Court Opinion

ID: 802814
Source: CourtListenerOpinion
Date Created: 2012-06-21 16:37:35+00
Date Added: 2024-06-11T18:00:05.696503
License: Public Domain

NOT PRECEDENTIAL

     UNITED STATES COURT OF APPEALS
          FOR THE THIRD CIRCUIT
               ___________

             Nos. 10-2833 & 10-2887
                  ___________

      COLONY INSURANCE COMPANY

                        v.

MID-ATLANTIC YOUTH SERVICES CORPORATION;
            ROBERT J. POWELL

     Mid-Atlantic Youth Services Corporation,
            Appellant at No. 10-2833

               Robert J. Powell,
            Appellant at No. 10-2887

        (D.C. Civil Action No. 09-cv-1773)
                   ___________

             Nos. 10-4198 & 10-4780
                  ___________

  GENERAL STAR INDEMNITY COMPANY, INC.

                        v.

   MID-ATLANTIC YOUTH SERVICES CORP.;
   GREGORY ZAPPALA; ROBERT J. POWELL

        Mid-Atlantic Youth Services Corp.;
                Gregory Zappala,
            Appellants at No. 10-4198

               Robert J. Powell,
            Appellant at No. 10-4780
                           (D.C. Civil Action No. 10-cv-0511)
                              _______________________

                    On Appeal from the United States District Court
                        for the Middle District of Pennsylvania
                            (Honorable A. Richard Caputo)
                                   ______________

                    Submitted Pursuant to Third Circuit LAR 34.1(a)
                                   January 10, 2012

              Before: SCIRICA, RENDELL and SMITH, Circuit Judges.

                                 (Filed: June 21, 2012)
                                  _________________

                              OPINION OF THE COURT
                                 _________________

SCIRICA, Circuit Judge.

      In this declaratory judgment action, Robert Powell and Mid-Atlantic Youth

Services Corporation (“MAYS”) appeal from judgments in favor of the plaintiffs, Colony

Insurance Company and General Star Indemnity Company, the issuers of general liability

insurance policies to Powell and MAYS. The District Court declared Colony Insurance

and General Star Indemnity did not have a duty to defend or indemnify appellants in the

underlying lawsuit brought by the juvenile victims of the kickback scheme. For the

following reasons, we will affirm.

                                            I

      The underlying complaints stem from the same judicial kickback scheme

described in the related case, Travelers Property & Casualty Co. v. Mericle, No. 10-

3887. Robert Powell is the owner of MAYS, which managed several juvenile detention

                                            2
facilities in Pennsylvania. The complaints allege that Powell paid approximately $2.6

million to Mark Ciavarella and Michael Conahan, two judges of the Luzerne County

Court of Common Pleas, in exchange for committing adjudicated juveniles to detention

facilities owned and operated by MAYS. The juvenile victims filed suit against Powell

and MAYS for their role in the illegal scheme.

       The present dispute is about insurance coverage. Powell and MAYS have general

liability policies with both Colony Insurance Company and General Star Indemnity

Company. Both policies provide for “Bodily Injury and Property Damage Liability” in

Coverage A and “Personal and Advertising Injury Liability” in Coverage B. Coverage A

is only triggered if the injury is caused by an “occurrence,” defined in the policy as an

“accident, including continuous or repeated exposure to substantially the same general

harmful conditions.” Both policies exclude coverage under Coverage A for an injury

“expected or intended from the standpoint of the insured.” Coverage B covers any

“injury, including consequential ‘bodily injury’, arising out of one or more of the

following offenses: (a) [f]alse arrest, detention, or imprisonment.” The policies exclude

coverage under Coverage B for “knowing violation[s] of rights of another.” The Colony

Insurance policy includes an exclusion under Coverage B for “Criminal Acts,” defined as

an injury “arising out of a criminal act committed by or at the direction of the insured.”

The General Star Indemnity policy contains a general policy exclusion for “Criminal

Acts” defined as “[a]ny criminal, malicious, dishonest, or fraudulent ‘act, error or

omission’ committed by or at the direction of the Insured.”

