                                                                                                                           Opinions of the United
1994 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


5-27-1994

Air Products and Chem., Inc. v. Hartford Acc. &
Indem. Co., et al.
Precedential or Non-Precedential:

Docket 91-1681




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                                                           1


            UNITED STATES COURT OF APPEALS
               FOR THE THIRD CIRCUIT



              NOS. 91-1681 and 91-1682


              AIR PRODUCTS AND CHEMICALS, INC.,
                                 Plaintiff

                         v.

    HARTFORD ACCIDENT AND INDEMNITY COMPANY; and
       LIBERTY MUTUAL INSURANCE COMPANY; and
         AETNA CASUALTY AND SURETY COMPANY,
                                 Defendants

                         v.

        NATIONAL UNION FIRE INSURANCE COMPANY
               OF PITTSBURGH, PA.; and
           THE TRAVELERS INSURANCE COMPANY,
                                  Third-Party Defendants

                         v.

          AIR PRODUCTS & CHEMICALS, INC.,
                                 Third-Party Defendant


         AETNA CASUALTY AND SURETY COMPANY,
                                 Appellant No. 91-1681

       HARTFORD ACCIDENT & INDEMNITY COMPANY,
                                  Appellant No. 91-1682


    Appeals from the United States District Court
       for the Eastern District of Pennsylvania
               D. C. Civil No. 86-7501



              Argued January 24, 1994

Before: MANSMANN, NYGAARD, and SEITZ, Circuit Judges.

                     Filed: May 31, 1994
                                                                      2


                   Valerie J. Munson (Argued)
Daniel W. Cantú-Hertzler
MILLER DUNHAM DOERING & MUNSON, P.C.
1515 Market Street, 13th Floor
Philadelphia, PA 19102
   Attorneys for Appellant
   Aetna Casualty & Surety Co.

George W. Mayo, Jr. (Argued)
Teresa C. Plotkin
Jonathan T. Rees
HOGAN & HARTSON
555 Thirteenth Street, N.W.
Washington, DC 20004-1109

John M. Fitzpatrick
DILWORTH, PAXSON, KALISH & KAUFFMAN
1735 Market Street
3200 Mellon Bank Center
Philadelphia, PA 19103
   Attorneys for Appellant
   Hartford Accident & Indemnity Co.

Sherry W. Gilbert (Argued)
Anthony F. King
HOWREY & SIMON
1299 Pennsylvania Avenue, N.W.
Washington, DC 20004

Stephen S. Ferrara
Richard H. Albert
LAW DEPARTMENT, AIR PRODUCTS & CHEMICALS, INC.
P. O. Box 538, 7201 Hamilton Boulevard
Allentown, PA 18195
   Attorneys for Appellee
   Air Products & Chemicals, Inc.
                          _______________


                        OPINION OF THE COURT

SEITZ, Circuit Judge.


          These appeals principally involve the duty of two

insurance carriers under Pennsylvania law to defend their insured

in numerous actions instituted against it.     The carriers contend
                                                                       3


that the claims asserted against their insured could not have

arisen during the periods of their policy coverage. Additionally,

if such duties to defend are found, they assert that the proper

allocation of defense and indemnity costs must be addressed.

            The district court had diversity jurisdiction, while we

have jurisdiction over partial summary judgment orders made final

by certification under Fed. R. Civ. P. 54(b).      Our standard of

review is plenary.    The parties agree that Pennsylvania law

controls.

                       I.   ACTION AGAINST AETNA

            Air Products & Chemicals, Inc. ("Air Products")

instituted this declaratory judgment action against, inter alia,
appellant Aetna Casualty & Surety Company ("Aetna"), which

provided it with coverage from May 16, 1951 to June 8, 1953.         Air

Products sought a determination that Aetna breached a duty that

it owed to defend and indemnify it1 in numerous underlying civil

actions pending against it, thus requiring Air Products to take

up its own defenses.    The plaintiffs in these underlying actions

alleged injuries as a result of their exposure at their

workplaces to fumes and gases emitted from welding rod material

sold to their employers by numerous defendants, including Air

Products.

