UNITED STATES FIRE INSURANCE COMPANY v. KELMAN BOTTLES, LLC et al
MEMORANDUM AND OPINION re 91 MOTION for Summary Judgment filed by CONTINENTAL CASUALTY COMPANY; 93 MOTION for Summary Judgment filed by UNITED STATES FIRE INSURANCE COMPANY; 98 Partial MOTION for Summary Judgment Against Continent al filed by KELMAN GLASS, LLC, KELMAN BOTTLES, LLC; 103 MOTION for Partial Summary Judgment Against U.S. Fire Insurance Company filed by KELMAN GLASS, LLC, KELMAN BOTTLES, LLC; and 112 Cross MOTION for Summary Judgment filed by UNITED STATES FIRE INSURANCE COMPANY. Signed by Judge Arthur J. Schwab on 04/05/2012. (lmt)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
UNITED STATES FIRE INSURANCE
KELMAN BOTTLES, KELMAN GLASS,
CONTINENTAL CASUALTY COMPANY,
MEMORANDUM AND OPINION
This is a declaratory judgment action brought by Plaintiff, United States Fire Insurance
Company (“U.S. Fire”), seeking a declaration that it does not have to provide insurance
coverage to the Defendants, Kelman Bottles and Kelman Glass, LLC (“Kelman”). See doc.
no. 1. Kelman filed counterclaims against U.S. Fire seeking damages for breach of contract
and for bad faith. See doc. no. 10. Kelman also sued third-party Defendant Continental
Casualty Company (“Continental”) for breach of contract. See doc. no 29.
Presently before the Court are the parties’ Cross-Motions for Summary Judgment.
Continental filed a Motion for Summary Judgment against Kelman. See doc no. 91. U.S. Fire
also filed a Motion for Summary Judgment against Kelman. See doc. no. 93. Kelman filed a
Partial Motion for Summary Judgment against Continental (see doc. no. 98) and a Partial
Motion for Summary Judgment against U.S. Fire. See doc. no. 103.
Each party filed a Response to the Motion(s) for Summary Judgment that was/were
filed against each of them. See doc. nos. 107, 110, 114-115, and 116-117.
U.S. Fire also filed a Cross-Motion for Summary Judgment (doc. no. 112) and brief in
support. Doc. no. 113. Although Kelman filed a Motion seeking time to respond to U.S. Fire’s
Cross-Motion (doc. no. 122) and this Court granted Kelman’s Motion (doc. no. 123), no
response was filed. However, Kelman filed a Reply Brief re Motion for Partial Summary
Judgment Against U.S. Fire (doc. no. 131) and U.S. Fire filed a Reply Brief in support of its
Original Motion for Summary Judgment (doc. no. 93). Doc. no. 127.
The Court has carefully considered all of the aforementioned submissions as well as the
Statements of Material Facts (and Responses thereto) and finds that these Motions are now ripe
for disposition. For the reasons that follow, this Court will grant U.S. Fire’s Motion for
Summary Judgment, will grant Continental’s Motion for Summary Judgment, will deny
Kelman’s Motion for Partial Summary Judgment against U.S. Fire, and will deny Kelman’s
Motion for Partial Summary Judgment against Continental. Finally, the Court will deny U.S.
Fire’s Cross-Motion for Summary Judgment (doc. no. 122) as moot.
I. FACTUAL AND PROCEDURAL BACKGROUND
The following facts are undisputed and material.
A. The Incident and the Furnace
Kelman operates a glass manufacturing facility in Glenshaw, Pennsylvania, where it
produces glass containers for the food industry. Doc. nos. 1 and 10 at ¶¶ 8-9. The facility
contains several furnaces for melting glass. Doc. nos. 1 and 10 at ¶ 11. From 2007 to March
15, 2011, Kelman operated only one furnace at the facility. Doc. no. 121 at ¶ 6.
On March 15, 2011, molten glass escaped from “furnace no. 2” or “kiln #2”
(hereinafter “the furnace”) which resulted in physical damage to the furnace and other
property. Doc. nos. 1 and 21 at ¶ 21 and doc. nos. 29 and 44 at ¶ 1.
The following is a summary of the relevant history of the furnace. The furnace had
undergone “a rebuild” from December of 2003 through January of 2004. Doc. no. 108 at ¶ 18.
A rebuild occurred approximately every nine years. Id. Between January of 2007 and March
15, 2011, the furnace leaked molten glass. Doc. No. 1 at ¶ 19. Specifically in April of 2009,
the furnace leaked molten glass. Doc. no. 116 at ¶ 15. On June 4, 2010 the furnace leaked
again. Doc. no. 116 at ¶ 29.
Following the April of 2009 leak, Doug Hilliard (Kelman’s Furnace Manager) sent an
email dated April 15, 2009 to William Kelman stating, in pertinent part, as follows:
As per your question on how long [the furnace] will last … Well as I told you
no one can tell you that answer with any certainty. I am in here this morning at
12:30 am because of a leak on the Northside of the melter. We have it stopped
but it is in a very serious spot in the furnace. It is about halfway down the block
meaning there is a lot of pressure pushing the glass out. I have water and
compressed air on it as of now but will have to chip it back and see what we
have in the morning. If it were not for the quick thinking and action of my crew
this could have gotten out of hand very easily and we could have lost well over
half of the glass in the furnace into the basement. . . .
Doc. no. 97-7.
After the April 2009 leak, Glass Furnace Management, LLC (“GFM”) conducted a
“Hot Repair Scope Evaluation” at Kelman. Doc. no. 97-8. Under the “Repairs Needed”
section of its written report, GFM indicated that Kelman needed to make the following repairs:
(1) replace the Left Front Checker; (2) “[o]vercoat 5 Sidewall Blocks 100% on Left Side of
Furnace[;]” (3) “[o]vercoat the entire front wall metal line[;]” (4) “[o]vercoat 1 [e]lectrode
block on the left side of ther furnace 100%[;]” (5) “[o]vercoat three sidewall blocks along
metal line of [r]ight side of furnace.” Id.
Under the “Repair Options” section of GFM’s written report, GFM indicated that the
“[o]vercoat work [items 2 though 5 immediately above] should be completed
conventionally. . . . [L]owest risk option is to replace 100% of the checker pack including both
settings including the rider arches, rider tiles, and transition course with HPC setting as
previously installed.” Id.
Under the “Recommendations” section of its report, GFM stated that if Kelman
“desires to run the furnace longer than 2 years, then I would propose 100% replacement of the
checker pack and rider arches in both settings.” Id.
In early May of 2009, GFM sent several quotes to Doug Hilliard at Kelman for the
recommended work. See doc. nos. 97-9, 97-10, 97-11. On May 15, 2009, Doug Hilliard sent
an email to William Kelman (and others) regarding the cost of the work proposed by GFM. In
the body of the email he wrote (in pertinent part) as follows:
At this time the known fact is the north regenerator front two zones have
collapsed. This is causing a blockage of the combustion air coming in and the
exhaust going out in these two ports. This in turn limits the daily tonnage . . . .
cutting deeply in to the potential profit . . . .
The furnace inspection also showed that we are in direr [sic] need of
overcoat block on mainly the north side of the melter. There is a great potential
for us to get a dangerous glass leak that may or may not be stopped in this area.
My recommendation is that we replace the whole north checker pack
and overcoat the side walls at the same time. This will be the most cost
effective, least amount of down time and reliable way to do this repair. We do
run a risk of the south failing under this extreme thermal shock of firing them
continually during the repair, but I feel that is a risk we must take at this
time. . . .
