Appeal From The United States District Court For The Eastern District Of Pennsylvania (D.C. Civil No. 79-1944).
Adams and Weis, Circuit Judges, and Harris, District Judge.*fn*
In this case, the district court held that an insurance company which furnished a defense to a putative insured was estopped to assert lack of coverage even though the parties had executed a non-waiver agreement. Finding that conclusion inconsistent with applicable state law, we will vacate and remand for further proceedings.
After a bench trial, the court issued a declaratory judgment that the Continental Insurance Company was liable for a judgment that had been entered against the Rimar Manufacturing Company in an earlier but related suit. The court also determined that the Insurance Company of North America and the New Hampshire Insurance Company did not have underlying policies in force that would have covered Rimar's deductible under the Continental excess policies. Accordingly, judgment was entered in their favor. Only Continental Insurance Company has appealed, and plaintiff does not contest the findings in favor of the other carriers.
This insurance coverage dispute arises out of a products liability claim brought by Draft Systems against Rimar Manufacturing. On December 19, 1975, Draft Systems shipped to its customers beer dispensers containing an unsuitable grade of nylon tubing manufactured and supplied by Rimar. In the months that followed the shipment, the defective product caused beer to sour in the kegs, resulting in substantial losses to Draft Systems. To recover its damages, Draft Systems sued Rimar in the District Court for Eastern Pennsylvania.
Before Draft Systems commenced the products liability case, Rimar had filed a petition in bankruptcy under Chapter 11. Draft Systems secured relief form the automatic stay so that the damage suit could go forward and determine liability for claims covered by Rimar's liability insurance, if any. After the Insurance Company of North America and the New Hampshire Insurance Company both denied the existence of valid policies. Rimar's trustee in bankruptcy executed a non-waiver agreement with the continental Insurance Company. The agreement provided that Continental, without prejudice to its rights, would furnish a defense even though it denied any obligation to indemnify Rimar. At Continental's request, Louis Bricklin, Esquire, of Bennett, Bricklin, Saltzburg & Fullem, took over the defense of Rimar.
Before trial of the damage suit, Draft Systems filed the present declaratory judgment action against Rimar's trustee and the three insurance companies to resolve the coverage issues. The matter was held in abeyance awaiting the outcome of the tort suit.
Draft Systems eventually recovered a judgment against Rimar for $409,184.16. On appeal to this court, we affirmed on liability, but because of errors in the damage phase of the case, remanded for further proceedings. We explained our reasoning in an unpublished per curiam opinion.*fn1
After the case was returned to the district court, counsel for Rimar and Draft Systems resolved their differences regarding the amount of damages without trial. Rimar's counsel, Mr. Bricklin, submitted an offer of judgment of $200,000, which was accepted by Draft Systems and entered in the district court.
Instead of proceeding through execution and garnishment on the judgment, Draft Systems elected to pursue this declaratory judgment action. In due course the court scheduled a bench trial and after its conclusion filed an opinion. Because no issue has been raised on appeal as to the policies of the Insurance Company of North America and New Hampshire Insurance Company, no reference need be made to the findings on their lack of coverage.
The district court found that Continental issued an excess policy with a $300,000 deductible on October 30, 1975. On January 15, 1976, Rimar requested that the policy be canceled and a new one with a $100,000 deductible be issued. The court noted some doubt as to "which, if either, Continental Insurance policy was outstanding as of the date of the occurrence, February 19, 1976." Rather than answering that question, the court resolved the case by holding that continental was bound by the settlement with Draft Systems, "regardless of its reservation of rights." In the court's view "when its counsel settled the matter with the plaintiff [Draft Systems], it was acting not only in Rimar's interest, but it was acting in Continental's interest, even though counsel was retained by Continental to defend the Rimar action under a reservation of rights."
The court based it conclusion on the premise that when an insurer undertakes a defense of its insured, the right to deny coverage is waived. In denying Continental's motion for a new trial, the court wrote, "The nonwaiver agreement is a legal nullity in that its terms are contrary to case law governing the subject."
On appeal, Continental raises a number of issues. It contends that neither of its policies was in effect at the pertinent time, that the district court erred in fixing the date of occurrence, and that the court failed to recognize the deductible feature of the policies. Continental's principal argument, however, is that its non-waiver agreement was valid and should have been honored.
The district court observed that under Pennsylvania law, when an insurer voluntarily manages the insured's defense to final judgment or settlement, the carrier cannot later disclaim liability under the policy. Perkoski v. Wilson, 371 Pa. 553, 92 A.2d 189 (1952); Lewis v. Fidelity & Casualty Co., 304 Pa. 503, 156 A. 73 (1931). However, that general proposition does not apply when coverage defenses are disclosed and specifically preserved.
In many instances, the validity of policy defenses requires protracted investigation. J. APPLEMAN, INSURANCE LAW & PRACTICE § 4682 (1979); Note, Insurer's Duty To Defend Under A Liability Policy, 114 U. PA.L.REV. 734 (1966). If coverage is not determined at the time the claimant files suit, both the insured and the carrier are at a disadvantage. If the insurance company fails to provide a defense, the claimant may enter a default judgment against the insured. If however, the company affords representation without some understanding with the insured, the carrier may later be estopped to assert an otherwise valid coverage defense. See APPLEMAN, §§ 4689 & 4694. From the insured's standpoint, the prospect of a default judgment is unacceptable, as is the perhaps unnecessary expense of retaining competent counsel on short notice.
To accommodate the concerns of both the insured and the carrier, the practice of using a non-waiver agreement has developed. See APPLEMAN, § 4689; M. RHODES, COUCH ON INSURANCE § 51:88 (1982). Through this device, the carrier informs the insured of various factors which cast doubt on coverage, reserves the right to assert those matters a t a later date, but agrees to provide a defense in the interim. This practice not only serves the interests of the parties to the insurance policy but is helpful to claimants and the courts as well because the claimant's tort litigation may proceed expeditiously. Indeed, in most instances, the coverage issues are amicably resolved along with the tort claims. It is unlikely that such settlements would be reached if the carrier could not reserve its right to ultimately disclaim liability.
The courts have recognized the usefulness of non-waiver agreements.
"Such an agreement is proper and effective . . . * * * When, therefore, such an agreement between the insured and the insurer is entered into as in the present case, the insurer does not, by defending the original suit, waive any rights or become estopped to repudiate liability in a subsequent action on the policy brought by the injured person."
LaRoche v. Farm Bureau Mut. Auto. Ins. Co., 335 Pa. 478, 484, 7 A.2d 361, 363-64 (1939). "The insurance company may defend the action with the express understanding that it is not admitting coverage by so doing." Gedeon v. State Farm Mut. Auto. Ins., 410 Pa. 55, 58 n.3, 188 A.2d 320, 322 n.3 (1963), See also State Farm Mut. Auto. Ins. Co. V. Coughran, 303 U.S. 485, 82 L. Ed. 970, 58 S. Ct. 670 (1938); Speier v. Ayling, 158 Pa. Super. 404, 45 A.2d 385 (1946).
We have held, "There can be no doubt that the reservation of rights and defenses under the non-waiver agreement was valid and effective under the law of Pennsylvania." Meerdink v. Ott, 307 F.2d 721 (3d Cir. 1962).*fn2 It follows, therefore, that ...