Court Opinion

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Opinions of the United
1997 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

6-26-1997

Township of Center v. First Mercury
Precedential or Non-Precedential:

Docket 96-3290

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Recommended Citation
"Township of Center v. First Mercury" (1997). 1997 Decisions. Paper 139.
http://digitalcommons.law.villanova.edu/thirdcircuit_1997/139

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Filed June 26, 1997

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 96-3290

TOWNSHIP OF CENTER, BUTLER COUNTY,
PENNSYLVANIA; DEAN E. SCHWEINSBERG; and
DEBRA J. OESTERLING,

Appellants

v.

FIRST MERCURY SYNDICATE, INC.

On Appeal from the United States District Court
for the Western District of Pennsylvania
(D.C. Civil Action No. 95-cv-00837)

Argued January 28, 1997

Before: BECKER and ROTH, Circuit Judges and
ORLOFSKY,1 District Judge

(Opinion Filed June 26, 1997)

William D. Kemper, Esq. (Argued)
209 West Diamond Street
Butler, Pennsylvania 16001-5712

Attorney for Appellants

_________________________________________________________________
1. Honorable Stephen M. Orlofsky, United States District Judge for the
District of New Jersey, sitting by designation.
David P. Helwig, Esq. (Argued)
Sharlock, Repcheck & Mahler
600 Grant Street
3280 USX Tower
Pittsburgh, Pennsylvania 15219

Attorney for Appellee

OPINION OF THE COURT

ROTH, Circuit Judge

This appeal is from the district court's granting of
summary judgment in favor of defendant insurance
company, First Mercury Syndicate, Inc. The issue before us
is whether dismissed employees, who brought underlying
wrongful discharge actions, are "insureds" within the
meaning of a policy provision which excludes coverage for
actions brought by "insureds against insureds." We
conclude that the ex-employees are not "insureds" within
the meaning of the policy exclusion. We will, therefore,
reverse and remand this case to the district court to enter
judgment in favor of the Township of Center and Township
supervisors, Dean E. Schweinsberg and Debra J. Oesterling
(Township).

I. Facts

On January 4, 1993, the Township dismissed three
employees. These former employees filed suit in the United
States District Court for the Western District of
Pennsylvania, on December 10, 1993, against the
Township, Schweinsberg and Oesterling. Schweinsberg and
Oesterling were duly elected township supervisors and were
serving in their capacities of elected supervisors at the time
the dismissed employees filed the underlying lawsuits. The
former employees alleged that their discharge violated their
constitutional rights and the Age Discrimination in
Employment Act and that it was a result of a common law
conspiracy. One of the former employees also filed suit in
state court, on January 13, 1993, alleging that he was

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wrongfully discharged from employment in violation of state
law.

At the time the employees were discharged, First Mercury
was Township's errors and omissions insurer and provided
the Township with its public officials' liability insurance
policies. The relevant contracts of insurance have the
effective date and policy periods of March 24, 1992,
through March 23, 1993, and March 24, 1993, through
March 23, 1994. Under the policies, the Township was the
named insured. Schweinsberg and Oesterling were also
"insureds." The relevant provisions of both policies are
identical.

Township notified First Mercury of the wrongful
discharge actions in a timely fashion and demanded
defense and indemnity coverage under the policies. First
Mercury issued a denial letter, declining to defend or
indemnify the Township, Schweinsberg or Oesterling. In
taking this position, First Mercury relied on Exclusion V of
the policy, which excludes claims made by insureds against
other insureds. The Township then brought this declaratory
judgment action to determine coverage. The parties brought
cross motions for summary judgment. The district court
granted summary judgment in favor of First Mercury,
declaring that First Mercury had no duty to defend or
indemnify the Township or its supervisors in the underlying
actions. The Township appealed.

II. Discussion

The district court had jurisdiction pursuant to 28 U.S.C.
§ 1332 by reason of diversity of citizenship. We have
jurisdiction of the district court's final order pursuant to 28
U.S.C. § 1291. We "exercise[ ] plenary review of the district
court's decisions resolving cross-motions for summary
judgment." United Parcel Service, Inc. v. Int'l Bhd. of
Teamsters, Chauffeurs, Warehousemen and Helpers of
America, Local Union No. 430, 55 F.3d 138, 140 (3d Cir.
1995). Summary judgment is only appropriate when, after
consideration of the evidence in the light most favorable to
the nonmoving party, no genuine issue of material fact
remains in dispute and the moving party is entitled to

                    3
judgment as a matter of law. Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 247 (1986); Fed. R. Civ. P. 56(c). In this
appeal, the parties agree that there is no factual dispute.
Rather, the question is whether the district court correctly
interpreted the provisions of the contract. A district court's
conclusion as to the legal operation of an insurance policy
is a question of law subject to plenary review. Dickler v.
CIGNA Property & Casualty Co., 957 F.2d 1088, 1094 (3d
Cir. 1992).