            The parties here filed cross-motions for partial

summary judgment.    The district court granted Air Products'


1
Air Products' declaratory action sought reimbursement for
defense costs and expenses incurred in the underlying suits
through September 30, 1989.
                                                                    4


motion on the ground that Aetna had breached a duty to defend it2

in the underlying actions for injuries incurred during the period

of Aetna's coverage.   The district court denied Aetna's cross-

motion.   Aetna appeals.

           Generally speaking, under Pennsylvania law, the issuer

of a general liability insurance policy has a duty to defend its

insured when the allegations in the complaint against it could

potentially fall within the coverage of the policy.   Gedeon v.
State Farm Mut. Auto. Ins. Co., 188 A.2d 320, 321-22 (Pa. 1963);

see Cadwallader v. New Amsterdam Cas. Co., 152 A.2d 484, 488 (Pa.

1959); Wilson v. Maryland Cas. Co., 105 A.2d 304, 307 (Pa. 1954).

The district court applied that rule in finding for Air Products.

           The resolution of this dispute first requires us to

examine the pertinent allegations of a typical complaint in one

of the underlying actions to determine whether it could

potentially fall within the coverage of Aetna's policy.   We turn

to such allegations:
          The Defendants, [including Air Products]
          during all the times herein mentioned and for

2
Aetna's policy provided in pertinent part:
          II. Defense, Settlement, Supplementary
               Payments
          As respects the insurance afforded by the
          other terms of this Policy the Company shall:
               (a) defend any suit against the Insured
          alleging such injury, sickness, disease or
          destruction and seeking damages on account
          thereof, even if such suit is groundless,
          false or fraudulent; but the Company may make
          such investigation, negotiation and
          settlement of any claim or suit as it deems
          expedient . . . .
                                                                    5


          a long time prior thereto, have been and now
          are engaged in the manufacture of materials
          used for, insulation containing asbestos
          and/or welding rods, that the products
          manufactured, compounded, and prepared by
          Defendants, acting through their servants,
          employees, representatives and agents were
          and are placed on the market to be purchased
          and used by the public.
          . . . .

               The Plaintiff says that during the years
          1951 to 1984, inclusive, he was employed as a
          welder, and that in the performance of his
          duties as a welder, he was required to handle
          large quantities of the products manufactured
          and distributed by the above-named
          Defendants. That in addition to the fact
          that Plaintiff actually used the product
          manufactured by the above-named Defendants,
          [including Air Products] and many more, as a
          welder, and specifically many and various
          products containing asbestos, the Plaintiff
          says that on many of the jobs, while not
          using himself the specific products
          manufactured by the Defendants, he was
          nevertheless exposed to the dangerous
          materials and especially those dust, fibers,
          fumes, and particulates, which were used by
          other workers in the same area at which
          Plaintiff was working.
          [Emphasis added]



          Air Products says, as the district court concluded,

that the quoted allegations of the underlying complaint can be

read to charge that the plaintiff was injured as a result of

exposure to welding rod materials supplied, inter alia, by Air

Products during the 1951 to 1984 period.   This, of course,

included the period of Aetna's coverage.    Aetna responds in its

brief that the "allegations [in the underlying complaint] do not
                                                                   6


establish coverage, although neither do they expressly rule it

out."   Aetna Brief at 28.

           Given Aetna's own quoted response and the allegations

of the underlying complaint, the duty to defend provision of the

policy could have been triggered under Gedeon because the welding
rod material could have been sold by Air Products to the employer

in the underlying action during the covered period.   But Aetna

argues that the summary judgment record shows that Air Products

sold no welding rod material to any underlying employer during

the period of Aetna's coverage and thus summary judgment should

have been granted it on that ground.

           It is apparent that in seeking summary judgment Aetna

was asking the district court to go beyond the face of the

underlying complaint to decide Aetna's initial duty to defend.

This the district court was not free to do unless this case

triggered cases outside the general Pennsylvania rule.   Aetna

says that this is such a case.