                                             3
       Powell and MAYS tendered the complaints to Colony Insurance and General Star

Indemnity for defense. Both insurers filed declaratory judgment actions in the district

court contending they neither owed a duty to defend nor to indemnify Powell and MAYS.

The parties filed motions for judgment on the pleadings. The District Court granted the

insurers’ motions for summary judgment. Powell and MAYS timely appealed. 1

                                              II

       An insurer’s obligation to provide a defense for claims asserted against its insured

is contractual, and the language of the policy will determine whether an insurer has a duty

to defend. Under Pennsylvania law, the duty to defend is determined solely by the

allegations contained within the four corners of the complaint. Kvaerner Metals Div. of

Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 908 A.2d 888, 896-97 (Pa. 2006). If

there is one claim that falls within the policy, the insurer must defend the entire action.

D’Auria v. Zurich Ins. Co., 507 A.2d 857, 859 (Pa. Super. Ct. 1986). But it is the facts

alleged in the underlying complaint, not the cause of action pled, that will determine if

there is coverage. Donegal Mut. Ins. Co. v. Baumhammers, 893 A.2d 797, 811 (Pa.

Super. Ct. 2006) aff’d in part and rev’d in part on other grounds, 938 A.2d 286 (2007).

The court should not inquire into or resolve factual disputes to determine whether an

insurer’s duty to defend has been triggered; all evidence is limited to the “language of the

complaint against the insured.” Kvaerner Metals, 908 A.2d at 896.

                                             III

1
 The District Court had jurisdiction under 28 U.S.C. § 1332(a). We have jurisdiction
under 28 U.S.C. § 1291. Pennsylvania law governs this diversity case. Berrier v.
Simplicity Mfg., Inc., 563 F.3d 38, 46 (3d Cir. 2009).
                                              4
       Powell and MAYS both contend the District Court erred in three aspects: (1)

finding the underlying complaints allege only intentional acts and not negligence; (2)

finding that there was no “occurrence” under the policy so as to trigger coverage under

Coverage A; and (3) holding that the knowing violation exclusion applied to deny

coverage. MAYS contends the exclusion was inapplicable because it was an innocent co-

insured as Powell was not an agent acting in control of MAYS. Powell argues that the

exclusion was inapplicable because there was no allegation that he intended the specific

injuries suffered by the juvenile victims. Finally, Powell argues the court erred in

holding that the penal statute exclusion applied to deny coverage under Coverage B.

None of appellants’ contentions have merit. 2

       1. The underlying complaints do not contain allegations of negligence.

       Powell and MAYS contend the District Court erred in finding Colony Insurance

and General Star Indemnity had no duty to defend against the underlying lawsuit because

the complaints included allegations of negligence, triggering coverage under the policies.

Appellants’ attempt to recast the allegations in the underlying complaints as claims

alleging negligence is unavailing. Although they point to language in the complaints at ¶

109 that defendants “unlawfully, and/or recklessly, willfully, wantonly and/or in a

manner that shocks the conscience and/or with deliberate and/or reckless indifference…”

to demonstrate allegations of negligence, we look at the factual allegations and not the

particular cause of action that is pled in determining whether coverage is triggered. See

2
 Powell did not file a brief in General Star v. Mid-Atlantic Youth Services Corp., No. 10-
4780 and therefore the appeal is subject to dismissal for lack of prosecution under Fed. R.
App. Proc. 31(c) and 3rd Cir. LAR 107.2 (2010).
                                             5
Mut. Benefits Ins. Co. v. Haver, 725 A.2d 743, 745 (Pa. 1999). The factual allegations in

the complaints recite that appellants “knowingly and willfully entered into a

conspiracy…” (¶ 733), “knowingly and willfully entered into an agreement…” (¶ 745),

participated in the racketeering acts by “devising … to defraud by means of wire

communication … in violation of 18 U.S.C. §1343” (¶ 756), and “intentionally conspired

and agreed to acquire or maintain interests in and control of the enterprise…” (¶ 772).

We agree with the District Court that the allegations include only claims of intentional

conduct, not negligence.