What I need is some guidance on which way to proceed with this. The
most economical and fastest way of doing it would be to only replace the front
part that has collapsed. . . . I do not recommend this type of repair but if it is all
we can afford at this time then that is what we will have to deal with. . . .
Doc. no. 97-12.
Although Kelman ultimately replaced the checker pack in the north regenerator of the
furnace sometime between December of 2009 and February of 2010, it only repaired the south
side checker pack and regenerator during this same time frame. See doc. no. 101-3 at pp. 3538. Kelman stated that it overcoated the entire metal line, not just portions of it, but admitted
that it did not do some of the “other work” GFM recommended. Doc. no. 121 at ¶ 24. Kelman
explained that it did not do some of the “other work” recommended by GFM because “it was
not done in the industry, had never been done at the [f]acility and it could cause the block to
wear out faster than it would without the work.” Id.
Following the June 4, 2010 leak (which appears to have been two leaks, close in time
on the same date), on June 4, 2010, Doug Hilliard wrote an email to Eleni Sotiriou (a Kelman
employee), which stated in pertinent part:
The furnace is ok right now. We did have another leak, a fairly bad one, after I
had talked to Bill. I was already here and was able to stop it fairly quickly. We
are now in the process of cleaning both areas where the leaks occurred up and
getting more air to them.
Doc. no. 97-17. On February 2, 2011, Doug Hilliard wrote the following in an email to Eleni
As for how worried we should be, I think we should be extremely worried. In
my opinion if this block falls into the throat and causes a blockage, we will have
no other option than shutting the furnace down, draining it and do a full repair
on the whole melting end. I do not feel that this furnace will take a drain, cool
down, minor repair and restart.
Doc. no. 97-18. On February 6, 2011 Doug Hilliard again emailed Eleni Sotiriou,
We have had some movement in the blocks on the front wall overnight.
The block to the left, or to the north side of the wall, has remained stable, but
the block on the right, or the south side has shown some additional slippage.
The crack in the bridge-wall above this area seems to have become more
. . . Although we have had some slight movement I am confident we will
be ok until tomorrows [sic] repair. I have my tank attendants watching it
closely on reversals and they are to contact me as soon as they see any change.
Doc. no. 97-20.
On March 15, 2011, molten glass leaked from one, if not two, locations on the north
wall. Doc. no. 116 at ¶ 24.
Kelman had a written procedure in place to manage potential leaks from the furnace.
Doc. no. 121 at ¶ 14. U.S. Fire’s and Continental’s expert conceded that glass plants typically
have contingency plans in place to manage furnace leaks. Id. and doc. no. 108 at ¶ 23.
B. The Insurance Policies
U.S. Fire issued a commercial property insurance policy to “Kelman Bottles LLC” (the
named insured set forth on the declarations page of the policy), and listed “Kelman Glass
LLC” as an additional named insured pursuant to an endorsement. Doc. nos. 1 and 10 at ¶ 7,
doc. no. 1-4, and doc. no. 121 ¶ 37. The policy declarations page indicates that the policy
period ran from March 10, 2011 to March 10, 2012. Doc. no. 1-4.
Continental also issued an insurance policy to Kelman Glass LLC. Doc. no 97-1 at
bates no. 02776. The declarations page of the policy indicates that the policy period ran from
March 14, 2011 to March 14, 2012. Id. Continental’s policy provides coverage for
“equipment breakdown” as that term is defined by the policy. Id.
No party contests that Kelman provided timely notice of the March 15, 2011 event to
its two insurers.
On June 14, 2011, Continental denied Kelman coverage for the claim arising out of the
March 15, 2011 event indicating that no “breakdown” (as the policy defines that term)
occurred. Doc. no. 29-1, ex. “B.” On June 30, 2011, U.S. Fire denied Kelman coverage for
the claim arising out of March 15, 2011 event based on the policy’s: (1) inherent vice
exclusion, (2) wear and tear exclusion, and (3) design defect exclusion. Doc. no. 121 at ¶ 60.
C. Procedural History
On July 6, 2011, U.S. Fire filed the instant declaratory judgment action seeking a
judgment declaring that “the furnace is not ‘Covered Property’” as defined by the U.S. Fire
policy. Doc. no. 1.
On August 23, 2011, in response to U.S. Fire’s Complaint, Kelman filed an Answer and
Counterclaims asserting claims for breach of contract and bad faith. Doc. no. 10. U.S. Fire
moved to dismiss Kelman’s Counterclaims, which this Court denied. Doc. no. 23 and text
order dated September 13, 2011. U.S. Fire filed an Answer to Kelman’s Counterclaims on
September 26, 2011.
On October 10, 2011, Kelman filed a Joinder Complaint against Continental asserting a
claim for breach of contract. Doc. no. 29. After Continental was joined, U.S. Fire amended its
Answer to Kelman’s Counterclaims to assert an additional affirmative defense. Doc. no. 43.
The additional affirmative defense referenced the portion of its own policy which excluded
coverage for any property covered by another insurance policy, except for any excess amount
due (whether collectible or not) from the other insurance policy. Id.
On November 30, 2011, Continental filed an Answer to Kelman’s Joinder Complaint.
Doc. no. 44.
Following the close of discovery, Kelman sought to amend its Third Party Complaint
against Continental to assert a claim for bad faith. Doc. no 77. On March 1, 2012, the Court
denied Kelman’s Motion to amend its Third Party Complaint. Doc. no. 90.
As noted above, Continental filed a Motion for Summary Judgment against Kelman.
See doc no. 91. U.S. Fire also filed a Motion for Summary Judgment against Kelman. See
doc. no. 93. Kelman filed Partial Motions for Summary Judgment against Continental (see
doc. no. 98) and U.S. Fire. See doc. no. 103.
In addition to filing Cross-Motions, the parties also filed Responsive Briefs to one
another’s Motions. Continental filed a Response to Kelman’s Motion for Partial Summary
Judgment (doc. no. 107), and U.S. Fire filed a Response to Kelman’s Motion for Partial
Judgment. Doc. no. 110. Kelman filed a Response to Continental’s Motion for Summary
Judgment (doc. nos. 114-115), and it also filed a Response to U.S. Fire’s Motion for Summary
Judgment (doc. nos. 116-117).
In addition, U.S. Fire filed (with the Court’s permission) a Reply to Kelman’s Response
to U.S. Fire’s Motion for Summary Judgment. Doc. no. 127.
Finally, Kelman filed a “Cross-Motion for Summary Judgment” and a Brief in Support
of same. See doc. nos. 112-113. Kelman filed a Response to the same. Doc. no. 131.
Thus, the procedural posture is one of Cross-Motions for Summary Judgment in which
there appears to be no dispute as to any material fact. Thus, as discussed below, the only issues
before the Court are purely legal ones which may be decided upon Motion.
II. STANDARD OF REVIEW
Summary judgment may be granted if, drawing all inferences in favor of the nonmoving party, “the pleadings, the discovery and disclosure materials on file, and any affidavits
show that there is no genuine issue as to any material fact and that the movant is entitled to
judgment as a matter of law.” Fed.R.Civ.P. 56(c)(2).
When a motion for summary judgment is properly made and supported, an opposing
party may not rely merely on allegations or denials in its own pleading; rather, its response
must – by affidavits or as otherwise provided in this rule – set out specific facts showing a
genuine issue for trial. If the opposing party does not so respond, summary judgment should, if
appropriate, be entered against that party. Fed. R. Civ. P. 56(e)(2).
