Court Opinion

ID: 2794116
Source: CourtListenerOpinion
Date Created: 2015-04-15 23:05:03.362101+00
Date Added: 2024-06-11T11:29:08.023574
License: Public Domain

J. A27010/14 & J. A27011/14

                              2015 Pa. Super. 78

ERIE INSURANCE EXCHANGE                :    IN THE SUPERIOR COURT OF
                                       :          PENNSYLVANIA
                 v.                    :
                                       :
MICHAELA LOBENTHAL,                    :
DEVIN JOHN MILLER, KORY L. BOYD        :
AND MARK D. BOYD, INDIVIDUALLY         :
AND AS PARENT AND NATURAL              :
GUARDIAN OF KORY L. BOYD               :
                                       :
APPEAL OF: KORY L. BOYD AND            :
MARK D. BOYD                           :         No. 1971 WDA 2013
                                       :
                      Appellant        :

           Appeal from the Order Entered November 20, 2013,
              in the Court of Common Pleas of Erie County
                      Civil Division at No. 13247-12

ERIE INSURANCE EXCHANGE                :    IN THE SUPERIOR COURT OF
                                       :          PENNSYLVANIA
                 v.                    :
                                       :
MICHAELA LOBENTHAL,                    :
DEVIN JOHN MILLER, KORY L. BOYD,       :
AND MARK D. BOYD, INDIVIDUALLY         :
AND AS PARENT AND NATURAL              :
GUARDIAN OF KORY L. BOYD               :
                                       :
APPEAL OF: MICHAELA LOBENTHAL,         :         No. 2031 WDA 2013
                                       :
                      Appellant        :

           Appeal from the Order Entered November 20, 2013,
              in the Court of Common Pleas of Erie County
                     Civil Division at No. 13247-2012

BEFORE: FORD ELLIOTT, P.J.E., SHOGAN AND MUSMANNO, JJ.
J. A27010/14 & J. A27011/14

OPINION BY FORD ELLIOTT, P.J.E.:                      FILED APRIL 15, 2015

     Michaela Lobenthal, Kory L. Boyd, and Mark D. Boyd appeal from the

order of November 20, 2013, granting summary judgment for Erie Insurance

Exchange (“Erie”), plaintiff in this declaratory judgment action, and ruling

that Erie has no duty to defend or indemnify Michaela Lobenthal with respect

to any of the claims brought by the Boyds in the underlying lawsuit. After

careful review, we reverse.1

     The trial court has set forth the history of this case as follows:

                 Boyd Defendants filed the underlying tort
           claim[Footnote 1]          against       Defendants
           Lobenthal[Footnote 2] and [Devin] Miller[Footnote 3]
           pursuant to injuries sustained by Defendant [Kory L.]
           Boyd in a motor vehicle accident.          The facts
           surrounding the accident are not in dispute.
           Defendant Boyd suffered injuries as the result of a
           car accident on September 26, 2010, while a
           passenger in a car driven by Defendant Miller.

                 [Footnote  1] The claims by Boyd
                 Defendants      against      Defendants
                 Lobenthal and Miller were consolidated at
                 docket 11321-2011.

                 [Footnote  2]  Defendant   Lobenthal’s
                 parents were dismissed from the
                 underlying tort case.   Praecipe for
                 Voluntary Discontinuance, June 2,
                 2011 at 11353-2011.

1
  Michaela Lobenthal and the Boyds filed separate appeals; however, as they
involve the same issues, we have consolidated them sua sponte.

                                     -2-
J. A27010/14 & J. A27011/14

                  [Footnote  3] Default judgment was
                  entered against Defendant Miller on
                  March 22, 2013, at this docket.

                   Counts Two and Three of the underlying
            Complaint allege Defendant Lobenthal engaged in
            “negligent, careless, reckless, outrageous, willful and
            wanton conduct” and “concerted tortuous [sic]
            conduct” in that she permitted the “possession and
            consumption” of controlled substances by Defendant
            Miller[Footnote 4] at a property owned by Defendant
            Lobenthal’s parents which was covered by Plaintiff’s
            insurance policy.

                  [Footnote 4] Count One of the Complaint
                  set forth a negligence claim against
                  Defendant Miller.

                  On October 28, 2011, the Court overruled
            Defendant Lobenthal’s Preliminary Objections finding
            that as Defendant Lobenthal was not liable to
            Defendant Boyd for the injuries resulting from
            Defendant Miller’s alcohol consumption, her “liability
            in Counts II and III turns solely on whether she
            furnished controlled substances to Miller.” Order,
            J. Connelly, Oct. 28, 2011 (emphasis in original).
            On September 26, 2012, Plaintiff filed its Action for
            Declaratory Judgment and the instant Motion for
            Summary Judgment on July 22, 2013.                On
            August 14, 2013, Boyd Defendants filed their Motion
            [Footnote 5] for Summary Judgment.

