Opinion
No. 1621 WDA 2001 1771 WDA 2001.
Filed: June 12, 2003. Petition for Reargument Filed: June 25, 2003.
Appeal from the Judgment entered on September 5, 2001, In the Court of Common Pleas of ERIE County Civil Division, No. 13818-1997.
BEFORE: JOYCE, MUSMANNO and CAVANAUGH, JJ.
¶ 1 This protracted litigation concerns whether Harleysville Mutual Insurance Company ("Harleysville") acted in bad faith in denying the insurance claim of David and Marianne Zimmerman ("Zimmerman(s)"), owners of a bowling alley, Frontier Lanes, whose roof had collapsed. We reverse, holding that as the Zimmermans failed to present sufficient evidence to sustain their claim that Harleysville acted in bad faith, the trial court erred in denying Harleysville's motion for judgment notwithstanding the verdict.
The Underlying Action
¶ 2 We review the history of the coverage litigation:
Since 1987, [the Zimmermans] have owned and operated Frontier Lanes, a bowling alley, with a lounge. The bowling lanes were housed in a building with an arched roof supported by laminated timber trusses. An aluminum gridwork hung from the roof and supported a suspended tile ceiling which had an overlay of insulation and paper. From the time of purchase until June 30, 1993, [the Zimmermans'] business insurance was provided by Fireman's Fund Insurance Company. In April 1993, Fireman's informed [the Zimmermans] that they would no longer write worker's [sic] compensation policies for small accounts. Through their agent, [the Zimmermans] submitted an application for coverage, including workers [sic] compensation, to Harleysville Mutual which on June 21, 1993 agreed to "write the account." [The Zimmerman's] agent worked out details of coverage with the Harleysville underwriter on June 25 and had [the Zimmermans] sign the policies on June 28. Comprehensive coverage went into effect on June 30, 1993. Harleysville did not inspect the bowling alley before writing the insurance. On June 28, 1993, tiles fell from the ceiling of the bowling alley.[*] On July 2, 1993, [the Zimmermans] called their agent for a recommendation of someone to determine what the problem was. On July 13, 1993, the recommended contractor, accompanied by [David Zimmerman], investigated the area above the ceiling and found that three of sixteen trusses supporting the roof had begun to separate. No immediate repairs were recommended, but it was suggested that an engineer look at the problem. Based on the contractor's report of July 14, 1993, [stating] that damage had been caused by the heavy ice and snow of the previous winter, a loss report was filed with Fireman's Fund. On July 23, 1993 a structural engineer retained by Fireman's examined the building. He advised [the Zimmermans] to hire their own contractor and, on July 26, 1993 issued a report in which he found that eight of sixteen trusses were "failing/failed and in danger of collapsing." As advised, [the Zimmermans] hired a local contractor, who inspected the bowling alley, accompanied by a second engineer on July 26, 1993. Both agreed they could wait for Fireman's engineer's report before undertaking repairs. In the early evening of July 29, 1993, a day of high winds, [David Zimmerman] returned to his office, and once again, found tiles and gridwork on the [bowling] alleys. After cleaning up the debris and calling his wife to tell her what had happened, he heard a loud snap and saw additional tiles and gridwork start to fall. Running to the counter area, he hid under a desk while the roof of the building collapsed. Claims for the loss from collapse of the structure were filed with both Fireman's and Harleysville. On September 14, 1993, Fireman's sent [the Zimmermans] a check for $21,798 for the pre-collapse repair of eight trusses[**] and denied any further liability. On November 5, 1993, Harleysville declined to cover the claim, stating that Fireman's was responsible for the loss. On December 17, 1993, [the Zimmermans] brought suit for declaratory relief asking the Court to determine which policy provided coverage. The parties stipulated to the operative facts, and filed cross motions for summary judgment. On June 30, 1995, the trial court held Harleysville was obligated to indemnify [the Zimmermans] for all damage, except the amount tendered earlier by Fireman's; Harleysville's obligation was $668,828.00. A final order was entered on June 12, 1996. . . .
[*] This was actually the third incident involving the ceiling. In late 1992 and early 1993, [the Zimmermans] had become aware that the gridwork over the alleys had separated and sagged causing tiles to fall. Simple repairs were made to correct the condition on two or three occasions. In May 1993, tiles again fell and repairs were made. On May 13, 1993, in the course of an annual insurance review on the premises, [David Zimmerman] informed his insurance agent of the damage from the tiles. No claim was filed, however, because the agent indicated that the damage would be below the policy deductible.
[**] This sum was for repair of five trusses identified as damaged in the July 13, 1993 inspection and for three additional trusses reported as damaged by Fireman's engineer on July 23, 1993. Zimmerman v. Harleysville Mut. Ins. Co., et al., No. 1283 Pittsburgh 1996, slip op. at 1-4 (Pa.Super. June 18, 1997) (some footnotes omitted) [hereinafter "Zimmerman I"].
This memorandum decision (with one judge concurring in the result) does not establish the law of Pennsylvania, although it constitutes the law of this case.