To demonstrate entitlement to summary judgment, the defendant, as the moving party,
is not required to refute the essential elements of the plaintiff’s cause of action. The defendant
needs only point out the absence or insufficiency of the plaintiff’s evidence offered in support
of those essential elements. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986);
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986). Once that
burden has been met, the plaintiff must identify affirmative evidence of record that supports
each essential element of his cause of action. If the plaintiff fails to provide such evidence,
then he is not entitled to a trial, and defendants are entitled to summary judgment as a matter of
In summary, the inquiry under Rule 56 is whether the evidence of record presents a
genuine dispute over material facts so as to require submission of the matter to a jury for
resolution of that factual dispute or whether the evidence is so one-sided that the movant must
prevail as a matter of law. It is on this standard that the Court has reviewed each of the CrossMotions and Responses thereto.
A. Kelman’s Breach of Contract Claims against Continental and U.S. Fire
The legal principles governing this Court’s interpretation of the two insurance policies
at issue, are well settled. Under Pennsylvania law, 1 the “‘interpretation of an insurance
contract regarding the existence or non-existence of coverage is generally performed by the
court.’” Gardner v. State Farm Fire and Cas. Co., 544 F.3d 553, 558 (3d Cir. 2008) (citing
Donegal Mut. Ins. Co. v. Baumhammers, 938 A.2d 286, 290 (Pa. 2007)). Since an insurance
policy is a contract, the Court’s duty is to ascertain the intent of the parties as manifested in the
language of the agreement. Eastern Associated Coal Corp. v. Aetna Cas. & Sur. Co., 632 F.2d
1068, 1075 (3d Cir. 1980). A policy must be read as a whole and its meaning construed
according to its plain language. Meyer v. CUNA Mut. Ins. Soc., 648 F.3d 154, 163 (3d Cir.
Whether an ambiguity exists is a question of law. Viera v. Life Ins. Co. of North
America, 642 F.3d 407, 419 (3d Cir. 2011). The Court should read policy provisions so as to
avoid ambiguities, if the plain language of the contract permits, and should not torture the
language of the policy to create an ambiguity. Id. Under Pennsylvania law, an insurance
contract is ambiguous where it: “(1) is reasonably susceptible to different constructions, (2) is
obscure in meaning through indefiniteness of expression, or (3) has a double meaning.”
Lawson v. Fortis Ins. Co., 301 F.3d 159, 163 (3d Cir. 2002).
Pennsylvania law applies to this diversity action.
When policy language is clear and unambiguous, the Court is required to enforce that
language. Medical Protective Co. v. Watkins, 198 F.3d 100, 103 (3d Cir. 1999), citing
Standard Venetian Blind Co. v. American Empire Ins. Co., 469 A.2d 563, 566 (Pa. 1983).
When the policy language is ambiguous it must be construed against the insurer and in favor of
the insured, and any reasonable interpretation offered by the insured must control. American
Auto. Ins. Co. v. Murray, 658 F.3d 311, 320 (3d Cir. 2011).
Finally, the last-antecedent rule provides “that qualifying words, phrases, and clauses
are to be applied to the words or phrase immediately preceding and not to others more remote.”
Stepnowski v. C.I.R., 456 F.3d 320, 324 (3d Cir.2006) (quoting United States v. Hodge, 321
F.3d 429, 436 (3d Cir.2003)). In other words, if a sentence reads “A or B with respect to C,” it
should be interpreted as containing two items: (1) “A” and (2) “B with respect to C.” Id. at 324
n. 7. However, the last-antecedent rule “is not an absolute and can assuredly be overcome by
other indicia of meaning.” Pilosi, 393 F.3d at 365.
1. Continental’s Motion for Summary Judgment and Kelman’s
Motion for Partial Summary Judgment as to Continental
Kelman’s Joinder Complaint alleges that by denying insurance coverage, Continental
breached its contract with Kelman. Although Continental admits that it denied coverage, it
also denies that it breached its contract with Kelman.
In support of its argument that summary judgment should be entered in its favor,
Continental primarily argues that “the leak,” which Kelman sustained on March 15, 2011, was
not “sudden and accidental” and therefore was not a “breakdown” as defined by the insurance
policy. In support of this contention, Continental points to the prior leaks Kelman endured
between April of 2009 and June 4, 2010. Continental seeks a declaration that the loss
sustained by Kelman was not “sudden and accidental” as defined by Continental’s policy and
thus, Continental is not required to provide insurance coverage.2
Kelman, in its Motion for Partial Summary Judgment, contends that “the loss” it
sustained on March 15, 2011, must be “sudden and accidental” per the policy. Kelman argues
that because the loss was sudden and accidental, Continental breached the terms of the
insurance policy by failing to provide coverage and suggests that this Court enter such a
declaration and allow a jury to determine the amount of damages to be awarded for this alleged
Under the Pennsylvania case law discussed immediately above, the primary duty of this
Court is to ascertain the parties’ intent as manifested in the language of Continental’s insurance
policy, and the Court must do so by reading Continental’s policy “as a whole” while
construing its meaning according to the policy’s plain language.
The insurance policy issued by Continental is described as an “Equipment Breakdown”
policy. See doc. no. 97-1. Accordingly, this Court finds that, on the whole, Continental’s
insurance policy was designed to provide coverage to Kelman3 when a breakdown in the
insured’s equipment occurred.4 The Continental policy states that, “‘Breakdown’ . . . [m]eans
Continental secondarily argues that the valuation provision of its policy required Continental to pay to the cost to
repair, rebuild, or replace the furnace – which ever was less costly – based on proof of each cost proffered by
Kelman. Continental then asserted that Kelman only proffered the cost of rebuilding the furnace ($3,800,000.00),
and never attempted to secure a cost to repair the furnace. Continental also asserted that Kelman failed to produce
any evidence to support its contention that the need to rebuild the furnace resulted solely from the March 15, 2011
leak, as opposed to damage the furnace incurred during the other prior leaks. The Court does not need to consider
these arguments as will be discussed, infra.
Per the Continental policy produced to the Court at doc. no. 97-1, only Kelman Glass, LLC is an insured.
Continental’s policy at issue here does exclude coverage for “a breakdown” that is caused by certain causes;
however, the parties agree that none of those causes led or contributed to the event of March 15, 2011.
sudden and accidental direct physical loss to ‘Covered Equipment’ . . . .”5 Doc. no. 97-1 at
Bates no. 02800.
Given the fact that the parties to the Continental insurance policy agree that the furnace
at issue is “Covered Equipment,” this Court must determine as a matter of law is whether an
ambiguity exists with respect to the phrase “sudden and accidental.”
a. Sudden and Accidental – Defined
The phrase “sudden and accidental” has been defined by Pennsylvania courts in a
pollution exclusion context – not in the context of equipment breakdown. See Lower Paxton
Twp. v. United States Fire and Guaranty Co., 557 A.2d 393, 397 (Pa. Super. 1989) (“[T]he
plain meaning of [“sudden and accidental”] requires that damages resulting from gradual
releases of pollution are excluded from coverage.”); Northern Ins. Co. v. America Northern
Aadrvark Assoc., Inc., 942 F.2d 189, 193 (3d Cir. 1991) (“We therefore hold, in accordance
with the decisions of the Superior Court of Pennsylvania, that the exception for ‘sudden and
accidental’ discharges applies only to discharges that are abrupt and last a short time.”);
Chemetron Invs., Inc. v. Fidelity & Cas. Co. of New York, 886 F.Supp. 1194, 1197 (W.D. Pa.
