                                                                                                                           Opinions of the United
2004 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


5-6-2004

Rector Wardens v. Amer Natl Fire Ins
Precedential or Non-Precedential: Non-Precedential

Docket No. 03-1703




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                                                                  NOT PRECEDENTIAL


                        IN THE UNITED STATES COURT
                                 OF APPEALS
                            FOR THE THIRD CIRCUIT


                             NOS. 03-1703 and 03-1732


                THE RECTOR, WARDENS AND VESTRYMEN OF
            ST. PETER’S CHURCH IN THE CITY OF PHILADELPHIA

                                          v.

             AMERICAN NATIONAL FIRE INSURANCE COMPANY;
                 AGRICULTURAL INSURANCE COMPANY,
                             Appellants


                         On Appeal From the United States
                                     District Court
                       For the Eastern District of Pennsylvania
                        (D.C. Civil Action No. 00-cv-02806)
                        District Judge: Hon. Herbert J. Hutton


                              Argued January 27, 2004

        BEFORE: NYGAARD, FUENTES and STAPLETON, Circuit Judges

                            (Opinion Filed May 6, 2004)




Richard L. McMonigle, Jr. (Argued)
Tracey N. Kilcullen
1600 John F. Kennedy Boulevard
Four Penn Center
Philadelphia, PA 19103
 Attorneys for Appellants
Stephen J. Mathes
Kevin J. Kotch (Argued)
Hoyle, Fickler, Herschel & Mathes
One South Broad - Suite 1500
Philadelphia, PA 19107
 Attorneys for Appellee




                               OPINION OF THE COURT




STAPLETON, Circuit Judge:

              American National Fire Insurance Company (“ANF”) and Agricultural

Insurance Company (“Agricultural”; collectively, the “Appellants”) appeal from the

judgment entered on behalf of plaintiff The Rector, Wardens and Vestrymen of St. Peter’s

Church in the City of Philadelphia (“St. Peter’s Church” or “the Church”). St. Peter’s

Church filed this diversity suit against Appellants alleging, inter alia, that ANF breached

its duty to defend under an insurance contract. In ruling on the parties’ cross-motions for

summary judgement, the District Court held that: (1) ANF’s policy imposed a duty upon

it to provide a defense to the original and the amended complaints in the underlying

litigation; (2) ANF breached that duty; and (3) ANF was not guilty of bad faith. The

parties thereupon stipulated to the entry of judgment in favor of St. Peter’s Church in the

amount of $314,000. Pursuant to the same stipulation, the parties also agreed that if the

District Court’s summary judgment rulings were reversed on appeal, the District Court

                                             2
would enter judgment in favor of St. Peter’s Church in the amount of $284,000.

Appellants now seek to appeal from the District Court’s judgment, but only as to the

District Court’s ruling that ANF breached its contractual duty to defend. We will affirm

the District Court’s judgment.

                The parties are familiar with the facts and procedural history of this case.

Because we write only for them, we limit ourselves to a brief statement of the reasons for

our decision.

                                               I.

                The District Court had jurisdiction over this case pursuant to 28 U.S.C. §

1332 because the citizenship of the parties was diverse and the amount in controversy was

in excess of $75,000. The District Court also had jurisdiction to enter a declaratory

judgment under 28 U.S.C. § 2201. We have jurisdtiction over this appeal pursuant to 28

U.S.C. § 1291 because the District Court’s judgment constituted a final decision.

                                               II.

                On March 11, 1999, a civil suit was brought against St. Peter’s Church, as

well as the Episcopal Diocese of Pennsylvania, by the 19th Street Baptist Church in the

Philadelphia Court of Common Pleas (the “Underlying Suit”). St. Peter’s Church sent a

copy of the complaint in the Underlying Suit to its insurance broker on M arch 26, 1999.

The complaint reached ANF’s claims division on April 1, 1999.1 As of that date, and in

   1
    ANF provided primary liability insurance coverage to St. Peter’s Church for, inter
alia, the “wrongful acts” of the Church’s officers and directors, and Agricultural provided

                                               3
accordance with the unchallenged ruling of the District Court, ANF had a duty to provide

a defense to St. Peter’s Church and to reimburse the Church for any necessary and

reasonable defense expenses incurred by the Church until it was able to provide that

defense. See American States Ins. Co. v. Maryland Cas. Co., 628 A.2d 880, 887 (Pa.