                  [Footnote   5] On August 15, 2013,
                  Defendant Lobenthal filed her Response
                  and Brief in Opposition to Plaintiff’s
                  Motion     for   Summary      Judgment
                  incorporating in full Boyd Defendants’
                  responses.

Opinion and Order, 11/20/13 at 1-2 (additional citations to the pleadings

omitted).

     Appellants have raised the following issues for this court’s review:

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J. A27010/14 & J. A27011/14

            A.    Whether Erie, after tendering a defense of
                  Michaela Lobenthal under the insurance policy,
                  ever reserved its right to deny a defense and
                  indemnification to her when its reservation of
                  rights letters were expressly limited to claims
                  against Adam and Jacqueline Lobenthal?

            B.    Whether Erie satisfied its obligation to provide
                  timely notice to Michaela Lobenthal (an adult)
                  when it addressed both reservations of rights
                  letters to her parents, Adam and Jacqueline
                  Lobenthal, sent it [sic] to the home, and sent a
                  copy to Lobenthal’s insurance defense counsel?

            C.    Whether Erie satisfied its obligation to provide
                  timely notice to Michaela Lobenthal when it
                  knew from the “four corners” of the Complaint
                  that it may apply the “controlled substances”
                  exclusion, but did not provide her with notice
                  to that effect until after insurance defense
                  counsel had gotten the covered claims
                  (providing   alcohol)    dismissed    by   filing
                  Preliminary Objections[?]

            D.    Whether Erie played “fast and loose” by
                  withholding its reservation of rights under the
                  “controlled substances” exclusion until it had
                  first obtained an Order dismissing all claims
                  that fell within the coverage of the policy
                  resulting in prejudice to Michaela Lobenthal[?]

            E.    Whether Lobenthal and Boyd established a
                  sufficient basis for a grant of summary
                  judgment against Erie[?]

Boyds’ brief at 5-6.

            Initially, we note:

                  Our scope of review of a trial court’s
                  order disposing of a motion for summary
                  judgment is plenary. Accordingly, we
                  must consider the order in the context of
                  the entire record.     Our standard of

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J. A27010/14 & J. A27011/14

                review is the same as that of the trial
                court; thus, we determine whether the
                record documents a question of material
                fact concerning an element of the claim
                or defense at issue. If no such question
                appears, the court must then determine
                whether the moving party is entitled to
                judgment on the basis of substantive
                law.     Conversely, if a question of
                material fact is apparent, the court must
                defer the question for consideration of a
                jury and deny the motion for summary
                judgment. We will reverse the resulting
                order only where it is established that
                the court committed an error of law or
                clearly abused its discretion.

          Grimminger v. Maitra, 887 A.2d 276, 279
          (Pa.Super.2005) (quotation omitted). “[Moreover,]
          we will view the record in the light most favorable to
          the non-moving party, and all doubts as to the
          existence of a genuine issue of material fact must be
          resolved against the moving party.”         Evans v.
          Sodexho, 946 A.2d 733, 739 (Pa.Super.2008)
          (quotation omitted).

American Nat. Property and Cas. Companies v. Hearn, 93 A.3d 880,

883 (Pa.Super. 2014), quoting Ford Motor Co. v. Buseman, 954 A.2d 580,

582-583 (Pa.Super. 2008), appeal denied, 970 A.2d 431 (Pa. 2009).

          “The proper construction of a policy of insurance is
          resolved as a matter of law in a declaratory
          judgment action.” Alexander v. CNA Insurance
          Co., 441 Pa.Super. 507, 657 A.2d 1282, 1284
          (1995), appeal denied, 543 Pa. 689, 670 A.2d 139
          (1995) (citation omitted).       “The Declaratory
          Judgments Act may be invoked to interpret the
          obligations of the parties under an insurance
          contract, including the question of whether an
          insurer has a duty to defend and/or a duty to
          indemnify a party making a claim under the policy.”
          General Accident Ins. Co. of America v. Allen,

                                  -5-
J. A27010/14 & J. A27011/14

           547 Pa. 693, 706, 692 A.2d 1089, 1095 (1997)
           (citations omitted). Both the duty to defend and the
           duty to indemnify may be resolved in a declaratory
           judgment action. Id. at 707, 692 A.2d at 1096,
           citing Harleysville Mutual Ins. Co. v. Madison,
           415 Pa.Super. 361, 609 A.2d 564 (1992) (insurer
           can seek determination of obligations to insured
           before conclusion of underlying action) (additional
           citations omitted).

