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Public Service Mutual Insurance Co. v. Cohen

decided: February 28, 1980.

PUBLIC SERVICE MUTUAL INSURANCE COMPANY, APPELLANT
v.
LEE COHEN, APPELLEE



APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA (D.C. Civil No. 78-2254)

Before Seitz, Chief Judge, Adams and Weis, Circuit Judges.

Author: Weis

Opinion OF THE COURT

In this diversity case, plaintiff insurance company seeks reimbursement from its agent, alleging that he failed to notify an insured that certain of its employees would be excluded from coverage under a policy, and as a result the company had to pay a claim. The district court invoked collateral estoppel against the plaintiff because a Maryland court had determined that the carrier's contemporaneous audits of its insured's records and ensuing collection of additional premiums barred a disclaimer of coverage. Because the Maryland judgment does not preclude the possibility of liability on the part of the agent, we vacate the summary judgment in his favor and remand the matter for further proceedings.

This case has its genesis in a workmen's compensation claim filed in Maryland. The record establishes that Roger Eastwood, a truck driver employed by Packaged Poultry Sales Corporation (Sales), was killed in an accident while in the course of his employment in August 1975. His widow and children submitted claims to the plaintiff, Public Service Mutual Insurance Company, which denied liability. The insurer contended that it did not cover the Sales employees but did insure employees of Packaged Poultry, Inc. (Poultry), a related organization, except for its truck drivers who had been deleted from the policy in December 1974.

The Workmen's Compensation Commission of Maryland, the state in which the Eastwood family resided, made an award to the widow and children. The insurance company then appealed to the Circuit Court for Caroline County, Maryland. In affirming the Commission, the court found that both Sales, a Pennsylvania corporation, and Poultry, a New Jersey corporation, were entirely owned by the same individual, operated out of the same office, and "(t)o all intents and purposes . . . were the same, as far as the Workmen's Compensation insurance coverage for Eastwood was concerned."

The court went on to observe that Poultry had only two employees on its books, the president of the corporation, who also controlled Sales, and a bookkeeper. All of the truck drivers were employed by Sales. Nonetheless, the court had little difficulty in concluding that the insurance policy issued to Poultry was intended to cover the truck drivers working for Sales, since the relationship between the companies had been explained to the insurance agent when he first wrote the policy for the 1973-74 period.

The Maryland court also found that the carrier had audited the insured after the first year of the policy had been completed on October 16, 1974 and sent a bill for an additional premium of $620 on January 2, 1975.*fn1 In the meantime, the policy had been renewed for another year as of October 17, 1974, despite the fact that the Pennsylvania Insurance Department had directed the carrier to delete coverage on Poultry's policy for drivers because that corporation employed none. On December 18, 1974, the Philadelphia branch of the insurance company notified the home office that coverage for truckmen had been withdrawn. There was no evidence, however, that Poultry was told about the deletion at that time, and "(t)he insurer offered no satisfactory proof that Levin, the broker, was ever notified of the cancellation until after Eastwood's death."

The court concluded that the insurance company was estopped from denying coverage because of the audits it had made and the additional premiums it had collected. Under the circumstances, the carrier was said to have a duty to discover that the drivers in fact had been listed on the Sales company payroll.

The insurer did not appeal the circuit court's decision but instead sought a declaratory judgment against its Philadelphia agent, defendant Lee Cohen. The company asserted he had received notice of the cancellation of drivers' coverage on December 18, 1974 but had neglected to inform the insured. Based on this allegation, the carrier asked for a declaration that Cohen was liable for the amount of compensation awarded to the Eastwood family and the litigation expenses incurred. The district court determined that the Maryland judgment established that the insurance company's losses were caused by its own conduct, not that of the agent. The court commented, "Assuming, arguendo, that Lee Cohen's knowledge or lack of knowledge, was not previously litigated, it cannot be denied that the proximate cause of plaintiff's loss has been judicially established." Accordingly, it entered summary judgment for the defendant.

Lee Cohen was vice president of the I. W. Levin Insurance Agency of Philadelphia. Public Service had no agency agreement with Levin but did have a contract with Lee Cohen, "an individual." The Maryland findings do not mention Cohen by name or describe his participation in any way but do refer to Levin, apparently inaccurately, as the broker. Thus, the Maryland court did not pass upon Cohen's conduct or responsibility in the matter before it. The district court did not dwell upon that aspect of the case, however, but instead relied on the proposition that the insured's own conduct precluded it from recovering against its agent, whoever that might be.

The parties do not dispute that the district court in this diversity action was correct in applying Pennsylvania law, which requires the presence of four elements in order to invoke collateral estoppel:

"1) the issue decided in the prior adjudication was identical with the one ...


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