¶ 3 In Zimmerman I, Harleysville appealed from the adverse summary judgment. Among the issues that Harleysville raised was:
[W]hether the [trial] court erred in finding liability under the Harleysville policy when the damage was a "loss in progress"[*] which was manifest and apparent to [the Zimmermans] during the period of Fireman's Fund coverage[.]
[*] [Harleysville] asks that we rule on "a critical issue of first impression in Pennsylvania" to determine the obligations of successive property insurers where a loss which is a "continuous event" occurs in more than one policy period. [Harleysville] advocates adoption of the "loss in progress" doctrine citing, in particular, to rulings of the California courts.
Id. at 4.
¶ 4 The Zimmerman I court summarized each party's respective position:
[Harleysville disclaims] responsibility for the property loss . . . on two grounds: first, that under the language of the policy there was no coverage; and, second, that [the Zimmermans] violated their contractual obligations because they did not disclose the defect to [Harleysville]. [The Zimmermans] counter that both "windstorm" and "weight of snow" were "specified causes of loss" under the Harleysville policy and nothing in the policy, or in the law, required them to prove that the precipitating cause of the ultimate loss occurred during the policy period.
Furthermore, they respond that [Harleysville's] "loss in progress" and "fortuity" arguments, as well as those that suggest they failed to meet their obligations, assume prior knowledge of an ongoing or imminent loss which they did not have.
Id. at 5-6. Harleysville responded that no evidence existed that the windstorm contributed to the collapse of the roof. Even presuming otherwise, Harleysville argued that the "damage had manifested before [Harleysville's] policy date and was, therefore, not an insurable risk." Id. at 7. Specifically, that the "snow and ice from the previous winter had weakened the building and that this constituted a `loss in progress.'" Id. at 8.
¶ 5 The Zimmerman I court affirmed the summary judgment against Harleysville, essentially adopting the lower court's analysis.
The lower court resolved this dispute by finding that two occurrences caused distinct effects at different times: the injurious effect of the past winter weather occurred when tiles fell and the trusses began to separate; and, the injurious effect of high winds took place when the roof collapsed. The court assessed appellant's claim under the Third Circuit's "cause" and "effect" test, Appalachian Insurance Company v. Liberty Mutual Insurance Company, 676 F.2d 56 (3d Cir. 1982). This test looks to whether there was but one proximate, uninterrupted and continuing "cause" or whether there were multiple occurrences. Id. at 61. In the latter situation, the court fixes the time of the occurrence by reference to the time when the injurious effects of the occurrence took place. Id. at 62. This Court adopted the Appalachian test in D'Auria v. Zurich Ins. Co., 352 Pa. Super. 231, 507 A.2d 857 (1986). See also Keystone Automated Equipment Co., Inc. v. Reliance Insurance Co., 369 Pa. Super. 472, 479, 535 A.2d 648, 652 (1988) (time at which damages arise, that is time of ultimate injury, is time that must be examined to determine if claim falls within policy limitations.)[*]
Thus, Pennsylvania law provides clear authority for determining liability when damages occur over time and under different insurers. In the absence of ambiguity in this area of the law, we decline appellant's invitation to adopt the "loss in progress" doctrine of other jurisdictions[**] and find that under the Appalachian test, as adopted by this Court in D'Auria, appellant was the insurer when the collapse occurred.
[*] As noted supra fn. 7, appellant asserts that appellate courts in Pennsylvania have yet to address the obligations of successive property insurers where their policies "straddle" damage which is a "continuous event." D'Auria, 352 Pa. Super. 231, 507 A.2d 857 (1986), and Keystone, 369 Pa. Super. 472, 535 A.2d 648 (1988), however, apply the Appalachian test to liability policies; moreover, the Keystone court's citation to [two non-Pennsylvania] property policy cases suggests the extension of the Appalachian logic to that context as well. Keystone Automated Equipment v. Reliance, supra at 472, 535 A.2d at 655 citing Prieto v. Reserve Ins. Co., 340 So.2d 1282, 1283 (Fla.Dist.Ct.App. 1977) (building built in policy period, collapsed after; accident took place when collapsed); Oceanics, Inc. [sic] v. Petroleum Dis. Co., 280 So.2d 874 (La.App. 1973) (crane negligently repaired when policy in effect, collapsed after; no coverage since no property damage during policy period).
[**] Without analyzing in detail the California cases cited by appellant, we note that they have been specifically limited in their application to first party property loss cases in the context of homeowner's insurance. Prudential-LMI Commercial Insurance v. The Superior Court of San Diego County, 51 Cal.3d 674, 678, 798 P.2d 1230, 1232 (1990). Id. at 8-9 (all but first emphasis supplied). ¶ 6 We denied Harleysville's petition for reargument en banc and Harleysville thereafter requested, and was granted, a petition for allowance of appeal. See Zimmerman v. Harleysville Mut. Ins. Co., 708 A.2d 99 (Pa. 1998) (per curiam). Our Supreme Court limited the issue to:
We comment that D'Auria, Keystone, and Appalachian addressed third-party liability insurance policies whereas the instant case addresses a first-party property insurance policy.
