ALLIED WORLD ASSURANCE COMPANY, LTD. v. STEADFAST INSURANCE COMPANY
MEMORANDUM AND/OR OPINION. SIGNED BY HONORABLE GERALD A. MCHUGH ON 8/24/15. 8/24/15 ENTERED AND COPIES EMAILED.(rf, )
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
ALLIED WORLD ASSURANCE
AUGUST 24, 2015
The parties in this litigation, two insurance companies, have filed cross motions for
summary judgment. The motions pose a narrow question about the interpretation of Defendant
Steadfast Insurance Company’s (“Steadfast”) insurance contract with a third party that both
Steadfast and Allied World Assurance Company (“Allied”) insure. For the reasons that follow, I
will grant Steadfast’s Motion for Summary Judgment and deny Allied’s motion.
Steadfast and Allied both provide excess liability insurance for Pottstown Memorial
Medical Center (“PMMC”). PMMC self-insures for up to five million dollars. Steadfast
provides the first excess layer in the amount of twenty million dollars, and Allied provides the
second excess layer in the amount of twenty-five million dollars.
On May 4, 2012, a jury entered a verdict in the amount of $78,404,669 against PMMC in
a medical malpractice action. After the verdict, Steadfast hired Ronald Schiller, Esq. of the law
firm Hangley Aronchick Segal Pudlin & Schiller (“Hangley firm”) to serve as counsel to PMMC
in conjunction with PMMC’s own counsel and continue litigating the case. The suit eventually
settled for thirty-one and one half million dollars. Upon settlement, PMMC, Steadfast, and
Allied delivered the settlement to the tort plaintiffs. PMMC paid the tort plaintiffs its five
million dollar Self-Insured Retention (“SIR”). Steadfast paid the Hangley firm $751,765.00 and
the tort plaintiffs $19,248,235.00 for a total of twenty million dollars. Allied paid the balance to
the tort plaintiffs.
The dispute here focuses on whether the legal fees that Steadfast paid to the Hangley firm
should have been counted against Steadfast’s twenty million dollar policy limit. Steadfast argues
that its insurance contract with PMMC gave it the discretion to participate in PMMC’s defense
and to count the costs of that defense against the policy limit. Allied agrees that Steadfast was
permitted to hire the Hangley firm but insists that by making that discretionary decision,
Steadfast took the cost of that firm on itself. According to Allied, Steadfast should have paid the
entire twenty million dollar limit to the tort plaintiffs. If Steadfast had done so, then Allied’s
remaining obligation would have been diminished by the amount Steadfast paid to the Hangley
firm. Allied filed this lawsuit to recoup that amount, and both parties have filed for summary
judgment seeking a resolution of the question.
Rule 56 requires courts to “grant summary judgment if the movant shows that there is no
genuine dispute as to any material fact and the movant is entitled to judgment as a matter of
law.” Fed. R. Civ P. 56(a). Here, the parties have agreed that there are no material factual
disputes. The only issues to resolve relate to the interpretation of Steadfast’s insurance contract
with PMMC. This is a question of law. “[T]he task of interpreting [an insurance] contract is
generally performed by a court rather than by a jury.” Madison Const. Co. v. Harleysvill Mut.
Ins. Co., 557 Pa. 595, 606, 735 A.2d 100, 106 (1999) (citing Gene & Harvey Builders v.
Pennsylvania Mfrs. Ass'n, 512 Pa. 420, 426, 517 A.2d 910, 913 (1986)); Bishops Inc. v. Penn
Nat’l Ins., 984 A.2d 982, 989 (Pa. Super. Ct. 2009).
