Hospital Support Services, Ltd. v. Kemper Group, Inc.

• Decision Date: 06 September 1989
• Docket Number: No. 89-1337,89-1337
• Citation: 889 F.2d 1311
• Parties: HOSPITAL SUPPORT SERVICES, LTD., Appellant, v. KEMPER GROUP, INC. and Lumbermens Mutual Casualty Company. . Submitted Under Third Circuit Rule 12(6)
• Court: U.S. Court of Appeals — Third Circuit

Page 1311

889 F.2d 1311

HOSPITAL SUPPORT SERVICES, LTD., Appellant, v. KEMPER GROUP, INC. and Lumbermens Mutual Casualty Company.

No. 89-1337.

United States Court of Appeals Third Circuit.

Submitted Under Third Circuit Rule 12(6)

Sept. 6, 1989.

Decided Nov. 30, 1989.

Michael R. Needle, Philadelphia, Pa., for appellant.

Dean F. Murtagh, Frank A. Gerolamo, German, Gallagher & Murtagh, Philadelphia, Pa., for appellees.

Before BECKER, COWEN and WEIS, Circuit Judges.

OPINION OF THE COURT

COWEN, Circuit Judge.

This is an appeal of the trial court's order entered on January 27, 1989 granting summary judgment in favor of defendant Lumbermens Mutual Casualty Company ("Lumbermens") and against the plaintiff-appellant, Hospital Support Services, Ltd. ("HSS") and of the February 24, 1989 order of the district court denying appellant's motion for reconsideration of the January 27 order. Based on our prediction of Pennsylvania law, we will affirm the judgment of the district court.

I.

The facts relevant to this appeal are undisputed. HSS owns and operates mobile CAT scan equipment, some of which was insured with Lumbermens. When a dispute arose regarding coverage of four failed x-ray tubes, HSS initiated a declaratory judgment action against Lumbermens and Kemper Group, Inc. ("Kemper") on April 8, 1988. Specifically, HSS sought a declaration that Lumbermens and Kemper were required to indemnify HSS in the amount of $35,473.50 in connection with alleged losses. ¹ Thereafter, Lumbermens filed its answer along with affirmative defenses, including the defense that HSS's claims were barred because the litigation was not commenced within one year of the alleged loss as required by the policy of insurance. ²

The parties then agreed to a set of stipulated facts and filed cross motions for summary judgment. According to the stipulation, the policy requires the filing "with the Company or its agent within ninety (90) days from date of discovery of such loss, damage or occurrence, a detailed sworn proof of loss." App. at 7, 8. The policy also requires that any lawsuit brought to enforce a claim be commenced "within twelve (12) months next after discovery by the Insured of the occurrences which gives rise to the claim...." App. at 8.

The parties stipulated that HSS submitted its first claim under the policy for loss arising from use of the x-ray equipment on May 5, 1987 and that Lumbermens denied this claim. App. at 9. On April 8, 1988, HSS initiated the present litigation against Kemper and Lumbermens. The parties agree that "HSS did not give Lumbermens a sworn, written proof of loss within 90 days of the occurrence of its loss" nor did "HSS ... commence the present action within twelve (12) months of the occurrence of its loss." App. at 9.

In an order entered on January 27, 1989, the district court summarily granted Lumbermens' motion and denied HSS's motion. App. at 41. On February 24, 1989, the district court denied HSS's motion for reconsideration of the January 27, 1989 order and indicated that an opinion would follow. The opinion issued pursuant to this order was entered on April 4, 1989. App. at 65. The district court held that the insurance contract's one year suit limitation clause barred HSS's claim. HSS now appeals to this Court.

II.

HSS submits on this appeal that the district court erred in not extending the rule enunciated in the Pennsylvania Supreme Court's decision in Brakeman v. Potomac Ins. Co., 472 Pa. 66, 371 A.2d 193 (1977) to the facts of this case. In Brakeman, the Pennsylvania Supreme Court held that an insured's failure to file a notice of loss within the deadline set by the policy would not bar coverage unless the carrier can prove prejudice as a result. Because such notice provisions as the one at issue in Brakeman are generally "dictated by the insurance company to the insured," 472 Pa. at 72, 371 A.2d at 196, the Pennsylvania Supreme Court held that "a strict contractual approach is inappropriate." 472 Pa. at 73, 371 A.2d at 196. Accordingly, it held that enforcement of such notice deadlines, absent prejudice to the insured, would effect an inequitable forfeiture. 472 Pa. at 72, 73, 371 A.2d at 196, 197.

The question thus presented on this appeal is whether the rationale of Brakeman should apply to limitation of suit clauses as well as to notice of loss provisions. Because the Pennsylvania Supreme Court has never squarely addressed the issue, our task is one of predicting Pennsylvania law. See Compagnie Des Bauxites de Guinee v. Insurance Co. of N. Am., 724 F.2d 369, 371 (3d Cir.1983); Connecticut Mut. Life Ins. Co. v. Wyman, 718 F.2d 63, 66 (3d Cir.1983); National Sur. Corp. v. Midland Bank, 551 F.2d 21 (3d Cir.1977). We have jurisdiction over this appeal pursuant to 28 U.S.C. Sec. 1291 and our review is plenary.

