TPLC, Inc. v. United Nat. Ins. Co., s. 92-1227

• Decision Date: 19 January 1995
• Docket Number: Nos. 92-1227,92-1237,s. 92-1227
• Citation: 44 F.3d 1484
• Parties: TPLC, INC., a Delaware corporation, * Plaintiff-Appellant/Cross-Appellee, v. UNITED NATIONAL INSURANCE COMPANY, Defendant-Appellee/Cross-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1484

44 F.3d 1484

TPLC, INC., a Delaware corporation, ^* Plaintiff-Appellant/Cross-Appellee, v. UNITED NATIONAL INSURANCE COMPANY,

Defendant-Appellee/Cross-Appellant.

Nos. 92-1227, 92-1237.

United States Court of Appeals, Tenth Circuit.

Jan. 19, 1995.

Peter L. Edwards (Scott C. Johnson with him, on the brief) of Rothgerber, Appel, Powers & Johnson, Denver, CO, for plaintiff-appellant/cross-appellee Telectronics, Inc.

Leslie Block Kaye of Dill, Dill and Carr, P.C., Denver, CO, for defendant-appellee/cross-appellant United Nat. Ins. Co.

Before McKAY, HOLLOWAY, and GARTH, ^** Circuit Judges.

HOLLOWAY, Circuit Judge.

These appeals arise out of Plaintiff-Appellant/Cross-Appellee Telectronics, Inc.'s (Telectronics) efforts to obtain reimbursement from its insurer, Defendant-Appellee/Cross-Appellant United National Insurance Company (United), for legal expenses incurred in defending a products liability action. Claiming that Telectronics' insurance policy was in effect for less than the total period of bodily injury alleged in the products liability action, United offered to reimburse Telectronics only for United's pro rata share of the expenses, apportioned on the ratio of the time when United's policy was in effect to the total time of exposure of the injured party to the product, and also limited to expenses incurred after the date of United's direct receipt of notification of the products liability action. Due to United's refusal to pay all of the legal expenses incurred by Telectronics in defending the underlying products liability suit, Telectronics commenced this breach of contract and bad faith breach of insurance contract action in a state court in Colorado.

After removal to the court below on diversity grounds, both parties moved for summary judgment. Concluding that Pennsylvania law governed any disputes arising under the terms of the policy, the district judge held that when the policy was in effect for less than 100% of the total period of bodily injury, Pennsylvania law required the insurer to pay only its pro rata share of the defense expenses incurred by its insured in defending the lawsuit, apportioned on the ratio of the time its coverage was in force to the total time when the injury allegedly occurred. The judge further concluded that Colorado law applied to Telectronics' bad faith claim and that Telectronics had failed to show bad faith by United under that law. The court denied a motion by United for sanctions under Fed.R.Civ.P. 11 for Telectronics' pursuit of the bad faith claim. We affirm in part, reverse in part, and remand.

I

A

The facts were thoroughly stated by Judge Arraj in Telectronics, Inc. v. United Nat'l Ins. Co., 796 F.Supp. 1382 (D.Colo.1992). We therefore recite only the central facts concerning the issues before us.

From September 15, 1984, to September 15, 1985, Telectronics had general liability insurance under a policy issued by United (the policy). The policy provided liability coverage for bodily injury and property damage with a $1,000,000 limit in the aggregate and per occurrence. It also included a $10,000 deductible, which applied to both bodily injury liability and to "investigation, adjustment, and legal expenses incurred in the handling and investigation of each claim...." Aplt.App. at 180 (emphasis removed). The policy provided that United had the right and duty to defend any suit against Telectronics for damages resulting from bodily injury. Id. at 178.

For the two years following expiration of the United policy, Telectronics had purchased general liability insurance policies from Transco Syndicate # 1. Transco Policy # DOL-02181, which had a retention limit of $25,000, provided liability coverage for bodily injury and property damage with a $500,000 limit for occurrences taking place between September 15, 1985, and September 15, 1986. Transco Policy # DOL-07294, which had a retention limit of $100,000, provided liability coverage for bodily injury and property damage with a $500,000 limit for occurrences taking place between September 15, 1986, and September 15, 1987. Neither of these Transco policies, however, required Transco to reimburse Telectronics for legal expenses incurred unless the retention limits were exceeded by judgment or settlement.