Whether the trial court erred in not adopting the "loss in progress" theory of insurance coverage which would have required the insurer providing insurance at the commencement of the damage to compensate its insured for all of the damage even though the policy of insurance had expired.
Id. Our Supreme Court, however, after briefing and oral arguments, and over the dissent of two justices, dismissed the appeal as improvidently granted. See Zimmerman v. Harleysville Mut. Ins. Co., 717 A.2d 1024 (Pa. 1998) (per curiam). Harleysville then paid the outstanding judgment.
The Bad Faith Action
¶ 7 The judge for the coverage litigation also presided over the bad faith litigation. Before our Supreme Court granted Harleysville's petition for allowance of appeal, the Zimmermans filed the instant suit alleging that Harleysville acted in bad faith pursuant to title 42, section 8371 of the Pennsylvania Consolidated Statutes. Eventually, a non-jury trial was held and the trial court found in favor of the Zimmermans. After an evidentiary hearing to determine damages, the trial court awarded the Zimmermans $152,266 in interest; counsel fees for the coverage litigation of $234,591; counsel fees for the bad faith litigation of $169,152; and punitive damages of $200,000, for a total of $756,009.
¶ 8 Both parties filed post-trial motions for relief. Harleysville requested judgment notwithstanding the verdict, or alternatively, a modification of the verdict or a new trial. Harleysville also asserted that the trial court erred in its award of punitive damages. The Zimmermans alleged, inter alia, that the trial court erred in calculating the amount of interest. The trial court denied both parties' post-trial motions and formally entered judgment on September 5, 2001.
¶ 9 Harleysville filed an appeal and the Zimmermans filed a cross-appeal. Harleysville now presents the following issues in its brief:
I. In a bad faith lawsuit, whether the insurer had a reasonable basis to deny, defend, and appeal the insured's claim for insurance coverage where the law was complex and the insurer consistently relied on the advice of respected counsel?
II. Whether the trial court's stated bases for its bad faith ruling are supported by the record and constitute bad faith even though an insurer is not required to submerge its interest to the insured?
III. Whether the trial court erred in awarding punitive damages and stating that a showing of "bad faith per se" may be sufficient to impose punitive damages?
The Zimmermans, in their brief on cross-appeal, present one claim:
I. Whether an insurer who pays a judgment after losing [the] coverage litigation should be entitled to a credit for the interest component of that judgment when the court awards interest damages in a subsequent bad faith litigation under 42 Pa.C.S.A. § 8371?
¶ 10 Broadly speaking, after an insurance policy is issued, coverage under that policy must be "triggered." Various theories exist as to when a "triggering" occurs. See, e.g., Consulting Eng'rs, Inc. v. Ins. Co. of N. Am., 710 A.2d 82, 87 (Pa.Super. 1998) (rejecting "multiple trigger" theory under the facts). Where successive insurance carriers are involved, determining when coverage is triggered becomes particularly important.
¶ 11 One such theory is the "manifestation trigger." For example, coverage is triggered under an occurrence type liability insurance policy "when the injurious effects of the negligent act first manifest themselves in a way that would put a reasonable person on notice of the injury." D'Auria, 507 A.2d at 861. By way of corollary, in a property insurance context, coverage is triggered when the property damage first manifests itself — presumably in a manner "that would put a reasonable person on notice of the [damage]." Id.
¶ 12 It has been posited that the "manifestation" theory complements the "known loss" or "loss in progress" theory. See Prudential-LMI v. Commercial Ins. v. Superior Court, 798 P.2d 1230, 1246-47 (Cal. 1990); 7 LEE R. RUSS, COUCH ON INSURANCE § 102:9 (3d ed. 1995). The "known loss" doctrine, as defined by our Supreme Court, states: "that one may not obtain insurance for a loss that either has already taken place or is in progress." Rohm and Haas Co. v. Cont'l Cas. Co., 781 A.2d 1172, 1176 (Pa. 2001) (citation omitted) (emphasis supplied). Thus, if property damage manifested itself prior to or was in progress at the time insurance coverage commenced, the insurer may argue that the "manifestation" occurred outside the scope of its coverage under the Pennsylvania interpretation of the "known loss" doctrine.
We recognize that state and federal courts disagree on whether the "known loss" and "loss in progress" doctrines are separate or identical doctrines.
The Rohm and Haas court's definition seemingly considers these doctrines as identical. We note one commentator's discourse:
The loss in progress doctrine is generally articulated in terms of the insurer not being liable if a loss was already in progress before the policy's coverage took effect. While the term "known loss" would, on its face, appear to indicate that the loss has actually occurred, and has been so interpreted, most courts articulate this doctrine to include both actual losses that have occurred by the time the insurance is effected, and losses which are "substantially certain to occur" or which were a "substantial probability" or some equivalent statement.