III. DISCUSSION

In Brakeman, the Pennsylvania Supreme Court held that an insured's noncompliance with a notice of loss provision bars a claim only if the carrier can show that it has been prejudiced. Two theoretical underpinnings form the basis for the holding. First, the departure from a strict contractual approach was deemed appropriate since such notice provisions are seldom subject to negotiation. Rather, "[t]he only aspect of the contract over which the insured can 'bargain' is the monetary amount of coverage." 472 Pa. at 72, 371 A.2d at 196. Consequently, where the penalty to be suffered is a "forfeiture," 472 Pa. at 73, 371 A.2d at 196, "an insurance company [may not] refuse to provide that which it was paid for unless a sound reason exists for doing so." 472 Pa. at 74, 371 A.2d at 197.

Second, the court, in analyzing the purpose of such notice provisions, found that "[t]he purpose of a policy provision requiring notice of an accident or loss to be given within a certain time is to give the insurer an opportunity to acquire, through an adequate investigation, full information about the circumstances of the case, on the basis of which, it can proceed to disposition, either through settlement or defense of the claim." 472 Pa. at 74, 371 A.2d at 197 (citations omitted). The court reasoned that since "the function of a notice requirement is to protect the insurance company's interests from being prejudiced," id., then "[w]here the insurance company's interests have not been harmed by a late notice ... the reason behind the notice condition in the policy is lacking, and it follows neither logic nor fairness to relieve the insurance company of its obligations under the policy in such a situation." 472 Pa. at 75, 371 A.2d at 197.

Two lines of cases can be explained in terms of these theoretical underpinnings. First, in light of Brakeman's characterization of insurance contracts as contracts of adhesion and its departure from a strict contractual approach, several courts have held Brakeman to be inapplicable to limitations of suit clauses where Pennsylvania statutes have mandated the inclusion of the limitations clauses in insurance policies. See, e.g., Laughton v. Chester County Mut. Ins. Co., 641 F.Supp. 40 (E.D.Pa.1985); Esbrandt v. Provident Life & Accident Ins. Co., 559 F.Supp. 23 (E.D.Pa.), aff'd mem., 722 F.2d 731 (3d Cir.1983); Schreiber v. Pennsylvania Lumberman's Mut. Ins. Co., 498 Pa. 21, 444 A.2d 647 (1982). In these cases, the courts distinguish Brakeman by noting that the limitation of suit clauses at issue were not included at the exclusive discretion of the insurance carrier but rather, as a result of a legislative mandate. Thus, the large disparity of bargaining power between the insured and the carrier upon which Brakeman was premised was not present in such cases.

Second, with regard to the prejudice requirement being based on the purpose of the notice of loss provision, other courts have held that the reasoning supportive of the Brakeman "notice" rule should not extend to limitation of suit clauses, and that Brakeman, therefore, does not apply to limitation of suit clauses. See Brandywine One Hundred Corp. v. Hartford Fire Ins. Co., 405 F.Supp. 147 (D.Del.1975), aff'd mem., 588 F.2d 819 (3d Cir.1978) (applying Delaware law) (generally noting the difference between a notice provision and a limitation of suit provision, and applying a prejudice rule to the former and not to the latter). In Brandywine, the district court, in distinguishing the two types of provisions, stated that "the purpose of [notice provisions] is to avoid prejudice; the [purpose of suit limitation clauses] is simply a contractual modification of the statute of limitations." 405 F.Supp. at 151. Further, the court noted that "[t]he weight of authority in the United States holds that a provision in an insurance policy which requires an action for loss to be instituted within a period of limitations prescribed by statute is valid if the period in the policy is reasonable." Id.

However, we note that the lines of authority are not so neatly drawn. At least one federal court has concluded that Brakeman applies to limitation of suit clauses generally, whether or not such clauses have been required by law. See ACF Produce, Inc. v. Chubb/Pacific Indem. Group, 451 F.Supp. 1095 (E.D.Pa.1978) ("We concluded that Pennsylvania law, as developed in Brakeman, requires an insurer to show prejudice before it can compel forfeiture by invoking a proof of loss or limitation of suit clause."). The Pennsylvania Superior Court has also generally applied the Brakeman rationale to a legislatively mandated limitation of suit clause. See Diamon v. Penn Mutual Life Ins. Co., 247 Pa.Super. 534, 372 A.2d 1218 (1977). Yet we also note that these cases, which appear to depart from the theoretical lines, have been sharply criticized. See, e.g., Petraglia v. American Motorists Ins. Co., 284 Pa.Super. 1, 424 A.2d 1360 (1981), aff'd mem., 498 Pa. 32, 444 A.2d 653 (1982).

In Leone v. Aetna Casualty & Sur. Co., 599 F.2d 566 (3d Cir.1979), this Court expressly reserved decision on the issue now before us. In Leone, we...