APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA (D.C. Civil No. 78-0732)
Before Seitz, Chief Judge, and Aldisert and Rosenn, Circuit Judges.
The major question for decision in this Pennsylvania diversity case involving an extremely complicated insurance transaction is whether Admiral Insurance Company is liable to its insured, Northern Associates. We also must decide whether the district court erred in holding Admiral jointly liable with Alexander & Alexander, the retail insurance broker who represented Northern. Admiral and Alexander & Alexander have appealed, and Northern has cross appealed seeking restitution of its premiums in lieu of the district court's award of damages measured by the benefit of its bargain. We hold that the district court erred in holding the broker jointly liable with the insurer and modify the judgment accordingly, and in all other respects we affirm.
Northern Associates is a partnership doing business as a stevedoring contractor. The present controversy concerns an insurance policy issued to Northern by appellant Admiral on March 6, 1975. Appellant Alexander & Alexander (A&A) and appellee Delaware Valley Underwriting Agency (DVUA) are a retail broker and a wholesale broker, respectively, who served as intermediaries between Northern and Admiral.
Northern has obtained workmen's compensation coverage from a number of insurers over the past twenty-five years, but each of its policies has operated on a "retrospective premium" basis. A retrospective premium policy, unlike a standard insurance policy, provides for retrospective determination of the insured's premium obligations according to a formula based on the cost of claims actually paid by the insurer under the policy. A standard workmen's compensation policy requires payment of a fixed premium, which may be calculated in part with reference to the insured's past losses; under a retrospective premium policy, the premium varies according to current, rather than historical, experience. The retrospective policy establishes minimum and maximum premiums to be paid, and it states the standard premium that would be charged under an equivalent standard policy. The minimum is computed as a fraction of the standard premium.
Prior to November 1974, each of Northern's retrospective premium policies included a "loss limitation" provision. A loss limitation provision modifies retrospective premium coverage by limiting the amount of claims paid by the insurer that may be used in computing the retrospective premium. A loss limitation provision fixes a maximum amount either "per claim" or "per occurrence" to be considered in the premium calculation. A "per claim" limitation establishes a maximum amount that may be considered from each individual claim for compensation; a "per occurrence" limitation in effect treats all losses arising from a single accident or occurrence as a single claim. Thus if the maximum figures are the same, an insured receives substantially greater protection from a "per occurrence" than from a "per claim" limitation.*fn1 The insured pays an "excess loss premium" which, simply stated, insures against its liability for retrospective premiums generated by payments by the insurer above the stated limitation.
In 1973, A&A negotiated for Northern a one-year retrospective premium workmen's compensation policy with Midland Insurance Company with a loss limitation of $30,000 per occurrence. Northern thereafter asked A&A to explore the options available for workmen's compensation insurance for the following year. Among the options considered were several retrospective premium programs with various loss limitation levels and a self-insurance program (requiring state approval) with insurance coverage for risks in excess of a stated amount.
In October 1974, A&A account manager Edwin Hoffman approached Robert Cohen, a marketing person*fn2 at DVUA, seeking rate quotations for excess workmen's compensation coverage above various levels of maximum self-insurance. Cohen in turn contacted representatives of several insurance companies, including Morton Calpin, vice president of Admiral's underwriting manager. Calpin quoted Cohen a premium rate of $67,000 to cover Northern for losses exceeding $50,000.
A&A also discussed with Midland the possibility of renewing Northern's policy at various loss limitation levels. In October 1974, Midland quoted an excess loss premium of $66,000 for a $50,000 limitation. On November 4, however, the Pennsylvania Insurance Department announced a new schedule of minimum rates for loss limitation coverage to be effective after October 1974. The minimum annual premium for a $50,000 loss limitation was fixed at $406,021, and Midland accordingly communicated the revised figure to A&A.
Unable to qualify as a self-insurer, Northern through A&A first negotiated a brief extension of the Midland policy that was scheduled to expire November 7, 1974, and thereafter obtained a new retrospective premium policy from Midland providing coverage for the following year. Because of the dramatic increase in Midland's excess loss premiums, however, Northern elected to take out a Midland policy without a loss limitation provision, and it asked A&A to obtain loss limitation coverage from another carrier.
Because Admiral had previously quoted a $67,000 premium to insure losses exceeding $50,000 if Northern qualified as a self-insurer, A&A asked DVUA to determine whether Admiral would issue loss limitation coverage at the same rate. After some telephone discussions between Calpin of Admiral and Vice President James Bryson of DVUA, DVUA's Cohen on December 12, 1974, sent the following telex to Calpin:
Firm order 12/11/74. Issue annual policy $50,000 loss limitation per your telexed quote 10/18/74. 50 percent of premium due at inception and other half due at time of qualification. Please confirm bound and advise policy number. Would like to bill today. Advise.
Calpin responded by telex the same day as follows:
Congratulations on order. Good work. Will assign 4 CW 0003 to excess WC policy but all not as easy as that. Understand from Jim Bryson that Midland writing a retro D from inception to qualification and we asked to protect insured's interest in event loss exceeding $50,000 throws retro premium over standard. This wholly different kettle of fish and want DVUA provide ...