IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF PENNSYLVANIA

GENERAL REFRACTORIES COMPANY : CIVIL ACTION

:

v. :

:

FIRST STATE INSURANCE CO., et al. : No. 04-3509

MEMORANDUM

Ludwig, J. March 26, 2012

All of the eleven defendants in this action again move for summary judgment (doc.

no. 346 sealed). Fed. R. Civ. P. 56. See footnote 1 for case history. Jurisdiction is

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diversity. 28 U.S.C. § 1332.

 On July 23, 2004, plaintiff General Refractories Company commenced this action against 16 of

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its umbrella and excess insurance carriers, suing for a declaration of insurance coverage against asbestosrelated claims and for breach of insurance contract. All defendants denied coverage, maintaining that the

policies sold to plaintiff GRC contain exclusions of such claims. 

On June 3, 2005, five of the insurance carriers moved to dismiss the action under Fed. R. Civ. P.

12(b)(7) for failure to join indispensable parties under Fed. R. Civ. P. 19 (doc. no. 149). Those defendants

contended that the complaint had not named all of the excess and umbrella carriers that insured GRC from

1979 to 1986, and that the absent carriers were indispensable to the action. Some of the absent carriers were

non-diverse. On September 27, 2005, this court dismissed the action, ruling that the unnamed insurers were

necessary and indispensable parties under Rule 19. Gen. Refractories Co. v. First State Ins. Co., 234 F.R.D.

99, 100 (E.D. Pa. 2005). On October 27, 2005, reconsideration of that ruling was denied. (Orders and mem.,

doc. nos. 158, 159, 166.) Defendants appealed both orders. On August 28, 2007, our Court of Appeals

reversed the September 27, 2005 order and remanded this action. Gen. Refractories Co. v. First State Ins.

Co., 500 F.3d 306 (3d Cir. 2007). 

On November 15, 2007, discovery was commenced. (Order, Nov. 13, 2007, doc. no. 191). After

remand, on June 7, 2010, nearly six years after this litigation had been begun, fact discovery closed. (Orders,

Jan. 21, 2010 and Feb. 19, 2008, doc. nos. 239, 199.) On April 29, 2011, expert discovery was closed. 

(Order, Mar. 17, 2011, doc. no. 303). 

On August 1, 2011, defendants moved for summary judgment, contending that the action should be

dismissed with prejudice because GRC lacks any insured damages (doc. no. 346 (sealed)). GRC opposed

the motion (doc. no. 369 (sealed)), and defendants replied (doc. no. 400 (sealed)). By November 15, 2011,

all briefs were submitted. 

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Case 2:04-cv-03509-EL Document 432 Filed 03/27/12 Page 1 of 14
Plaintiff General Refractories Company (GRC), a manufacturer and supplier of

asbestos-containing products, sued its insurance carriers for a declaration of excess liability

insurance coverage in some 33,000 underlying asbestos-related suits pending throughout the

United States. GRC purchased the insurance policies between 1979 and 1985. After

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defendants denied coverage, GRC entered into “two-tiered or conditional” settlements with

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many of the underlying claimants.

Defendant insurers’ motion asserts that GRC under the pertinent policies cannot

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prove any damages. Its position is that under each policy the insuring agreement is to pay

The lawsuit asks for a declaration “that any asbestos-related exclusions in the Policies are invalid 2

and unenforceable” and that defendants are required “to pay for GRC’s defense of the Underlying Actions,

and to reimburse GRC for, or pay on behalf of GRC, any and all judgments or settlements reached in the

Underlying Actions, until such time as the total aggregate limits of each of the foregoing insurance policies

have been exhausted.” (Compl., doc. no. 1 at 10.) GRC also sues for breach of contract, claiming that

defendants “refused to honor their obligations to provide GRC with a defense or indemnification in and for

the Underlying Actions.” (Id., ¶ 73, at 11.) Among other things: the “entry of an award requiring

Defendants to pay GRC all monetary damages suffered by GRC caused by their breaches, including, without

limitation, compensatory damages, consequential damages, prejudgment interest, post-judgment interest, and

attorneys’ fees and costs.” (Id. at 12.)