           Aetna cites various cases that permit use of evidence

to determine whether the duty to defend has been triggered. Thus,

Aetna says that evidence of the absence of sale of welding rods

by Air Products to underlying employers should be useable to show

that it could not have been Air Products' welding rod materials

that caused the injury to the plaintiffs.   We acknowledge that

the New York federal district court case on which Aetna relies

most heavily seems to support its position. See Avondale Indus.

v. Travelers Indem. Co., 774 F. Supp. 1416, 1426 (S.D.N.Y. 1991)

(admitting evidence in an "unusual posture and [procedural]
                                                                     7


context" under Louisiana law).     However, our case is controlled

by Pennsylvania law and we reconcile the Commonwealth's lines of

cases differently.

          Aetna then cites a line of Pennsylvania cases dealing

with policy exclusions.3   In these suits, the allegations of the

underlying complaints clearly fall within policy exclusions.

Because the claims do not potentially trigger coverage under the

policy, there is no duty to defend.    See, e.g., Germantown Ins.

Co. v. Martin, 595 A.2d 1172 (Pa. Super. Ct. 1991), alloc.

denied, 612 A.2d 985 (Pa. 1992) (denying defense when the

allegations in the complaint of intentional gunshots clearly fell

within the policy's exclusion of "expected or intended" damage).

Extrinsic evidence is not required to resolve these disputes.

However, when the allegations may or may not fall within the

exclusion (and therefore the coverage), the insurer is required

to defend.   Safeguard Scientifics, Inc. v. Liberty Mut. Ins. Co.,

766 F. Supp. 324 (E.D. Pa. 1991), aff'd in part without op., 961

F.2d 209 (3d Cir. 1992) (table).

          Next, there is a subset of exclusion cases that

concerns exceptions to exclusions.    This is the group of cases

that permits extrinsic evidence to resolve the duty to defend.

The burden is on the insured, not the insurer, to introduce

evidence to show that the exclusion which appears to be triggered

3
We include in this category cases that construe policy
provisions as incapable of covering the conduct alleged. See,
e.g., Erie Ins. Exch. v. Transamerica Ins. Co., 533 A.2d 1363,
1368 (Pa. 1987) (holding that a policy insuring "use and
operation" of an automobile cannot be triggered by a 3-year-old,
who cannot "use" an automobile as a matter of law).
                                                                     8


does not apply after all.     See, Northern Ins. Co. v. Aardvark
Assocs., 942 F.2d 189 (3d Cir. 1991) (predicting that the

Pennsylvania Supreme Court would adopt the reasoning of Lower

Paxon Township v. United States Fidelity & Guaranty Co., 557 A.2d

393, 403 (Pa. Super. Ct. 1989) that held the insured had the

burden of proving the allegations in the complaint fell within a

"sudden and accidental" exception to a pollution exclusion);

Fischer & Porter Co. v. Liberty Mut. Ins. Co., 656 F.Supp. 132,

140 (E.D. Pa. 1986) (insured has burden to prove "sudden and

accidental" exception).     If the insured is successful in

demonstrating that coverage is not necessarily excluded by the

facts averred in the complaint, the insurer is required to defend

the underlying suit.

          We recognize that the rule permitting the introduction

of evidence to show that an exception to an exclusion applies,

while disallowing evidence to show that an exclusion applies

appears to be one-sided.     This construction against the insurer

and in favor of the insured, however, is consistent with general

insurance law principles and, in particular, the Pennsylvania

rule that requires only a "potential" of coverage of the

allegations in the complaint for the duty to defend to be

triggered.

             We conclude that the cases cited by Aetna do not take

this case outside the general Pennsylvania duty to defend rule.

On that premise we agree with the district court that Aetna had a

duty to defend.

                     II.   ACTION AGAINST HARTFORD
                                                                      9


            Air Products also instituted a diversity action under

Pennsylvania law seeking a declaratory judgment against Hartford

Accident and Indemnity Company ("Hartford").     Hartford was its

insurer from June 1, 1953 to September 30, 1972.     Air Products

sought a declaration that Hartford breached its duty to defend it

in underlying actions based on employee exposure to Air Products'

welding rods during the period of its coverage.

            Hartford essentially takes the same position as Aetna

on the duty to defend issue.      As we said in that case, Aetna's

position is contrary to Pennsylvania law covering the duty to

defend here.    If Pennsylvania law is to be changed, it must be

for the Supreme Court of Pennsylvania to do so.     Again, we affirm

the district court on this claim.