                  It is well established that an insurer’s
                  duties under an insurance policy are
                  triggered by the language of the
                  complaint against the insured.         In
                  determining whether an insurer’s duties
                  are triggered, the factual allegations in
                  the underlying complaint are taken as
                  true and liberally construed in favor of
                  the insured.

           Indalex Inc. v. National Union Fire Ins. Co. of
           Pittsburgh, 83 A.3d 418, 421 (Pa.Super.2013)
           (citation and quotation marks omitted).

                  The obligation of an insurer to defend an
                  action against the insured is fixed solely
                  by the allegations in the underlying
                  complaint.     As long as a complaint
                  alleges an injury which may be within the
                  scope of the policy, the insurer must
                  defend its insured until the claim is
                  confined to a recovery the policy does
                  not cover.

           Erie Ins. Exchange v. Fidler, 808 A.2d 587, 590
           (Pa.Super.2002) (citations omitted).

Id. at 883-884.

           “[W]e focus primarily on the duty to defend because
           it is broader than the duty to indemnify. If an
           insurer does not have a duty to defend, it does not
           have a duty to indemnify. However, both duties flow

                                    -6-
J. A27010/14 & J. A27011/14

            from a determination that the complaint triggers
            coverage.”

Id. at 884, quoting Indalex, supra (citations and quotation marks

omitted).

            Pennsylvania counterbalances the insurer’s broad
            obligation to defend even claims as to which
            coverage may not apply by providing the insurer the
            option of defending subject to a reservation of its
            right later or simultaneously to contest coverage:

                  Where the insurer assumes the duty to
                  defend, the insurer can simultaneously
                  challenge whether the claim is covered
                  under the insurance policy, even if the
                  underlying case settles.     An insurer’s
                  defense of the insured, therefore, does
                  not waive the insurer’s claims that a
                  policy exclusion applies. It is common
                  practice for insureds and insurance
                  companies to file declaratory judgment
                  actions when there is a dispute regarding
                  whether the insurer has a duty to defend
                  and/or indemnify . . . .

Babcock & Wilcox Co. v. American Nuclear Insurers, 76 A.3d 1, 12

(Pa.Super. 2013), appeal granted in part, 84 A.3d 699 (Pa. 2014),

quoting Step Plan Servs., Inc., v. Koresko, 12 A.3d 401, 419 (Pa.Super.

2010) (internal quotation marks and citations omitted).

            It is generally recognized that

            (a) liability insurer will not be estopped to set up the
            defense that the insured’s loss was not covered by
            the insurance policy, notwithstanding the insurer’s
            participation in the defense of an action against the
            insured, if the insurer gives timely notice to the
            insured that it has not waived the benefit of its
            defense under the policy. However, a reservation of

                                     -7-
J. A27010/14 & J. A27011/14

            rights in this respect, to be effective, must be
            communicated to the insured. It must fairly inform
            the insured of the insurer’s position and must be
            timely, although delay in giving notice will be
            excused where it is traceable to the insurer’s lack of
            actual or constructive knowledge of the available
            defense.

Brugnoli v. United Nat. Ins. Co., 426 A.2d 164, 167 (Pa.Super. 1981),

quoting 14 G. Couch, Cyclopedia of Insurance Law s 51:83 (2d ed. 1965)

(footnotes omitted).

      In the instant case, Erie sent two reservation of rights letters, one on

April 28, 2011, prior to the underlying complaint being filed, and another on

February 7, 2012. Both letters were addressed only to the named insureds,

Michaela’s parents, Adam and Jacqueline Lobenthal; neither letter mentioned

the defendant in the underlying tort action, Michaela Lobenthal, who had

attained majority status as of November 20, 2010. These letters reserved

Erie’s right to disclaim coverage and liability for any judgment “that may be

rendered against yourself,” i.e., against Adam and Jacqueline Lobenthal.

Furthermore, only the second reservation of rights letter, sent approximately

three and one-half months after the preliminary objections were decided,

referenced the controlled substances exclusion in the policy.

      While not binding on this court, we find the case of Luther v. Fuller,

30 Pa.D.&C.2d 725 (Cambria Co. 1963), to be instructive. In that case, the

defendant was a minor son of the named insured.          The defendant was

involved in an accident while driving an automobile covered by the policy.