7 LEE R. RUSS, COUCH ON INSURANCE § 102:8 (3d ed. 1995) (footnotes omitted).
¶ 13 The standard of review for the denial of a motion for judgment notwithstanding the verdict is
whether there was sufficient competent evidence to sustain the verdict. We view the evidence in the light most favorable to the verdict winner and give him or her the benefit of every reasonable inference arising there from [sic] while rejecting all unfavorable testimony and inferences. Moreover, [a] judgment n.o.v. should only be entered in a clear case and any doubts must be resolved in favor of the verdict winner. Birth Ctr. v. St. Paul Cos., 787 A.2d 376, 383 (Pa. 2001) (quotation marks and citations omitted). We amplify:
There are two bases upon which a judgment n.o.v. can be entered: one, the movant is entitled to judgment as a matter of law . . . and/or two, the evidence was such that no two reasonable minds could disagree that the outcome should have been rendered in favor of the movant[.] With the first a court reviews the record and concludes that even with all factual inferences decided adverse to the movant the law nonetheless requires a verdict in his favor, whereas with the second the court reviews the evidentiary record and concludes that the evidence was such that a verdict for the movant was beyond peradventure.
Moure v. Raeuchle, 604 A.2d 1003, 1007 (Pa. 1992) (citations omitted).
¶ 14 The "bad faith" statute states:
In an action arising under an insurance policy, if the court finds that the insurer has acted in bad faith toward the insured, the court may take all of the following actions:
(1) Award interest on the amount of the claim from the date the claim was made by the insured in an amount equal to the prime rate of interest plus 3%.
(2) Award punitive damages against the insurer.
(3) Assess court costs and attorney fees against the insurer.
42 Pa.C.S.A. § 8371. The legislature enacted section 8371 to "provide a statutory remedy to an insured when the insurer denied benefits in bad faith." Gen. Accident Ins. Co. v. Fed. Kemper Ins. Co., 682 A.2d 819, 822 (Pa.Super. 1996) (citation omitted). The statute itself, however, does not define "bad faith."
¶ 15 Our courts, therefore, have endeavored to rectify the legislature's omission:
Our Supreme Court has stated that "`the utmost fair dealing should characterize the transactions between an insurance company and the insured.'" Dercoli v. Pennsylvania Nat'l Mut. Ins. Co., 520 Pa. 471, 554 A.2d 906, 909 (1989) (quoting Fedas v. Ins. Co. of Pennsylvania, 300 Pa. 555, 151 A. 285 (1930)). An insurer's conduct constituting bad faith has been described as follows:
"Bad faith" on [the] part of [an] insurer is any frivolous or unfounded refusal to pay proceeds of a policy; it is not necessary that such refusal be fraudulent. For purposes of an action against an insurer for failure to pay a claim, such conduct imports a dishonest purpose and means a breach of a known duty (i.e., good faith and fair dealing), through some motive of self-interest or ill will; mere negligence or bad judgment is not bad faith. A recovery for bad faith requires clear and convincing evidence of bad faith, rather than mere insinuation, and a showing by the insured that the insurer did not have a reasonable basis for denying benefits under the policy and that the insurer knew of or recklessly disregarded its lack of a reasonable basis in denying the claim. Moreover, when evaluating bad faith under section 8371, a trial court may look to (1) other cases construing the statute and the law of bad faith in general, (2) the plain meaning of the terms in the statute, and/or (3) other statutes addressing the same or similar subjects.
MGA Ins. Co. v. Bakos, 699 A.2d 751, 754-55 (Pa.Super. 1997) (internal citations omitted). Bad faith claims are fact-specific and depend on the conduct of the insurer vis-a-vis its insured.
Williams v. Nationwide Mut. Ins. Co., 750 A.2d 881, 886-87 (Pa.Super. 2000) (alterations in original); see Terletsky v. Prudential Prop. Cas. Ins. Co., 649 A.2d 680, 690 (Pa.Super. 1994) (reversing finding of bad faith as insurer could not act unreasonably when the applicable Pennsylvania law was unsettled); Romano v. Nationwide Mut. Fire Ins. Co., 646 A.2d 1228, 1232 (Pa.Super. 1994) (approvingly quoting 3 APPLEMAN, INSURANCE LAW PRACTICE § 1612 at 368 (1967 Supp. 1991), in defining bad faith conduct as a "frivolous or unfounded refusal to pay, lack of good faith investigation into fact, and failure to communicate with the claimant."); see also Bostick v. ITT Hartford Group, Inc., 56 F. Supp.2d 580, 587 (E.D.Pa. 1999) (citing Pennsylvania case authority in concluding, "[b]ad faith cannot be found where the insurer's conduct is in accordance with a reasonable but incorrect interpretation of the insurance policy and the law."). "The `clear and convincing' standard requires a showing by the plaintiffs that the evidence is so clear, direct, weighty and convincing as to enable a clear conviction, without hesitation, about whether or not the defendants acted in bad faith." Bostick, 56 F. Supp.2d at 587 (citing Stafford v. Reed, 70 A.2d 345, 348 (Pa. 1950)). To obtain recovery, the claimant must show the elements of the bad faith cause of action, namely:
We comment that the precedential authorities defining "bad faith" essentially relied on the sixth edition Black's Law Dictionary definition cited in both Terletsky, 649 A.2d at 688, and Romano, 646 A.2d at 1232. The definition presently reads:
2. Insurance. An insurance company's unreasonable and unfounded (though not necessarily fraudulent) refusal to provide coverage in violation of the duties of good faith and fair dealing owed to an insured. * Bad faith often involves an insurer's failure to pay the insured's claim or a claim brought by a third party.
