Oliver B. Cannon and Son v. Fidelity and Cas. Co.

• Citation: 519 F. Supp. 668
• Decision Date: 31 July 1981
• Docket Number: Civ. A. No. 79-129.
• Parties: OLIVER B. CANNON AND SON, INC., a Pennsylvania corporation, Plaintiff, v. FIDELITY AND CASUALTY COMPANY OF NEW YORK, a New Hampshire corporation, Defendant.
• Court: U.S. District Court — District of Delaware

519 F. Supp. 668

OLIVER B. CANNON AND SON, INC., a Pennsylvania corporation, Plaintiff, v. FIDELITY AND CASUALTY COMPANY OF NEW YORK, a New Hampshire corporation, Defendant.

Civ. A. No. 79-129.

United States District Court, D. Delaware.

July 31, 1981.

Robert G. Carey of Prickett, Jones, Elliott, Kristol & Schnee, Wilmington, Del., for plaintiff.

B. Wilson Redfearn and Colin M. Shalk of Tybout, Redfearn, Casarino & Pell, Wilmington, Del., for defendant.

MEMORANDUM OPINION

LATCHUM, Chief Judge.

In this action plaintiff, Oliver B. Cannon and Son, Inc. ("Cannon"), seeks to recover from its insurance carrier, defendant Fidelity and Casualty Company of New York ("Fidelity"), (a) sums of money which Cannon allegedly became obligated to pay as damages as the result of a state court suit, (b) Cannon's litigation expenses accumulated in that suit, and (c) exemplary damages. The facts and issues of this action are described in detail in this Court's opinion denying cross-motions for summary judgment. Oliver B. Cannon and Son, Inc. v. Fidelity and Casualty Company of New York, 484 F.Supp. 1375 (D.Del.1980).

Presently before the Court are (A) Fidelity's motion that the Court reconsider its decision that the rule of law set forth in the case of Hionis v. Northern Mutual Insurance Co., 230 Pa.Super. 511, 327 A.2d 363 (1974) is applicable to this case; (B) Fidelity's motion to dismiss that portion of Count Five of the Complaint which seeks to recover attorney's fees allegedly incurred in the underlying state court litigation but never paid by Cannon (Docket Item "D.I." 129); (C) Cannon's third motion for summary judgment (D.I. 161); and (D) a request for a number of in limine rulings on questions raised by the parties pre-trial relating to (1) Fidelity's request for sequestration of witnesses at trial, (2) the subpoena duces tecum which will be sought by Fidelity and directed to Courtney Cummings, Esq., Cannon's attorney in the state court litigation, and (3) the applicability of the exclusions to insurance coverage invoked by Fidelity to the damages determined in the state court litigation. The Court will address these issues seriatim.

A. The Applicability of the Hionis Rule

Fidelity has requested that the Court reexamine its holding in its opinion of January 16, 1980, Oliver B. Cannon and Son, Inc. v. Fidelity and Casualty Co. of New York, 484 F.Supp. 1375, 1383-84 (D.Del.1980), that before Fidelity may rely upon the "work product" exclusions contained in the insurance policies which it issued to Cannon, it has the burden of proving that at the time the insurance contract was made, Cannon was aware of the exclusion "and understood its meaning, and thus intended to be bound by it." In so holding, the Court relied upon the rule of law stated in Hionis v. Northern Mutual Insurance Co., 230 Pa.Super. 511, 327 A.2d 363 (1974).¹ Fidelity argues that Hionis is inapplicable to the circumstances of this case. Specifically, it contends that "Pennsylvania courts have adopted a bi-level approach in dealing with insurance contracts." According to Fidelity, when the purchaser is a large sophisticated corporation with bargaining power equal to the insurer and the contract is unambiguous, all the normal rules of contract interpretation apply. Fidelity thus argues that it is only where the purchaser is unsophisticated and has no significant bargaining power or where the contract is ambiguous that special protective rules enunciated in Hionis apply. Finally, Fidelity contends that Cannon is a large sophisticated corporation with bargaining power equal to that of Fidelity and that therefore the Hionis requirement is inapplicable.