                           III.    INDEMNITY

            The judgment awarded Air Products against Hartford

included a sum to indemnify Air Products for amounts it paid to

settle underlying actions.    Hartford seems to argue that even if

it had a duty to defend, as we have found, any obligation to

indemnify was negated by the summary judgment record.     The short

answer is that on this record the district court found there was

an issue of material fact and thus properly denied summary

judgment.

            The position of Aetna on the indemnification issue is

far from pellucid.    It is not clear why it is entitled to advance

this issue here when the judgment appealed contains no obligation

on Aetna's part to indemnify Air Products.     In any event, if its

argument is based on some protective basis or otherwise, the
                                                                               10


answer here is that there is no basis on the record before us to

modify the judgment unless it impacts on the judgment.

                  IV.   APPORTIONMENT OF DEFENSE AND INDEMNITY COSTS

            Because two policies were triggered by the pre-1962

welding rod claims, allocation of the defense and indemnity costs

had to be determined.         The district court relied on the decision

of   the   Philadelphia       Court    of    Common   Pleas     in   J.H.   France

Refractories Co.v. Allstate Ins. Co., No. 3933 (Phila. Ct. C.P.

Apr. 18, 1986) ("France I")4 for its determination.                    It stated

that France I "constitute[d] the best statement of Pennsylvania

law concerning the designation of a triggered policy for coverage

in a particular underlying action . . . ."                  Air Prods., 707 F.

Supp. at 769.

            The    district     court       adopted   the   "chronological    and

seriatim" method of allocation discussed in France I.                 Under this

method, the first policy triggered must defend and indemnify the

insured until the policy limit is reached.                      The next-in-time

policy is then obligated, and so forth until the policies are

exhausted or until the insured is fully reimbursed.

            The     Supreme    Court        of   Pennsylvania     overruled   the

chronological and seriatim method of allocation in its decision

in J.H. France Refractories Co. v. Allstate Ins. Co. ("France

III"), 626 A.2d 502 (Pa. 1993), rev'g 578 A.2d 468 (Pa. Super.

1990) ("France II").       Under France III, as the allocation applies

4
Vacated on jurisdictional grounds, 539 A.2d 1345 (Pa. Super.
1988), rev'd, 555 A.2d 797 (Pa. 1989), on remand, 578 A.2d 468
(Pa. Super. 1990) ("France II"), aff'd in part, rev'd in part,
626 A.2d 502 (Pa. 1993) ("France III").
                                                                                11


to the duty to indemnify, if more than one policy is triggered,

the insured "should be free to select the policy or policies

under which it is to be indemnified."                  Id. at 508.     When the

policy   limits   of   the    chosen   policy    are     exhausted,   then     the

insured is entitled to choose again from the triggered policies

and continue to do so until fully indemnified for the claims.                  In

regard to the allocation of the liability associated with the

duty to defend, the Supreme Court held that the insurers have the

right to select which of the insurers will undertake a defense.

If the insurers cannot decide, then the insured may designate

which insurer it wishes to have defend the claims.               Id. at 510.

           Hartford    and    Aetna    argue    that    this   case   should    be

remanded to the district court for reconsideration in light of

the intervening Pennsylvania Supreme Court decision in France

III.     We   agree    that   a     federal    court    exercising    diversity

jurisdiction is bound to follow the law as decided by the highest

court of the state even if it has changed during the pendency of

the federal action.      Vandenbark v. Owens-Illinois Glass Co., 311

U.S. 538, 543 (1941).          The district court's order allocating

costs relied on a statement of Pennsylvania law that has since

been overruled by an intervening decision of the Supreme Court of

Pennsylvania.     The pertinent provisions of the district court's

order will be vacated and the case remanded so that the district

court can reconsider its order in light of France III.

                               V.     CONCLUSION

           The order of the district court will be affirmed to the

extent that it finds that Hartford and Aetna had a duty to
                                                                  12


defend. The order of the district court will be vacated and

remanded to the district court to the extent it apportions

defense costs and, if appropriate, indemnity costs so that they

may be determined in accordance with France III.
