On Appeal From The United States District Court For The Eastern District Of Pennsylvania, D.C. Civil No. 86-3646.
Stapleton and Mansmann, Circuit Judges, and Fisher, District Judges.*fn*
STAPLETON, Circuit Judge:
Having been sued in state court for breach of warranty, High Steel Structures, Inc. trading as High Steel Service Center, Inc. tendered the defense of the action to Imperial Casualty & Indemnity Co. ("Imperial"), which had issued it a professional liability policy, and to United States Fidelity & Guaranty Co. ("USF&G"), which had issued it a comprehensive general liability policy. Both Imperial and USF&G declined to provide a defense, and Imperial subsequently brought this declaratory judgment action requesting a finding that it had no duty to defend and that USF&G did have a duty to defend. The district court held against Imperial as to the duties of both insurers; we will reverse as to the duties of both insurers.
Imperial issued an architects, engineers, and construction managers professional liability insurance policy to High Concrete Structures, Inc. for the period October 22, 1984 to October 22, 1985. High Steel Structures, Inc. was also listed as a named insured in the Imperial policy. High Steel Service Center, Inc. is a fictitious name used by High Steel Structures in conducting part of its business.
USF&G issued a comprehensive general liability insurance policy to High Industries, Inc. for the period December 1, 1983 to December 1, 1986. Also listed as named insureds were High Concrete Structures, Inc. and High Steel Structures, Inc. t/a High Steel Service Center, Inc. High Concrete Structures and High Steel Structures are subsidiaries of High Industries.
The suit underlying this declaratory judgment action is a breach of warranty action instituted by Keystone Stampings, Inc., in the Lancaster County Court of Common Pleas. The material facts leading up to that suit, which are not in dispute, are as follows. Keystone is a manufacturer of, among other things, steel washers. High Steel Service Center is a distributor of carbon sheet steel. In need of some high-quality steel from which to make washers that would be heat-treated and used in the manufacture of automobiles, Keystone contacted High Steel Service Center. Because High Steel Service Center, as it explains, "had no in-house metallurgical engineering capability," it contacted Republic Steel Co., now LTV Corp., to see if Republic/LTV could supply the necessary steel. A metallurgical engineer from Republic/LTV, Thomas Dudas, met with representatives of High Steel Service Center and Keystone to discuss and arrange the deal.
All parties to the discussions knew the treatment the washers would have to go through and the ultimate function the washers would perform; it was agreed that the washers had to be made out of steel with excellent surface quality. Dudas advised that a certain manufacturing process was called for, and said that Republic/LTV could supply steel made using this process. Dudas told High Steel Service Center that in ordering this steel from Republic/LTV, it should mark its purchase orders to Republic/LTV in a certain way, so as to alert Republic/LTV to use the manufacturing process Dudas had determined was necessary. High Steel Service Center then agreed to supply Keystone with the quantity and quality of steel Keystone needed for its washers.
Republic/LTV manufactured the steel in accordance with the purchase orders it received from High Steel Service Center, which were marked as Dudas had advised. Republic/LTV shipped the steel in rolls 45" wide to High Steel Service Center, which slit the rolls into strips 3-4" in width and sent them along to Keystone.*fn1 Keystone stamped its washers out and sent them to Nice Bearing Products, which was to heat-treat the washers and send them along to Chrysler. When Nice heat-treated the washers, however, their surfaces developed pitts, burrs, and other defects. Nice thereupon rejected Keystone's washers as unsuitable for their intended use. Keystone sued High Steel Service Center for breach of warranty, alleging that its washers were defective because the steel supplied by High Steel Service Center was defective. Damages claimed by Keystone included loss of profits (from reduced production and from cancelled orders), incidental expenses (mainly extra freight charges incurred in purchasing replacement steel), and loss of reputation.
According to High Concrete and High Steel Structures, the reason for the failure of the steel was that the manufacturing process recommended by Dudas was not correct. This explanation, which is not disputed by Imperial, is supported by the report of a Republic/LTV investigating engineer which says that an entirely different manufacturing process should have been used to produce steel of the type needed by Keystone.
As noted, both insurers denied coverage. Imperial's bases for denial were that High Steel Service Center was not an insured under its policy and that the policy did not cover this type of claim. USF&G denied coverage on various grounds, most importantly for the reason that there had been no "property damage" within the meaning of the policy.
Imperial filed this action for a declaratory judgment, arguing that it did not have to defend the action and USF&G did. High Concrete counterclaimed, seeking a declaration that Imperial had to defend and an award of attorney's fees and costs incurred in defending both the state court suit and this federal court suit. High Steel Structures intervened, joining forces with High Concrete. USF&G filed an answer and counterclaim, requesting a determination that it did not have to defend and that Imperial did. The parties filed cross-motions for summary judgment.
