Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-92-01237/USCOURTS-ca10-92-01237-0/pdf.json

Parties Involved:
TPLC, Inc.
Appellee
United National Insurance Company
Appellant

Document Text:

Patrick Fisher 

Clerk 

UNITED STATES COURT OF APPEALS 

Office of the Clerk 

Byron White United States Courthouse 

1823 stout Street 

Denver, CO 80257 

January 30, 1995 

TO: ALL RECIPIENTS OF THE CAPTIONED OPINION 

RE: 92-1227, 92-1237, TPLC, Inc. v. United National 

Filed January 19, 1995 by Judge Holloway 

Please be advised of the following correction to the 

captioned opinion: 

The caption of this case has been corrected to read: 

TPLC, INC., A Delaware corporation,* 

Plaintiff-Appellant/ 

cross-Appellee, 

*formerly known as Telectronics, Inc. 

TPLC, Inc., was substituted as a successor to 

Telectronics, Inc., whose name is used throughout 

this opinion. 

Attached is a corrected caption page. 

Attachment 

Very truly yours, 

Patrick Fisher, 

Clerk 

By"'-.i{f/ ;,_, L -.J/ ~ ~'-< ;::___ 

Barbara Schermerhorn 

Deputy Clerk 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 1 
PUBLISH 

FILED 1/19/95 

IN THE UNITED STATES COURT OF APPEALS 

FOR THE TENTH CIRCUIT 

TPLC, INC., a Delaware 

corporation,* 

v. 

Plaintiff-Appellant/ 

Cross-Appellee, 

) 

) 

) 

) 

) 

) 

) 

) 

UNITED NATIONAL INSURANCE COMPANY, ) 

Defendant-Appellee/ 

Cross-Appellant. 

) 

) 

) 

No. 92-1227 

No. 92-1237 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF COLORADO 

(D.C. No. 91-A-2150) 

Peter L. Edwards (Scott c. Johnson with him on the brief), of 

Rothgerber, Appel, Powers & Johnson, Denver, Colorado, for 

Plaintiff-Appellant/Cross-Appellee Telectronics, Inc. 

Leslie Block Kaye of Dill, Dill and Carr, P.C., Denver, Colorado, 

for Defendant-Appellee/Cross-Appellant United National Insurance 

Company. 

Before McKAY, HOLLOWAY, and GARTH,** Circuit Judges. 

HOLLOWAY, Circuit Judge. 

*formerly known as Telectronics, Inc.; TPLC, Inc., was 

substituted as a successor to Telectronics, Inc., whose name is 

used throughout this opinion. 

** The Honorable Leonard I. Garth, Senior Circuit Judge for the 

Third Circuit, sitting by designation. 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 2 
~. 

PUBLISH 

IN THE UNITED STATES COURT OF APPEALS F I L E D 

tJIIItecl Statet Court of Appeals FOR THE TENTH CIRCUIT Tenth Circuit 

JAN 19 1995 

TELECTRONICS, INC., 

Plaintiff-Appellant/ 

Cross-Appellee, 

PATRICK FISHER 

Clerk 

v. 

UNITED NATIONAL INSURANCE COMPANY, 

Defendant-Appellee/ 

Cross-Appellant. 

No. 92-1227 

No. 92-1237 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF COLORADO 

(D.C. No. 91-A-2150) 

Peter L. Edwards (Scott C. Johnson with him on the brief), of 

Rothgerber, Appel, Powers & Johnson, Denver, Colorado, for 

Plaintiff-Appellant/Cross-Appellee Telectronics, Inc. 

Leslie Block Kaye of Dill, Dill and Carr, P.C., Denver, Colorado, 

for Defendant-Appellee/Cross-Appellant United National Insurance 

Company. 

Before McKAY, HOLLOWAY, and GARTH,* Circuit Judges. 

HOLLOWAY, Circuit Judge. 

* The Honorable Leonard I. Garth, Senior Circuit Judge for 

Third Circuit, sitting by designation. 

the 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 3 
These appeals arise out of Plaintiff-Appellant/Cross-Appellee 

Telectronics, 

reimbursement 

Inc.'s 

from 

(Telectronics) 

its insurer, 

efforts to obtain 

Defendant-Appellee/ 

Cross-Appellant United National Insurance Company (United), for 

legal expenses incurred in defending a products liability action . 

. Claiming that Telectronics' insurance policy was in effect for 

less than the total period of bodily injury alleged in the 

products liability action, United offered to reimburse 

Telectronics only for United's pro rata share of the expenses, 

apportioned on the ratio of the time when United's policy was in 

effect to the total time of exposure of the injured party to the 

product, and also limited to expenses incurred after the date of 

United's direct receipt of notification of the products liability 

action. Due to United's refusal to pay all of the legal expenses 

incurred by Telectronics in defending the underlying products 

liability suit, Telectronics commenced this breach of contract and 

bad faith breach of insurance contract action in a state court in 

Colorado. 

After removal to the court below on diversity grounds, both 

parties moved for summary judgment. Concluding that Pennsylvania 

law governed any disputes arising under the terms of the policy, 

the district judge held that when the policy was in effect for 

less than 100% of the total period of bodily injury, Pennsylvania 

law required the insurer to pay only its pro rata share of the 

defense expenses incurred by its insured in defending the lawsuit, 

apportioned on the ratio of the time its coverage was in force to 

the total time when the injury allegedly occurred. The judge 

2 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 4 
further concluded that Colorado law applied to Telectronics' bad 

faith claim and that Telectronics had failed to show bad faith by 

United under that law. The court denied a motion by United for 

sanctions under Fed. R. Civ. P. 11 for Telectronics' pursuit of 

the bad faith claim. We affirm in part, reverse in part, and 

remand. 

The facts were 

I 

A 

thoroughly stated by Judge Arraj in 

Telectronics. Inc. v. United Nat'l Ins. Co., 796 F. Supp. 1382 (D. 

Colo. 1992). We therefore recite only the central facts 

concerning the issues before us. 