       2. There was no “occurrence” to trigger the policy under Coverage A.

       Under both policies, the insurers’ duty to defend is only triggered under Coverage

A if there was an “occurrence.” An “occurrence” is defined in the policies as “an

accident, including continuous or repeated exposure to substantially the same general

harmful conditions.” The Pennsylvania Supreme Court has emphasized that the fortuity

of the events in question is the key factor in determining whether there has been an

accident. Brenneman v. St. Paul Fire & Marine Ins. Co., 192 A.2d 745, 747 (Pa. 1963);

see also State Farm Fire & Cas. Co. v. Estate of Mehlman, 589 F.3d 105, 111 (3d Cir.

2009). An accident is an unanticipated event, and therefore an injury is “not ‘accidental’

if the injury was the natural and expected result of the insured’s actions.” Donegal Mut.

Ins. Co., 938 A.2d at 292. We must determine whether, from the perspective of the

insured, the claims present the degree of fortuity contemplated by the definition of

“accident.” The burden is on the insured to prove that the claim is covered under the

policy. Miller v. Boston Ins. Co., 218 A.2d 275, 277 (Pa. 1966).

                                             6
       Appellants contend the District Court erred by concluding there was no

“occurrence” because “occurrence” turns on intent and there is no allegation that the

insured intended to cause bodily injury. The District Court held:

       Both the MIC and MCAC allege intentional conspiratorial activity on the
       part of the underlying defendants, including MAYS and Powell. The
       underlying complaints allege that MAYS and Powell were malicious,
       reckless, and/or wanton, but do not allege in any way that MAYS and
       Powell were negligent. Reckless, malicious, or purposeful conspiratorial
       activities are not “negligent” and cannot be considered “accidents” under
       the plain language of an occurrence-based insurance policy…

Because the allegations were not the result of an “occurrence,” the court held Colony

Insurance and General Star Indemnity did not have a duty to defend. We agree.

       An act is accidental if premised on the negligent acts of the insured. Nationwide

Mut. Fire Ins. Co. v. Pipher, 140 F.3d 222, 225 (3d Cir. 1998). As discussed, the

complaints do not contain allegations that Powell and MAYS committed negligent acts,

only intentional acts. From the perspective of the insured, the acts cannot be seen as

accidental because they were deliberate efforts to initiate and perpetuate the conspiracy.

Accordingly, there was no “occurrence” that triggered Colony Insurance or General Star

Indemnity’s duty to defend. 3

       3. The Knowing Violation of Rights Exclusion is applicable.

       Powell and MAYS’s policies excluded coverage under Coverage B for any

“Knowing Violation of Rights of Another” if the injury was “caused by or at the direction

of the insured with the knowledge that the act would violate the rights of another.” The

3
 Because we find there was not an “occurrence” as defined in the policy, Colony
Insurance’s obligations to Powell under Coverage D for Professional Liability coverage
are not triggered.
                                             7
exclusion applies to an “injury and damage of the same general type which the insured

intended to cause.” United Servs. Auto. Ass’n v. Elitzky, 517 A.2d 982, 989 (Pa. Super.

Ct. 1986). An injury is intended if the insured “desired to cause the consequences of his

act or if he acted knowing that such consequences were substantially certain to result.” Id.

When “an insurer relies on a policy exclusion as the basis for its denial of coverage and

refusal to defend, the insurer has asserted an affirmative defense and, accordingly, bears

the burden of proving such defense.” Mistick, Inc. v. Nw. Nat’l Cas. Co., 806 A.2d 39, 42

(Pa. Super. Ct. 2002) (internal quotation marks and citation omitted). “Thus, unless the

insurer establishes that the allegations of the insured’s complaint fall within the stated

scope of the exclusion, the court must deny its demurrer and require the insurer to tender

a defense under the policy.” Id.

       Powell contends there are no factual allegations that he directed any act with the

knowledge that it would violate the juvenile victims’ rights. But the complaints allege

Powell participated in the conspiracy knowing that the juvenile victims’ detention had

been procured by violating their constitutional rights in order to ensure the detention

facilities operated at or near capacity to ensure maximum profit. 4 Therefore, the

complaints contend factual averments that Powell “desired to cause the consequences of

his act.” Elitzky, 517 A.2d at 989. Because the exclusion is applicable, Colony Insurance

and General Star Indemnity do not owe Powell a duty to defend.