1994) (Under Pennsylvania law, “the exception for ‘sudden and accidental’ discharges applies
only to discharges that are abrupt and last a short time.”). In Sunbeam Corp. v. Liberty Mut.
Ins. Co., 1997 WL 1073957 (Pa. Co. Pl. April 2, 1997), another pollution exclusion case, the
Court of Common Pleas of Allegheny County, upon review of the Lower Paxton decision
stated as follows:
[O]n several occasions the Pennsylvania Superior Court has rejected the
argument that the pollution exclusion may be reasonably construed to exclude
coverage only in cases where the damage was intended or expected. The court
Continental and Kelman agree that the furnace, which leaked on March 15, 2011, is “Covered Equipment.”
has said that any interpretation of the clause which defines “sudden” as meaning
only unexpected or unintended is “blatantly unreasonable.”
Id. at *7.6
Continental contends that the phrase “sudden and accidental” – found in the definition
of “breakdown” in its own policy – is not ambiguous and argues that this Court must enforce
the plain meaning of the words “sudden and accidental.” Although Kelman does not state
whether it considers the phrase “sudden and accidental” to be ambiguous, it concurs with
Continental that the Pennsylvania Superior Court in Lower Paxton defined “sudden” as “abrupt
and only lasting a short time” and “accidental” as “unexpected or unintended.” Thus, the
parties concur on the definition of “sudden and accidental” as “abrupt and lasting a short time”
(i.e. sudden), and “unexpected or unintended” (i.e. “accidental”).
Both parties rely (to varying degrees) on Cyclops Corp. v. Home Ins. Co., 352 F.Supp.
931 (W.D. Pa. 1973), to support their respective positions concerning whether the leak or the
resultant damage must be “sudden and accidental.” The relevant portion of the Cyclops
opinion regarding whether “sudden and accidental” refers to the cause or the damage reads as
The parties are in dispute as to whether the “cause” of the damage is an essential
element of proof. Plaintiff does not dispute defendant’s evidence as to “cause”,
but asserts that under the policy provisions applicable “cause” is not an issue in
this damage claim. Again we must examine all of the policy provisions. We do
not find that the definition of “accident” requires any consideration of the term
“cause.” The term “accident” requires only “sudden and accidental damage”
which “necessitates repair,” and we find these conditions met.
Id. at 937.
Although this Court finds the above cases informative, it recognizes that these cases are not entirely dispositive
on the matter presently before this Court.
Although Continental concedes that Cyclops ultimately concludes that the cause of the
damage is not relevant, Continental essentially tries to distinguish the facts of this case from
those in Cyclops by noting that in Cyclops, the piece of equipment at issue was only two years
into its expected twenty-year life. Here, Continental argues, the insured possessed ample
information that the furnace at issue would probably undergo a major glass leak. Continental
contends that this distinction supports its position that the leak (which allowed molten glass to
escape and thus, the “cause” of the resultant damage) is germane and is what must be “sudden
In contrast, Kelman contends that Cyclops stands for the proposition that cause is never
important and that the resultant damage (i.e. the loss) must be “sudden and accidental.”
Taking direction from Cyclops, this Court, notes that the term “breakdown” is defined
by Continental’s policy as the “sudden and accidental direct physical loss to Covered
Equipment . . . .” A plain reading of the policy language where “sudden and accidental” is
referenced (i.e., “‘Breakdown’ . . . [m]eans sudden and accidental direct physical loss to
‘Covered Equipment’”) would suggest that “sudden and accidental” designates the nature of
the loss sustained by Kelman, not the nature of the cause of the loss.
Moreover, under the last-antecedent rule, “loss” is the word in the policy which is
impacted by the qualifying phrase “sudden and accidental.” Thus, the loss Kelman sustained
had to be sudden and accidental per Continental’s policy.
Accordingly, the issue of whether Kelman’s “loss” (i.e., its damage) was indeed
“sudden and accidental” is the next issue for this Court to determine.
b. Sudden and Accidental – As Applied
Based on the plain meaning of the phrase “sudden and accidental” as “abrupt” and
“unexpected or unintended,” if the loss was “abrupt” and “unexpected or unintended,”
Continental would be required to provide coverage to Kelman. Conversely, if the loss was
“abrupt” but “expected or intended” by Kelman then the definition of breakdown would not be
met and Continental would not be required to provide coverage. Put another way, if Kelman
could have expected the loss at issue to occur, the loss would not be “sudden and accidental” as
Although Continental concedes that Kelman did not intend for the furnace at issue to
leak and that Kelman could not have known exactly when the next leak would occur,
Continental argues that Kelman expected that a leak would happen, and thus, the current loss
was not “unexpected.” Doc. no. 96 at pp. 6-7. The Court is persuaded by evidence of record
which supports Continental’s argument in this regard.
The Court finds that, based on the uncontroverted and relevant evidence submitted by
Kelman and the two insurers as discussed in the fact section above at subpart “I.” of this
Opinion, Kelman expected leaks to occur. Moreover, based upon the uncontroverted, material
evidence of record, Kelman expected another leak to occur subsequent to the two, June 4, 2010
leaks. Perhaps the most convincing piece of evidence is the admissions set forth in the emails
from Kelman’s Furnace Manager, Doug Hilliard, to Eleni Soutiriou, approximately one month
prior to the event at issue in this litigation. On February 2, 2011 Mr. Hilliard wrote:
I think we should be extremely worried. In my opinion if this block falls into
the throat and causes a blockage, we will have no other option than shutting the
furnace down, draining it and do a full repair on the whole melting end.
Doc. no. 97-18. Then, four days later, on February 6, 2011, Mr. Hilliard again wrote to
Mr. Soutiriou stating:
We have had some movement in the blocks on the front wall overnight. The
block to the left, or to the north side of the wall, has remained stable, but the
block on the right, or the south side has shown some additional slippage. The
crack in the bridge-wall above this area seems to have become more prominent.
Doc. no. 97-20.
Given these emails which evidence knowledge possessed by Kelman just days before
the leak which led to the loss occurred, it is clear that Kelman was concerned about the result if
the block fell “into the throat and cause[d] a blockage,” and Kelman even anticipated having to
shut the furnace down to prevent a loss that could not be contained. Four days after these
concerns are shared among Kelman employees, the block on the north side of the wall exhibits
movement and the crack in the bridge wall appears to the furnace manager to become more
Moreover, the independent review performed by GFM in May of 2009 established that
certain repairs needed to be made. Doc. no. 97-8. GFM’s report specifically suggested which
repairs needed to be done if Kelman intended to run the furnace for more than two years. Id.
Kelman admitted that although it did “more overcoating” than was suggested by GFM, it did
not make some of the “other repairs” that GFM recommended. Doc. no. 121 at ¶ 24.
Although Kelman did not know the exact date or time of the March 15, 2011 leak, nor
the extent of the loss/damage that the leak would cause, there is no dispute of material fact to
suggest that Kelman did not expect another leak to occur. Moreover, the evidence of record
suggests that such a leak would lead to a loss, and that Kelman was aware of this. See, e.g.
deposition testimony of Kelman’s furnace manager Doug Hilliard, at doc no. 93-3, pp. 57-59.