                                    -8-
J. A27010/14 & J. A27011/14

Five days before trial, the insurer notified the named insured that although it

intended to defend the action, it reserved the right to disclaim liability. Id.

at 727. No notice of reservation or disclaimer was sent to the defendant.

Id. The trial court held that the insurer was estopped to deny liability where

it failed to notify the defendant of a reservation of its right to disclaim. The

insurer notified only one of the named insureds, who was not the defendant

in the action, of its right to disclaim liability.

              Although research fails to disclose any Pennsylvania
              cases on point, we are of the opinion the garnishee,
              in possession of all the facts eight months before
              trial, had a duty to advise the defendant of its
              nonwaiver, or at least proceed by way of declaratory
              judgment to determine whether or not it was liable.
              Defendant claimed to be a “person insured” under
              the policy by virtue of his status as a member of the
              household of the named insureds. If, in fact, the
              garnishee had a defense to liability, notice should
              have been given to him and not the named insureds
              who could suffer no loss if the defense were
              successful.

Id. at 738.

      Similarly, here, Erie sent reservation of rights letters to the named

insureds, Adam and Jacqueline Lobenthal, but not to Michaela Lobenthal,

who was an additional insured as a member of her parents’ household. On

June 2, 2011, the action was voluntarily discontinued as against Adam and

Jacqueline     Lobenthal.         The     only       remaining   defendants   were

Michaela Lobenthal and Miller, yet Erie failed to copy Michaela Lobenthal on

the February 7, 2012 reservation of rights letter. We also note that unlike

                                         -9-
J. A27010/14 & J. A27011/14

the defendant in Luther, Michaela Lobenthal was an adult and was clearly

entitled to notice.

        Erie argues that notice was sent to Michaela’s attorney, which can

fairly be imputed to Michaela. In addition, Erie contends that as a resident

of her parents’ household, it is unlikely Michaela was not made aware of the

reservation of rights letters.   Erie also states that, in any event, Michaela

had actual notice of Erie’s position when it filed the instant declaratory

judgment action.

        In Knox-Tenn Rental Co. v. Home Ins. Co., 2 F.3d 678 (6th Cir.

1993), Home Insurance Company (“Home”) issued a professional liability

policy to Robert Lowe’s (“Lowe”) employer, Jenkins Insurance, Inc.

(“Jenkins”).   The policy contained an exclusion for criminal or fraudulent

acts.   Id. at 680.   The underlying suit brought by Knox-Tenn Rental Co.

(“KTR”) alleged a fraudulent scheme whereby the defendants conspired to

overcharge KTR for its insurance premiums and return the overcharges in

cash to KTR’s vice-president and general manager. Id. Lowe was treasurer

of Jenkins and was insured under a clause in the policy providing coverage

for directors and officers.

        Home furnished a defense and provided counsel.       Id.   In addition,

Home sent Jenkins a reservation of rights letter reserving all rights and

defenses. Id. Home sent a copy of this letter to counsel but did not send a

copy to Lowe or advise him that coverage might not be available under the

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J. A27010/14 & J. A27011/14

policy. Id. After judgment was entered, Home informed Lowe that it would

not pay the judgment, citing the policy’s fraud exclusion. Id. KTR and Lowe

brought a declaratory judgment action claiming that Home was estopped

from denying coverage because it failed to reserve its rights as to Lowe. Id.

at 680-681.

     The Sixth Circuit Court of Appeals agreed, finding that notice of

reservation of rights to Jenkins and insurance defense counsel did not

constitute notice to Lowe. The court refused to impute the notice received

by Jenkins to Lowe merely because he was employed by the company. Id.

at 682.   Moreover, the court in Knox-Tenn stated that even if the notice

provided to Jenkins could somehow be attributed to Lowe, the reservation of

rights letter only gave notice with respect to Home’s defense of Jenkins and

made no reference to Lowe.        Id. at 683.   The letter was addressed to

Jenkins and did not reserve Home’s rights with respect to its defense of

Lowe:

              [E]ven if Lowe read the letter or its contents
              somehow came to his attention through co-workers,
              he reasonably could have concluded that Home’s
              reservation of rights applied to the company and not
              to him in light of the fact that the letter was
              addressed only to Jenkins Insurance, although he
              and several others had been named as individual
              defendants in the same suit.

Id. at 684.

     Similarly, here, Erie’s reservation of rights letter was addressed solely

to the named insureds, Adam and Jacqueline Lobenthal, not to Michaela.