4
 “These gross violations of the youth plaintiffs’ constitutional rights were part and parcel
of the defendants’ scheme to ensure that youth were adjudicated delinquent and placed in
detention, in furtherance of their scheme to line their own pockets through financial
payments or kickbacks from other defendants named herein.” (¶ 686).
                                              8
       MAYS argues that the knowing violation exclusion does not apply because the

complaints fail to allege that Powell was acting as MAYS’s agent. But the complaints

allege that Powell was an “owner[], officer[], shareholder[] and operator[]” of MAYS.

Moreover, as Powell was not a named insured in the Colony Insurance and General Star

policies, he would only be covered if MAYS designated him as an “‘executive officer[]’

and director[]” of the corporation. Given that MAYS tendered the complaints to Colony

Insurance and General Star for defense of both itself and Powell, it contradicts its own

assertion that Powell was not a controlling agent. Furthermore, the complaints allege

MAYS had a financial interest in perpetuating the scheme in order to keep the facility at

or near capacity. Because Colony Insurance and General Star Indemnity’s duty to defend

must be evaluated according to the underlying complaints, MAYS’s argument that

Powell was not a controlling agent is irrelevant; the complaints allege MAYS had its own

motive to commit the acts that caused the juvenile victims’ injuries. For these reasons,

the policy exclusion is applicable and the insurers do not have a duty to defend.

       4. The Penal Statute Exclusion applies to exclude coverage under Coverage B.

       Under Coverage B, the Colony Insurance policy provided Powell with coverage

for damages resulting from “personal injury,” defined to include false imprisonment. The

policy included an exclusion for “personal injury” “arising out of the willful violation of

a penal statute or ordinance committed by or with the consent of the insured.” Powell

argues the exclusion is not applicable because he pled guilty to two violations of the

penal code for misprision of a felony and accessory after the fact that did not “aris[e] out

of” the allegations in the complaints. Powell contends the juvenile victims’ injuries were

                                              9
too remotely related from his actions to trigger the exclusion. Because the language

“arise out of” is ambiguous, Powell contends it must be construed against the insured to

mean proximate cause and Colony Insurance has not met its burden to establish coverage

was precluded.

       Pennsylvania law states that “‘arising out of’ means causally connected with, not

proximately cause by.” Roman Mosaic & Tile v. Aetna Cas. & Sur. Co., 704 A.2d 665,

669 (Pa. Super. Ct. 1997) (internal quotation marks and citation omitted). The phrase

‘arising out of’ has “been equated with ‘but for’ causation.” Id.; see also McCabe v. Old

Republic Ins. Co., 228 A.2d 901, 903 (Pa. 1967) (holding the phrase “arising out of,”

used in policy exclusion, was not ambiguous and indicated “but for” or “cause and result”

relationship). We agree with the District Court that “arising out of” means “causally

connected.” Therefore, the penal statute exclusion is applicable if the complaints allege a

causal link between Powell’s actions and the victims’ injuries.

       Although Powell points to his guilty plea to argue there is no connection, we

evaluate the allegations in the complaints to determine whether there is a causal

connection between his actions and the juveniles’ injuries. The complaints allege

conduct that is criminal – instances of wire fraud, conspiracy, and other criminal acts –

that perpetuated a scheme to deprive the victims of their constitutional rights. Because

the factual allegations in the complaints allege a causal link between his involvement in

numerous criminal acts and the injuries to the juveniles, the District Court was correct to

find the exclusion applicable. Because the exclusion is applicable, Colony Insurance

does not owe Powell a duty to defend.

                                            10
         Finally, because the duty to defend is broader than the duty to indemnify, there is

no duty to indemnify if there is no duty to defend. Haver, 725 A.2d at 746 n.1. Because

we have concluded that the insurers do not have a duty to defend, we agree with the

District Court that they also do not have a duty to indemnify.

                                              IV

         For the foregoing reasons, we will affirm each of the judgments of the District

Court.

                                              11