Thus, the definition of “sudden and accidental” is not met and a “breakdown” as
defined by Continental’s policy did not occur. Accordingly, based on the foregoing law and
authority as applied to facts present in this case, and viewing all material evidence in a light
most favorable to Kelman, this Court will enter an Order consistent with this portion of the
Opinion granting Continental’s Motion for Summary Judgment and denying Kelman’s CrossMotion for Partial Summary Judgment as to Continental.
2. U.S. Fire’s Motion for Summary Judgment and Kelman’s Motion
for Partial Summary Judgment as to U.S. Fire
Unlike Continental, which issued Kelman an equipment breakdown policy, U.S. Fire
issued Kelman an “all risk” insurance policy. However, the principles and rules of contract
interpretation under Pennsylvania law, as discussed in “III. A.” above, also apply to U.S. Fire’s
insurance policy with Kelman.
Kelman’s breach of contract Counterclaim against U.S. Fire alleges that by denying
insurance coverage, U.S. Fire breached its contract with Kelman. Although U.S. Fire admits
that it denied coverage to Kelman, it denies that in doing so it breached its contract with
Kelman. In support of its argument that summary judgment should be entered in its favor, U.S.
Fire primarily argues that coverage for the leak is excluded by its policy.
The Court begins its analysis by placing the burden of proof on U.S. Fire, to prove that
no coverage is warranted, for the reasons stated in its Motion and Brief in Support of Summary
Judgment. In doing so, the Court views all evidence in the light most favorable to Kelman. If
the Court finds in favor of U.S. Fire (and it does for the reasons discussed below), then Kelman
cannot sustain its burden of proof in its own Motion for Summary Judgment when all evidence
is viewed in a light most favorable to U.S. Fire.
a. U.S. Fire’s Policy – Inherent Risk Exclusion
U.S. Fire concedes that its “all risk” policy provides coverage to Kelman for direct
physical loss of, or damage to, “covered property” that is caused by or resulting from a
“covered cause of loss.” Doc. no. 1-4 at p. 49 (CP 10 06 07, p. 1). A “covered cause of loss”
in its “all-risk” policy includes all direct physical loss unless specifically excluded or limited
by the policy. Doc. no. 1-4 at CP 10 30 06 07, p. 1. Additionally, this U.S. Fire policy issued
to Kelman contained additional coverage for loss or damage resulting from molten material.
Doc. no. 1-4 at p. 81 (CP 10 30 06 07, p. 9).
In support of its position that summary judgment should be granted in its favor with
respect to Kelman’s breach of contract Counterclaim, U.S. Fire argues that its insurance policy
specifically excludes coverage under what is referred to as an “inherent vice exclusion.”
The purported “inherent vice exclusion” located within U.S. Fire’s insurance policy
reads in relevant part:
2. We will not pay for loss or damage caused by or resulting
from any of the following:
(1) Wear and tear,
(2) Rust, corrosion, decay, deterioration, hidden
or latent defect, or any quality in property that
causes it to damage or destroy itself.
Doc. no. 1-4 at p. 75 (CP 10 30 06 07, p. 3).
In response to U.S. Fire’s position, Kelman primarily argues that the “inherent vice”
exclusion does not enable U.S. Fire to escape its duty to provide coverage because U.S. Fire
cannot meet its burden of proving that the sole, proximate cause of the March 15, 2011 loss
was due to either “inherent vice” or “wear and tear.”
Kelman asserts in its brief that under Pennsylvania law, the insurer bears the burden of
proving that any exclusion: is (1) unambiguous; (2) that the exclusion applies in the given
instance; and (3) that that any exceptions to the exclusion do not apply. As to the first
requirement, the parties do not contest that the language of the above exclusion is ambiguous,
and the Court likewise finds that it is not ambiguous.
As to the second requirement, in Peters Twp. Sch. Dist. v. Hartford Acc. and Indem.
Co., 833 F.2d 32 (3d Cir. 1987), the United States Court of Appeals for the Third Circuit held:
. . . The burden of proof of the insurance company that a loss comes within the
scope of an exception or an exclusion is an affirmative one. It is only when the
existence of facts constituting an affirmative defense is admitted by the insured,
or is established by uncontradicted testimony in the insured’s case, that such
burden is removed from the insurance company.
Id. at 37. Thus, Kelman is correct that U.S. Fire bears the burden of proof with respect to the
scope of an exclusion and/or exception; however, if Kelman admitted facts or provided
uncontradicted testimony which supports U.S. Fire’s position, the burden would then be
In addition to the above, the Court of Appeals defined “inherent vice” as:
. . . [A] cause of loss . . . [that] does not relate to an extraneous cause but
to a loss entirely from internal decomposition or some quality which
brings about its own injury or destruction. . . . In other words, the
question is whether the insured property . . . contain[s] its own seeds of
destruction . . . [or] was threatened by an outside natural force.
GTE Corp. v. Allendale Mutual Ins. Co., 372 F.3d 598, 611 (3d Cir. 2004) (internal
quotes and citations omitted).
Although Kelman contests the application of the “inherent vice” exclusion, it has
admitted the following: (1) “. . . all glass furnaces experience minor leaks on occasion[,]” (see
doc no. 121, p. 5); (2) on March 15, 2011, molten glass escaped from the furnace, (id.); (3)
Kelman’s furnace manager, Doug Hilliard, had been involved with “with ‘devastating’ and
‘unstoppable’ leaks during his thirty years of experience in the glass industry[,]” (id.); and (4)
“Kelman, like the prior owner of the plant, Glenshaw Glass Company, had a written procedure
in place to deal with the potential for leaks from any of the furnaces.” Id. at p. 6.
Given the uncontradicted testimonial evidence provided by Kelman, this Court finds
that under the Peters Twp. case, U.S. Fire met its the burden of proving that furnace leaks are
an inherent risk in the glass making business.
Moreover, given the definition of “inherent risk” adopted by the United States Court of
Appeals in GTE, combined with the admissions made by Kelman whereby it agreed that the
furnace was expected to (and did) leak molten glass, the unambiguous language of U.S. Fire’s
insurance policy indicates that U.S. Fire will not provide coverage for such an inherent risk.
The policy unambiguously states that U.S. Fire will not pay for any “loss or damage caused by
or resulting from . . . any quality in property that causes it to damage or destroy itself.” Here,
as admitted by Kelman, the insured, there was an inherent risk of molten glass leaking from the
furnace. Kelman admitted the furnace in question leaked molten glass in the past and further
admitted the furnace leaked the molten glass that caused the loss at issue in this litigation.
Accordingly, this Court finds that based on the foregoing law and the uncontroverted facts
present here, because the loss sustained by Kelman occurred as result of molten glass escaping
the furnace, and because Kelman admitted that molten glass was an inherent risk to operating
the furnace, the loss falls within U.S. Fire’s inherent risk exclusion.
The Court now turns to the issue raised by Kelman as to whether there is an applicable
exception to the policy’s exclusion.
b. U.S. Fire’s Policy – Molten Material Loss Exception
Kelman argues that even if U.S. Fire meets its burden of proof with respect to “inherent
vice,” Kelman’s loss would still be covered by U.S. Fire’s additional coverage provision for
“molten material loss damage.” The relevant portion of the U.S. Fire policy reads as follows:
F. Additional Coverage Extensions
Water Damage, Other Liquids, Powder or Molten
If loss or damage caused by or resulting from
covered . . . molten material damage loss occurs, we will
also pay the cost to tear out and replace any part of the
building or structure to repair damage to the system or
appliance from which the . . . substance escapes. . . .
