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12th Street Gym, Inc. v. General Star Indem. Co.

August 28, 1996






On Appeal from the United States District Court for the Eastern District of Pennsylvania

(D.C. Civil Action No. 94-cv-05757)

Before: SCIRICA, ROTH and GODBOLD *fn*, Circuit Judges

SCIRICA, Circuit Judge.

Submitted Pursuant to Third Circuit LAR 34.1(a)

May 2, 1996

(Filed August 28, l996)


The issue on appeal is whether a liability insurance policy's Sexually Transmitted Disease Exclusion excludes coverage for claims arising out of a gym member's expulsion from a gym due to his Acquired Immune Deficiency Syndrome ("AIDS"). Because we believe the Sexually Transmitted Disease Exclusion is ambiguous, we will vacate the district court's judgment that the exclusion does not bar coverage, and remand for the factfinder to consider extrinsic evidence on the exclusion's meaning.

I. Background

The plaintiffs, 12th Street Gym, Inc. ("Gym") and its co-owner and president, Robert Guzzardi, brought this action seeking a declaration of their rights under a liability insurance policy issued by the defendant, General Star Indemnity Company ("General Star"). General Star is an excess and surplus lines insurer which provides third-party liability insurance to entities that cannot secure insurance through conventional commercial lines insurers.

The Gym and Guzzardi seek indemnification for the settlement of an underlying suit filed against them by Irving Silverman. Silverman was a Gym member who had been diagnosed with AIDS in 1990. Based on events that took place in the Gym's exercise facility in Philadelphia during February and March of 1994, Silverman sued the Gym and Guzzardi in the United States District Court for the Eastern District of Pennsylvania.


On February 23, 1994, Silverman approached the Gym management with a suggestion for a special membership option for people diagnosed with AIDS. After submitting his special membership proposal, Silverman was advised by a Gym employee that he would not be allowed to return to the Gym without a note from a doctor. Silverman was permitted to enter the Gym when he returned several days later and presented a note from his doctor stating he was fit to exercise. After exercising, Silverman nicked his finger on a gym locker. He bandaged his cut with a band-aid given to him by a Gym employee, and then showered and dressed in the locker room.

According to Silverman, Guzzardi confronted him in the lobby as he was leaving and demanded to know whether he had AIDS. Guzzardi began yelling until Silverman publicly admitted he had AIDS. After noticing the bandage on Silverman's finger, Guzzardi allegedly shouted: "We don't want your kind in here. You're careless! You could infect everybody!" Guzzardi demanded Silverman leave the gym and told him not to return.

In his complaint Silverman sought damages and declaratory and injunctive relief based on the Gym and Guzzardi's alleged discrimination in violation of the Americans with Disabilities Act ("ADA"), intentional and negligent infliction of emotional distress, invasion of privacy, fraudulent misrepresentation, civil conspiracy, and defamation.

At the time of the incidents alleged in Silverman's Complaint, the Gym and Guzzardi were named insureds under General Star's policy of general liability insurance, Policy No. IMA 212509. The policy had general provisions providing coverage for four different categories of harm: bodily injury, property damage, advertising injury and personal injury. Attached to the policy was an endorsement that contained the following exclusion:

15. Sexually Transmitted Disease Exclusions (GSI-52-C200)

This insurance does not apply to "bodily injury," "property damage," "personal injury," "professional liability" or "advertising injury" with respect to any claim, suit or cause of action arising directly or indirectly out of instances, occurrences or allegations involving sexually transmitted diseases, including Acquired Immune Deficiency Syndrome (AIDS). This exclusion shall apply regardless of the legal form any claim may take. As an example, this insurance shall provide no coverage for a claim alleging that any Insured was negligent or in breach of contract by maintaining premises where the Insured knew, or should have known, diseases might be sexually transmitted.

The Gym and Guzzardi filed a claim for defense and indemnification of the Silverman suit under General Star's policy. General Star declined to defend or indemnify the Gym and Guzzardi due, in part, to the Sexually Transmitted Disease Exclusion ("STDE"). On September 20, 1994, while Silverman's suit was pending, the Gym and Guzzardi instituted this suit in the District Court for the Eastern District of Pennsylvania against General Star. In the complaint, the Gym and Guzzardi sought a declaration that General Star had a duty to defend against the Silverman suit, a duty to indemnify for any judgment entered against them in the Silverman suit, damages in excess of $50,000, and punitive damages.