“A settlement in which the plaintiff is paid additional money in the event a specified condition is 3

met is. . . ‘two-tiered.’ The conditional portion of the settlement constitutes the ‘second tier.’” Greater N.Y.

Mut. Ins. Co. v. N. River Ins. Co., 85 F.3d 1088, 1090 n.1 (3d Cir. 1996). “[T]his type of settlement provides

for the tort victim to recover a larger amount if the insurer is liable than if the tortfeasor must pay the

settlement out of its own pocket.” Trustees of the Univ. of Pa. v. Lexington Ins. Co., 815 F.2d 890, 893 (3d

Cir. 1987).

Defendants insurers: Hartford Accident and Indemnity Company; First State Insurance Company; 4

Government Employees Insurance Company; Republic Insurance Company; Westchester Fire Insurance

Company; AIU Insurance Company; Continental Insurance Company as successor-in-interest to certain

policies of insurance issued by HarborInsuranceCompany; Lexington InsuranceCompany; Sentry Insurance

A Mutual Company, as assumptive reinsurer of Great Southwest Fire Insurance Company, sued herein as

Vanliner Insurance Company; Travelers Casualty and Surety Company (formerly known as The Aetna

Casualty and Surety Company and incorrectly designated in the complaint as “St. Paul Travelers”); and

Westport Insurance Corporation, formerly known as Puritan Insurance Company. 

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only what GRC is obligated to pay “by reason of liability imposed by law for damages.”

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GRC, they say, “has not paid one penny to the claimants” in thousands of the settlements and

“never will.” Defs. br. at 1, doc. no. 346. This is so, they continue, because GRC’s promises

to fund the settlements are restricted to the proceeds of whatever may be collected in the

present action, and policy exclusions eliminate coverage for the underlying claims. Id. at 1,

6-7. According to defendants, they have no legal obligation to pay what GRC is not

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obligated to pay “from its own financial resources”: “[I]n return for a complete and absolute

release . . . , GRC agreed that the claimants would be paid if, and only if, GRC prevails in

this coverage litigation. . . . [In the event GRC does not recover damages in this litigation],

claimants agreed to receive nothing and have no recourse against GRC.” Id. at 1-2, 3, 8, 9.

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Because the settlements “impose no legal liability on GRC whatsoever” to pay the

underlying claimants’ damages, defendants aver that they have no obligation to indemnify

GRC. Id. at 2; Defs. reply br. at 1-2, doc. no. 400.

GRC opposes the motion. It asserts entitlement to an award of each defendant’s share

necessary to pay for the underlying settlements as well as GRC’s defense costs and other

 Defendants submitted each policy’s insuring agreement, LoCasale Aff., Exs. 2-11, and Def. br., 5

App. A, doc. no. 346 (sealed). Their position is that “differences in these provisions are insignificant for

purposes of this motion.” Id. at 3. 

See LoCasale Aff., Ex. 16, Jan. 1, 2001 Assignment and Security Agreement; Ex. 17, Feb. 10, 2004 6

Amendment to Assignment and Security Agreement. 

See LoCasale Aff., Ex. 18, Compromise Settlement Agreement and Release; Ex. 19, Barry L. 7

Katz’s Nov. 6, 2002 letter to counsel for underlying claimants. 

“No recourse” is defined: “The lack of means by which to obtain reimbursementfrom, or a judgment

against, a person or entity.” Black’s Law Dictionary (9th ed. 2009).

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declaratory judgment relief. According to GRC, each policy’s insurance agreement

encompasses the settlements it made in the underlying lawsuits. Pl. br. at 10-11, doc. no.

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369.

Barry L. Katz, Esq., GRC’s Rule 30(b)(6) representative, testified:

A. There was a time period in 2000-2001 where there were settlements

that had a cash component and a non-cash component.

* * *

Q. Is it your understanding . . . that every entry on the queue that shows a

cash payment is related to a settlement for which GRC has already been

indemnified by some other insurer other than the ones that are

defendants in this action?

A. If there was a cash payment, it was paid by an insurance company. I

believe that’s the case.