From September 15, 1984, to September 15, 1985, Telectronics 

had general liability insurance under a policy issued by United 

(the policy) . The policy provided liability coverage for bodily 

injury and property damage with a $1,000,000 limit in the 

aggregate and per occurrence. It also included a $10,000 

deductible, which applied to both bodily injury liability and to 

"investigation, adjustment, and legal expenses incurred in the 

handling and investigation of each claim .... " Aplt. App. at 

180 (emphasis removed) . The policy provided that United had the 

right and duty to defend any suit against Telectronics for damages 

resulting from bodily injury. Id. at 178. 

For the two years following expiration of the·united policy, 

Telectronics had purchased general liability insurance policies 

from Transco Syndicate #1. Transco Policy #DOL-02181, which had a 

retention limit of $25,000, provided liability coverage for bodily 

3 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 5 
injury and property damage with a $500,000 limit for occurrences 

taking place between September 15, 1985, and September 15, 1986. 

Transco Policy #DOL-07294, which had a retention limit of 

$100,000, provided liability coverage for bodily injury and 

property damage with a $500,000 limit for occurrences taking place 

between September 15, 1986, and September 15, 1987. Neither of 

these Transco policies, however, required Transco to reimburse 

Telectronics for legal expenses incurred unless the retention 

limits were exceeded by judgment or settlement. 

B 

On May 5, 1985, a pacemaker manufactured by Telectronics was 

implanted in Thelma Annis of Cape Girardeau, Missouri. Ms. Annis 

allegedly experienced difficulties with the pacemaker, including 

scarring, electrical shocking, weakness, sleeplessness, heart 

palpitations, heart skipping, anxiety, and fainting spells. These 

difficulties allegedly lasted from approximately June 20, 1985, 

until May 14, 1987, when the pacemaker was removed and replaced. 

Alleging that these problems were caused by defects in 

Telectronics' pacemaker, Annis and her husband commenced a 

products liability action against Telectronics on November 24, 

1987, in the United States District Court for the Eastern District 

of Missouri. Shortly thereafter, Telectronics notified its 

insurance broker of the action. The broker forwarded a copy of 

the summons and complaint to claims adjusters Adjusting Services 

Unlimited, Inc. (ASU) on December 5, 1987. ASU was designated as 

the adjuster to whom various notices should be given both in the 

United policy and in the Transco policies. ASU, in turn, gave 

4 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 6 
notice of the Annis suit to Transco but did not notify United 

until almost three years later. 

United was not directly notified of the Annis suit until 

November 5, 1990, when it received a letter from ASU informing 

United that the pretrial statement received from the attorney 

representing the Annises had indicated that they were seeking to 

recover damages for injuries incurred during the period covered by 

the United policy. ASU's letter also informed United that the 

Annis trial was scheduled to commence on December 3, 1990. On 

November 29, 1990, United replied to ASU, stating in part: 

First we would point out that your notice to us of this 

lawsuit is hardly timely and that any participation in 

expense sharing would be limited to those expenses 

incurred from the date of receipt of your tender . . 

From the information supplied, it would appear that the 

potential period of injury ran from June 20, 1985 to May 

15, 1987 or a period of 23 months. Our policy period 

covers 3 months, June 20, to September 15, 1985. Based 

upon the ratio of months our share would be 13% and we 

repeat that this offer is limited to the expenses 

incurred from the date of receipt of your tender, 

November 5, 1990. 

Id. at 225. 

The Annis suit was tried before a jury in December 1990, 

resulting in a verdict and judgment for Telectronics. No appeal 

was taken. In defending itself in the Annis suit, Telectronics 

incurred legal expenses in the amount of $156,805.90. Due to 

United's refusal to pay more than a pro rata share of the defense 

expenses incurred after November 5, 1990, Telectronics sued United 

in Colorado state court for breach of contract and for bad faith 

breach of an insurance contract. This action was removed to the 

5 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 7 
United States District Court for the District of Colorado in 

December 1991 on diversity grounds. 

Telectronics moved for summary judgment, claiming that the 

language of the policy required United to reimburse it for all the 

legal expenses incurred in defending the Annis suit, not just a 

pro rata share.1 United filed a cross-motion for summary 

judgment, arguing that Telectronics' failure to provide it direct 

notice of the Annis suit until November 5, 1990, some three years 

after the suit was filed, amounted to a failure to satisfy the 

policy's notice requirements, thus voiding coverage.2 United 

1 

United's policy provides: 

I. COVERAGE A--BODILY INJURY LIABILITY 

COVERAGE B--PROPERTY DAMAGE LIABILITY 

The company will pay on behalf of the insured all 

sums which the insured shall become legally obligated to 

pay as damages because of 

A. bodily injury or 

B. property damage 

to which this insurance applies, caused by an 

occurrence, if the bodily injury or property damage is 

included within the completed operations hazard or the 

products hazard, and the company shall have the right 

and duty to defend any suit against the insured seeking 

damages on account of such bodily injury or property 

damage, even if any of the allegations of the suit are 

groundless, false or fraudulent, and may make such 

investigation and settlement of any claim or suit as it 

deems expedient, but the company shall not be obligated 

to pay any claim or judgment or to defend any suit after 

the applicable limit of the company's liability has been 

exhausted by payment of judgments or settlements. 

Aplt. App. at 178 (latter emphasis added). 

2 United relied on Condition 4 of the policy. Condition 4 

(Footnote continued on next page) 

6 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 8 
therefore claimed that it was relieved of its duty to defend 

Telectronics in the Annis suit and was not required to reimburse 

Telectronics for any legal expenses incurred in defending the 

action. Alternatively, United argued that even if it were found 

that it had a duty to defend under the policy, it would only be 

liable for its pro rata share of Telectronics' legal expenses 

apportioned on the time United's policy was in effect during the 

period of injury and limited to expenses incurred after notice of 

suit on November 5, 1990. 

Telectronics, citing Endorsement 5 of the policy,3 argued 

(Footnote continued) : 

states in part: 

Insured's Duties in the Event of Occurrence, Claim or 

Suit: 

(a) In the event of an occurrence, written notice 

containing particulars sufficient to identify the 

insured and also reasonably obtainable information with 

respect to the time, place and circumstances thereof, 

and the names and addresses of the injured and of 

available witnesses, shall be given by or for the 

insured to the company or any of its authorized agents 

as soon as practicable. 

(b) If claim is made or suit is brought against the 

insured. the insured shall immediately forward to the 

company evekY demand. notice. summons or other process 

received by him or his representative. 

