Brokers Title Co. v. ST. PAUL F. & M. INS. CO.

• Decision Date: 26 January 1979
• Docket Number: Civ. A. No. 76-1547.
• Citation: 466 F. Supp. 1174
• Parties: BROKERS TITLE COMPANY, INC. and the Title Guarantee Company v. ST. PAUL FIRE AND MARINE INSURANCE COMPANY.
• Court: U.S. District Court — Eastern District of Pennsylvania

466 F. Supp. 1174

BROKERS TITLE COMPANY, INC. and the Title Guarantee Company v. ST. PAUL FIRE AND MARINE INSURANCE COMPANY.

Civ. A. No. 76-1547.

United States District Court, E. D. Pennsylvania.

January 26, 1979.

Paul Yermish, Philadelphia, Pa., for Brokers Title.

Reeder R. Fox, Gene Bruton, Philadelphia, Pa., for Title Guarantee.

Edwin L. Scherlis, Philadelphia, Pa., for defendant.

MEMORANDUM AND ORDER

NEWCOMER, District Judge.

This case was tried before the Court sitting without a jury on July 27-28, 1978. The plaintiffs seek a declaratory judgment to the effect that certain losses they incurred are covered by a policy of insurance issued by the defendant St. Paul Fire and Marine Insurance Company.

FINDINGS OF FACT

Plaintiff Brokers Title Company, Inc. is a corporation organized and existing under the laws of the Commonwealth of Pennsylvania and having its principal office in Philadelphia, Pennsylvania. Title Guarantee Company, also a plaintiff, is a corporation organized and existing under the laws of the State of Maryland and having its principal offices in Baltimore, Maryland.

Defendant St. Paul Fire and Marine Insurance Company (St. Paul) is a corporation organized and existing under the laws of Minnesota and having its principal office in St. Paul, Minnesota.

This is an action for declaratory judgment seeking the Court's construction of the terms of an insurance policy. The amount in controversy is in excess of ten thousand dollars ($10,000) exclusive of interest and costs.

This case arises out of the same series of events which was the subject of earlier findings of fact and conclusions of law made by this Court. See Bernard Smith and Betty Smith v. The Title Guarantee Company v. Brokers Title Company, Inc., C.A. 74-2710 (E.D.Pa.1977). Those findings of fact are reaffirmed and incorporated herein by reference.

Brokers Title is a title insurance company. In August of 1969, the company was handling the settlement of the sale of 42 Lee Lynn Lane in Abington Township, Montgomery County, Pennsylvania. Bernard Smith and Betty Smith were purchasing the property from Morris Smith and Mary Smith. The settlement was held on August 18th, 1969, in the offices of Brokers Title.

On the day of the settlement the president of Brokers Title, Verne Mockler, spoke to a representative of the Montgomery County Tax Claims Bureau and determined that there were real estate taxes due on the property for the years 1967 and 1968.

On September 2, 1969, Brokers Title received one thousand, nine hundred fifty-one dollars and forty cents ($1,951.40) from Morris and Mary Smith to satisfy the outstanding tax liens on the property. One of the employees of Brokers Title thereafter sent a check for $1,951.40 to the City of Philadelphia in an attempt to discharge the lien. Unfortunately, the property was located in Montgomery County, not Philadelphia, and the check was returned uncashed. By the time Brokers Title sent the check to the proper taxing authority, the property had been sold at a tax sale. The prospective purchasers, Bernard and Betty Smith, had lost the property.

In Bernard and Betty Smith v. Title Guarantee Company, et al., this Court found that Brokers Title's negligence was the cause of the loss of the property, and also held Title Guarantee liable for the negligence of its agent, Brokers Title. Judgment was entered in favor of Bernard and Betty Smith and against Title Guarantee in the amount of $59,746. Brokers Title was held liable to Title Guarantee in the same amount, in a judgment entered on April 6, 1977. On July 6, 1977 this Court entered an amendment to the judgment declaring Brokers Title liable to Title Guarantee in the amount of $92,130.40. The additional $32,384.40 was added to the obligation of Brokers Title to compensate Title Guarantee Company for a payment it made to United Brokers Mortgage Company to satisfy the mortgage debt that Bernard and Betty Smith incurred before their loss of the property.

Before any of the events arising out of the 42 Lee Lane settlement, Brokers Title purchased from St. Paul Fire and Marine Insurance Company an "errors and omissions" insurance policy. That policy states:

"The Company agrees with the Insured . . .

I. COVERAGE: To pay on behalf of the Insured . . . all sums which the Insured . . . shall become obligated to pay by reason of the liability imposed on him by law or contract for damages arising from any claim made against the Insured . . . and caused by any negligent act, error or omission of the Insured or any persons now or heretofore employed by the Insured in the performance of professional services for others in the Insured's professional capacity as Title Insurance agent . . ."