* * *

Q. [A]re there any claims where GRC has paid cash out of pocket and it’s

seeking recovery in this litigation for such claims?

A. Not that – leaving aside defense costs, separate-issue claims, I don’t

believe so.

* * *

The record does not contain complete copies of all of the policies. However, it is not disputed that

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each policy would insure settlement obligations, subject to all policy terms and conditions. For example: 

The Company hereby agrees . . . [t]o indemnify the INSURED . . . for ULTIMATE NET

LOSS . . . [which means in part] sums paid as damages in settlement of a claim . . . for

which the INSURED is legally liable . . . . (First State policy nos. 943208, 942632, doc. no.

348 (sealed)).

* * *

The Company hereby agrees . . . to indemnify the Insured . . . for damages . . . as more fully

defined by the term “ultimate net loss” [which means in part] . . . settlement . . . of claims

and suits . . . . (Century Indemnity policy nos. CIU 42 89 94, CIU 54 91 38, doc. no. 339.) 

* * * 

The Company hereby agrees . . . to indemnify the Assured . . . for damages . . . as more

fully defined by the term “ultimate net loss” . . . [which means in part] . . . the total sum

which the Assured . . . becomes obligated to pay by reason of personal injury . . . either

through adjudication or compromise . . . and for . . . settlement . . . of claims and suits 

. . . . (Granite State policy no. 6484-0088, doc. no. 277-4, Ex. E; see also Insurance

Company of the State of Pennsylvania policy no. 4485-1093, doc. no. 338.) 

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Case 2:04-cv-03509-EL Document 432 Filed 03/27/12 Page 4 of 14
Q. Am I correct that when GRC enters into one of these settlement

agreements, where it gives the plaintiffs an interest in the outcome of

this litigation, that GRC does not pay any cash out of pocket with

respect to those settlements?

A. Yes.

Q. Is that true in all instances?

A. Yes.

* * *

Q. Who first proposed that the underlying claimants settle cases without

accepting a present cash payment?

A. I did. . . . Because General Refractories was running out of insurance

. . . as to which the carriers had agreed to provide coverage. . . .

Originally the proposal was that as to any settlements entered into, they

would get half cash and half an interest in the litigation . . . . The reason

being that there was still insurance companies covering General

Refractories and money available. But it was clear that the writing was

on the wall . . . . GRC would run out. And, so, originally it was half

cash, half the arrangement to be paid later. And when the insurance

actually ran out, it became fully to be paid later.

* * *

Q. Aside from insurance proceeds, at the time when – I’m using your

words – the insurance ran out, did GRC have any other assets?

A. Effectively, no. It did not.

* * *

Q. If this case comes to a conclusion, say there’s a judgment in favor of

the defendants, and GRC recovers no money, what do the underlying

claimants get in that instance?

A. No money.

* * *

Q. So, if the defendants win this case and GRC recovers nothing, do any

of the underlying claimants . . . have any recourse to GRC for any

further payment?

A. I don’t believe so. . . . I can tell you that my understanding of the actual

agreements with them, the settlement agreements and releases, is that

they’ve released General Refractories with respect to their cases and the

only consideration that they’re getting is their settlement amount. And

that payment obligation is only with respect to the outcome of this case.

Katz dep., 1058:12-15, 1059:6-14, 1060:5-9, 1109:12-20, 1110:4-1111:6, 1111:17-21,

1222:25-1223:5, 1223:6-1224:25, LoCasale Aff., Ex. 12, doc. no. 346.

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Case 2:04-cv-03509-EL Document 432 Filed 03/27/12 Page 5 of 14
Pennsylvania substantive law, as the parties agree, governs this damages dispute. In

an action based on diversity of citizenship, a federal court generally applies the damages law

of the jurisdiction in which it sits. Kaneff v. Del. Title Loans, Inc., 587 F.3d 616, 621 (3d

Cir. 2009) (citing Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941)); Thabault

v. Chait, 541 F.3d 512, 521 (3d Cir. 2008) (validity of a theory of damages is “a matter

uniquely subject to state law principles”) (citing Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78

(1938)). Under Pennsylvania law, an insurance contract is governed by the law of the state

in which the contract was made. Meyer v. CUNA Mut. Ins. Soc’y, 648 F.3d 154, 162 (3d

Cir. 2011) (citing Crawford v. Manhattan Life Ins. Co. of N.Y., 221 A.2d 877, 880 (Pa.