3. An insured's claim against an insurance company for an unreasonable and unfounded refusal to provide coverage. BLACK'S LAW DICTIONARY 134 (7th ed. 1999).
(1) that the insurer lacked a reasonable basis for denying benefits; and
(2) that the insurer knew or recklessly disregarded its lack of a reasonable basis. Booze v. Allstate Ins. Co., 750 A.2d 877, 880 (Pa.Super. 2000) (citing Terletsky, 649 A.2d at 688); see also Klinger v. State Farm Mut. Auto. Ins. Co., 115 F.3d 230, 233 (3d Cir. 1997) (rejecting argument that the Terletsky test requires a showing "that the insurer was motivated by an improper purpose such as ill will or self-interest.").
¶ 16 Thus, within the context of a bad faith action, judgment notwithstanding the verdict should be granted to the insurer-defendant if the insured-plaintiff failed to present sufficient clear and convincing evidence meeting the aforementioned elements, despite giving the plaintiff all reasonable factual inferences from the record. See Birth Ctr., 787 A.2d at 383; Booze, 750 A.2d at 880.
¶ 17 Harleysville asserts five grounds for its first claim that it had a "reasonable basis to deny, defend, and appeal the insurance claim." Appellant's Br. at 21. Harleysville's first ground is that, under these facts, "the general rule [i.e., the manifestation rule] applied by most courts in property insurance cases provided a reasonable basis to conclude that Harleysville did not provide coverage." Id. The rule, Harleysville explains, "provides that manifestation occurs at that point in time when appreciable damage occurs and is or should be known to the insured, such that a reasonable insured would be aware that his notification duty under the policy has been triggered." Id. at 22. Applied instantly, Harleysville contends:
[t]he "manifestation" occurred during the Fireman's Fund policy term because: (a) appreciable damage occurred in the form of falling ceiling tiles; (b) the falling ceiling tiles were known to the Zimmermans; and (c) the Zimmermans were aware that their notification duty was triggered as they notified their insurance agent about the falling ceiling tiles during the effective dates of the Fireman's Fund policy.
Id. Harleysville cites to non-Pennsylvania cases, primarily Prudential-LMI Commercial Insurance v. Superior Court, 798 P.2d 1230 (Cal. 1990), in support of this manifestation rule.
¶ 18 The Zimmermans counter that "Harleysville lacked any reasonable basis for the `loss-in-progress' defense [i.e., the complement of the "manifestation" theory]," and further assert that Harleysville failed to present evidence supporting its four other reasons for denying the Zimmerman's claim. Appellee's Br. at 23. The Zimmermans rely on the Zimmerman I court's unreported, memorandum decision in the coverage litigation rejecting the "loss in progress" doctrine. See Zimmerman I, slip op. at 9. That is, because the Zimmerman I court rejected Harleysville's legal theory, Harleysville lacked a reasonable basis to deny.
¶ 19 The trial court listed a number of different facts in concluding that Harleysville acted in bad faith. See Zimmerman v. Harleysville Mut. Ins. Co., No. 13818-1997, slip op. at 3-5 (C.P. Pa. Jan. 31, 2002) [hereinafter "Trial Court Op."]. The trial court also relied on the Zimmerman I decision, reasoning that "[w]hile an insurer unquestionably has the right to pursue the adoption of a new, even novel theory for determining coverage, in such circumstances it has a concomitant obligation to avoid doing so in a manner that is likely to cause additional injury and damage to its insured." Id. at 6. For this proposition, the trial court apparently relied upon this Court's reasoning in Birth Center v. St. Paul Cos., 727 A.2d 1144, 1155 (Pa.Super. 1999), aff'd, 787 A.2d 376 (Pa. 2001), which noted, "[t]he insurer must also assess the impact upon its insured of the insurer's decision to settle or to litigate the claim against its insured."
¶ 20 We disagree with the trial court's finding that Harleysville acted in bad faith in denying the Zimmerman's claim based on (a) that the facts did not support the invocation of the manifestation theory; and (b) that "it was apparent" that the "loss in progress" theory lacked legal support. Id. Our primary disagreement is with the manner in which the trial court arrived at its conclusion. We secondarily note our Supreme Court's later adoption of the "known loss" doctrine and the Zimmerman I court's unexplained application of a third-party liability insurance analysis to the instant first-party property insurance policy.
¶ 21 The bad faith trial court's analysis is predicated on the Zimmerman I court's rejection of Harleysville's "loss in progress" theory of defense. According to the trial court, Harleysville, therefore, acted in bad faith by even presenting this defense in the first place. The flaw in this conclusion lies in the fact that the viability of this defense was not rejected by our courts until the underlying coverage litigation.