The district court ruled that Imperial did owe a duty to defend, that USF&G did not, and that High Concrete and High Steel Structures were not entitled to recover from Imperial the attorney's fees and costs incurred in the federal action. Imperial appeals, contending that it does not have a duty to defend and USF&G does; High Concrete and High Steel Structures appeal, contending that USF&G has a duty to defend.*fn2 USF&G has filed a notice of appeal purporting to appeal "from that portion of the district court's opinion finding property damages under the terms of the policy." App. at 434. The parties' arguments on appeal concerning proper construction of the two policies are essentially the same as the arguments made before the district court.*fn3
We have jurisdiction pursuant to 28 U.S.C. § 1291, and because the material facts are not in dispute, our review of the district court's determination of the proper coverage of the insurance contracts at issue is plenary. Pacific Indemnity Co. v. Linn, 766 F.2d 754, 760 (3d Cir. 1985). We are guided in our review by the well-settled principles governing the interpretation of insurance policies under Pennsylvania law, which include the following: if the language of an insurance policy is clear and unambiguous, its ordinary meaning is to be given effect; policy terms should be read to avoid ambiguities; a provision is ambiguous if reasonable persons on considering it in the context of the entire policy could honestly differ as to its meaning; if ambiguities do exist in the wording chosen by the insurance company, they must be resolved in favor of the insured;*fn4 a court cannot rewrite the terms of a policy or give them a construction in conflict with the accepted and plain meaning of the language of the policy. See, e.g., St. Paul Fire & Marine Ins. Co. v. United States Fire Ins. Co., 655 F.2d 521, 524 (3d Cir. 1981); Pacific Indemnity Co. v. Linn, 766 F.2d at 760-61; Northbrook Ins. Co. v. Kuljian Corp., 690 F.2d 368, 372 (3d Cir. 1982); Houghton v. American Guar. Life Ins. Co., 692 F.2d 289, 291 (3d Cir. 1982). The specific rules with respect to determination of a duty to defend are stated in Pacific Indemnity Co. v. Linn:
Under Pennsylvania law, an insurance company is obligated to defend an insured whenever the complaint filed by the injured party may potentially come within the policy's coverage. . . . The obligation to defend is determined solely by the allegations of the complaint in the action. . . . The duty to defend remains with the insurer until the insurer can confine the claim to a recovery that is not within the scope of the policy.
766 F.2d at 760 (citations omitted) (emphasis in original).
Imperial makes two arguments as to why its policy does not require it to provide a defense: first, that High Steel Service Center is not an insured under the policy; and second, that the activities sued over are not within the scope of the policy's coverage. We agree with the district court that the first of these arguments lacks merit. High Steel Structures is named as an insured on the Imperial policy; the Keystone complaint alleges liability based on business activity engaged in by High Steel Structures; and High Steel Structures will have to pay if liability is established. It is irrelevant that High Steel Structures chose to conduct part of its business activities under a fictitious name.*fn5
Imperial's contention that High Steel Service Center's activities are significantly unlike the covered activities of High Steel Structures is immaterial to determination of the identity of the named insureds. This contention bears on the issue of whether the activities forming the basis alleged for liability are within the scope of coverage, and should be addressed in connection with that issue. If High Steel Service Center's activities do come within the policy's scope of coverage, then they are similar enough to High Steel Structures' covered activities to require that High Steel Service Center, which is just another name for a named insured, be considered a named insured. If High Steel Service Center's activities do not come within the policy's scope of coverage, then that is the ground on which coverage may be denied, not the ground that High Steel Service Center is not separately named as an insured.
We agree with Imperial, however, that the activities sued over by Keystone do not fall within the scope of the Imperial policy's coverage. As reflected in its caption and text, the Imperial policy is an "Architects, Engineers, and Construction Managers Professional Liability Insurance Policy." High Steel Structures, according to the Imperial policy's declarations, engages in "Civil Engineering, Structural Engineering, Building Design, Bridge Design, Design of Prestressed and Precast Structural Components and Concrete Erection." The paragraph defining the scope of coverage expressly limits coverage to claims arising out of rendering or failing to render "professional services of the type described in the Declarations." Thus, if the professional services of Dudas, which according to High Steel are the cause of the possible liability to Keystone, are not of the type described in the declarations, then these claims do not potentially come within the scope of coverage spelled out in the body of the policy and there is no duty to defend thereunder. As the district court correctly stated, "metallurgical ...