Super. Ct. 1966)). The law of the state where the insurance policy was delivered to the

insured is the law to be applied in construing its terms. Peele v. Atl. Exp. Transp. Group,

Inc., 840 A.2d 1008, 1011 (Pa. Super. Ct. 2003); Crawford, 221 A.2d at 881. Here, GRC’s

business premises in Pennsylvania will be presumed to be the place of delivery, and the

record does not contain evidence to the contrary. See Compl. (premises located in Bala

Cynwyd, Pa.).

A federal court sitting in diversity must apply the law of the state that governs the

issue to be decided. Mitchell Partners, L.P. v. Irex Corp., 656 F.3d 201, 203 (3d Cir. 2011)

(citing Klaxon, 313 U.S. at 496-97)). “In the absence of a definitive ruling by a state’s

highest court, we must predict how that court would rule if faced with the issue.” Meyer, 648

F.3d at 164. For this purpose, “decisions of state intermediate appellate courts, of federal

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courts interpreting that state’s law, and of other state supreme courts that have addressed the

issue, as well as . . . analogous decisions, considered dicta, scholarly works, and any other

reliable data tending convincingly to show how the highest court in the state would decide

the issue at hand” offer guidance. Id. (citations and internal quotation marks omitted).

“‘Although not dispositive, decisions of state intermediate appellate courts should be

accorded significant weight in the absence of an indication that the highest state court would

rule otherwise.’” Allstate Prop. & Cas. Ins. Co. v. Squires, 667 F.3d 388, 391 (3d Cir. 2012)

(quoting Orson, Inc. v. Miramax Film Corp., 79 F.3d 1358, 1373 n.15 (3d Cir. 1996)).

The question here is whether the conditional settlements entered into by GRC are

permissible under Pennsylvania law. Because the Pennsylvania Supreme Court has not ruled

on this issue, it is necessary to predict the conclusion it would reach in the event that it did

so. The controlling case in this area, decided by our Court of Appeals, is Trustees of the

Univ. of Pa. v. Lexington Ins. Co., 815 F.2d 890 (3d Cir. 1987) (Becker, J., later C.J.). Judge

Becker found Alfiero v. Berks Mut. Leasing Co., 500 A.2d 169 (Pa. Super. Ct. 1985), appeal

denied (Sept. 9, 1986) “the most persuasive indication of the position of Pennsylvania law,”

predicting that Pennsylvania would uphold the validity of two-tiered conditional settlements

when the insurer refused to defend against the plaintiff’s suit, subject to the requirements of

good faith and reasonableness. Trustees, 815 F.2d at 902. Our Court of Appeals repeated

this prediction in Greater N.Y. Mut. Ins. Co. v. North River Ins. Co., 85 F.3d 1088, 1090,

1092 (3d Cir. 1996) (Scirica, now C.J.) (a two-tiered conditional settlement between a

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plaintiff, an insured, and the insured’s excess insurer, when the primary insurer refused to

settle the plaintiff’s claim). Judge Scirica: “Alfiero is the most persuasive statement of

Pennsylvania law.” Id. at 1092 n. 4.

The best indicators of Pennsylvania law on the subject today remain Alfiero, together

with Trustees of the Univ. of Pa. (1987) and Greater N.Y. Mut. Ins. Co. (1996). Since

Alfiero was decided in 1985, Pennsylvania intermediate appellate courts have not reexamined the validity of conditional settlement agreements. Two Pennsylvania trial courts

have endorsed and followed Trustees and Alfiero in casesinvolving comparable settlements.