¶ 22 The Zimmerman I court rejected Harleysville's "loss in progress" defense on the basis of our holding in D'Auria v. Zurich Ins. Co., 507 A.2d 857, 858 (Pa.Super. 1986). The Zimmerman I court concluded, based on D'Auria, that "Pennsylvania law provides clear authority for determining liability when damages occur over time and under different insurers. In the absence of ambiguity in this area of the law, we decline [Harleysville's] invitation to adopt the `loss in progress' doctrine of other jurisdictions. . . ." Zimmerman I, slip op. at 9 (footnote omitted). The Zimmerman I court considered Harleysville's theory, decided that it was foreclosed by prior Pennsylvania law, and, therefore, rejected it.
¶ 23 Harleysville could not have known it was acting in bad faith by presenting a reasonable but heretofore unrecognized defense, as opposed to one previously rejected by our courts. Cf. J.H. France Refractories Co. v. Allstate Ins. Co., 626 A.2d 502, 510 (Pa. 1993) (commenting, "[i]t would be harsh indeed to attribute bad faith to parties which relied on the reasoning and approaches that other courts have found convincing, when there had been no definitive precedent in this jurisdiction."). We therefore disagree with the bad faith trial court's conclusion that "[i]t was apparent that the defendant's legal position was tenuous." Trial Court Op., slip op. at 6. This was, as Harleysville asserts, a "legitimate coverage issue" that required litigation as to its belief that the Zimmerman's claims were not covered.
We do not, by any means, hold that an insurer, by presenting a defense previously rejected by Pennsylvania courts, acts in bad faith per se.
¶ 24 We further note that our Supreme Court adopted the "known loss" doctrine in Rohm and Haas Co. v. Continental Cas. Co., 781 A.2d 1172, 1177 (Pa. 2001). While the Zimmermans contend that Rohm and Haas is factually distinguishable from the instant case, our Supreme Court's adoption of this theory is suggestive that Harleysville did not act in bad faith by presenting it at the underlying coverage litigation. As previously discussed, it appears that our Supreme Court has defined "known loss" to encompass a "loss in progress." Other courts have also adopted the "manifestation" and "loss in progress" theories. See, e.g., Bostick v. ITT Hartford Group, Inc., 56 F. Supp.2d 580, 585 (E.D.Pa. 1999) (commenting that "if a deterioration problem [that resulted in collapse of wall] occurred prior to the effective date of a policy, an insurer would not be held liable for ongoing damage that began before the insurer's policy period."); Winding Hills Condo. Ass'n, Inc. v. N. Am. Specialty Ins. Co., 752 A.2d 837, 840 (N.J.Super.Ct.App.Div. 2000) (concluding "that the manifest-trigger rule remains appropriate in first-party property damage claims for a variety of reasons.").
¶ 25 Finally, we note that D'Auria addressed a different issue: whether the insurers had a duty to defend the insured, a medical doctor, against third parties when the alleged acts of malpractice occurred before the insurers' coverage began. The D'Auria insurers provided "occurrence" type liability policies. The D'Auria court, in defining "occurrence" in that context, adopted the "cause" and "effect" test of Appalachian Ins. Co. v. Liberty Mut. Ins. Co., 676 F.2d 56 (3d Cir. 1982).
"An `occurrence' policy protects the policyholder from liability for any act done while the policy is in effect. . . ." D'Auria v. Zurich Ins. Co., 507 A.2d 857, 858 (Pa.Super. 1986) (quoting St. Paul Fire Marine Ins. Co. v. Barry, 438 U.S. 531, 535 n. 3 (1978)).
The D'Auria court explained the "cause" and "effect" test as follows:
The general rule is that an occurrence is determined by the cause or causes of the resulting injury. "[T]he majority of jurisdictions [employ] the `cause theory'. . . . Using this analysis, the court asks if `[t]here was but one proximate, uninterrupted, and continuing cause which resulted in all of the injuries and damage.'" [citing Appalachian, 676 F.2d at 61.]
. . . .
We adopt the "cause of the loss" test in the instant case to determine the number of "occurrences" present in [the insured's] complaint.
D'Auria, 507 A.2d at 860.
In many insurance contexts ranging from principles of causation, to the varied post-loss duties addressed here, the courts recognize the conceptual and practical difference between[*] "First party" insurance, which is a contract between the insurer and insured protecting the insured's own actual losses and expenses, such as property insurance, fidelity insurance, and medical/health insurance.
[*] "Third party" insurance, which is a contract to protect the insured from actual or potential monetary liability to a third party, such as liability insurance.
14 LEE R. RUSS, COUCH ON INSURANCE § 198:3 (3d ed. 1995) (footnote omitted); accord Port Auth. v. Affiliated FM Ins. Co., 311 F.3d 226, 233-34 (3d Cir. 2002) (considering New Jersey case); Anthem Elecs., Inc. v. Pac. Employers Ins. Co., 302 F.3d 1049, 1054 (9th Cir. 2002) (interpreting California law); see also 7 LEE R. RUSS, COUCH ON INSURANCE § 101:58 (3d ed. 1995).