The primary issue in this action is whether the "insured
v. insured" exclusion should prevent coverage of a wrongful
discharge action even though, when the claim was made,
the discharged employees were no longer employed by the
Township. The policy language relevant to the scope of
coverage is as follows:

A. [I]f, during the "policy period," any "claim" or
"claims" are first made against the "Insured"
individually or collectively, for a "wrongful act,"
[First Mercury] will pay, on behalf of the"Insured,"
all "loss" which the "Insured" shall become legally
obligated to pay as "damages" in accordance with
the terms of this policy . . . .

The policy contains the following exclusionary language:

WE SHALL NOT BE LIABLE TO MAKE ANY PAYMENT
FOR "LOSS" IN CONNECTION WITH ANY "CLAIM" OR
"CLAIMS" MADE AGAINST THE "INSURED" BASED
UPON OR ATTRIBUTABLE TO:

V. Any claims by the "governmental entity" against an
"insured" or claims by an "insured" against another
"insured."

First Mercury contends that the ex-employee/plaintiff's
in the underlying actions are "insureds" within the meaning
of the "insured v. insured exclusion." Therefore, because
the underlying suits were brought by insureds, discharged
employees, against other insureds, the Township and the
supervisors, First Mercury argues that Exclusion V
precludes coverage.

"Insureds" is defined in the policies as follows:

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A. [A]ll persons acting within the scope of their official
duties who were, now are or shall be lawfully
elected or lawfully appointed officials and members
of the "Governmental Entity"

It is the Township's position that the Plaintiffs in the
underlying actions are not insureds within the policy
definition because at the time the claims were made they
were no longer employees of the Township.2

Under Pennsylvania law, exclusions from an insurance
policy must be clearly worded and conspicuously displayed.
Pacific Indemnity Co. v. Linn, 766 F.2d 754 (3d Cir. 1985).
Furthermore, the policy must unequivocally indicate
coverage or non-coverage. Lucker Manufacturing v. Home
Ins. Co., 23 F.3d 808, 814 (3d Cir. 1994) (citing Hartford
Mutual Ins. Co. v. Moorhead, 396 Pa. Super. 234, 578 A.2d
492, 503 (1990)). The district court determined that the
"insured v. insured" exclusion was unambiguous, "explicitly
exclud[ing] coverage for claims brought by `insureds'
against other `insureds,' " and defining" `insureds' to
include elected and appointed officials as well as
employees." The court also decided that the relevant time
period for determining the applicability of the exclusionary
clause was the point when the alleged wrongful acts of the
Township defendants occurred, not when the claims
against them were made. Thus, the court concluded,
because the ex-employee/plaintiffs were "employees" at the
time of the alleged wrongful acts, they were "insureds"
within the meaning of the policy and excluded from
coverage. We must decide whether the status of "insureds"
under the contract is determined at the time the claims
were made or at the time of the alleged wrongful acts.

The policies in question are "claims made" policies. The
policies state:

EXCEPT TO SUCH EXTENT AS MAY OTHERWISE BE
PROVIDED HEREIN, THE COVERAGE OF THIS
POLICY IS LIMITED TO LIABILITY FOR ONLY THOSE
_________________________________________________________________

2. The appellants further argue that the First Mercury contracts are
riddled with ambiguities. In view of our decision to reverse the judgment
of the district court, we do not need to address the ambiguity issue.

                    5
"CLAIMS" THAT ARE FIRST MADE AGAINST THE
INSURED AND REPORTED TO THE COMPANY WHILE
THE POLICY IS IN FORCE.

A "claims made" policy, as opposed to an "occurrence"
policy, protects the policy holder against claims made
during the life of the policy, rather than against
"occurrences" which happen during the policy period and
for which claims may arise later. Bolden v. Niagra Fire Ins.
Co., 814 F. Supp. 444 (E.D. Pa. 1993). Therefore, a "claims
made" policy provides coverage for a wrongful act
regardless of when it took place, as long as a claim is made
during the relevant policy period.3

Both the district court and First Mercury rely on City of
Harrisburg v. International Surplus Lines Insurance Inc., 596
F. Supp. 954, 959 (M.D. Pa. 1984), aff'd mem. 770 F.2d
1067 (3d Cir. 1985), to support the proposition that for
both "claims made" and "occurrence" policies, the relevant
time for determining a person's status as an insured is
when the alleged wrongful conduct took place, not when
the claim is made. In City of Harrisburg, the district court
held that the mayor of Harrisburg was not covered under a
public officials' liability policy because, at the time of the
mayor's allegedly wrongful conduct, he was the mayor-elect
and had no official public duties or responsibilities.
Therefore, the court concluded, he was not yet a public
official or employee of Harrisburg and consequently not an
"insured" under the policy.