Doc. no. 1-4 at p. 81, (CP 10 30 06 07, p. 9).
This unambiguous language raises the question of what is a “covered . . . molten
material damage loss” as defined by the policy. The Court, again, looks to the policy language
to see how the parties agreed to define a “covered loss.” The policy states in pertinent part:
Covered Causes of Loss
. . . Covered Cause of Loss means Risks of Direct Physical Loss
unless the loss is:
1. Excluded in Section B.
2. We will not pay for loss or damage caused by or resulting
from any of the following:
(1) Wear and tear,
(2) Rust, corrosion, decay, deterioration, hidden
or latent defect, or any quality in property that
causes it to damage or destroy itself.
Id. at pp. 73 and 75 (CP 10 30 06 07, pp. 1 and 3).
As noted above, the second enumerated exclusion in “Section B.” of the policy was the
inherent risk exclusion discussed immediately above. Thus, the plain and unambiguous
reading of U.S. Fire’s policy is that it does not consider a loss caused by an inherent risk to be
a covered loss. Accordingly, the damage resulting from the molten glass escaping the furnace
is not considered to be a covered loss because the escape of molten glass from the furnace was
an inherent risk.
Put another way, the policy’s “molten material loss exception” is predicated upon the
loss being a covered loss. In this case, because the escape of molten glass from the furnace
was an inherent risk to operating a furnace containing molten glass, damage caused by the
escape of the molten glass is excluded as a “covered” risk as the policy defines “covered . . .
loss.” If some other hot, molten material, i.e., something other than molten glass, had caused
the loss at issue here, the “inherent risk” exclusion would not apply and (assuming no other
exclusion were applicable) the “molten material loss exception” could have applied.
Accordingly, Kelman’s second argument opposing U.S. Fire’s position is erroneous. The
Court finds that the policy’s exclusion applies and under the uncontested, relevant facts
presented, the exception to the exclusion does not apply under the circumstances present in this
c. Pennsylvania’s Current Causation Doctrine
Kelman also contends that Pennsylvania has adopted the “concurrent causation
doctrine” which, as applied here, means that if two or more causes concurrently caused
Kelman’s loss and one of the causes is covered under U.S. Fire’s policy, U.S. Fire must
provide coverage. Kelman cites to Colella v. State Farm Fire & Cas. Co., 407 Fed. Appx. 616,
662 (3d Cir. 2011), in support of its position.
In response, U.S. Fire argues that Jefferson Bank v. Progressive Cas. Ins. Co., 965 F.2d
1274 (1992), stands for the proposition that U.S. Fire only has to prove by a preponderance of
the evidence that the inherent risk was the efficient proximate cause of the loss.
In the more recent, unpublished, Colella opinion, the insureds sued their insurer
alleging breach of an “all risk” insurance policy. The Court of Appeals, affirming the decision
of the district court to deny coverage, found that the unambiguous language of the “subsurface
water exclusion” in the policy applied so as to exclude coverage for damage caused by water
below the surface of the ground, regardless of the cause of the subsurface water. This policy
language was deemed to be “more expansive” than the language in a different policy in a case
relied on by the Colellas.
The Court does not find that the Collela case stands for the proposition that
Pennsylvania adopted a concurrent causation doctrine. The United States Court of Appeals
stated as follows (referencing the doctrine without applying it):
Finally, the Colellas argue that they are entitled to coverage
under the “concurrent causation” or “efficient proximate cause”
doctrine, which holds that “when there are two . . . or more causes of
loss, the policyholder's claim is covered as long as the immediate or
proximate cause of loss is covered by the policy.” Appellants’ Br. at 25
(citing, among other cases, Trexler Lumber Co. v. Allemannia Fire Ins.
Co. of Pittsburgh, 289 Pa. 13, 136 A. 856, 858 (1927)). The District
Court was correct in rejecting this argument because the lead-in clause
of the State Farm policy (“[w]e do not insure for such loss regardless of:
. . . (c) whether other causes acted concurrently or in any sequence with
the excluded event to produce the loss . . .”) clearly negates the
application of the doctrine.
Id. at 622. Thus, as is evident from the portion of the Opinion quoted above, the Court of
Appeals never affirmatively stated that the concurrent causation doctrine would control the
coverage question. Indeed, the Court of Appeals never had to consider the applicability
because the exclusion at issue so clearly negated the application of such a doctrine.
However, Kelman further contends that the concurrent causation doctrine would apply
here because there is no such “negating language” in the “inherent risk” exclusion at issue in
this case. Kelman also contends that a “void” along with “wear and tear” and a “failure of the
coolant line” were the concurrent causes of the loss it sustained on March 15, 2011. See doc.
no. 117, pp. 3-10.
The Court need not (and does not) comment on whether Pennsylvania has adopted a
“concurrent causation doctrine,” because this Court finds that the guidance provided by the
Court of Appeals in its Jefferson (supra.) decision, as well as in PECO Energy Co. v. Boden,
64 F.3d 852 (3d Cir. 1995), provide sufficient guidance to decide this issue.
In PECO, the insured sued to recover for a series of thefts of fuel oil under its “all-risk”
cargo transit policies. The Court first affirmed the district court’s holding that a series of thefts
amounted to one “occurrence.” Id. at 856. In reaching this conclusion, the Court of Appeals
noted that in a prior case (Appalachian Ins. Co. v. Liberty Mut. Ins. Co., 676 F.2d 56
(3d Cir. 1992)), it had held that “an occurrence” was determined by the cause or causes of the
resulting injury. Id. The Court further reiterated that the district courts should determine if
there was “but one proximate, uninterrupted and continuing cause which resulted in all of the
injuries and damage.” Id., citing Appalachian, 676 F.2d at 61. If a court were determine that
there was “but one proximate, uninterrupted and continuing cause,” then a single occurrence
has taken place.
In Jefferson, the bank sued to recover on a banker’s blanket bond when the morgatee
defaulted. The Court of Appeals held that there was a question of material fact as to whether
the forgery of a notary’s signature was a substantial factor in the bank’s decision to issue the
mortgage, thereby reversing the district court’s grant of summary judgment. The Court of
. . . the policy’s language makes clear by its terms that the Banker’s Blanket
Bond does not cover loan losses suffered by an insured bank unless (1) the loss
resulted from the bank’s having acted in good faith in reliance on a
mortgage . . . that was defective because it bore a signature that had been
obtained through fraud . . .
Id. at 1277-78. The district court had noted that under the provisions cited above, Jefferson
had to demonstrate that its loss resulted directly from the its extension of credit in good faith
reliance on a mortgage that bore a forged signature. The district court acknowledged that the
mortgage contained a forgery (i.e. the signature of the notary), but declined to enforce coverage
because, in the district court’s view, the loss did not “result directly from” this defect.