B

On May 5, 1985, a pacemaker manufactured by Telectronics was implanted in Thelma Annis of Cape Girardeau, Missouri. Ms. Annis allegedly experienced difficulties with the pacemaker, including scarring, electrical shocking, weakness, sleeplessness, heart palpitations, heart skipping, anxiety, and fainting spells. These difficulties allegedly lasted from approximately June 20, 1985, until May 14, 1987, when the pacemaker was removed and replaced.

Alleging that these problems were caused by defects in Telectronics' pacemaker, Annis and her husband commenced a products liability action against Telectronics on November 24, 1987, in the United States District Court for the Eastern District of Missouri. Shortly thereafter, Telectronics notified its insurance broker of the action. The broker forwarded a copy of the summons and complaint to claims adjusters Adjusting Services Unlimited, Inc. (ASU) on December 5, 1987. ASU was designated as the adjuster to whom various notices should be given both in the United policy and in the Transco policies. ASU, in turn, gave notice of the Annis suit to Transco but did not notify United until almost three years later.

United was not directly notified of the Annis suit until November 5, 1990, when it received a letter from ASU informing United that the pretrial statement received from the attorney representing the Annises had indicated that they were seeking to recover damages for injuries incurred during the period covered by the United policy. ASU's letter also informed United that the Annis trial was scheduled to commence on December 3, 1990. On November 29, 1990, United replied to ASU, stating in part:

First we would point out that your notice to us of this lawsuit is hardly timely and that any participation in expense sharing would be limited to those expenses incurred from the date of receipt of your tender....

From the information supplied, it would appear that the potential period of injury ran from June 20, 1985 to May 15, 1987 or a period of 23 months. Our policy period covers 3 months, June 20, to September 15, 1985. Based upon the ratio of months our share would be 13% and we repeat that this offer is limited to the expenses incurred from the date of receipt of your tender, November 5, 1990.

Id. at 225.

The Annis suit was tried before a jury in December 1990, resulting in a verdict and judgment for Telectronics. No appeal was taken. In defending itself in the Annis suit, Telectronics incurred legal expenses in the amount of $156,805.90. Due to United's refusal to pay more than a pro rata share of the defense expenses incurred after November 5, 1990, Telectronics sued United in Colorado state court for breach of contract and for bad faith breach of an insurance contract. This action was removed to the United States District Court for the District of Colorado in December 1991 on diversity grounds.

Telectronics moved for summary judgment, claiming that the language of the policy required United to reimburse it for all the legal expenses incurred in defending the Annis suit, not just a pro rata share. ¹ United filed a cross-motion for summary judgment, arguing that Telectronics' failure to provide it direct notice of the Annis suit until November 5, 1990, some three years after the suit was filed, amounted to a failure to satisfy the policy's notice requirements, thus voiding coverage. ² United therefore claimed that it Telectronics, citing Endorsement 5 of the policy, ³ argued that the policy only requires that notice be given to ASU, i.e. it does not further require that additional notice be provided directly to United. Moreover, Telectronics pointed out that neither an address nor a telephone number for United appears anywhere in the policy. Thus, Telectronics argued that the policy's notice of suit requirement was fully satisfied on December 5, 1987, the date on which Telectronics' insurance broker notified ASU of the Annis suit. Similarly, Telectronics argued that ASU was United's agent, and as such, notice to ASU was by operation of law notice to United.

was relieved of its duty to defend Telectronics in the Annis suit and was not required to reimburse Telectronics for any legal expenses incurred in defending the action. Alternatively, United argued that even if it were found that it had a duty to defend under the policy, it would only be liable for its pro rata share of Telectronics' legal expenses apportioned on the time United's policy was in effect during the period of injury and limited to expenses incurred after notice of suit on November 5, 1990.

C

The district judge concluded that in light of his ruling, explained below, that United showed no prejudice from lack of notice, it was not necessary to determine either whether United had received timely notice under the policy or whether ASU was the agent of United. 796 F.Supp. at 1387. Finding that the policy did not indicate which state's law would govern disputes arising under its terms, the judge engaged in a choice of law analysis. He concluded that the policy should be construed under Pennsylvania law, as argued by Telectronics, rather than Colorado law, as contended by United. Citing Brakeman v. Potomac Ins. Co., 472 Pa. 66, 371 A.2d 193 (1977), the judge held that under Pennsylvania law an insurer seeking to avoid coverage for lack of timely notice must also prove " 'that it suffered prejudice as a consequence.' " 796 F.Supp. at 1388 (quoting Brakeman, 371 A.2d at 196). ⁴ The judge held that United had not satisfied its burden of proving prejudice. Consequently, United would be required to reimburse Telectronics for its defense of the Annis suit, regardless of whether Telectronics had...