See Resource Am., Inc. v. Certain Underwriting Members of Lloyd’s Subscribing to Policy

No. 501/FT98AAAF (“Resource”), No. 02709 Apr. Term 2003, 69 Pa. D. & C.4th 496, 2004

WL 2580554, *1, *4, *5 n.5 (Pa. Com. Pl., Phila. Co. Nov. 12, 2004) (Sheppard, J.) (Trustees

“appears to be a logical extension of the Superior Court’s views expressed in Alfiero”); Nat’l

Union Fire Ins. Co. of Pittsburgh v. Sharon Reg’l Health Sys., GD01-14026, 69 Pa. D. &

C.4th 374, 388-92, 2004 WL 3259083, *8-10 (Pa. Com. Pl., Allegheny Co. Dec. 1 2004)

(Wettick, Jr., A.J.). See generally Annotation, “Insured’s payment of excess judgment, or

a portion thereof, as prerequisite of recovery against liability insurer for wrongful failure to

settle claim against insured,” 63 A.L.R.3d 627 §§ 5[a], 5[b] (1975 & West Supp. 2012) (prepayment is not a condition of recovery in Pennsylvania).

Defendants cite one Pennsylvania case: Dennis v. New Amsterdam Cas. Co., 264

A.2d 436 (Pa. Super. Ct. 1970). There, after the insurer refused coverage, the insured settled

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Case 2:04-cv-03509-EL Document 432 Filed 03/27/12 Page 8 of 14
with plaintiff, agreeing to pay a relatively small sum and to sue the insurer to recover

additional money. Recovery against the insurer would be the sole source for the balance of

the settlement. Dennis affirmed the trial court’s ruling that the insurer had no duty to

indemnify its insured principally because the original suit involved workers’ compensation,

which was excluded under the policy. As relates to this action, Dennis added without

elaboration that indemnification would be denied because “under the settlement agreement,

[the insured] is not obligated to pay the same, this being a secondary and minor

consideration.” Id. at 439. Defendants contend that just as the insured in Dennis “was not

obligated to pay” the balance of the settlement, GRC is under no legal obligation to fund its

settlements. Id. When presented with a similar argument in Trustees, Judge Becker found

the “language in Dennis . . . was at most an alternative holding” that “was so offhand and

self-consciously ‘minor’ that we cannot consider it controlling authority.” 815 F.2d at 901.

Defendants’ damages theory of damages is based on Dennis – as well as on a line of

similar cases from jurisdictions other than Pennsylvania that strictly construed the “legally

obligated” policy language and refused recovery for the conditional upper tier. The

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principal policy concern of these courts is the danger that an insured will enter into a

Defendants cite: United States Fire Ins. Co. v. Lay, 577 F.2d 421 (7th Cir. 1978); Bendall v. 9

White, 511 F. Supp. 793 (N.D. Ala. 1981); Clock v. Larson, 564 N.W.2d 436 (Iowa 1997); Silvers v. Horace

Mann Ins. Co., 378 S.E.2d 21 (N.C. 1989); Stubblefield v. St. Paul Fire & Marine Ins. Co., 517 P.2d 262 (Or.

1973); Bumgarner v. Burlington Ins. Co., 691 S.E.2d 133 (N.C. Ct. App. 2010); Stroop v. N. County Mut.

Ins. Co., 133 S.W.3d 844 (Tex. App. 2004); McDonough v. Dryden Mult. Ins. Co., 713 N.Y.S.2d 787 (N.Y.

App. Div. 2000); Erdman v. Eagle Ins. Co., 658 N.Y.S.2d 463 (N.Y. App. Div. 1997); Terrell v. Lawyers

Mut. Liab. Ins. Co. of N.C., 507 S.E.2d 923 (N.C. Ct. App. 1998); Lida Mfg. Co., Inc. v. U.S. Fire Ins. Co.,

448 S.E.2d 854 (N.C. Ct. App. 1994). See also Trustees, 815 F.2d at 900 (discussing the differences among

jurisdictions on this issue); Barry R. Ostrager & Thomas R. Newman, Handbook on Insurance Coverage

Disputes, “Potentially Collusive Settlements Involving Assignment of Insured’s Rights to Injured Party,” §

22.03 at 1630-31 (15th ed., vol. 3 & Supp. 2011) (same). 