The Court of Appeals in Jefferson then explored the definition “resulting directly from”
under Pennsylvania law. In this regard, the Court analyzed the phrase and held in pertinent
. . . the phrase “resulting directly from” in the policy does suggest a stricter
standard of causation than mere “proximate cause.” Under Pennsylvania tort
law, a cause is proximate if it is merely a “substantial cause” of the harm. See
Whitner v. Von Hintz, 437 Pa. 448, 263 A.2d 889, 893-94 (1970). Arguably, the
words “resulting directly from” suggest a requirement beyond that the cause be
substantial, for the words imply that the loss must flow “immediately,” either in
time or space, from the forged signature. An analysis of Insuring Agreement E
in light of Pennsylvania law persuades us, however, that conventional proximate
cause is indeed the correct standard and that requiring “immediacy” is
Id. at 1281. The Court concluded that “an accurate prediction of Pennsylvania law is that
‘resulting directly from’ means ‘proximately caused by.’” Id. Finally, the Court noted that
“immediate cause” was “a nebulous and largely indeterminate concept” and one that was not
favorably accepted under Pennsylvania law. Id. Based on this thorough analysis, the Court
concluded that the language “resulting directly from” means “proximately caused by.” Id. at
Turning to this case, Kelman argues that the absence of the word “directly” eliminates
the possibility that this case is akin to Jefferson. Indeed the word is absent from the inherent
defect exclusion relied upon by U.S. Fire:
2. We will not pay for loss or damage caused by or resulting from any
of the following:
(1) Wear and tear,
(2) Rust, corrosion, decay, deterioration, hidden or latent
defect, or any quality in property that causes it to damage
or destroy itself.
Doc. no. 1-4 at p. 75 (CP 10 30 06 07, p. 3) (emphasis added).
However, as noted above, reading Jefferson in line with PECO, there can be little doubt
that proximate cause provides the basis for determining whether a single occurrence took place
as well as whether an occurrence causes the loss at issue. Thus, this Court finds that the
absence of the word “directly” in the inherent risk exclusion does not open the door a
concurrent causation analysis. Looking again at the unambiguous language of the inherent risk
exclusion, the loss had to result – arguably, directly or indirectly – from the inherent risk of
operating a furnace containing molten glass. Put this context, the inherent risk of operating a
furnace containing molten glass had to be the proximate cause of the loss.
Importantly, the parties concur that the escape of the molten glass is what caused
Kelman’s loss on March 15, 2011. What caused the molten glass to escape from the furnace is
another matter entirely, and not one that must be decided in order for the Court to determine
that the escape of the molten glass was the proximate cause of Kelman’s March 15, 2011 loss.
Accordingly, after placing all of the evidence in the light most favorable to Kelman, the
Court finds none of Kelman’s arguments persuasive, and thus, will grant U.S. Fire’s Motion
for Summary Judgment, and will issue a declaration of no coverage as requested by U.S. Fire
in its Motion. Because this Court had to view the evidence in a light most favorable to
Kelman when evaluating U.S. Fire’s Motion, Kelman’s Motion for Summary Judgment on its
breach of contract Counterclaim will be denied.7
B. Kelman’s Bad Faith Claim Against U.S. Fire
The Pennsylvania statute governing bad faith insurance actions provides as follows:
In an action arising under an insurance policy, if the court finds that the
insurer has acted in bad faith toward the insured, the court may take all of the
(1) Award interest on the amount of the claim from the date the claim
was made by the insured in an amount equal to the prime rate of interest
(2) Award punitive damages against the insurer.
(3) Assess court costs and attorney fees against the insurer.
42 Pa.C.S.A. § 8371.
In order to recover on a bad faith claim, the insured must prove: (1) that the
insurer did not have a reasonable basis for denying benefits under the policy; and
(2) that the insurer knew of or recklessly disregarded its lack of a reasonable basis in
In light of the fact that the Court is granting U.S Fire’s initial Motion for Summary Judgment (doc. no. 93)
based on the arguments raised therein and as further expounded upon its Brief in Support (doc. no. 94), and
because Kelman’s Motion for Partial Summary Judgment as to U.S. Fire (doc. no. 103) will be denied, U.S. Fire’s
Cross-Motion (doc. no. 112) will be denied as moot.
denying the claim. Northwestern Mut. Life Ins. Co. v. Babayan, 430 F.3d 121, 137 (3d
Cir.2005); Terletsky v. Prudential Prop. & Cas. Ins. Co., 649 A.2d 680, 688 (Pa. Super.
1994). “Although the insurer’s conduct need not be fraudulent, ‘mere negligence or
bad judgment is not bad faith.’” Babayan, 430 F.3d at 137 (internal quotation omitted).
Ultimately, the burden is on the insured to prove such “bad faith” by clear and
convincing evidence. Polselli v. Nationwide Mut. Fire Ins. Co., 126 F.3d 524, 528 (3d
Cir. 1997); Terletsky, 649 A.2d at 688. At the summary judgment stage, the insured’s
burden in opposing a summary judgment motion is “commensurately high because the
court must view the evidence presented in light of the substantive evidentiary burden at
trial.” Babayan, 430 F.3d at 137 (quoting Kosierowski v. Allstate Ins. Co., 51
F.Supp.2d 583, 588 (E.D. Pa.1999)).
Although “bad faith” is not defined by Pennsylvania’s statute, courts
interpreting Pennsylvania law have held that a claim under 42 Pa.C.S.A. § 8371
contains two elements: (1) the insurer lacked a reasonable basis for denying benefits
under the applicable policy, and (2) the insurer knew or recklessly disregarded the lack
of a reasonable basis for refusing the claim. Employers Mut. Cas. Co. v. Loos, 476
F.Supp.2d 478, 490 (W.D. Pa. 2007) (citing Terletsky, 649 A.2d at 688).
The standard of proof required to establish a statutory bad faith claim against an insurer
under Pennsylvania law is clear and convincing evidence. See Loos, 476 F.Supp.2d at 491
(citing Terletsky, 649 A.2d at 688) (footnote omitted); and Babayan, 430 F.3d at 137 (citing
Terletsky, supra). “The ‘clear and convincing’ standard requires that the [insured] show ‘that
the evidence is so clear, direct, weighty and convincing as to enable a clear conviction, without
hesitation, about whether or not the defendants acted in bad faith.’” J.C. Penney Life Ins. Co. v.
Pilosi, 393 F.3d 356, 367 (3d Cir.2004) (quoting Bostick v. ITT Hartford Group, Inc., 56
F.Supp.2d 580, 587 (E.D.Pa.1999)).
In the case at bar, Kelman’s bad faith claim is predicated (in large part) on U.S. Fire’s
denial of insurance coverage under the all-risk policy. Doc. no. 10, ¶¶ 100, 145. To the extent
that Kelman’s claim is predicated upon the denial of coverage without any reasonable basis,
that claim is now foreclosed by this Court’s Opinion finding that U.S Fire did not breach its
contract with Kelman.
Under Pennsylvania law, there is some authority wherein circumstances existed so as to
enable a bad faith claim to proceed even when a breach of contract claim was dismissed. In
March v. Paradise Mut. Ins. Co., 646 A.2d 1254 (Pa. Super. 1994), the Pennsylvania Superior
Court affirmed the trial court’s dismissal of a breach of contract claim based on the expiration
of the statute of limitations, but held that the bad faith claim could proceed because it was not
subject to the one-year statute of limitations.
In Polselli v. Nationwide Mut. Fire Ins. Co., 126 F.3d 524 (3d Cir. 1997), the United
States Court of Appeals for the Third Circuit acknowledged the March decision (among others)
noting that, “a Pennsylvania intermediate appellate court [ ] held that claims brought under
section 8371 are distinct from the underlying contractual insurance claims from which the
dispute arose.” Id. at 529 (internal quotes and citations omitted). The Court went on to state,
“While not obvious from the language of section 8371, it is apparent that Pennsylvania courts
have interpreted section 8371 to create a cause of action that exists separately and
independently from a claim on the insurance contract itself.” Id. (internal quote and citation
omitted). Expanding on this comment the Court held:
Initially, we observe that under the plain language of the statute, it is reasonably
clear that a section 8371 claim may not be the sole claim of an insured. Section
8371 provides that “[i]n an action arising under an insurance policy, if the court
finds that the insurer has acted in bad faith toward the insured, the court may take
all of the following actions. . . .” 42 Pa. Cons. Stat. Ann. § 8371. This language
implies that a determination of bad faith is merely an additional finding to be
made in a predicate action arising under an insurance policy. Absent a predicate
action to enforce some right under an insurance policy, an insured may not sue an
insurer for bad faith conduct in the abstract.
