Employers Reinsurance Corp. v. Sarris

• Decision Date: 07 September 1990
• Docket Number: Civ. A. No. 89-6349.
• Citation: 746 F. Supp. 560
• Parties: EMPLOYERS REINSURANCE CORP. v. Emmanuel L. SARRIS, Jane M. Sarris, Sarris Financial Group, Inc., Nancy DeChristoforo, Mark DeChristoforo, Morris B. Stackhouse and Massachusetts General Life Insurance Co.
• Court: U.S. District Court — Eastern District of Pennsylvania

746 F. Supp. 560

EMPLOYERS REINSURANCE CORP. v. Emmanuel L. SARRIS, Jane M. Sarris, Sarris Financial Group, Inc., Nancy DeChristoforo, Mark DeChristoforo, Morris B. Stackhouse and Massachusetts General Life Insurance Co.

Civ. A. No. 89-6349.

United States District Court, E.D. Pennsylvania.

September 7, 1990.

Susan McLaughlin, Philadelphia, Pa., for plaintiff.

David Kraut, Plymouth Meeting, Pa., for defendants Sarris.

Edward Jay Weiss, Media, Pa., for defendants DeChristoforo and Stackhouse.

Jonathan L. Braff, Philadelphia, Pa., for defendant Massachusetts.

OPINION AND ORDER

VAN ANTWERPEN, District Judge.

A non-jury trial was held in the captioned matter on August 20, 1990 in Easton, Pennsylvania. This action for a declaratory judgment and an award of monetary damages was filed by the plaintiff on September 1, 1989. The plaintiff seeks a declaration by the court that it is not obligated to provide a defense for the defendants in the instant case who are also defendants in DeChristoforo, et al. v. Sarris, et al., Civil Action No. 88-5250, currently pending in the United States District Court for the Eastern District of Pennsylvania. Pursuant to Fed.R.Civ.P. 52(a); we make the following findings of fact and state the following conclusions of law.

FINDINGS OF FACT

1. Employers Reinsurance Corporation is an insurance company duly organized under the laws of the State of Kansas with its principal place of business in Kansas.

2. The defendant, Sarris Financial Group, Inc., is a corporation duly organized and existing under the laws of the Commonwealth of Pennsylvania with its principal place of business in the Commonwealth of Pennsylvania.

3. The defendants, Emmanuel L. Sarris and Jane M. Sarris, are individual citizens and residents of the Commonwealth of Pennsylvania. They are licensed to sell life insurance.

4. Nancy DeChristoforo, Mark DeChristoforo and Morris Stackhouse are all citizens of the State of New Jersey.

5. Massachusetts General Life Insurance Co. is an insurance company duly organized and existing under the laws of Massachusetts with its principal place of business in Colorado.

6. The defendants in this action are parties to litigation in connection with which Emmanuel L. Sarris, Jane M. Sarris and Sarris Financial Group, Inc. claim a right to a defense and indemnity from Employers Reinsurance Corp 7. On September 1, 1987, Employers Reinsurance Corp. issued a policy of professional liability insurance to Emmanuel L. Sarris, which was renewed, effective September 1, 1988.

8. The policy provides coverage for: "... claims first made against the Insured and reported to the Corporation during the policy period." The policy also excluded claims for: "any dishonest, fraudulent, criminal or malicious act or assault or battery": or for: "injury arising out of any willful violation of any federal, state or municipal law, regulation, ordinance or code."

9. On May 18, 1988, Nancy and Mark DeChristoforo and Morris B. Stackhouse filed suit (hereinafter the "DeChristoforos' suit") against Emmanuel L. Sarris, Jane M. Sarris and the Sarris Financial Group, Inc. in Montgomery County, Pennsylvania, and said defendants were duly served with process. (Hereinafter the "Sarris defendants" shall include Emmanuel L. Sarris, Jane M. Sarris and Sarris Financial Group, Inc.). That action was removed to Federal Court and docketed at number 88-5250. The DeChristoforos' complaint seeks damages on two counts: fraud and deceit and unfair trade practices under Pa.Stat.Ann. tit. 73, §§ 201-1 et seq. (Purdon Supp.1990). No claim for negligence, breach of contract or "malpractice" is asserted.

10. The Sarris defendants initially referred the defense of the DeChristoforos' suit to the law firm of Baratta and Fenerty. Anthony P. Baratta, Esq., has been a friend of Emmanuel L. Sarris since their college days together and has provided Emmanuel L. Sarris with legal representation frequently in the past.

11. On February 28, 1989, Emmanuel L. Sarris canceled his professional liability insurance with Employers Reinsurance Corp. This cancellation occurred several months after the Sarris defendants had had notice of the DeChristoforos' suit filed against them.

12. On or about June 8, 1989, almost four months after the policy had been canceled, Mr. Baratta notified Employers Reinsurance of the DeChristoforos' suit and endeavored to tender the defense of that case to Employers Reinsurance Corp.