(c) . . . The insured shall not, except at his own 

cost, voluntarily make any payment, assume any 

obligation or incur any expense other than for first aid 

to others at the time of accident. 

Aplt. App. at 174 (latter emphasis added). 

3 

Endorsement 5 provides: 

CLAIMS REPORTING 

IN THE EVENT OF ANY OCCURRENCE WHICH MAY RESULT IN A 

7 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 9 
that the policy only requires that notice be given to ASU, i.e. it 

does not further require that additional notice be provided 

directly to United. Moreover, Telectronics pointed out that 

neither an address nor a telephone number for United appears 

anywhere in the policy. Thus, Telectronics argued that the 

policy's notice of suit requirement was fully satisfied on 

December 5, 1987, the date on which Telectronics' insurance broker 

notified ASU of the Annis suit. Similarly, Telectronics argued 

that ASU was United's agent, and as such, notice to ASU was by 

operation of law notice to United. 

c 

The district judge concluded that in light of his ruling, 

explained below, that United showed no prejudice from lack of 

notice, it was not necessary to determine either whether United 

had received timely notice under the policy or whether ASU was the 

agent of United. 796 F. Supp. at 1387. Finding that the policy 

did not indicate which state's law would govern disputes arising 

under its terms, the judge engaged in a choice of law analysis. 

He concluded that the policy should be construed under 

(Footnote continued) : 

CLAIM AGAINST THIS POLICY, THE 

IMMEDIATELY REPORT SUCH OCCURRENCE TO: 

INSURED SHOULD 

ADJUSTING SERVICES 

P. 0. BOX 19069 

LANSING, MICHIGAN 

TELEPHONE NUMBER -

UNLIMITED, INC. 

48901 

(517) 321-5565 

ALL OTHER TERMS AND CONDITIONS OF THIS POLICY REMAIN 

UNCHANGED. 

Aplt. App. at 185 (bold face emphasis in original). 

8 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 10 
Pennsylvania law, as argued by Telectronics, rather than Colorado 

law, as contended by United. Citing Brakeman v. Potomac Ins. Co., 

371 A.2d 193 (Pa. 1977), the judge held that under Pennsylvania 

law an insurer seeking to avoid coverage for lack of timely 

notice must also prove "'that it suffered prejudice as a 

.consequence.'" 796 F. Supp. at 1388 (quoting Brakeman, 371 A.2d 

at 196) .4 The judge held that United had not satisfied its burden 

of proving prejudice. Consequently, United would be required to 

reimburse Telectronics for its defense of the Annis suit, 

regardless of whether Telectronics had given timely notice. 

The judge then determined the extent of United's liability 

for the costs of defense. Citing J.H. France Refractories Co. v. 

Allstate Ins. Co., 578 A.2d 468, 477 (Pa. Super. Ct. 1990) 

(France I), rev'd in part. aff'd in part, 626 A.2d 502 (Pa. 1993) 

(France II), he concluded that under Pennsylvania law, United was 

only required to pay its pro rata share of all of Telectronics' 

defense costs, not limited however to those expenses incurred 

after November 5, 1990 (the date of United's direct notice of the 

Annis suit), as argued by United. Following France I and 

Insurance Co. of North America v. Forty-Eight Insulations. Inc., 

633 F.2d 1212 (6th Cir. 1980), reh'g granted. clarified, 657 F.2d 

814 (6th Cir. 1981), cert. denied, 454 U.S. 1109 (1981), which 

France I had cited with approval, the district judge held that 

Telectronics should bear a portion of the cost of defense for the 

4 

Under Colorado law a showing of prejudice is not required for 

an insurer to avoid coverage. Marez v. DaikYland Ins. Co., 638 

P.2d 286, 290-91 (Colo. 1981). 

9 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 11 
time during which the Transco policies, which provided no coverage 

under the circumstances, had been in effect. 

Since United's policy was in effect for only three months, or 

13% of the total period of Annis' alleged injury (June 20, 1985, 

to May 14, 1987, a 23-month period), the judge concluded that 

United was only required to reimburse Telectronics for 13% of its 

total legal expenses, minus 13% of the $10,000 deductible. 

Therefore, United was only required to reimburse Telectronics 

$19,084.77 (i.e., $156,805.90 multiplied by 13%, minus 13% of the 

$10,000 deductible). The court also awarded Telectronics 

prejudgment interest at the Pennsylvania statutory rate of 6%. 

In its motion for summary judgment Telectronics also claimed 

that it was entitled to punitive damages due to United's bad faith 

refusal to reimburse it for all the legal expenses Telectronics 

had incurred in defending the Annis suit and sought recovery of 

attorneys' fees incurred in bringing this action. Conversely 

United, claiming that Telectronics' bad faith breach of contract 

claim was frivolous, sought summary judgment on that claim and 

sanctions pursuant to Fed. R. Civ. P. 11. 

Holding that there was nothing to suggest that United had 

acted in bad faith in its dealings with Telectronics, the district 

judge granted summary judgment in favor of United on Telectronics' 

bad faith breach of contract claim. However, the judge denied 

United's motion for sanctions. He also denied Telectronics' 

request for attorneys' fees. 

Telectronics and United raise several issues by the appeal 

and cross-appeal, to which we now turn. 

10 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 12 
II 

A 

We review summary judgments de novo, applying the same 

standards as those employed by the district court under 

Fed. R. Civ. P. 56(c). Russillo v. Scarborough, 935 F.2d 1167, 

1170 (lOth Cir. 1991). Summary judgment is appropriate when, 

viewing the record in the light most favorable to the nonmoving 

party, "there is no genuine dispute over a material fact and the 

moving party is entitled to judgment as a matter of law." Id.; 

Applied Genetics Int'l. Inc. v. First Affiliated Sec .. Inc., 912 

F.2d 1238, 1241 (lOth Cir. 1990). At the summary judgment stage, 

the court's function is not to weigh the evidence and determine 

the truth but to decide whether there is a genuine issue for 

trial. Anderson v. Liberty Lobby. Inc., 477 U.S. 242, 249 (1986). 

The court must determine "whether the evidence presents a 

sufficient disagreement to require submission to a jury or whether 

it is so one-sided that one party must prevail as a matter of 

law." Id. at 251-52. 