On December 10, 1994, Silverman died, and his estate was substituted as plaintiff. Subsequently the parties settled the Silverman suit for $35,000 and other non-monetary relief. The settlement agreement provided for a complete release of all claims against the Gym, Guzzardi and General Star. General Star agreed to pay the defense costs incurred by the Gym and Guzzardi in litigating the underlying action. General Star also advanced the cost of settlement to the Gym and Guzzardi, but reserved its right to contend it was not obligated to indemnify and therefore was entitled to repayment of the $35,000. The Gym and Guzzardi agreed to drop all counts against General Star except for the claim that General Star had a duty to indemnify for the settlement. By order entered January 31, 1995, the district court dismissed the Silverman suit.


The Gym and Guzzardi filed an Amended Complaint on February 6, 1995, alleging General Star had a duty to indemnify them for the Silverman suit liabilities. In its Answer to the Amended Complaint, General Star set forth several affirmative defenses, including one based on the policy's Sexually Transmitted Disease Exclusion. General Star also counterclaimed for a declaration that it had no duty to indemnify, and for judgment in the amount of $35,000 to reimburse it for the settlement cost.

The parties filed cross-motions for summary judgment. By order entered June 22, 1995, the district court determined the STDE did not exclude coverage for the remaining claims in the Silverman suit and denied General Star's motion for summary judgment. But the court also held General Star was not obligated to indemnify the Gym and Guzzardi for Silverman's ADA claim. In addition, the court determined that the pre-trial settlement of the Silverman suit did not prevent General Star from contesting its obligation to indemnify the Gym and Guzzardi for the settlement of the Silverman action. Finally, the district court found the facts were insufficiently developed to determine which counts of the underlying complaint, if any, gave rise to liability and coverage. 12th Street Gym, Inc. v. General Star Indem. Co., No. 94-5757, slip op. at 2 (E.D. Pa. June 22, 1995).

On September 6, 1995, the parties filed a stipulation in the district court under which General Star agreed to withdraw all affirmative defenses except for the defense based on the STDE. The district court granted the Gym and Guzzardi's renewed Motion for Summary Judgment based on this stipulation and on its previous holding that the STDE did not bar coverage for the Silverman suit. 12th Street Gym, Inc. v. General Star Indem. Co., No. 94-5757 (E.D. Pa. September 5, 1995).

General Star appeals the district court's determination that the STDE does not preclude indemnification for the Silverman suit. The Gym and Guzzardi cross-appeal from the district court's holding that pre-trial settlement and dismissal of the underlying suit did not require General Star to indemnify for the Silverman settlement.


We have jurisdiction over the district court's final order pursuant to 28 U.S.C. Section(s) 1291. We exercise plenary review of the district court's grant of summary judgment. Oritani Savings & Loan Ass'n v. Fidelity & Deposit Co., 989 F.2d 635, 637 (3d Cir. 1993). The parties agree that Pennsylvania law governs this dispute. The district court's application and interpretation of state law is subject to plenary review. Salve Regina College v. Russell, 499 U.S. 225, 231 (1991); Grimes v. Vitalink Communications Corp., 17 F.3d 1553, 1557 (3d Cir.), cert. denied, 115 S. Ct. 480 (1994). Inquiry into the "legal operation" of an insurance policy is a conclusion of law and is also subject to plenary review. Dickler v. CIGNA Property & Casualty Co., 957 F.2d 1088, 1094 (3d Cir. 1992); see also Linder v. Inhalation Therapy Services, Inc., 834 F.2d 306, 310 (3d Cir. 1987) (citing Cooper Labs. Inc. v. Int'l Surplus Lines Ins. Co., 802 F.2d 667, 671 (3d Cir. 1986) (holding judicial construction of an insurance policy to account for events not foreseen by the parties is subject to plenary review)).

II. Discussion

A. Duty to Indemnify

General Star is not obligated to indemnify the Gym and Guzzardi for claims that fall outside the general scope of the insurance policy. Accordingly, before we examine the meaning of the STDE, we must determine whether each of Silverman's claims is potentially covered under a reasonable interpretation of the policy. *fn1

As we have noted, Silverman alleged seven claims in his first amended complaint: (1) discrimination in violation of the ADA; (2) intentional infliction of emotional distress; (3) negligent infliction of emotional distress; (4) invasion of privacy; (5) fraudulent misrepresentation; (6) civil conspiracy; and (7) defamation. The district court determined General Star is not obligated to indemnify the Gym and Guzzardi for the ADA claim, and this holding has not ...

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