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Case 2:04-cv-03509-EL Document 432 Filed 03/27/12 Page 9 of 14
collusive or unreasonably high settlement. Here, defendants assert that inasmuch as GRC

made no payment and no payment obligation will ever be imposed on it, the settlements are

uninsured because they are entirely contingent on recovery from defendants. They contend

that Trustees is inapposite because some portion of the settlement was paid by the insured,

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and Alfiero is also inapposite because there a judgment was entered against the insured.

11

Even assuming, as posited by defendants, the underlying settlement documents

extinguished GRC’s liability to the underlying, that would not produce a different outcome.

Both Trustees and Alfiero hold that once an insurer repudiates its insurance contract, the

insured is at liberty to negotiate a settlement that best protects the interests for which

insurance was purchased. Trustees, 815 F.2d at 901; Alfiero, 500 A.2d at 172. The rationale

of Alfiero as reiterated by Trustees permits the insured to protect itself from risks created by

the insurer’s refusal of coverage: “Prohibiting two-tiered settlements . . . may force insureds

to turn down advantageous settlement offers.” 815 F.2d at 901-02. “[P]recluding such

12

The Hospital of the University of Pennsylvania agreed to pay plaintiff the first tier of $200,000 10

from its self-insurance plan and the second tier of $2 million provided by the Pennsylvania Medical

Professional Liability Catastrophe Loss Fund, plus an additional $4.8 million if it won a suit against its

insurer, Lexington, which had refused coverage. Trustees, 815 F.2d at 893-94, 900.

Defendants also cite Alfiero v. Berks Mut. Leasing Co., 500 A.2d 169, 171 (Pa. Super. Ct. 1985) 11

(“Alfiero [injured plaintiff] did not agree to release Berks [tortfeasor] from further liability. . . . a final

judgment had been entered in separate declaratory judgment proceedings . . . [which] . . . could be enforced

by garnishment”)), appeal denied (Sept. 9, 1986). 

“Insurance policies are risk-spreading devices. They exist primarily because the stakes of liability 12

to an insured are greater than they are to the insurer, which can spread the loss across all of the its customers. 

The impact of a settlement offer may be sufficiently great on an insured that it must risk the hazards of even

greater liability after trial despite odds that make the settlement advantageous. Prohibiting two-tiered

settlements therefore may force insureds to turn down advantageous settlement offers.” Trustees, 815 F.2d 

at 901-02.

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settlements is undesirable.” Greater N.Y., 85 F.3d at 1091-92 n.4 (reaffirming the rationale

of Alfiero).

On the other hand, two-tiered conditional settlements present recognized dangers –

primarily that an insured will enter into an unreasonably high settlement. Trustees, 815 F.2d

at 902; see also Greater N.Y., 85 F.3d at 1092 (“the prospect of self-dealing and self-serving

testimony”). But nothing in Pennsylvania law suggests that such settlements should be

completely prohibited to avoid these dangers. Our Court of Appeals and Pennsylvania courts

have all held that the insurer is adequately protected by the requirements that the settlement

be “reasonable” and “in good faith.” See Trustees, 815 F.2d at 900, 901-02; Alfiero, 500

A.2d at 172. Trustees upheld recovery for the conditional top tier, finding that Pennsylvania

courts would not view the danger that an insured will enter into a collusive or unreasonably

high settlement as the principal policy concern. 815 F.2d at 901-02 (noting “this agreement

exempts HUP completely from liability for part of the settlement”).

No doubt Pennsylvania also would not recognize defendants’ theory of damages for

a further reason – it is not supported by Pennsylvania’s rules for the interpretation of

insurance contracts. Defendants: The phrase, “by reason of liability imposed by law for

damages,” should be interpreted as strictly a promise to indemnify that comes into play only

when liability for actual loss or damage has been shown. However, Pennsylvania’s Supreme

Court has held the phrase to be ambiguous, Egger v. Gulf Ins. Co., 903 A.2d 1219, 1225-26

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(Pa. 2006), and ambiguity in policy language is to be construed in favor of coverage. Id.

13

(citing Standard Venetian Blind Co. v. Am. Empire Ins. Co., 469 A.2d 563, 566 (Pa. 1983)).