B 

It is undisputed that Annis alleged a "bodily injury" arising 

from a "product hazard," constituting an "occurrence" during the 

policy period as defined by the policy. Therefore unless, as 

United argues, there was a breach of the notice requirements of 

the policy such as to excuse United from the duty of defense, 

United was obligated to provide Telectronics with a defense in the 

Annis suit. As noted, Telectronics contends that it satisfied the 

11 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 13 
notice of suit requirement by giving notice to ASU, while United 

contends that direct notice to it was required. 

The district court concluded that Endorsement 5 required 

Telectronics to give notice to ASU in the event of an occurrence, 

and that the policy also required Telectronics to satisfy the 

other notice provisions of the policy (apparently Condition 4) for 

United to bear any liability. 796 F. Supp. at 1387. In so 

ruling, the court found that the two notice provisions, quoted 

supra in notes 2 and 3, were not mutually repugnant. Thus, the 

court reasoned, Telectronics' argument that the typewritten 

provisions of Endorsement 5 should control over the printed 

provisions of Condition 4 was not well taken. The court did not 

discuss Telectronics' further argument that the two provisions 

created an ambiguity which, according to Pennsylvania law, should 

have been construed against the insurer. Appellant's Opening 

Brief at 40. This was because it was not necessary in view of the 

judge's finding of no prejudice from the allegedly untimely notice 

to United. We have considered the argument of ambiguity and find 

it persuasive.5 

Specifically, we find ambiguity arising from the provisions 

in Condition 4(a), see note 2 supra, that notice of an occurrence 

must be given to the company "or any of its authorized agents," 

when read in conjunction with Endorsement 5, ~ note 3 supra, 

specifically designating ASU as the party to be notified in the 

5 

As discussed infra, we 

conclusion that Pennsylvania 

issues in this case. 

agree with 

law must 

12 

the district court's 

govern all contractual 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 14 
event of "ANY OCCURRENCE WHICH MAY RESULT IN A CLAIM." We note 

that Condition 4 does not contain a designation of ASU within its 

notice provision. However, we do not read this as removing the 

ambiguity about ASU's status. We note that Endorsement 5 is 

captioned "CLAIMS REPORTING" in all capital lettering, thus at 

least suggesting that it applies to claims as well as mere 

"occurrences." Especially in light of the fact that only the 

address and telephone 

endorsement, and none was 

construed as a whole 

number of ASU are given in the policy or 

given for United, we conclude that 

the policy is ambiguous regarding whether 

direct notice of suit to United was also required or whether such 

notice to ASU was sufficient. The ambiguity must, of course, be 

construed against United and in favor of Telectronics. Bateman v. 

Motorists Mutual Ins. Co., 590 A.2d 281, 283 (Pa. 1991). 

Therefore, we hold that the notice of suit requirement was 

satisfied when such notice was given to ASU. 

However, even if we were to conclude, as the district court 

did, that the notice given to ASU was not sufficient to satisfy 

Telectronics' duty to give notice of suit, we still would find 

United obligated to Telectronics for reimbursement of the costs of 

defending the Annis action because we agree with the district 

judge's views, 796 F. Supp. at 1388-90, that Pennsylvania law must 

govern the parties' rights and duties under the policy; that 

under that state's law, United is not relieved of its duties 

unless it carries the burden of showing that it suffered prejudice 

from the belated notice; and that United failed to carry this 

burden of proof. 

13 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 15 
The policy does not indicate which state's law governs 

disputes arising under it. In diversity actions the federal 

courts are obliged to apply the conflict of laws rules of the 

forum state. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 

496 (1941) . We must therefore apply the conflict of laws rules of 

Colorado, as the district court correctly did. Colorado has 

adopted "the 'most significant relationship' approach of 

Restatement (Second) of Conflict of Laws for resolving conflict of 

laws questions in contract cases." Webb v. Dessert Seed Co .. 

Inc., 718 P.2d 1057, 1066 (Colo. 1986) (en bane) (citing Wood 

Brothers Homes. Inc. v. Walker Adjustment Bureau, 601 P.2d 1369, 

1372 (Colo. 1979) (en bane)). In Wood Brothers, the Supreme Court 

of Colorado stated: 

6 

Where a conflict of laws question is raised, the 

objective of the Restatement (Second) is to locate the 

state having the "most significant relationship" to the 

particular issue. In analyzing which state has the most 

significant relationship, the principles set forth in 

Restatement (Second) sections 66 and 1887 are to be 

Section 6 states: 

Choice-of-Law Principles 

(1) A court, subject to constitutional restrictions, 

will follow a statutory directive of its own state on 

choice of law. 

(2) When there is no 

relevant to the choice 

include 

such directive, the factors 

of the applicable rule of law 

(a) the needs of 

international systems, 

the interstate and 

(b) the relevant policies of the forum, 

(c) the relevant policies of other interested 

states and the relative interests of those 

states in the determination of the particular 

issue, 

(d) the protection of justified expectations, 

(Footnote continued on next page) 

14 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 16 
taken into account. Once the state having the most 

significant relationship is identified, the law of that 

state is then applied to resolve the particular issue. 

601 P.2d at 1372 (footnotes omitted). We have considered the 

factors listed in sections 6 and 188 and agree with Judge Arraj 

that Pennsylvania, United's state of incorporation and principal 

place.of business, has the most significant relationship to the 

policy at issue: 

(Footnote continued) : 

(e) the basic 

particular field 

(f) certainty, 

of result, and 

(g) ease in the 

of the law to be 

policies underlying the 

of law, 

predictability and uniformity 

determination and application 

applied. 

7 Section 188 states: 

Law Governing in Absence of Effective Choice by the 

Parties 

(1) The rights and duties of the parties with respect to 

an issue in contract are determined by the local law of 

the state which, with respect to that issue, has the 

most significant relationship to the transaction and the 

parties under the principles stated in § 6. 

(2) In the absence of an effective choice of law by the 

parties .... , the contacts to be taken into account 

in applying the principles of § 6 to determine the law 

applicable to an issue include: 

(a) the place of contracting, 

(b) the place of negotiation of the contract, 

(c) the place of performance, 

(d) the location of the subject matter of the 

contract, and 

(e) the domicil, residence, nationality, place 

of incorporation and place of business of the 

parties. 