We find City of Harrisburg to be distinguishable from the
case at bar. In City of Harrisburg, the issue was whether
the wrongful act was committed by a person covered by the
policy. The policy defined wrongful act as "any actual or
alleged error or misstatement or misleading statement or
act of omission or neglect . . . by an insured, as a public
official." The court interpreted this language to indicate that
for coverage under the policy to be triggered, the wrongful
_________________________________________________________________

3. We note that many claims-made policies include a provision negating
or restricting coverage for events which occurred prior to the policy
period. The instant policies, however, are "pure" claims-made policies,
providing complete retroactive coverage save one minor exception not
relevant to this case.

                    6
act must have been committed by a then-insured public
official. In the case at bar, however, the crucial question is
not whether the wrongful act was committed by a
"then-insured" official. The issue here is whether it is
determinative for coverage that the person, who suffered
the injury from the alleged wrongful act, was also covered
by the policy at the time of the wrongful act.

We conclude, because the policy here is a "claims made"
policy, that the determination of the status of the injured
party in the "insured v. insured" context must be made as
of the time that the claim is made. This result is consistent
with the language of the policy. Under the policy, First
Mercury was liable for any claims made during the policy
period for wrongful acts which occurred even before it was
on the risk. Accordingly, it is irrelevant whether the
Township or the plaintiffs were insureds of First Mercury at
the time of the wrongful act. The focus is whether the
plaintiffs were insureds at the time the claim was made.
This conclusion is supported by the purpose behind claims-
made policies, which, as previously noted, is to insure
against a claim, rather than against an occurrence.

This conclusion finds further support in the policy
underlying the "insured v. insured" exclusion. The primary
focus of the exclusion is to prevent collusive suits in which
an insured company might seek to force its insurer to pay
for the poor business decisions of its officers or managers.
The exclusion arose from a wave of litigation in the mid-
1980's when corporations attempted to use their Director
and Officer policies to recoup operational losses. BARRY R.
OSTRAGER, THOMAS R. NEWMAN, HANDBOOK ON INSURANCE
COVERAGE DISPUTES § 20.02(g) at 778 (7th ed. 1994). Where,
however, it is clear that the underlying action is not
collusive, the exclusion has not precluded coverage. See,
e.g., Fidelity and Deposit Co. of Maryland v. Zandstra, 756
F. Supp. 429, 432 (N.D. Cal. 1990); Conklin, Inc. v. Nat'l
Union Fire Ins. Co., No. 4-86-680, 1987 WL 108957, at *6
(D. Minn. Jan. 28, 1987) (the endorsement is not designed
to exclude wrongful discharge suits, but rather is "intended
to prevent collusive or friendly lawsuits, where, for example,
the insured company sues its directors or officers for their
wrongful acts"); American Cas. Co. v. FDIC , No. 86-4018,

                     7
1990 WL 66505, at *41 (N.D. Iowa Feb. 26, 1990) (the
purpose "intended to be served by the insured v. insured
exclusion" is to exclude coverage for "internecine warfare
and collusive suits among officers and directors"). Thus,
because the focus is on the nature of the underlying suit,
the relevant time period for determining the status of the
insured for purposes of the exclusion should be when the
claim is made.

Here, there is no contention that the underlying actions
are collusive. Moreover, the discharged employees are not
seeking coverage under the policy. When the underlying
actions were brought against the Township, and hence by
the time the claims were made, the plaintiffs were no longer
employed by it. It is difficult to imagine a circumstance,
short of a conspiracy to defraud, in which a wrongful
discharge suit, brought by a former employee, could be
perceived as constituting a collusive act. We conclude,
therefore, that under the facts of this case the ex-
employees/plaintiffs are not insureds within the meaning of
the policies' exclusion.4

III. Conclusion

Because none of the ex-employee/plaintiffs in the
underlying action were employed by the Township at time
the claims were made, First Mercury's "insured v. insured"
exclusion does not apply. The district court's judgment in
favor of First Mercury is reversed, its order dated April 15,
1996, is vacated, and the case is remanded to the district
court to grant judgment in favor of the Township of Center
and the Township Supervisors, Dean E. Schweinsberg and
Debra Oesterling. Costs are to be taxed against appellee.

A True Copy:
Teste:

Clerk of the United States Court of Appeals
for the Third Circuit
_________________________________________________________________

4. In coming to this conclusion, we do not intend in any way to modify
the definitions of "insured" which appear in the policy provisions other
than in the "insured v. insured" exclusion.

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