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PA Duty To Defend = Duty To Indemnify? In Some Situations, Yes.

December 13, 2021

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<p style="text-align: justify;">On November 18, 2021, the U.S. Court of Appeals for the Third Circuit issued a non-precedential opinion in the case of <em><a href="" rel="attachment wp-att-24699">Liberty Mutual Insurance Co v. Penn National Mutual Casualty</a> </em>arising out of an appeal filed by Penn National Mutual Insurance Company (“Penn National”) of an order directing Penn National to defend and indemnify an entity insured by Liberty Mutual Insurance Company (“Liberty Mutual”) as an additional insured.</p>
<p style="text-align: justify;">By way of brief background, the underlying action involves a wrongful death and survival suit brought against Cost Company (“Cost”), insured by Liberty Mutual, and Pittsburgh Flexicore Co. (“Flexicore”), insured by Penn National, for the death of Yamil Alexander Gonzalez allegedly caused by Cost’s and Flexicore’s <em>inter alia</em>, negligence, failure to maintain adequate safety measures during a construction project and failure to provide proper warnings or instructions.</p>
<p style="text-align: justify;">Cost and Flexicore entered a subcontract, which required, <em>inter alia</em>, Flexicore to obtain general liability insurance, name Cost as an additional insured and indemnify Cost “against any and all claims, causes of action, suits, losses, costs or damages, including attorneys’ fees, resulting from the acts, failure to act, omissions, negligence, or fault” of Flexicore, “whether or not said claim . . . is alleged to be caused in part by any act, omission, negligence, or fault” of Cost. <span> </span>Pursuant to the subcontract, Flexicore obtained a general liability policy from Penn National, which contained a Completed Operations endorsement providing additional insured coverage to any person(s)/organization(s) where required by a written contract to name such person(s)/organization(s) as an additional insured for the “products-completed operations hazard”, but only with respect to, bodily injury” caused by “your work” at the location/project designated in the subcontract and performed for that additional insured and included in the products-completed operations hazard.</p>
<p style="text-align: justify;">In response to the underlying action, Cost requested defense and indemnify from Penn National; however, Penn National disclaimed coverage as it determined (1) the Subcontract did “not clearly and unambiguously” establish Flexicore agreed to indemnify Cost for its own negligence and (2) any additional insured coverage owed to Cost terminated at the completion of Flexicore’s operations. <span> </span>As such, Liberty Mutual defended Cost and Penn National defended Flexicore.<span>  </span>Ultimately, the underlying action settled and Liberty Mutual and Penn National indemnified their respective insureds.</p>
<p style="text-align: justify;">Following settlement, Liberty Mutual commenced the instant action claiming Cost was an additional insured under the Penn National policy and seeking reimbursement for the sums it paid to defend and indemnify Cost in the underlying action.<span>  </span>The parties then moved for summary judgment.<span>  </span>Examining the allegations in the complaint of the underlying action, the District Court granted Liberty Mutual’s motion holding Penn National had a duty to defend and indemnify Cost. Penn National’s appeal ensued.</p>
<p style="text-align: justify;">On appeal, the Third Circuit first analyzed whether Penn National had a duty to defend Cost.<span>  </span>Applying long-standing Pennsylvania case law, the Court held Penn National’s duty to defend was triggered because Cost qualified as an additional insured under the Policy’s Completed Operations endorsement as (1) the subcontract named Cost as an additional insured; (2) the underlying action alleged the “bodily injury” was caused, at least in part, by Flexicore’s work; and (3) the Policy’s “products-completed operations hazard covered such work as the underlying action alleged Gonzalez’s death was caused, in part, by Flexicore’s failure to provide warnings, i.e., Flexicore’s “work” as defined by the Policy. <span>  </span></p>
<p style="text-align: justify;">The Third Circuit then analyzed whether Penn National had a duty to indemnify Cost. Beginning with the principle that a duty to indemnify analysis typically considers evidence beyond the four corners of the underlying tort claim, in cases where the underlying action settles, the Court held extrinsic evidence may not necessarily come into consideration. Specifically, the Court stressed that in cases where the underlying tort action settles and the necessary factfinding to aid in coverage determinations does not occur, insurers are <em>only </em>permitted to seek resolution of factual disputes that would not have been resolved even if the underlying action was tried.<span>  </span>In other words, factual disputes that could have been addressed at trial (if the underlying action did not settle) <em>cannot</em> be resolved in coverage litigation.<span>  </span>In such situations, the Court held the duty to indemnify is triggered where there is a duty to defend.<span>  </span></p>
<p style="text-align: justify;">In affirming the District Court’s holding, the Court held the underlying settlement made it impossible to determine the basis of Costs’ and Flexicore’s precise liability for coverage purposes as the underlying action involved multiple claims against multiple defendants, covered by multiple insurers – therefore, the underlying settlement made it impossible for the District Court to determine whether Flexicore was liable for its “work”. <span> </span>As such, the Court held Penn National’s duty to indemnify flowed from its duty to defend.<span>   </span></p>
<p style="text-align: justify;">This decision is interesting as it seems to adhere to the sentiment of Pennsylvania courts that insurers declining coverage do so at their own peril as one could argue this decision precludes an insurer – that improperly disclaims coverage – from litigating indemnity and coverage issues in cases where the underlying action settles. Either way, this decision amplifies the importance of addressing coverage issues head on to ensure such issues are properly preserved where necessary.<span> </span></p>
<p style="text-align: justify;">For more information about this post please contact <a href="">Lauren Berenbaum</a>.</p>

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