These contacts are 

relative importance 

issue. 

to be evaluated according to their 

with respect to the particular 

(3) If the place of negotiating the contract and the 

place of performance are in the same state, the local 

law of this state will usually be applied, except as 

otherwise provided in §§ 189-199 and 203. 

15 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 17 
Pennsylvania has the most significant relationship to 

the contract and the greatest interest in seeing that 

its laws apply when interpreting the notice provisions 

of insurance contracts written and issued by 

Pennsylvania insurers. It simply would not make sense 

to have United's insurance contract notice provisions 

interpreted in fifty different ways every time a dispute 

arose between United and one of its insureds. Since the 

subject matter of the Policy (the heart pacemakers) has 

no particular locus, there is no compelling reason to 

apply the law of the state in which the insured has its 

principal place of business. The worthy goals stated in 

Restatement § 6 of uniformity, predictability and ease 

of applicability are best served by applying 

Pennsylvania law to this dispute. 

Telectronics, 796 F. Supp. at 1390.8 

c 

The district court also correctly determined that under 

Pennsylvania law as pronounced in 1977, an insurer that seeks to 

avoid providing coverage to an insured because of lack of timely 

notice must also show that it was prejudiced by this default.9 

Brakeman, 371 A.2d at 196. "[A] reasonable notice clause is 

8 

Our conclusion that we are required to apply Pennsylvania law 

in this case is consistent with our previous statement that 

"[i]nsurance policies generally are interpreted under the law of 

the state where the policy was issued." Budd v. American Excess 

Ins. Co., 928 F.2d 344, 347 (lOth Cir. 1991) (also applying 

Colorado law) (citing Blue Cross of W. N.Y. v. Bukulmez, 736 P.2d 

834, 841 (Colo. 1987)). 

9 

According to the Supreme Court of Pennsylvania: 

[T]he function of a notice requirement is to protect the 

insurance company's interests from being prejudiced. 

Where the insurance company's interests have not been 

harmed by a late notice, even in the absence of 

extenuating circumstances to excuse the tardiness, the 

reason behind the notice condition in the policy is 

lacking, and it follows neither logic nor fairness to 

relieve the insurance company of its obligations under 

the policy in such a situation. 

Brakeman, 371 A.2d at 197. 

16 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 18 
designed to protect the insurance company from being placed in a 

substantially less favorable position than it would have been in 

had timely notice been provided, e.g., being forced to pay a claim 

against which it has not had an opportunity to defend 

effectively." Id. at 197 (emphasis added) . The burden of 

showing prejudice is on the insurance company. Id. at 198.10 

United asserts that it was prejudiced by not having received 

direct notice of the Annis suit until November 5, 1990, arguing 

that: (1) it lost the opportunity to settle the Annis suit for an 

amount less than the defense expenses incurred by Telectronics in 

defending the suit;11 (2) it has no basis for determining the 

reasonableness of the defense expenses incurred by Telectronics in 

defending the Annis suit because it did not receive any bills in 

connection with the defense of the Annis suit until nearly five 

years after the Annis claim was made, and the bills are cryptic; 

(3) it lost the opportunity to avoid unnecessary litigation 

expenses and to control the risk of the litigation; (4) it was 

exposed to risk of indemnification; (5) it lost the opportunity 

10 

In this regard, the Supreme Court of Pennsylvania has 

recognized that "prejudice is a difficult matter to prove 

affirmatively, but although it may be difficult for the insurance 

company to prove it suffered prejudice as a consequence of an 

untimely notice, it appears to us that it would be at least ·as 

difficult for the claimant to prove a lack of prejudice." 

Brakeman, 371 A.2d at 198 (footnote with citations omitted). 

11 

United states that the Annises offered to settle their claims 

for $150,000, and that the legal expenses incurred in defending 

the Annis suit were in excess of $156,000. The original demand by 

the Annises, however, was $500,000, and the $150,000 offer was not 

made until shortly before the Annis trial, when the record shows 

that substantial legal fees had already been incurred. 

17 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 19 
to bring a declaratory judgment action at the time the Annis suit 

was commenced, permitting an earlier and less expensive resolution 

of the issues; (6) it has incurred substantial expenses; (7) it 

has been slandered by Telectronics' accusation of bad faith; (8) 

it risks exposure to loss; (9) its relationships in the 

insurance industry have suffered; and (10) it has been annoyed, 

harassed, and burdened by the extra work occasioned by this suit. 

These generalized claims do not suffice to satisfy United's 

burden of proving prejudice under Pennsylvania law. 

nothing in the record to suggest that United was 

prejudiced by Telectronics' allegedly untimely notice 

There is 

directly 

of suit. 

The conclusion that United had not shown prejudice is bolstered by 

the facts that Telectronics was victorious in the Annis suit 

(i.e., it was not necessary for United to indemnify Telectronics), 

and Telectronics was represented in the Annis suit by counsel who 

were on United's list of approved counsel. Aplt. App. at 214. 

Further, United made no effort to develop evidence to support its 

allegation that the legal fees were excessive, nor did it attempt 

to support its suggestion that somehow this dispute between it and 

its insured could have been resolved less expensively had the 

dispute arisen promptly after the Annises made their claim. Other 

contentions do not relate at all to United's position with respect 

to the Annis claim, which is the focus of the holding of Brakeman. 

Having failed to satisfy its burden of proving prejudice, 

United had a duty to defend Telectronics in the Annis suit and to 

reimburse Telectronics for expenses incurred in that defense. see 

Imperial Cas. & Indem. Co. v. High Concrete Structures, 858 F.2d 

18 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 20 
128, 131 n.2 (3d Cir. 1988) ( 11 If an insurer has a duty to defend a 

suit and is requested to provide a defense, then that insurer is 

clearly obligated to pay fees and costs incurred by the insured in 

defending the suit. 11 ) (citations omitted) (applying Pennsylvania 

law) . 

Citing Safeguard Scientifics, Inc. v. Liberty Mutual Ins. 

Co., 766 F. Supp. 324 (E.D. Pa. 1991), rev'd in material part, 961 

F.2d 209 (3d Cir. 1992) (table)12; and Clemente v. Home Insurance 

Co., 791 F. Supp. 118 (E.D. Pa.), aff'd without opinion, 981 F.2d 

1246 (3d Cir. 1992), United makes a further argument that the duty 

to defend in any event does not arise until the insurer is given 

notice of the underlying suit and that, accordingly, it can only 

be liable for defense costs incurred after its receipt of notice. 