Super. Ct. 1993) (“Under Pennsylvania law, an insurance company is obligated to defend

an insured whenever the complaint filed by the injured party may potentially come within

the policy’s coverage” and that duty “remains with the insurer until the insurer can

confine the claim to a recovery that is not within the scope of the policy.”); see also

Widener University v. Fred S. James & Co., Inc., 537 A.2d 829, 833 (Pa. Super. Ct. 1988)

(noting that an insurer’s duty to defend is triggered when it is “reasonably alerted of an

action to which its duty would extend”). On March 31, 1999, the Church engaged

Sprague & Sprague as interim counsel so that a timely answer could be filed.

              ANF issued a reservation of rights letter on June 25, 1999, which, inter alia,

acknowledged coverage of the breach of fiduciary duty claim set forth in Count II of the

amended complaint in the Underlying Suit, provided that a wrongful act occurred during

the coverage period. The letter acknowledged a duty to defend, subject to the

reservations stated therein, and expressed an intention “to refer the defense of [the] action

to new counsel.” App. at 21a. We assume, without deciding, that this reservation of



umbrella coverage. The relevant insurance policy provided, subject to certain limits and
exclusions, that “[ANF] will have the right and duty to defend any ‘suit’ seeking . . .
‘damages.’” App. at 661a.

                                              4
rights letter created no conflict of interest between the insurer and the insured. We

therefore assume, without deciding, that ANF, barring a material breach by it, retained the

right, as well as the duty, to select and pay counsel.

              In the five months following the filing of the complaint, ANF provided no

defense and made no reimbursement of expenses incurred by the Church. At various

points in time during that period, it did offer to engage five different counsel: (1)

Margolis Edelstein; (2) Post & Schell, P.C.; (3) Marshall, Dennehey, Warner, Coleman &

Goggin; (4) Manta & Welge; and (5) Sprague & Sprague. Margolis Edelstein was

rejected because it represented the Episcopal Diocese of Pennsylvania, a co-defendant in

the Underlying Suit; Post & Schell was rejected because it counseled ANF as to whether

the claims in the Underlying Suit were covered by the Church’s insurance policy;

Marshall, Dennehey was not engaged because ANF had removed the firm from its

approved counsel list; and Manta & Welge was not engaged because it lacked relevant

experience. Finally, Sprague & Sprague was not engaged because when it was presented

with the fee schedule guidelines ANF insisted upon, Sprague & Sprague found “them

unacceptable.” App. at 38a.2 Those guidelines, inter alia, would have imposed a

maximum rate of $130 per hour for a partner’s work and $115 per hour for the work of an

associate.



   2
    On August 2, 1999, ANF was advised that the “Church has discussed [the fee
schedule guidelines] and the other guidelines with Sprague & Sprague which has advised
that it finds them unacceptable.” App. at 38a.

                                              5
                Importantly, ANF does not assert before us that its tender of representation

by the first four of these firms satisfied its obligation to provide a defense. Rather,

Appellants argue that an offer made months later to engage Sprague & Sprague on

different terms satisfied ANF’s obligation to provide a defense.3 The undisputed record

evidence, however, is that Sprague & Sprague was unwilling to undertake the

representation on the terms ANF was insisting upon in August of 1999.

                On August 12, 1999, five months after suit was filed, St. Peter’s Church

wrote to ANF advising it that the Church regarded ANF as being in breach of its duty to

provide a defense, and that the Church would conduct its own defense and look to ANF

for reimbursement. The letter concluded:

                In sum, it is clear that [ANF] has an obligation to reimburse
                St. Peter’s for the defense costs that it has incurred to date and
                an obligation going forward to pay the law firm of Sprague
                and Sprague its attorney fees and costs as they are incurred.
                Please contact me to discuss the amount of costs which should
                be reimbursed to St. Peter’s immediately and the orderly
                procedures which should be established concerning the future
                payment of the fees and expenses of the Sprague law firm.

