815 F.2d 890 (3rd Cir. 1987), 86-1115, Trustees of University of Pennsylvania v. Lexington Ins. Co.

Docket Nº:86-1115, 86-1195.
Citation:815 F.2d 890
Party Name:The TRUSTEES OF the UNIVERSITY OF PENNSYLVANIA, Appellee, v. LEXINGTON INSURANCE COMPANY, Appellant, v. AFFILIATED RISK CONTROL ADMINISTRATORS OF PENNSYLVANIA, INC. and Insurance Company of North America, Aetna Insurance Company, Cigna Companies and Johnson & Higgins of Pennsylvania, Inc. and Alexander & Alexander, Inc. and Duane Morris & Heckscher
Case Date:March 31, 1987
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit

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815 F.2d 890 (3rd Cir. 1987)






and Insurance Company of North America, Aetna Insurance

Company, Cigna Companies and Johnson & Higgins of

Pennsylvania, Inc. and Alexander & Alexander, Inc. and Duane

Morris & Heckscher, a Pennsylvania Partnership and McCabe,

James J. Esquire individually and Medical Professional

Liability Catastrophe Loss Fund.

Nos. 86-1115, 86-1195.

United States Court of Appeals, Third Circuit

March 31, 1987

Argued Oct. 14, 1986.

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Harvey Bartle, III (argued), Judy Yun, Dechert Price & Rhoads, Philadelphia, Pa., for appellee.

Robert A. Korn (argued), Glenn F. Rosenblum, Philip A. Tordella, Robert D. Billet, Korn, Kline & Kutner, Philadelphia, Pa., for appellant.

David B. Adams, Philadelphia, Pa., for appellee, Affiliated Risk Control Administrators.

Before GIBBONS, Chief Judge, BECKER, Circuit Judge and BROWN, District Judge. [*]


BECKER, Circuit Judge.

This appeal, from a judgment entered on a jury verdict in favor of an insured against its excess carrier, raises several questions of Pennsylvania insurance law. The Trustees of the University of Pennsylvania, the corporate owner of the Hospital of the University of Pennsylvania ("HUP"), and the plaintiffs in the district court, won a $4.8 million judgment in compensatory damages against the Lexington Insurance Co., HUP's excess insurer. The jury also awarded punitive damages, attorneys' fees and prejudgment interest. The claim arose from Lexington's refusal to pay its share of a settlement in a suit against HUP by Mrs. Estelle Soppe, who had suffered catastrophic injuries from the administration of a contaminated diagnostic test fluid at the hospital.

Initially, we must consider Lexington's contention that it is absolved from liability because HUP did not give timely notice of the claim and HUP's contention that lack of timely notice does not save Lexington because Lexington was not prejudiced. We conclude: (1) that the question of late notice and prejudice was for the jury; (2) that the district court gave erroneous instructions on the policy's notice requirements; but (3) that the rule of Brakeman v. Potomac Ins. Co., 472 Pa. 66, 371 A.2d 193 (1977), requiring the insurer to prove prejudice as a condition of disclaimer, applies to this case despite the relative sophistication of the insured, hence late notice is not conclusive; and (4) that the faulty instructions were harmless because the jury rejected Lexington's claims of prejudice. We

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conclude that the jury's verdict was supported by substantial evidence.

We next consider the enforceability of the two-tiered settlement entered into between HUP and Mrs. Soppe. This type of settlement provides for the tort victim to recover a larger amount if the insurer is liable than if the tortfeasor must pay the settlement out of its own pocket. We find that Pennsylvania would approve the two-tiered settlement involved in this case, so long as the amount the insurer must pay was reasonable and was sincerely believed to be reasonable by the insured. Despite some problematic evidentiary rulings which we also find to constitute harmless error, we conclude that the record supports the jury's determination that the two-tiered settlement was reasonable and entered into in good faith. We therefore sustain the judgment for Lexington's share of the underlying settlement.

We also affirm the awards of prejudgment interest and attorneys fees. With respect to the latter, we reject the argument that, while Pennsylvania permits an award of attorneys fees in an action to establish the insurer's breach of a duty to defend, it would not permit an award to enforce a duty to indemnify. However, we set aside the award of punitive damages, concluding that Pennsylvania would not recognize an action for punitive damages against an insurer even where the insurer refuses in bad faith to compensate its insured.


On June 9, 1981, Estelle Soppe, HUP's fifty-four year old director of volunteer services, drank a contaminated and highly toxic magnesium sulfate solution while undergoing a simple diagnostic procedure at the hospital. Dr. Bruce Trotman, a staff physician, supervised the test. As a result, Mrs. Soppe lost ninety percent of her small bowel as well as her gall bladder, spleen and one kidney. Having lost the ability to digest food, she is fed by a tube inserted in a vein leading to her heart, a long, laborious and painful process which requires most of her waking day.