Eight exclusions from coverage were set forth in the policy. Exclusion G is the clause at issue:

"This policy does not apply

(G) To claims based upon or arising out of handling or disbursement of funds."

The policy was sold to Verne Mockler, the president of Brokers Title, by Eugene Murray, a sub-agent of St. Paul.

The evidence conflicts as to how the sale was made. Mr. Mockler testified that the agreement was made by telephone and that he did not recall that anyone discussed the exact terms or exclusions of the policy with him.

Eugene Murray testified that he went to Mr. Mockler's office and read the coverage and exclusions of the policy to Mr. Mockler, including exclusion G.¹

The Court finds Mr. Murray's testimony to be credible. He remembers details about the meeting very well, while Mr. Mockler merely says that he cannot recall any discussions about exclusions. N.T.-1, p. 50.

Nevertheless, there is no testimony offered by either party that Mr. Murray explained the effect of the exclusions to Mr. Mockler. Mr. Murray merely said that he "went over each one exclusion". Murray Deposition p. 10.

The testimony is clear that Mr. Murray only read the exclusions aloud to Mr. Mockler — he did not say anything further by way of explanation: "I read it. I neither added or deleted". Id. p. 60. Furthermore, Mr. Mockler did not ask any questions about the policy. Id. p. 10.

The Court also finds that Mr. Mockler was not aware of the effects of Exclusion G, nor did he understand them. That is, he was not aware that many activities of his company (those involving handling of funds) were, in St. Paul's opinion, not covered by the errors and omissions insurance policy.

Mr. Mockler understood the construction of a typical insurance policy. He understood that there is coverage and that there are exclusions from coverage in many and perhaps most policies. However, his experience with the St. Paul errors and omissions policy was his first exposure to such coverage; and, regrettably, he did not understand its terms.

CONCLUSIONS OF LAW

Two preliminary conclusions of law would perhaps clarify much of the legal discussion that is to follow. First, the exclusion in issue, taken as a whole, is not ambiguous. Ambiguous is defined by Webster's Third New International Dictionary as "having two or more possible meanings." By that standard, the exclusion is not ambiguous.

Second, reading the exclusions aloud to the insured established that he was aware of the language of the exclusions. The legal effect of such a presentation is the same as if the insured had silently read the policy to himself. The insured cannot rely on a defense, if one exists, that he did not read the exclusions.

This case presents a problem commonly encountered in federal district courts in diversity cases — that of deciding whether to acknowledge dicta by state trial and intermediate appellate courts as accurate statements of state law.² Here, two cases raise such issues. In Hionis v. Northern Mutual Insurance Company, 230 Pa.Super. 511, 327 A.2d 363 (1974), a case involving an ambiguous exclusion Judge Hoffman wrote for the court:

"When a defense is based on an exception or exclusion in a policy, our Supreme Court has held that such a defense is an affirmative one, and the burden is on the defendant to establish it. Weissman v. Prashker, 405 Pa. 226, 233, 175 A.2d 63 (1961). Even where a policy is written in unambiguous terms, the burden of establishing the applicability of an exclusion or limitation involves proof that the insured was aware of the exclusion or limitation and that the effect thereof was explained to him. See e. g., Frisch v. State Farm Fire and Casualty Company, 218 Pa.Super. 211, 275 A.2d 849 (1971); Purdy v. Commercial Union Insurance Company of New York, 50 D. & C.2d 230, 235 (1970)."

In Purdy v. Commercial Union Insurance Company, supra, cited by Judge Hoffman in Hionis, supra, Judge Silvestri wrote:

"An exclusion to comprehensive coverage . . . is not to be enforced, even though in unambiguous terms, unless it be proved that the insured was aware of the exclusion, and that the effect of the exclusion was explained to him. The insured's intention in entering into such a contract must be proved, and the burden of proof is on the insurer . . . We do not intend to treat the individual plaintiff differently from the larger corporate plaintiff. The burden of proof, in either event, is on the party asserting the exclusion to prove not only its applicability but its understanding by the party against whom the exclusion is sought." Purdy, supra, 50 D. & C.2d at 235-6.³

Most doubts as to whether the Hionis case properly stated Pennsylvania law, for purposes of a diversity case, were removed by the Third Circuit in Daburlos v. Commercial Insurance Company of Newark, New Jersey, 521 F.2d 18 (3d Cir. 1975):

"Pennsylvania is a jurisdiction which treats the insured with great liberality . . . Recently, the Pennsylvania Superior Court had occasion to comment on the insurer's burden of proof in Hionis v. Northern Mutual Insurance Company, 230 Pa.Super. 511, 516-17, 327 A.2d 363, 365 (1974):

The court quoted the passage from Hionis that is quoted herein, supra.

Thus, even if we assume Clause 3 was clear

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