App. at 42a.4


   3
    On March 15, 2000, over a year after the underlying suit was filed, counsel for ANF
advised counsel for the Church “in accordance with our recent conversation” that his
“client has accepted the [$200] hourly rate for the counsel fees incurred on behalf of the
Church”, provided that “a legal auditing service” agree that the hours charged were
reasonable. App. at 66a.
   4
    The August 12th letter took the position that the reservation of rights letter had
created a conflict of interest and that “by meeting its defense obligations under a
reservation of rights, [ANF had] renounced its control of the litigation.” App. at 41a. As

                                                6
              On September 14, 1999, six and a half months after suit was filed, coverage

counsel for ANF responded:

              [ANF] has sought to retain independent counsel to represent
              the interests of St. Peter’s Church. [ANF] also indicated that
              it would be agreeable to retaining the firm that the Church had
              engaged to represent the interests of the Church if the firm
              was willing to work within the [ANF] fee schedule. The
              Church’s refusal to agree to either of these proposals puts the
              Church in violation of the terms and conditions of the policy
              of insurance.

              Again, it is clear that [ANF] has no obligation to reimburse
              St. Peter’s for the defense costs incurred to date and no
              obligation to pay counsel fees to the law firm of Sprague and
              Sprague for the future. Notwithstanding these comments,
              please be advised that [ANF] continues to remain open to the
              possibility of amicably resolving these issues.

App. at 45a-46a.

              On April 17, 2000, thirteen months after the underlying suit was filed, the

Church filed this suit against ANF and Agricultural. As of that time, while ANF had

made further, conditional, offers to engage Margolis Edelstein and Sprague & Sprague, it

neither provided a defense nor paid any reimbursement to the Church for the legal fees it

had incurred in defending the Underlying Suit, i.e., at that point $284,000.

              We conclude that, on August 12, 1999, ANF was in material breach of its

duty to defend. Vanderveen v. Erie Indem. Co., 208 A.2d 837, 838 (Pa. 1965) (“An


earlier indicated, we express no opinion on whether this position was legally correct. As
explained hereafter, we hold only that even accepting ANF’s characterization of its duty
to defend, it was in material breach of its policy as of August 12, 1999, and the Church
had a right to mitigate its damages by going forward with its own counsel.

                                             7
insurer’s failure or refusal to defend a claim within the scope of an insurance policy

constitutes a breach of contract for which it is subject to damages recoverable in an action

of assumpsit.”). That duty required ANF to provide counsel able and willing to undertake

representation of the Church in the underlying litigation, and it had failed to do so despite

the fact that the suit was over five months old. See, e.g., Gray Cary Ware & Freidenrich

v. Vigilant Ins. Co., 8 Cal. Rptr.3d 475, 477 (Cal. Ct. App. 2004) (noting that the duty to

defend “includes providing competent counsel and paying all reasonable and necessary

costs”). ANF’s offer to engage Sprague & Sprague on terms that firm was unwilling to

accept clearly did not satisfy this duty to defend. As a result, the Church was entitled to

declare ANF in breach, provide its own defense, and look to ANF for reimbursement of

the reasonable costs of that defense. Gedeon v. State Farm Mut. Auto. Ins. Co., 188 A.2d

320, 322 n.5 (Pa. 1963) (“[T]he recovery for breach of the covenant to defend will

ordinarily be the cost of hiring substitute counsel and other costs of the defense.”); Zeitz

v. Zurich General Acc. & Liability Ins. Co., 67 A.2d 742, 746 (Pa. Super. Ct. 1949)

(holding that an insurer’s failure to fulfill its duty to defend “subjects it to liability to the

insured for the costs and fees expended in successfully opposing a claim for damages”).

The Church has done so and is therefore entitled to the judgment the District Court has

entered in its favor.5

   5
   ANF contends on appeal that it complied with its duty to defend by offering, in
January 2000, to pay Sprague & Sprague for its representation of the Church at Sprague
& Sprague’s $200 hourly rate, subject to an auditor’s approval of Sprague & Sprague’s
hours reasonably spent on the Church’s defense. Because we find that ANF was in

                                                8
                                          III.

             For the foregoing reasons, we will affirm the judgment of the District

Court.




breach as of August 12, 1999, we do not reach the question of whether ANF’s belated
January offer would have complied with its duty to defend.

                                           9