¶ 26 Harleysville, in the underlying coverage litigation, did not consider D'Auria applicable as D'Auria addressed an insurer's duty to defend the insured against third parties under an "occurrence" type liability insurance policy, whereas the instant case concerned an insurer's allegedly "bad faith" failure to pay a claim under the insured's first-party property insurance policy. The November 3, 1993 letter from Harleysville's retained counsel states in pertinent part:
Our investigation and research of relevant legal authority in regard to [this] claim has been completed. It is interesting to note that this appears to be a case of first impression in Pennsylvania. Nonetheless, the loss for which the insureds seek indemnity, was in progress at the inception of the Harleysville policy and therefore did not result from a fortuitous event.
. . . .
The coverage afforded by any policy of liability or property insurance is generally "triggered" by an occurrence. Though integral to any contract of insurance, most policies do not expressly define an "occurrence". Additionally, the meaning of an "occurrence" differs in the context of liability and property insurance.
The instant policy defined "occurrence" under the liability section as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." Zimmerman v. Harleysville Mut. Ins. Co., et al., No. 10103-1993, slip op. at 5 (C.P. Pa. June 30, 1995) (citation omitted). "Occurrence" was "not defined in the property portion of the policy. . . ." Zimmerman v. Harleysville Mut. Ins. Co., et al., No. 10103-1993, slip op. at 3 (C.P. Pa. Aug. 13, 1996). The trial court employed the liability section definition of occurrence, reasoning that insurance policies are interpreted in accordance with contract principles. See id.
There is a paucity of reported authority addressing the definition of occurrence in its application to property policies. No Pennsylvania case law was found. However, the few courts that have interpreted the term as used in this context, have done so by utilizing a comparative analysis to the term as used in liability coverage. . . .
. . . .
. . . Hence, while the cause of a loss constitutes an occurrence for purposes of liability coverage, the actual manifestation of damage is the occurrence for which property insurance affords coverage.
But see D'Auria, 507 A.2d at 862 (explaining, "an `occurrence' happens when injury is reasonably apparent, not at the time the cause of the injury occurs.").
The conclusion was based upon a discussion and analysis of Newmont Mines, Ltd. v. Hanover Ins. Co., 784 F.2d 127 (2d Cir. 1986).
The ascertainment of an occurrence becomes particularly critical where, as in the instant claim, an insured sustains a continuous or protracted loss.
Def.'s Trial Ex. Y, at 5-6, R.R. at 986a-87a (emphasis supplied); see also Def.'s Trial Ex. Q1, at 2, R.R. at 1060a (noting, in a letter discussing whether to appeal the adverse trial court coverage litigation verdict, "[t]he [coverage trial judge's] obvious confusion between liability and property coverages and his improper analysis of this property claim under the liability portion of the policy. . . .").
¶ 27 The Zimmerman I court disagreed, relying on the D'Auria-Keystone-Appalachian "cause" and "effect" test in rejecting the concept that the "occurrence," or manifestation of damage that led to the collapse of the roof, took place during the Fireman's Fund coverage. D'Auria, Keystone, and Appalachian all addressed third-party liability insurance policies. The instant case concerned a first-party property insurance policy. Although we agree that certain analytical principles may apply to issues involving both first-party and third-party insurance policies, the Zimmerman I court chose not to explain its reasoning in following the Keystone court's "suggestion" in applying D'Auria to the underlying action. See Zimmerman I, slip op. at 8 n. 11; see also Caln Village Assocs., L.P. v. Home Indem. Co., 75 F. Supp.2d 404, 411 (E.D.Pa. 1999) (applying D'Auria test, without explanation, to a first-party property insurance policy).
Indeed, some commentators have cautioned against such intermingling. Many states have court decisions addressing trigger of coverage for third-party liability claims. Although a trigger-of-coverage analysis for both third-party and first-party claims focuses on when a loss occurs for purposes of coverage, it must be kept in mind that first-party property coverage concepts and coverage concepts applying to third-party liability claims are entirely different. . . . Applying the reasoning used for triggers of coverage in third-party claims to a first-party loss should be avoided or at least approached with caution because there are significant differences between the two types of coverage. Paula B. Tarr, William S. Daskam IV, Herbert J. Baumann, Jr., Insurance Coverage for Collapse Claims: Evolving Standards and Legal Theories, 35 TORT AND INS. L.J. 57, 78 (1999); see also Chandra Lantz, Note, Triggering Coverage of Progressive Property Loss: Preserving the Distinctions Between First- and Third-Party Insurance Policies, 35 WM. MARY L. REV. 1801 (1994).
¶ 28 In sum, we disagree that Harleysville acted in bad faith in denying coverage on the basis that the claim was a "loss in progress" in light of Harleysville's then-accurate belief that no countervailing Pennsylvania authority existed. That this Court disagreed with Harleysville's legal position and our Supreme Court dismissed the appeal after briefing and oral arguments (over the dissent of two justices) does not justify a finding of "bad faith." Reasonable theories would perish for fear of suffering a title 42, section 8371 imposition of punitive damages. Under these circumstances, we find that Harleysville was, at worst, reasonably mistaken in concluding D'Auria did not apply, or conversely, that Prudential-LMI should apply.