13. Mr. Baratta initially spoke to Annette Hollingsworth of Employers Reinsurance Corporation. Ms. Hollingsworth pulled up Sarris policy information on a computer screen and told Mr. Baratta that the policy had been canceled. The computer reading, however, gave no indication whether a policy was a "claims made" or a "claims made and reported" policy.

14. Mr. Baratta urged Ms. Hollingsworth to act immediately, not to wait for documentation. He wanted her to rely on the accuracy of his representation as a member of the bar. In a subsequent conversation that day with Douglas M. Dixon, Claims Counsel for Employers Reinsurance Corporation, Mr. Baratta again emphasized the urgency of the situation. He told Mr. Dixon that he had only just become aware of the existence of professional liability insurance, that the discovery deadline in the DeChristoforos' suit was shortly to expire, and that trial was to take place the next month, in July, 1989.

15. Mr. Dixon initially understood the Sarris policy to be a "claims made" rather than a "claims made and reported" policy. He told Mr. Baratta that he would look at the case, but that there was a problem with late notice. He also told Mr. Baratta that he needed more information. He said to Mr. Baratta that, once he had more information, he would issue a reservation of rights letter.

16. Employers Reinsurance Corporation thereafter authorized William J. Schmidt, Esquire, of the Philadelphia law firm, White and Williams, to substitute his appearance for that of Anthony P. Baratta.

17. Mr. Dixon then set in motion the paperwork necessary to have a file created and to obtain a copy of the Sarris policy from the Underwriting Department.

18. At the end of June, 1989, Mr. Dixon had received a copy of the complaint in the DeChristoforos' action from the file that had been transferred from Mr. Baratta to White and Williams.

19. On July 10, 1989, Mr. Dixon received the file from Underwriting and reviewed it and learned, for the first time, that the Sarris policy was a "claims made and reported" policy, and further, that Mr. Sarris had canceled that policy. He had also not obtained and paid for a "tail", i.e., an endorsement to provide extended coverage after cancellation for a period of one year.

20. The "tail" provision of the Sarris policy reads, in pertinent part:

AMENDATORY ENDORSEMENT — ONE-YEAR EXTENSION PERIOD

It is agreed that Section IX, Extension Period, is amended to read as follows: If the Corporation elects not to renew this policy or if this policy is canceled by either the Named Insured or the Corporation, the Named Insured shall have the right to purchase an extension period by paying within 30 days of the termination date one-half of the annual premium as stated in the Declarations or in the latest renewal endorsement. Such extension period will begin immediately following the date of termination and will run for one year, covering claims first made against the Insured during the extension period and caused by such negligent acts, errors or omissions occurring during any prior consecutive policy periods covered by this policy, renewal thereof, or any policy issued by the Corporation which this policy replaced.

....

21. On July 10, 1989, Mr. Dixon advised Anthony P. Baratta that an error had been made and that the defense of the DeChristoforos' suit must be denied since the DeChristoforos' claim had not been reported within the policy period as required by the policy. Mr. Dixon followed this conversation up with written confirmation to both Mr. Baratta and Mr. Sarris, but Mr. Baratta refused to resume handling the DeChristoforos' matter.

22. In defense of the DeChristoforos' suit, Employers Reinsurance Corporation has paid $15,249.25 in legal fees to White and Williams.

DISCUSSION

The professional liability insurance policy of the case at bar is a "claims made and reported" policy. The policy states at Section VIII: "POLICY PERIOD. This policy applies only to claims first made against the Insured and reported to the Corporation during the policy period." Under Pennsylvania law — the substantive law which applies in this diversity case¹ — any ambiguities in an insurance contract are to be construed in favor of the insured and against the insurance company, the drafter of the contract. "Where, however, the language of the contract is clear and unambiguous, a court is required to give effect to that language. See Pennsylvania Manufacturers' Ass'n Insurance Co. v. Aetna Casualty & Surety Insurance Co., 426 Pa. 453, 233 A.2d 548 (1967)." Standard Venetian Blind Co. v. American Empire Insurance Co., 503 Pa. 300, 469 A.2d 563, 566 (1983).

The policy language quoted above is clear and direct: only claims that are made and reported during the policy period are covered. In the instant case, the claim was made when the DeChristoforo plaintiffs filed suit against the Sarris defendants on May 18, 1988. For over ten months prior to the policy's cancellation, Sarris was aware of this outstanding claim. For reasons known only to himself or Sarris' attorney, Mr. Baratta, it was not reported. Instead, Sarris requested that his policy be canceled on February 28, 1989. It was not until almost four months later, in June, 1989, that Mr. Baratta informed Employers Reinsurance Corporation of the DeChristoforos' suit. Given the direct and unambiguous language of the policy and given the failure of Sarris to report a claim of which he was well aware during the policy period, we believe that the insurance...