Lexington Ins. v. General Acc. Ins. Co. of America

• Decision Date: 04 August 2003
• Docket Number: No. 03-1124.,03-1124.
• Parties: LEXINGTON INSURANCE COMPANY, Plaintiff, Appellee, v. GENERAL ACCIDENT INSURANCE COMPANY OF AMERICA, Defendant, Appellant.
• Court: U.S. Court of Appeals — First Circuit

338 F.3d 42

LEXINGTON INSURANCE COMPANY, Plaintiff, Appellee, v. GENERAL ACCIDENT INSURANCE COMPANY OF AMERICA, Defendant, Appellant.

No. 03-1124.

United States Court of Appeals, First Circuit.

Heard June 3, 2003.

Decided August 4, 2003.

COPYRIGHT MATERIAL OMITTED

Jonathan S. Reed, with whom Traub Eglin Lieberman Straus, Scott L. Machanic, and Cunningham, Machanic, Celtin, Johnson & Harney, LLP were on brief, for appellant.

Robert M. Elmer, with whom Allan E. Taylor and Taylor, Duane, Barton & Gilman, LLP were on brief, for appellee.

Before SELYA and LIPEZ, Circuit Judges, and PONSOR,^* District Judge.

SELYA, Circuit Judge.

Defendant-appellant General Accident Insurance Company of America (General Accident) claims that it is entitled to reimbursement from plaintiff-appellee Lexington Insurance Company (Lexington) for a pro rata share of defense costs incurred on behalf of the parties' mutual insured. The district court disagreed, and General Accident now appeals. We affirm.

The essential facts are not in dispute. General Accident issued a professional responsibility policy with an aggregate limit of liability of $10,000,000 to the law firm of Blank, Rome, Comisky & McCauley (Blank Rome). Desiring extra protection, the insured purchased four separate excess insurance policies. Lexington underwrote the first layer of excess coverage under a policy containing an aggregate liability limit of $15,000,000. Blank Rome procured second-layer excess policies from Safety National Insurance Company (Safety National), International Surplus Lines Insurance Company (ISLIC), and American Insurance Company (American), respectively. All five policies were in effect for a one-year period beginning April 8, 1984. They collectively afforded Blank Rome $50,000,000 in professional liability coverage.

During the currency of the policies, Blank Rome was rocked by a series of securities fraud suits arising out of the collapse of a failed financial institution. General Accident undertook Blank Rome's defense. That undertaking lasted until July 28, 1988, when Blank Rome assumed responsibility for its own defense.¹ General Accident claims, without contradiction, to have incurred roughly $5,500,000 in legal fees and ancillary expenses while defending Blank Rome.

Unwilling to shoulder the load alone, General Accident sought to compel the four excess carriers to help defray the defense costs it had expended. Using limits of liability as a guide, it calculated each company's ratable share of the $5,500,000 total. Under this formula, it earmarked $1,650,000 (30% of the total) as Lexington's responsibility.

Lexington balked at this suggestion. It did, however, enter into an agreement with General Accident to toll the statute of limitations while the insurers "explore[d] the potential for resolution of General Accident's claims without resort to litigation." Although General Accident eventually resolved its claims against Safety National, ISLIC, and American, its dispute with Lexington proved intractable.

In an effort to bring matters to a head, Lexington brought a diversity action in the United States District Court for the District of Massachusetts. See 28 U.S.C. § 1332(a). Lexington took the position that its policy unambiguously excluded the payment of defense costs and asked the court to declare that it had no obligation to reimburse General Accident for Blank Rome's defense.

Lexington relied primarily on language in its policy stating that it would indemnify Blank Rome:

... in accordance with the applicable insuring agreements, terms, conditions and exclusions of the Underlying Policy [i.e., the General Accident policy] ... except as regards the premium, the obligation to investigate and defend and for costs and expenses incident to the same,... and any other provision therein inconsistent with this policy.

Noting that its policy defined "costs" as "interest on judgments, investigations, adjustments and legal expenses" (emphasis supplied), Lexington contended that General Accident's expenditures — which were legal expenses incident to the insured's defense — were excluded.

General Accident took a different slant. It sought to have Lexington share in the legal expenses both as a matter of contract and under the doctrine of equitable contribution. The linchpin of General Accident's claim was an apportionment provision contained within the limits of liability section of its policy. That provision, entitled "Apportionment of Claims Expenses," reads:

In the event payment for damages by the Insured, any other carrier on behalf of the Insured and the Company is in excess of the amount of the limit available under this policy, the Company shall be obligated to pay that proportion of claim expenses as the amount of damages paid by the Company bears to the total amount of damages.