¶ 29 We vacate the judgment below and direct the entry of judgment in favor of Harleysville Mutual Insurance Company. The cross-appeal of the Zimmermans is denied and dismissed.
¶ 30 Judgment vacated. Case remanded. Jurisdiction is relinquished.
¶ 31 Judge Musmanno files a dissenting opinion.
¶ 1 While the Majority sets forth a comprehensive analysis of the "loss in progress" theory presented by Harleysville, and its viability in Pennsylvania, I respectfully dissent because the Majority appears to ignore the compelling evidence of Harleysville's bad faith in the pursuit of its legal theory.
¶ 2 In its Opinion, the trial court sets forth the factual bases for its finding of bad faith on the part of Harleysville. Contrary to the conclusion reached by the Majority, the trial court did not find bad faith based upon Harleysville's pursuit of a novel legal theory. Instead, the trial court focused upon Harleysville's failure to protect its insured during its pursuit of its legal theory, and its failure to investigate its bald allegations against the Zimmermans throughout the course of the underlying litigation.
¶ 3 In its Opinion dated January 30, 2002, the trial court set forth specific Findings of Fact in support of its verdict in favor of the Zimmermans. The trial court found that Harleysville had continued to advance its claim that the Zimmermans concealed information regarding the condition of the roof when they applied for insurance, when there was no evidence to support this contention. See Trial Court Opinion, 1/30/02, at 3 (Finding of Fact No. 1). This Court confirmed the utter lack of evidence regarding this claim in its Opinion resolving the coverage dispute appeal. See Zimmerman v. Harleysville Mut. Ins. Co., et al., No. 1283 Pittsburgh 1996 (Pa.Super. filed June 18, 1997) ("Zimmerman I"), slip op. at 9-11.
¶ 4 The trial court also based its finding of bad faith upon the fact that Harleysville continued to advance its claim that the Zimmermans knew or should have known that falling ceiling tiles indicated a structural problem with the roof, "without any factual basis and despite the fact that it took a professional contractor inspecting the problem to ascertain that some of the trusses supporting the roof were separating." Trial Court Opinion, 1/30/02, at 5. This finding is supported by the evidence underlying the coverage litigation, and the parties' Stipulations. These Stipulations did not support Harleysville's claim that the Zimmermans had knowledge of the imminence of collapse prior to the date when Harleysville assumed its coverage. Thus, despite Harleysville's failure to investigate its claims and the lack of any supporting evidence, it continued to advance these theories.
¶ 5 The trial court further found that Harleysville acted in bad faith when it decided to advance a "loss in progress" theory for denying coverage, despite the lack of supporting Pennsylvania case law on this point, and without observing its concomitant duty to protect the Zimmermans. In support of this finding, the trial court noted that Harleysville did not consider a "joint loss payment" to protect its insured during the litigation process. See Trial Court Opinion, 1/30/02, at 3 (Finding of Fact Nos. 2, 3). Specifically, the trial court found that "Harleysville, knowing of its insured's financial difficulties as a result of the loss, did nothing to protect the Zimmermans while it pursued a legal position not recognized by Pennsylvania courts." See Trial Court Opinion, 1/30/02, at 4 (Finding of Fact No. 4). Harleysville's bad faith is further evidenced by the fact that it ignored the advice of its own counsel regarding the need to protect its insured during litigation of the loss in progress theory. See Defendant's Exhibit "Y" at 17-18. Thus, contrary to the Majority's conclusion, the trial court did not fault Harleysville for its pursuit of the "loss in progress" theory. Instead, the trial court found bad faith based on Harleysville's failure to observe its concomitant duty to protect the Zimmermans during the pursuit of its legal theory. The trial court additionally pointed out that Harleysville "made numerous exaggerations and misstatements in their briefs and court statements[.]" See Trial Court Opinion, 1/30/02, at 4 (Finding of Fact No. 4).
¶ 6 Harleysville's "lack of diligence and slacking off," and its "willful rendering of imperfect performance," are exemplified by its continued pursuit of its claim that the Zimmermans knew or should have known about the structural damage to the roof, despite the lack of any supporting evidence. See Kaplan v. Cablevision of Pennsylvania, Inc., 671 A.2d 716, 722 (Pa.Super. 1996) (stating that examples of "bad faith" conduct include: "evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of a power to specify terms, and interference with or failure to cooperate in the other party's performance"); Zimmerman I, slip op. at 10, 12.
¶ 7 Thus, Harleysville pursued a previously unrecognized legal theory without observing its concomitant duty to protect the Zimmermans. In the pursuit of its legal theory, Harleysville ignored the advice of its own counsel to protect its insured during the course of the litigation. Moreover, in the pursuit of its legal theory, Harleysville made factual allegations against its insured without any investigation, and those allegations remain unsupported by any evidence of record.
¶ 8 For these reasons, I disagree with the Majority's focus upon Harleysville's right to pursue its legal theory for denying coverage, and agree with the trial court's finding of bad faith based on Harleysville's conduct in pursuing its legal theory. On this basis, I dissent.