As to which state supplies the governing law, Steadfast points out in its brief supporting
its Motion for Summary Judgment that while the dispute focuses on events in Pennsylvania, the
insurance contract was delivered in Tennessee. Brief of Defendant Steadfast in Support of Its
Motion for Summary Judgment at 7 n.6. However, the relevant legal principles are the same in
both states. In Pennsylvania, courts interpret insurance contracts by reading the language of the
contract and attempting to “ascertain the intent of the parties as manifested by the language of
the written instrument.” Madison Const. Co., 557 Pa. at 606, 735 A.2d at 106 (citing Gene &
Harvey Builders, 512 Pa. at 426, 517 A.2d at 913); Am. & Foreign Ins. Co. v. Jerry's Sport Ctr.,
Inc., 606 Pa. 584, 608, 2 A.3d 526, 540 (2010) (“Insurance policies are contracts, and the rules of
contract interpretation provide that the mutual intention of the parties at the time they formed the
contract governs its interpretation.”). Likewise, in Tennessee, courts’ “interpretation of
insurance contracts … is governed by the same rules of construction used to interpret other
contracts. … An insurance contract ‘must be interpreted fairly and reasonably, giving the
language its usual and ordinary meaning.’ ” Travelers Indem. Co. v. Moor & Assocs., Inc., 216
S.W.3d 302, 305–06 (Tenn. 2007) (citing Naifeh v. Valley Forge Life Ins. Co., 204 S.W.3d 758,
768 (Tenn. 2006)).
There are several key provisions that relate to the dispute over whether Steadfast’s policy
limit could be eroded by the money Steadfast spent paying counsel to assist PMMC after the jury
First, within the Common Policy Provisions, Section III, Paragraph C explains that
Steadfast may—but is not obligated to—participate in the defense of a claim against an insured
such as PMMC:
C. If “Underlying Insurance” or any “Other Insurance” exists, we shall have the
right, but not the duty, to participate in the investigation, settlement or defense of
any “Occurrence”, “Medical Incident” or “Claim” against the Insured that in our
judgment may exceed that Applicable Underlying Limit”.
Common Policy Provisions, Section III, Paragraph C. Section X, paragraph C of the same
document defines the “Applicable Underlying Limit” as “the total of all available limits of
insurance for the applicable ‘Underlying Insurance’ plus any ‘Other Insurance.’ ” Here,
PMMC’s SIR is the Applicable Underlying Limit.
A provision amended in Endorsement Number 4 states that Steadfast will deduct
“Defense Expenses” that it incurs from its policy limit:
D. We will pay, as damages, “Defense Expenses” and “Post-judgment Interest”
incurred by us in the investigation or defense of any “Claims”. The payment of
such “Defense Expenses” and “Post-judgment Interest” shall reduce the Limits of
Insurance provided under this policy.
Endorsement Number 4. The Common Policy Provisions define “Defense Expenses” to mean “a
payment allocated to investigate or defend a specific ‘Claim’ to the extent that payment is not
included in the ‘Underlying Insurance.’ ” Common Policy Provisions, Section X, Paragraph G.
Endorsement Number 5 states that the insured may not deduct its defense expenses from
its own SIR limit. The Endorsement explains that the insured is responsible for its own “Defense
Expenses,” and any SIR will not be eroded by “Defense Expenses” that the Insured incurs. The
limits of the SIR “may not be reduced or exhausted for any reason other than the payment of
judgments or settlements which would be covered by the provisions of this policy.”
The same Endorsement also states that when the Insured’s SIR is exhausted by paying
claims, Steadfast will at that point “have the right and duty to settle existing and new ‘Claims’
which would have been covered…” Together with paragraph C above, this means that before
the SIR is exhausted, Steadfast may participate in the defense of claims, and once the SIR is
exhausted, Steadfast will have an affirmative duty to get involved.
Plaintiff Allied argues that Steadfast’s payments to the Hangley firm should not have
eroded Steadfast’s policy limit because the payments were not a “Defense Expense” as the term
is defined and used in the contract. Allied points to the fact that “Defense Expense” is defined to
exclude “payment … included in ‘Underlying Insurance.’ ” Common Policy Provisions, Section
X, Paragraph G. “Underlying Insurance” in this case includes PMMC’s SIR. According to
Allied, all spending on defense of a claim before the SIR is exhausted is part of the Underlying
Insurance. Only once the SIR is exhausted and Steadfast acquires the “right and duty to settle
existing and new ‘Claims’…” does Steadfast also acquire the ability to accumulate “Defense
Expenses.” Endorsement 5. In other words, Allied’s position appears to be that while the SIR is
unexhausted, any expenses on defense the insured pays do not exhaust the SIR, and any money
Steadfast spends defending claims against its insured is not a “Defense Expense.” Allied’s
Memorandum of Law in Opposition to the Motion for Summary Judgment of Defendant
Steadfast Ins. Co. at 7 (“[T]he only entity that could incur ‘Defense Expenses’ under the
Steadfast policy before exhaustion of the SIR was the Hospital.”).