At the time of the incident, the hospital's medical malpractice insurance consisted of three tiers. The first tier, as required by Pennsylvania law, 40 Pa.Stat.Ann. Sec. 1301.701(a)(1)(i) (Purdon Supp.1986), was provided by the hospital and consisted of $100,000 coverage for itself and $100,000 for Dr. Trotman. The second tier, provided by the Pennsylvania Medical Professional Liability Catastrophe Loss Fund (the "CAT Fund"), a state agency, consisted of $1 million coverage for each health care provider (i.e., HUP and Dr. Trotman). See 40 Pa.Stat.Ann. Sec. 1301.701 (Purdon Supp.1986). The third tier, known as excess or umbrella coverage, was provided by Lexington in the amount of $10 million.

Under Condition 5 of the HUP-Lexington policy, HUP had the obligation to notify Lexington of a potentially covered claim:

Whenever the Insured has information from which the Insured may reasonably conclude that an occurrence covered [by the policy] involved injuries or damages which, in the event that the Insured should be held liable, is likely to involve this policy, notice shall be sent to the Company as soon as practicable, provided however, that failure to notify the Company of any occurrence which at the time of its happening did not appear to involve this policy, but which at a later date would appear to give rise to claims hereunder, shall not prejudice such claims.

The policy also provided, however, that Lexington had no right to assume the defense of suits against HUP. Lexington had the right only "to associate with the Insured or the Insured's underlying insurer, or both, in the defense and control of any claim ... where the claim ... involves, or appears reasonably likely to involve Lexington."

Notwithstanding Condition 5, HUP did not notify Lexington after Mrs. Soppe's tragic accident, though it did initiate its own investigation. Approximately ten months later, on April 19, 1982, HUP received a request for Mrs. Soppe's medical records from the law firm of Litvin, Blumberg,

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Matusow & Young ("Litvin"), a firm with a reputation for prowess in medical malpractice cases. Ten months after this request, in February of 1983, Litvin brought a malpractice action on behalf of Mrs. Soppe against the hospital and Dr. Trotman in the Court of Common Pleas of Philadelphia County.

HUP engaged the law firm of Duane, Morris & Heckscher to conduct the defense both for HUP and Dr. Trotman, and the firm proceeded to investigate the case, to file an answer and to conduct discovery. On October 31, 1983, the Court granted Mrs. Soppe's petition for special listing. In early December, 1983, Litvin forwarded to the court and to HUP an evaluation of Mrs. Soppe's injuries which described a damage potential of $5 to $10 million. For apparently unrelated reasons, HUP's malpractice consultants, ARCAP, finally advised HUP to notify its excess insurers in a letter dated December 5, 1983. HUP did so on December 19.

On February 18, 1984, Lexington wired HUP disclaiming coverage on grounds of late notice. Lexington took the position that this late notice had prejudiced it for three reasons: (1) unspecified "gross mishandling" of the investigation and legal defense; (2) a failure of HUP's counsel to explore additional theories of liability that would involve other health care providers or HUP's products liability insurer; and (3) the failure of HUP's counsel to prosecute cross-claims against Dr. Trotman because of a conflict of interest. (360a-361a). At the time of the letter, the Soppe action was scheduled for trial on February 28, 1984, although it was ultimately postponed until April of that year.

In early April, 1984, on the even of trial, Mrs. Soppe, HUP and Dr. Trotman reached a settlement. Under the terms of the settlement, Mrs. Soppe agreed to accept $2.2 million from HUP's own (self-insurance) coffers and from the CAT Fund. HUP also agreed to pay an additional $4.8 million if it was successful in the suit it had brought against Lexington. Pending that suit, HUP agreed to pay Mrs. Soppe $550,000, for which it would be reimbursed by payment of one third of the proceeds of the suit against Lexington until that $550,000 was satisfied. The settlement also provided that if HUP did not win its suit against Lexington, it would pay Mrs. Soppe an additional $1.6 million over the next two years and would guarantee payment of Mrs. Soppe's lifetime medical expenses, which promised to be enormous.

On April 23, 1984, Mrs. Soppe, HUP and Dr. Trotman presented this settlement to Judge Bernard Goodheart of the Court of Common Pleas of Philadelphia County. Pursuant to the parties' request, Judge Goodheart considered the relative merits of the settlement and expressed his approval. On May 17, 1984, the parties again appeared before Judge Goodheart, this time to permit a Deputy Attorney General of the Commonwealth of Pennsylvania, Lawrence Barth, to present his views that the settlement was in the best interests of HUP. Mr. Barth purported to appear in the exercise of the Attorney...

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