In Safeguard Scientifics, the federal district court found no 

prejudice was shown by the insurer resulting from the belated 

notice, as is also found in the instant case. The court then 

considered the insurer's contention that its liability for defense 

costs should be limited to those costs incurred after notice, the 

same contention made by United. The court noted that no 

12 

We recognize that the Third Circuit by its internal operating 

procedures does not treat unpublished opinions as binding 

precedents. Internal Operating Procedures 5.8 of the Third 

Circuit provides: 

Because the court 

unpublished opinions as 

the court by tradition 

opinions as authority. 

historically has not regarded 

precedents that bind the court, 

does not cite to its unpublished 

We, nevertheless, cite the unpublished reversal, which is 

reported in the table of Third Circuit rulings cited above, to 

advise the readers of the true status of the Safeguard Scientifics 

opinion. 

19 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 21 
Pennsylvania case law was cited by the parties on the issue and 

ruled in favor of the insurer. 766 F. Supp. at 333. Similarly, 

we find no direct holding of the Pennsylvania Supreme Court 

dealing with this theory for rejecting pre-notice defense 

expenses. 

However, we are not persuaded by the Safeguard Scientifics 

opinion that the insurer can avoid the obligation to reimburse the 

insured for defense costs incurred prior to receipt of notice in 

the absence of prejudice to the insurer's interests. The opinion 

says there was no breach of the duty to defend until notice was 

given, and therefore it denied pre-notice defense expenses. Id. 

at 333. However, Safeguard Scientifics makes no persuasive 

analysis or distinction of the Pennsylvania Supreme Court's 

Brakeman holding and rationale as applied to the recoverability of 

pre-notice defense expenses. 

Moreover, United's reliance on Clemente is misplaced. In 

that case, the insured's sole claim was for reimbursement of the 

costs of defense incurred prior to giving notice to the insurer. 

As one ground for granting summary judgment in favor of the 

insurer, the Clemente court specifically stated that the insurer 

was required to show prejudice from the late notice, quoting 

reasoning from Brakeman, and found that there the insurer had 

carried this burden.13 796 F. Supp. at 120-21. In accord with 

that Clemente reasoning and Judge Arraj here, we conclude that 

13 

As grounds for its finding of prejudice, the Clemente opinion 

stated, inter alia, that a settlement had been made before notice 

of suit was given and counsel not approved by the insurer was used 

by Clemente. 

20 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 22 
United's contention is inconsistent with the reasoning of 

Brakeman.14 

We therefore hold that in the absence of a showing of 

prejudice, the insurer's duty to defend includes the duty to 

reimburse for reasonable costs of defense incurred prior to 

notice, as well as for subsequent defense costs. United having 

failed to produce any evidence that the costs incurred by 

Telectronics were not reasonable, we reject United's contention. 

D 

United also argues that its liability for the costs of 

defense should be reduced by allocating a portion of the costs to 

Telectronics as a self-insurer for the time period from the 

expiration of the United policy (September 15, 1985) until the 

Telectronics pacemaker was removed from Mrs. Annis (May 14, 1987). 

As noted, here the district court followed France I and allocated 

87% of the costs of defense to Telectronics. 

While this appeal was pending, the Supreme Court of 

Pennsylvania issued its opinion in France II, reversing in 

material part the Superior Court's decision in France I, on which 

the district judge had properly relied in determining the extent 

of United's liability for Telectronics' costs of defense. In 

14 

The judge in Clemente recognized that the Brakeman prejudice 

requirement applies in cases involving occurrence policies as does 

the instant case. As an alternative ground for his ruling for the 

insurer, the judge in Clemente said that his ruling was supported 

by the character of the policy, there a "claims-made" policy; the 

judge noted that some courts have held that the Brakeman prejudice 

requirement is inapplicable to claims-made policies, and he 

applied that view as an alternative basis for his ruling. 791 

F. Supp. at 121-22. 

21 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 23 
light of Huddleston v. Dwyer, 322 U.S. 232, 236 (1944), we must 

apply France II as the controlling Pennsylvania rule at the time 

of our decision. 

In France II, which involved coverage for products containing 

asbestos, the Pennsylvania Supreme Court rejected the approach of 

the lower Pennsylvania court, which had prorated the indemnity 

obligations of all the insurers whose policies were in effect 

during the period of bodily injury, including the insured as a 

self-insurer during periods when it did not purchase liability 

insurance. Instead, France II held that "once the liability of a 

given insurer is triggered, it is irrelevant that additional 

exposure or injury occurred at times other than when the insurer 

was on the risk. The insurer in question must bear potential 

liability for the entire claim." 626 A.2d at 508. 

The Pennsylvania Supreme Court said that the "most 

compelling" reason for holding the insurers jointly and severally 

liable for indemnity, rather than allocating liability among the 

insurers, "is the language of the policies themselves." Id. at 

507. Each policy obligated each insurer to "'pay on behalf of the 

Insured all sums which the Insured shall become legally obligated 

to pay as damages because of bodily injury to which the insurance 

applies. . '" Id. at 507 (emphasis in original). In 

France II, the court held that "under any given policy, the 

insurer contracted to pay all sums which the insured becomes 

legally obligated to pay, 

thereof." Id. (emphasis 

not merely 

in original) . 

some pro rata 

This "all 

portion 

sumsn 

terminology is similar to that in the United policy at issue. As 

22 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 24 
noted, the United policy provides that United "shall have the 

right and duty to defend any suit against the insured seeking 

damages on account of such bodily injury or property damage 

" Aplt. App. at 178 (emphasis added). 

The court in France II did discuss the insurer's liability 

for costs of defense. 626 A.2d at 505-06, 509-10. Although this 

issue had not been explicitly addressed in France I, the court 

noted that it was "implicit" that the lower court had intended to 

prorate the costs of defense in the same way as the obligation to 

indemnify. 626 A.2d at 506. As we understand it, France II held 

that the duty to defend, like the duty to indemnify, could not be 

prorated among the various insurers; to view its ruling otherwise 

would make the insurer's duty to defend narrower than its duty to 

indemnify, which would run counter to France II's reasoning. "It 

is well established that the duty to defend and to pay the costs 

of defense is broader than the duty to indemnify." Id. at 510. 