Id. at p. 530.
In Frog, Switch & Mfg. Co., Inc. v. Travelers Ins. Co., 193 F.3d 742 (3d Cir. 1999), the
insured (Frog) provided its insurance carriers (Travelers and U.S. Fire) with notice that it had
been sued for (inter alia) false advertising and reverse passing off under the Lanham Act. Id.
at 745. The insurers refused to defend Frog in the underlying litigation and Frog sued both
companies for breach of contract and bad faith. Id. The district court granted U.S. Fire’s
Motion to Dismiss and Traveler’s Motion for Summary Judgment. Id. On appeal, the Court of
Appeals affirmed, noting that it need only review the issue surrounding the insurers’ duty to
defend, which is a broader duty than an insurer’s duty to indemnify. Id. at 746. Given the
allegations in the underlying Complaint and Second Amended Complaint filed against Frog
and the language of the insurance policies, the Court held that Pennsylvania courts would not
find that the allegations fell within a reasonable understanding of the policy’s terms and
conditions. Id. at 750. In a footnote, the Court also rejected Frog’s bad faith claim stating that,
“ . . . where there was no duty to defend, there was no good cause to refuse to defend against a
suit.” Id. at 751, n.9.
In Gallatin Fuels, Inc. v. Westchester Fire Ins. Co., 244 Fed. Appx. 424 (3d Cir. 2007),
the Court of Appeals discussed both the March decision and the Frog decision. Affirming a
bad faith verdict against the insurer, the Court concluded that Frog did not preclude the Court
from allowing a bad faith claim (which led to a punitive damage award) to proceed in the
absence of other successful claims. Id. at 435. However, in reaching this conclusion the Court
. . .we find that this is one of the exceedingly rare cases in which an insurer can
be liable for bad faith even after the insured cancels the policy. Here, the bad
faith allegations were not based simply on the insurer’s representations that
there was not a valid policy. Indeed, both parties believed that a policy existed
for a large part of the relevant time period, and acted accordingly. Based on the
evidence in the record, a jury could have found – and, indeed, did find – that
Westchester acted in bad faith given its working assumption that the policy had
not been canceled. Therefore, we will affirm the bad faith verdict against
Id. at 435-6.
Turning now to the case at bar, Kelman contends that the bases for the denial of
coverage are as follows: “(1) [U.S. Fire] ignored facts that supported coverage under the
Policy; (2) [U.S. Fire] made no effort to meaningfully reevaluate coverage once facts in
contradiction of its position came to light; (3) [U.S. Fire] refused to evaluate coverage under
appropriate provisions of the Policy; (4) [U.S. Fire] forced the policyholder to exhaust its
limited financial resources with its litigation conduct, including raising the “kitchen sink”
defense to coverage, including raising defenses upon which it did not deny coverage in its
denial letter, and upon which it has no expert testimony.” Doc. no. 117, p. 11.
Based on the case law established by the United States Court of Appeals for the Third
Circuit, this Court does not find that any of the four grounds or bases alleged by Kelman can
support its bad faith claim against U.S. Fire. Kelman’s first and third arguments set forth
above are directly dependent on its breach of contract claim and thus, the bad faith claim
cannot survive based on those reasons. In addition, the Court does not find its fourth
contention to be a valid basis upon which a bad faith claim may rest, and Kelman cites no law
in support of its fourth proposition. This leaves the second basis, which the Court will address
in greater detail.
Kelman alleges that U.S. Fire knew that the furnace underwent a rebuild in late 2003
through early 2004, but denied coverage based on the fact that the furnace had not undergone a
rebuild since 1994 and thus, had outlived its ten-year useful life. See doc. no. 10, ¶¶ 108, 117119 and doc. no. 1-10. However, Kelman proffers no substantive evidence in support its claim
in this regard other than its own conjecture on this point. Even if U.S. Fire denied coverage
(in whole or in part) based on its erroneous belief that the furnace had not been rebuilt since
1994, this is not enough to legally support a claim for bad faith. See Winner Int’l Corp. v.
Continental Cas. Co., 889 F.Supp. 809 (W.D. Pa. 1994), aff’d without opinion, 54 F.3d 767 (3d
Cir. 1995) (mere negligence or bad judgment does not constitute bad faith; knowledge or
reckless disregard of a lack of a basis for denial of coverage is necessary).
In addition, all of the relevant evidence of record supports a finding that U.S. Fire
denied coverage (at least in part) based on the inherent risk exclusion of the policy. See doc.
no. 1-10. The parties agree that the denial letter was issued after U.S. Fire conducted an
investigation, which included sending an investigator to examine the furnace, subsequent to the
March 15, 2011 occurrence. The documentary evidence of record, specifically the denial of
coverage letter issued by U.S. Fire in a section entitled “background facts,” states in pertinent
part that, “[t]he documents which [Kelman] provided indicate that the last rebuild of [the
furnace] was in 1994.” Doc. no. 1-10. The section of the letter quotes from the policy and
specifically quotes the inherent risk exclusion. Id. Finally, in a section entitled, “Applicable
Exclusions and Limitations[,]” U.S. Fire explains its position with respect to the applicability
of the inherent risk exclusion to the March 15, 2011 loss and states there is no potential for
coverage. Id. U.S Fire does not base its analysis in this portion of the letter on the (erroneous)
fact that the furnace in question was last rebuilt in 1994. Id.
The inherent risk exclusion was U.S. Fire’s first and primary reason for disclaiming
coverage to Kelman under its policy, and as discussed above in subpart “A.2.,” it is the reason
that this Court found no viable claim for breach of contract, and found that U.S. Fire was
entitled to a declaration of no coverage. Thus, even if U.S. Fire erroneously believed the most
recent rebuild occurred in 1994, (a fact which it based on documentation Kelman provided),
and even if U.S. Fire issued its denial of coverage letter based, in part, on the erroneous rebuild
date, its denial predicated upon on the inherent risk exclusion did not rely on the date of the
rebuild of the furnace. Thus, upon learning of the true date of the rebuild, the denial of
coverage based on inherent risk remained unchanged.
Accordingly, this Court finds that the denial of coverage was not made in bad faith for
any of the reasons asserted by Kelman and therefore, will grant U.S. Fire’s request that the
Counterclaim alleging bad faith be dismissed.
Based on the foregoing law and authority, U.S. Fire’s Motion for Summary Judgment
(doc. no. 93) will be granted. Kelman’s Partial Motion for Summary Judgment against U.S.
Fire (doc. no. 103) will be denied. In light of the foregoing, U.S. Fire’s Cross-Motion for
Summary Judgment (doc. no. 112) will be denied as moot.
Continental’s Motion for Summary Judgment (doc. no. 91) will be granted. Kelman’s
Motion for Partial Summary Judgment against Continental (doc. no. 98) will be denied.
s/ Arthur J. Schwab
Arthur J. Schwab
United States District Judge
cc: all ECF registered counsel
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