In General Accident's view, this language imposed an expense-sharing obligation on Lexington both as a matter of contract and as a matter of equity.

In due season, the parties cross-moved for summary judgment. Lexington urged the district court to find that its policy exculpated it from any responsibility to share in the cost of Blank Rome's defense whereas General Accident exhorted the district court to find Lexington's policy ambiguous because it neither explicitly disclaimed a duty to reimburse the primary insurer nor specifically negated the applicability of the apportionment provision contained in the underlying policy. In this regard, General Accident posited that Lexington as the second-in-time insurer, had the obligation to repudiate explicitly any language in the underlying policy that it found to be objectionable and to clarify that it was excepting itself from an otherwise comprehensive and integrated insurance program that followed the form of the underlying policy. As a fallback, General Accident invoked the doctrine of equitable contribution.

The district court resolved this clash in Lexington's favor. See Lexington Ins. Co. v. Gen. Accid. Ins. Co., Civ. No. 01-11556, slip op. (D.Mass. Dec. 20, 2002) (unpublished). The court concluded that Lexington's policy was unambiguous; that its language clearly established Lexington's intent not to participate in the payment of Blank Rome's defense costs; and that, therefore, Lexington was not obligated to reimburse General Accident for any part of the defense costs that it had incurred. Id. at 8. In addition, the court rejected General Accident's equitable contribution theory. Id. This timely appeal ensued.

This appeal presents a purely legal question. The facts are undisputed, and the district court had no occasion to engage in differential factfinding. The general rule is that orders granting summary judgment are reviewed de novo, e.g., Houlton Citizens' Coalition v. Town of Houlton, 175 F.3d 178, 184 (1st Cir.1999), and that standard applies here. In all events, a trial court's interpretation of an insurance contract is equally subject to de novo review. See Utica Mut. Ins. Co. v. Weathermark Invs., Inc., 292 F.3d 77, 80 (1st Cir.2002); Greenly v. Mariner Mgmt. Group, Inc., 192 F.3d 22, 25-27 (1st Cir. 1999).

Before embarking upon our analysis, we pause to discuss a preliminary matter. It is a black-letter rule that state substantive law supplies the rules of decision for a federal court sitting in diversity jurisdiction. Erie R. Co. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); Crellin Techs., Inc. v. Equipmentlease Corp., 18 F.3d 1, 4 (1st Cir.1994). Thus, the initial question involves which source of law should guide our interpretive efforts.

In determining what state law is relevant, a federal court must apply the choice-of-law framework of the forum state (here, Massachusetts). See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 491, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941); Crellin Techs., 18 F.3d at 4. In this instance, the choice is between Pennsylvania (home to General Accident and Blank Rome) and Massachusetts (where Lexington is based). Our research reveals no material differences between the laws of these two jurisdictions with respect to the interpretive task that confronts us. That circumstance renders further inquiry unnecessary.

It is a well-established — and prudential — principle that when the result in a case will not be affected by the choice of law, an inquiring court, in its discretion, may simply bypass the choice. See, e.g., Fashion House, Inc. v. K Mart Corp., 892 F.2d 1076, 1092 (1st Cir.1989). That course is especially attractive where, as here, the parties have taken the position that either state's law will lead to the same result. Cf. Borden v. Paul Revere Life Ins. Co., 935 F.2d 370, 375 (1st Cir.1991) (explaining that when the parties achieve a satisfactory consensus on choice of law, a federal court sitting in diversity jurisdiction is free, if it so elects, to forgo independent analysis and accept the parties' agreement). Because the choice-of-law question in this case has been reduced to the point where nothing turns on a more precise refinement, we eschew any further inquiry. In the discussion that follows, we will cite interchangeably to applicable Pennsylvania and Massachusetts precedents.

The baseline rule in both Pennsylvania and Massachusetts is that insurance contracts must be interpreted to reflect the intention of the parties as manifested by the policy language. See Travelers Cas. & Sur. Co. v. Castegnaro, 565 Pa. 246, 772 A.2d 456, 459 (2001); Affiliated FM Ins. Co. v. Const. Reins. Co., 416 Mass. 839, 626 N.E.2d 878, 881 (1994). When the policy language is plain and admits of only one reasonable construction, a reviewing court must give effect to that construction. See Riccio v. Am. Repub. Ins. Co., 550 Pa. 254, 705 A.2d 422, 426 (1997); Cody v. Conn. Gen. Life Ins. Co., 387 Mass. 142, 439 N.E.2d 234, 237 (1982); accord GRE Ins. Group v. Metro. Boston Hous. P'ship, Inc., 61 F.3d 79, 81 (1st Cir. 1995) (applying...