                                     - 11 -
J. A27010/14 & J. A27011/14

The letter made no mention of Michaela.       As in Knox-Tenn, we will not

impute notice to Michaela based on the fact the letter was sent to counsel

where the letter was addressed to her parents and made no reference

whatsoever to Michaela. By the same token, we refuse to attribute notice to

Michaela based on the fact that she was living with her parents at the time.

Michaela was an adult at the time the lawsuit was filed, and there is no

evidence that she actually read the letter.    Michaela was the defendant in

the underlying tort action, and the letter should have been addressed in her

name.

      We also agree with appellants that Erie’s February 7, 2012 reservation

of rights letter was untimely. The underlying complaint, filed June 27, 2011,

alleged that Michaela permitted and encouraged the use of controlled

substances at the party, including marijuana and Xanax, and supplied Miller

with controlled substances. Erie was on notice when the complaint was filed

that these allegations fell under the controlled substances policy exclusion;

yet, Erie waited until February 2012 to send a reservation of rights letter.

            When an insurance company or its representative is
            notified of loss occurring under an indemnity policy,
            it becomes its duty immediately to investigate all the
            facts in connection with the supposed loss as well as
            any possible defense on the policy. It cannot play
            fast and loose, taking a chance in the hope of
            winning, and, if the results are adverse, take
            advantage of a defect in the policy. The insured
            loses substantial rights when he surrenders, as he
            must, to the insurance carrier the conduct of the
            case.

                                    - 12 -
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Malley v. American Indemnity Corp., 146 A. 571, 573 (Pa. 1929).

Cf. Brugnoli, 426 A.2d at 168 (insurer’s letter sent within one week of

receiving the complaint was timely).

     Here, Erie waited to send its reservation of rights letter until over

three months had passed from disposition of its preliminary objections and

the only remaining claim related to Michaela’s alleged furnishing of

controlled substances, which was clearly excluded from coverage. Once the

allegations regarding furnishing of alcohol to Miller were dismissed, Erie no

longer had any duty to defend/indemnify Michaela.         Had Michaela been

informed of Erie’s intention to deny coverage when the suit was filed, she

could have engaged separate counsel and managed her own defense. Erie

contends that Michaela cannot demonstrate how she was prejudiced, where

the case was not yet listed for trial and Erie defended her zealously.

However, where an insurer fails to clearly communicate a reservation of

rights to an insured, prejudice may be fairly presumed:

           In this vein, the Missouri Court of Appeals has
           observed:

                 The insurance company, if it were
                 reserving a right to deny coverage under
                 its policy, would be more or less zealous
                 in its defense of the claim depending
                 upon its evaluation of its exposure under
                 its policy. Nothing chills one’s zeal for a
                 defense so much as the belief that, even
                 if he loses, it will cost him nothing. . . .
                 There would in many instances be a
                 conflict of interest on the insurance
                 company’s part . . . with the insurance

                                   - 13 -
J. A27010/14 & J. A27011/14

                   company being as much interested in
                   establishing facts which would result in
                   non-coverage as in establishing facts
                   showing the insured’s non-liability.

Babcock & Wilcox, 76 A.3d at 13, quoting Mid-Century Ins. Co. v.

McKelvey, 666 S.W.2d 457, 459 (Mo.Ct.App. 1984).

      As astutely observed in Knox-Tenn, supra, “Analyzing how a case

might have gone differently for an insured if he had been aware of a

reservation of rights is an inherently speculative undertaking.” Knox-Tenn,
2 F.3d at 685 (footnote omitted).        At a minimum, Michaela could have

declined Erie’s offer to defend and retained her own lawyer. Id.; Brugnoli,
426 A.2d at 168 n.6 (“consent of the insured is necessary if the insurer is to

retain control of defense of the action and at the same time reserve the right

to disclaim liability under the policy”), quoting 14 G.Couch, Cycopedia of

Insurance Law § 51:84 (2nd ed. 1965); Babcock & Wilcox, supra (an

insured has the option to decline a defense tendered subject to a reservation

of rights and furnish its own defense, either pro se or through independent

counsel retained at the insured’s expense).

      For these reasons, we determine that Michaela, as the defendant, was

entitled to notice of Erie’s reservation of its right to disclaim liability. Notice

to Michaela’s parents, the named insureds, and to insurance defense counsel

provided by Erie, was ineffective as to Michaela.             In addition, Erie’s

reservation of rights letter, sent approximately seven months after the

complaint was filed, was untimely.

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J. A27010/14 & J. A27011/14

     Order reversed.      Remanded with instructions to enter judgment for

Michaela Lobenthal. Jurisdiction relinquished.

Judgment Entered.

Joseph D. Seletyn, Esq.
Prothonotary

Date: 4/15/2015

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