We think that it is implicit in France II that the language of the 

policies was the most compelling reason for rejecting the argument 

for proration of defense costs, as it was for declining to prorate 

the indemnity obligations. 

case, promised to defend 

thereof. 

The insurers there, and United in this 

all claims, not some pro rata portion 

And importantly, France II declined to impose an obligation 

on the insured as a self-insurer during periods when it was 

uninsured, as the Pennsylvania Superior Court had done. According 

to the Pennsylvania Supreme Court: 

23 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 25 
[A]lthough it is superficially attractive to include 

[the insured] in the pro rata apportionment of liability 

for periods during which it was uninsured, to do so is 

to create a judicial fiction which cannot be supported, 

viz., that [the insured] was self insured under a policy 

the terms of which are ascertainable so that [the 

insured] may be included among the insurers in 

apportionment of liability. Faced with the same 

argument, the United States Court of Appeals for the 

District of Columbia Circuit stated: 

We have no authority upon which to pretend 

that [the manufacturer] also has a 

'self-insurance' policy that is triggered for 

periods in which no other policy was 

purchased. Even if we had the authority, what 

would we pretend that the policy provides? 

What would its limits be? There are no 

self-insurance policies, and we respectfully 

submit that the contracts before us do not 

support judicial creation of such additional 

insurance polices. 

Id. at 508 (quoting Keene CokP. v. Insurance Co. of North America, 

667 F.2d 1034, 1048-49 (D.C. Cir. 1981), cert. denied, 455 U.S. 

1007 (1982)). Again, we understand the France II opinion to apply 

this reasoning to both the indemnity obligation and the duty to 

defend. 

United, however, argues that Telectronics was self-insured, 

not uninsured, and so should be required to share in the cost of 

defending the Annis suit notwithstanding the holding in France II. 

This argument is based on the fact that under the subsequent 

Transco policies, Telectronics bore significantly greater 

liability for the costs of defense than under the United policy. 

Indeed, it is clear that under the circumstances of the Annis 

suit, Transco had no liability at all for the costs of defense. 

Thus, had the pacemaker been implanted after expiration of the 

United policy, Telectronics would have had to bear the entire cost 

24 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 26 
of defense. We are not persuaded that these facts support 

relieving United of any portion of the cost of defense, however. 

First, we think it is beyond peradventure that France II 

precludes United from compelling Telectronics to bear any portion 

of the defense cost on any theory other than the self-insurance 

theory. Thus, most of the cases cited by United in its briefs 

filed before promulgation of the France II opinion are simply 

inapposite because they are in conflict with this most recent, 

authoritative pronouncement of Pennsylvania law. 

As we view it, then, the sole remaining issue is raised by 

United's reliance (in its supplementary brief filed after the 

France II opinion was issued) on a single statement in France II 

that "[t]here is no bar against an insurer obtaining a share of 

indemnification of defense costs from other insurers under 'other 

insurance' clauses or under the equitable doctrine of 

contribution." 626 A.2d at 509. Obviously, this comment cannot 

aid United unless we conclude that Telectronics was an insurer, 

because of the retention provision and Transco's limited 

reimbursement obligation on defense costs, during the period when 

coverage was provided by Transco. We find nothing in the 

France II opinion's discussion of the effect of periods of no 

insurance that would support such a conclusion. Clearly, if 

Telectronics had no insurance after expiration of the United 

policy, France II would preclude holding Telectronics liable for 

any portion of the defense costs at issue. We think it 

incongruous to suggest that Telectronics should be in a less 

advantageous position because it continued to purchase liability 

25 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 27 
insurance, which is the result for which United argues, than it 

would have been had it declined to do so. 

In Cooper Laboratories. Inc. v. Internat'l Surplus Lines Ins. 

Co., 802 F.2d 667 (3d Cir. 1986), the court considered and 

rejected a similar argument. In that case, the insurer provided 

products liability coverage in excess of one million dollars 

retention to the insured pharmaceuticals manufacturer. The policy 

also obligated the insurer to defend any suit against the insured 

alleging bodily injury within the policy period. The insured 

settled a personal injury suit and demanded reimbursement, 

including the cost of defense, from the insurer. Upon the 

insurer's refusal to reimburse, the insured brought suit under the 

policy. The insurer contended that the manufacturer was 

self-insured up to one million dollars and so had a duty to defend 

"as do primary insurers as a matter of insurance industry custom." 

Id. at 675. The Third Circuit disagreed, saying: 

This contention may be dismissed rather quickly. Cooper 

is neither a primary insurer nor an insurer at all. A 

duty to defend is a matter of contract, and the reason 

why primary insurers provide a defense is that their 

policies require that they do so. An industry custom 

allocating responsibility when two carriers both may 

have a contractual duty is not applicable when one of 

the parties bears no obligation. 

802 F.2d at 675. See also Keene, supra; Lac d'Amiante du Quebec, 

Ltee. v. American Home Assur. Co., 613 F. Supp. 1549, 1562-63 

(D. N.J. 1985). We agree with this reasoning and hold that 

Telectronics has no liability for contribution because it is not 

an insurer with a contractual duty to defend. 

United's alternative argument in response to the France II 

decision is unpersuasive. It says that France II dealt with the 

26 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 28 
duty to indemnify, which is not our issue, and that France II 

"does not alter Federal case law or the stream and weight of 

authority" favoring the France I method of apportionment of legal 

expenses in a case like this. Supp. Brief of Aple. at 2. The 

effort to distinguish France II as dealing with indemnity and not 

defense costs fails to convince us because the underlying issue as 

to both contractual duties is the same, and France II, in our 

view, so holds. The suggestion that we follow "Federal case law" 

or other state decisions and not the controlling Pennsylvania law 

of France II simply ignores Erie Railroad Co. v. Tompkins, 304 

u.s. 64 (1938). 