Steadfast rejects Allied’s interpretation requiring the SIR to be exhausted before
Steadfast could make “Defense Expenses” that erode Steadfast’s policy limit. Steadfast argues,
“[t]here is no language in the Steadfast Policy tying the reduction of the Steadfast limit to the
erosion of PMMC’s SIR.” Brief of Defendant Steadfast Ins. Co. In Support of its Reply to the
Motion for Summary Judgment of Plaintiff Allied World Assurance Company at 11. According
to Steadfast, Endorsement 4 plainly declares that “Defense Expenses” by Steadfast erode its
policy limit, the Common Policy provisions unequivocally permit Steadfast to participate in the
Insured’s defense, and there is nothing in the contract to prevent Steadfast from making Defense
Expenditures before exhaustion of the SIR.
I share Steadfast’s interpretation of its contract. To accept Allied’s perspective, I would
need to find that until the Insured exhausted the SIR, only the Insured’s defense expenses are
actually “Defense Expenses” as defined in the contract. I find nothing in the contract that
explicitly states such a rule. Moreover, the term “Defense Expenses” is defined to include
“Attorney fees and other litigation expenses incurred in the defense of a ‘Claim,’ ” and paragraph
C quoted above grants Steadfast the right to participate in the defense of claim without making
reference to whether the SIR must be exhausted. Common Policy Provisions, Section X,
Paragraph G(1), Definition of Defense Expenses. These provisions, read together, show the
contract contemplates that Steadfast may incur Defense Expenses before the exhaustion of the
SIR. Allied notes the definition of Defense Expenses does exclude payments “included in the
‘Underlying Insurance.’ ” However, I am not persuaded Steadfast’s payments to the Hangley
firm are part of the Underlying Insurance.
Allied appears to argue that because Endorsement 5 provides that the Medical Center’s
SIR is not eroded by defense costs, Steadfast’s liability limits are similarly not eroded by defense
costs (until the SIR is exhausted). However, this argument overlooks the fact that Endorsement
No. 5 qualifies “Defense Expenses” with the phrase, “incurred by any Insured.” Allied’s
Memorandum of Law in Opposition to the Motion for Summary Judgment of Defendant
Steadfast Ins. Co. at 6; Endorsement 5. This qualification contemplates that “Defense Expenses”
might be incurred by someone else. As Steadfast points out, “Schiller’s bills were not attorney
fees incurred by PMMC, and as such expressly erode the Steadfast limit.” Brief of Defendant
Steadfast Ins. Co. In Support of its Reply to the Motion for Summary Judgment of Plaintiff
Allied World Assurance Company at 7.
Allied expresses concern that this interpretation of the contract will permit Steadfast to
spend down its policy limits by hiring lawyers to defend claims. I do not see that Steadfast
would stand to gain much with such a strategy. Here, Steadfast disbursed its full policy limit to
its lawyers and the plaintiff in the underlying tort action. If it had not hired the Hangley firm, it
also would have disbursed its full policy limit. By hiring the Hangley firm to supplement
PMMC’s counsel, I fail to see that Steadfast has saved itself money. In fact, because a $78
million verdict was negotiated down to a $31.5 million settlement, Schiller’s work saved Allied
approximately $18 million as against its $25 million policy limit. Furthermore, even if this
interpretation of the contract permits Steadfast to pass extra costs to Allied, concerns about the
fairness of the contract to Allied do not determine the meaning of the contract’s terms.
For the reasons above, I will grant Steadfast’s Motion for Summary Judgment and deny
the Motion by Allied. An appropriate order follows.
/s/ Gerald Austin McHugh
Gerald Austin McHugh, J.
United States District
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