectations of the insured is the focal point of the
insurance transaction . . . regardless of the ambiguity, or lack thereof, inherent in a given set of
documents.”). This doctrine “is intended to protect against the inherent danger, created by the

16

The record supports this interpretation. (See Dep. of Ted Doughman, Senior
Underwriting Manager for Cincinnati, Doc. No. 29, p. 27 (“That endorsement is intended to
provide some clarity . . . We do not believe there is additional coverage in that endorsement that
would need additional premium.”)
17

This distinction is important as some courts have construed insurance policies
containing the phrase “negligent acts, errors, or omissions” to mean “negligent act, negligent,
error, or negligent omissions.” See Emp’rs Reinsurance Corp. v. Teague, 972 F.2d 339 (4th Cir.
1992); Group Voyagers, Inc. v. Emp’rs Ins. of Wausau, No. C 01-0400, 2002 WL 356653 (N.D.
Cal. March 4, 2002); Arcadia N.E., Inc. v. Thesseus Intern. Asset Fund NV, No. 01-cv-5398,
2003 WL 22057003 (S.D.N.Y. Sept. 4, 2003).
14

nature of the insurance industry, that an insurer will agree to certain coverage when receiving the
insured’s application, and then unilaterally change those terms when it later issues a policy.” Id.
The record here supports Stonebridge’s contention that it reasonably expected the Policy to cover
“all lender liability practices,” whether asserted in negligence or breach of contract. (See Doc.
No. 25, p. 18.) Specifically, Stonebridge attached a needs-checklist to its application for
insurance. That checklist noted Stonebridge’s desire for “coverage for all professional services
provided to a third party for a fee, whether such service is provided in accordance with a contract
or not.” (Doc. No 28, p. 25.) (emphasis in original). Ted Doughman, Cincinnati’s insurance
underwriter, placed a checkmark next to this request, indicating that it was acceptable and would
be provided. (Doc. No. 29, p. 24.) Cincinnati cannot now claim that the policy it issued in
response to that request does not cover the very services Stonebridge sought coverage for. See
UPMC Health System, 391 F.3d at 503.
C.

Duty to Defend v. Duty to Indemnify

Finally, Cincinnati contends that Stonebridge cannot obtain a declaratory judgment on the
existence of coverage and the duty to indemnify because the Bank’s ultimate liability on the
underlying Lawsuit, if any, has yet to be undetermined. This argument, too, fails. Pennsylvania
does distinguish between the duty to defend and the duty to indemnify: an insurer is obligated to
defend an insured if the claim is potentially covered by the insurance policy, but is only required
to indemnify after the insured has been found liable for a claim actually covered by the policy.
See Gen. Acc. Ins. Co. of Am. v. Allen, 692 A.2d 1089, 1095-6 (Pa. 1997). But Pennsylvania
allows courts to resolve both the duty to defend and the duty to indemnify in a single declaratory
judgment action. See id., 692 A.2d at1095-6 (noting that the question before a court in a
15

declaratory action is not whether the insurer owes a specified amount—which would be a
premature inquiry absent full resolution on the underlying action—but whether the insurer has a
duty to indemnify in the event of liability on the underlying action); Kvaerner Metals, 908 A.2d at
896 n.7 (acknowledging that both the duty to defend and the duty to indemnify flow from a
determination that coverage exists). Because we find that the Policy provides coverage for the
Lawsuit, Cincinnati is obligated to defend Stonebridge in that action. Cincinnati must also
indemnify Stonebridge—in accordance with the Policy’s terms—in the event Stonebridge is
ultimately found liable.
IV.

CONCLUSION
Accordingly, we GRANT judgment in Stonebridge’s favor and against Cincinnati. The

Clerk shall mark this matter statistically closed.

BY THE COURT:

/s/ Legrome D. Davis
Legrome D. Davis, J.

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