As a coverage provision, it must be construed to afford the greatest possible protection to the

insured. Bombar v. W. Am. Ins. Co., 932 A.2d 78, 87 (Pa. Super. Ct. 2007). If construed

in favor of GRC, the phrase could be interpreted to mean “by reason of liability imposed by

law for loss when GRC entered into the settlements.” Moreover, the policy must be read in

its entirety. Nationwide Ins. Co. v. Schneider, 906 A.2d 586, 591 (Pa. Super. Ct. 2006)

(quoting Riccio v. Am. Republic Ins. Co., 705 A.2d 422, 426 (Pa. 1997) (“intent of the policy

is gathered from consideration of the entire instrument”)), aff’d, 960 A.2d 442 (Pa. 2008);

see footnote 8 for insurance agreements.

What is more, Pennsylvania law allows an insured to assign to the injured plaintiff its

rights against its insurer. Egger, 903 A.2d at 1229 (post-loss assignment of rights under

excess liability policy changed only the identity of the party who was entitled to recover

under the policy and was valid); Greater N.Y., 85 F.3d at 1092 n.5 (citing Gray v.

Nationwide Ins. Co., 223 A.2d 8 (Pa. 1966)); Barr v. Gen. Acc. Group Ins. Co. of N. Am.,

520 A.2d 485, 487 (Pa. Super Ct.), appeal denied, 536 A.2d 1327 (Pa. 1987) (applying

Gray). See also Alfiero, 500 A.2d at 171 (“Alfiero [injured plaintiff] did not agree to release

Berks [tortfeasor] from further liability. Its agreement was to seek recovery of an agreed

“[T]he term ‘by reason of liability imposed by law’ could mean, for example: (1) only after a

13

judgment has been entered; (2) only after all appeals are exhausted and verdict stands; (3) only after efforts

to execute judgment have begun; (4) the occurrence upon which the liability is based . . . ; or (5) only after

the tender of primary coverage.” Egger v. Gulf Ins. Co., 903 A.2d 1219, 1225-26 (Pa. 2006). 

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debt from a specific asset, i.e., the contractual rights owed to Berks by CNA.”); Resource,

No. 02709 Apr. Term 2003, 77 Pa. D. & C.4th 347, 2005 WL 503126, *1 (Pa. Com. Pl.,

Phila. Co. Feb. 25, 2005) (Sheppard, J.) (rejecting insurer’s argument that settlement was

invalid because insured had not paid any portion of the settlement amount, citing Gray and

Barr); Annotation, “Assignment of insured’s right to recover over against liability insurer for

rejection of settlement offer,” 12 A.L.R.3d 1158, § 4[a] (1967 & West Supp. 2012) (citing

Gray for the proposition that an insured’s assignment of its rights against its insurer before

entry of judgment is valid). GRC’s settlement agreements would be permissible in

Pennsylvania as assignments of any damages recovered in this action.

Defendant’s theory of damages does not take into account the important distinction

long recognized by Pennsylvania courts between contracts of indemnity and contracts of

insurance where an insurer denies coverage and refuses to defend:

The insured left to fend for himself should be able to negotiate a settlement

which will protect his interests. If the injured party cannot acquire the right to

bring suit against the insurer, he will not be willing to enter into such a

settlement agreement. The injured party likewise would be hampered by a

prepayment rule for as was stated in Gray if the insured is insolvent there

would be no need for the insurance company to act, if the only cause of action

available requires payment of a judgment before it is actionable. The injured

party would thus be able to recover only from the insured and if the insured is

insolvent, he would be unable to pay and would have little incentive to seek

payment from the insurance company.

Barr, 520 A.2d at 488. To apply principles for enforcement of a promise to indemnify is

inappropriate here, where defendants have denied coverage and the only valuable asset the

insured may have is its causes of action against its insurers. See Trustees, 815 F.2d at 900

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(citing Am. Family Mut. Ins. Co. v. Kivela, 408 N.E.2d 805, 813 (Ind. Ct. App. 1980) (“an

insurer may not hide behind the ‘legally obligated to pay’ language of the policy after it

abandons its insured and the insured settles the claim against him by agreement”)).

An order accompanies this memorandum.

BY THE COURT:

/s/ Edmund V. Ludwig

Edmund V. Ludwig, J.

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