We hold 

$156,805.90, 

Telectronics 

deductible, 

court. 

that United owes Telectronics reimbursement of 

the sum total of all the expenses incurred by 

in defending the Annis suit, less the $10,000 

for which judgment should be entered by the district 

III 

Telectronics also appeals the district court's summary 

judgment rejecting its bad faith breach of insurance contract 

claim. The parties agree that Colorado law should be applied in 

resolving this claim. See First Nat'l Bank v. Rostek, 514 P.2d 

314, 320 (Colo. 1973) (adopting the most significant relationship 

test of section 145 of the Restatement (Second) of Conflict of 

Laws (1969)). We agree with the district court that Colorado has 

the most significant relationship to the bad faith dispute. 

27 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 29 
A 

In Farmers Group. Inc. v. Williams, 805 P.2d 419 (Colo. 1991) 

(en bane), the Colorado Supreme Court discussed the tort of bad 

faith breach of an insurance contract: 

In the context of insurance contracts, courts have 

established two standards of conduct by the insurer, 

depending on the type of benefit the insured is seeking 

to enforce. When the benefit derives from the insurer's 

duty to defend the insured against third-party actions, 

that relationship is characterized as a 'third-party 

claim.' A 'first-party claim,' on the other hand, 

results when the insured makes a claim against his 

insurer for benefits accruing directly from the 

insurance contract. 

Id. at 421 (citation omitted) . 

Under Colorado law, third-party claims are governed by a 

reasonableness standard, "i.e. would a reasonable insurer under 

the circumstances have denied or delayed payment of the claim 

under the facts and circumstances." Travelers Ins. Co. v. Savio, 

706 P.2d 1258, 1274 (Colo. 1985) (en bane) (citations and internal 

quotations omitted) . In contrast, to prevail in a first-party 

claim, the insured must establish that the insurer both acted 

unreasonably and "with knowledge of or reckless disregard for the 

fact that no reasonable basis existed for denying the claim." Id. 

We think it clear that a third-party claim was involved here. 

Hence, under Colorado law regarding third-party insurance, "[t]he 

question of whether an insurer has breached its duties of good 

faith and fair dealing with its insured is one of reasonableness 

under the circumstances. The relevant inquiry is whether the 

facts show the absence of any reasonable basis for denying 

the claim." Farmers Group. Inc. v. Trimble, 691 P.2d 1138, 1142 

28 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 30 
(Colo. 1984). The standard is thus "akin to that of negligence 

II 

We agree with the district court that even under this more 

stringent standard for assessing an insurer's conduct, United did 

not act in bad faith in arguing for proration of the costs of 

defending the Annis suit. At the time that United took this 

position, the law governing the extent of an insurer's duty to 

defend in these circumstances was not well settled, as the 

Pennsylvania Supreme Court recognized in France II: 

We do not read the issues presented in this case as 

simple ones, nor are the principles underlying our 

decision obvious. It 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. 

France II, 626 A.2d at 510. We agree with this assessment. Thus, 

the summary judgment against Telectronics on this portion of its 

bad faith claim was correct. 

B 

There remains the portion of the summary judgment for United 

on the bad faith claim dealing with United's position denying that 

ASU was its agent for receipt of notice of the Annis suit. 

Relying on this position, United denied responsibility for any 

part of the costs of defense incurred before United's direct 

receipt of notice of the Annis suit on November 5, 1990. United 

took this position about the temporal limitation on its liability 

for defense costs in its initial response to the November 5, 1990, 

notice of the suit and·continues to argue this position on appeal. 

United thus continues to eschew any effectiveness of the notice of 

29 

Appellate Case: 92-1237 Document: 01019290245 Date Filed: 01/19/1995 Page: 31 
the suit to ASU on December 5, 1987, when Telectronics' insurance 

broker forwarded a copy of the Annis summons and complaint to ASU. 

The district judge held that although he had not "ruled on 

the effectiveness of the notice to ASU, clearly [United's denial 

of effectiveness of earlier notice to ASU] is a position upon 

which reasonable minds could differ." 796 F. Supp. at 1393. We 

agree. We feel this is a third-party claim under Colorado law and 

therefore the test for Telectronics' bad faith claim is "whether 

the facts show the absence of any reasonable basis for 

denying the claim." Farmers Group v. Trimble, 691 P.2d at 1142. 

Reasonable minds could differ as to the effectiveness vis-a-vis 

United of the transmittal to ASU of the summons and complaint on 

December 5, 1987. We feel it was reasonably arguable that 

Endorsement 5 required Telectronics to provide notice to ASU of an 

occurrence, but that Condition 4(b) required the insured to 

immediately forward "to the company" every demand, notice, summons 

or other process. While we have earlier held the policy and 

endorsement ambiguous so that this Condition 4(b) notice of suit 

requirement was satisfied when such notice was given to ASU, see 

Part II-B supra, we are persuaded that the contrary interpretation 

that notice of suit was required to be given directly to United is 

not unreasonable. Therefore the circumstances do not support a 

bad faith claim on this portion of the controversy and we will 

affirm fully the grant of summary judgment for United on the bad 

faith claim.15 

15 

One further point is briefly argued by Telectronics. It says 

(Footnote continued on next page) 

30 

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IV 

In its cross-appeal, United asks for sanctions pursuant to 

Fed. R. App. P. 38 for Telectronics' continued prosecution of its 

bad faith breach of insurance contract claim. We do not view 

Telectronics' arguments on the bad faith issues to be so clearly 

without merit as to call for sanctions. 

AFFIRMED in part, REVERSED in part, and REMANDED for entry of 

judgment in accord with this opinion. 

(Footnote continued) : 

that United's agent, ASU, was negligent in failing to notify 

United promptly of the Annis suit in 1987; ASU's negligence 

should be imputed to United as a matter of law; there is an 

obvious question of fact as to ASU's negligence; and if ASU is 

found to be United's agent, whose negligence would be imputed to 

United, United should be found to have acted in bad faith because 

of ASU's negligent handling of the Annis claim. Appellant's 

Opening Brief at 44; Reply Brief of Appellant at 27. 

We find no mention of this argument in Telectronics' summary 

judgment briefs below. In any event, we are not persuaded by this 

contention. Imputing negligence or knowledge of ASU as an agent 

to United does not equate to direct forwarding to the insurer of 

the Annis summons and suit papers in compliance with a literal 

interpretation of Condition 4 which, as we have noted, is not 

unreasonable. The argument thus does not save Telectronics' bad 

faith claim. 

31 

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