After carefully considering the arguments and submissions of the parties, the Court is convinced that its original decision finding Hionis applicable to this case was correct. However, the Court also concludes that Fidelity is entitled to a jury instruction that the jury must find the exclusions to coverage claimed by Fidelity to be applicable if it finds that Fidelity has proved by a preponderance of the evidence that Fidelity and Cannon had relatively equal bargaining power at the time the contract was executed. The Court has reached this conclusion as a result of its examination of the Hionis case, its progeny, and the body of Pennsylvania law, upon which Hionis relied, finding insurance contracts to be contracts of adhesion.

In Hionis, the plaintiff, a layman of apparently average intelligence who was "unschooled in insurance matters," had sought insurance to cover certain improvements he had made on the premises of his leased restaurant. He sought this insurance upon the recommendation of an agent of the defendant insurance company and entrusted the entire matter to the agent. The insured's only requirement was "that the new policy cover him for loss to the improvements since his expense had been considerable." Thereupon, a fire policy issued covering improvements and betterments to the amount of $49,500. A fire later occurred and the insurers refused to pay anything in excess of $12,733, basing its refusal on an exclusion in the policy. Plaintiff thereupon brought suit against the insurer seeking the balance of his losses. The trial court entered a judgment for the plaintiff and the Superior Court affirmed. Judge Hoffman, summarizing prior law, stated:

Insurance contracts have been viewed under the law as contracts of "adhesion", where the insurer prepares the policy for a purchaser having no bargaining power. Where a dispute arises, such contracts are construed strictly against the insurer. * * The policy behind this rule construction against the insurer is sound; the insurer wrote the policy and the individual purchaser is concerned primarily with monetary benefits. Concern with definitional clauses and exclusions is minimal; therefore, if they do become material, they should be strictly construed against the insurer. * * * 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 upon the defendant to establish it.

327 A.2d at 365. The court went on to hold: "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." Applying this rule, the court concluded that because the plaintiff had adduced evidence showing that it was his intention to obtain full insurance for the improvements in his restaurant and because the insurer had failed to introduce any evidence, other than the policy itself, that would seem to indicate an awareness of the limitation on the part of the plaintiff, the lower court had properly directed judgment in favor of the plaintiff.

The new element which Hionis added to the case law concerning the construction of insurance contracts was that even where an exclusion to a policy is unambiguous, the insurer has the burden of proving that the insured was aware of and understood the exclusion at the time he became insured. This principle, known as the "Hionis rule" has been reaffirmed and applied in numerous later cases both by the Pennsylvania State and Federal Courts. See Daburlos v. Commercial Insurance Co. of Newark, New Jersey, 521 F.2d 18 (C.A.3, 1975); Mattes v. National Fidelity Life Insurance Co., 506 F.Supp. 955 (M.D.Pa.1980); Kelmo Enterprise, Inc. v. Commercial Union Insurance Co., ___ Pa.Super. ___, 426 A.2d 680 (1981); Klischer v. Nationwide Life Insurance Co., ___ Pa.Super. ___, 422 A.2d 175 (1980) (collecting cases); L. & W. Demolition Co., Inc. v. Rockwood Insurance Co., 75 Pa. D. & C.2d 688 (C.P. Dauphin County 1976).

Two exceptions to the "Hionis rule" have emerged from the case law applying the decision. See generally Mattes v. National Fidelity Life Insurance Co., supra. First, in cases where the claimed exclusion will not defeat the expectation of coverage, the exclusion may be enforced even though the insured was unaware of it and did not understand it. Thus, Hionis has been held to be inapplicable in cases where an exclusion merely prevented double recovery, Weiss v. CNA, 468 F.Supp. 1291 (W.D.Pa.1979); Miller v. Prudential Insurance Company of America, 239 Pa.Super. 467, 362 A.2d 1017 (1976), and in a case where an exclusion prevented recovery for a loss suffered by an owner of two stores at the store which was not the subject of the insurance policy under which recovery was sought. Treasure Craft Jewelers, Inc. v. Jefferson Insurance Company of New York, 583 F.2d 650 (C.A.3, 1978). Second, the Hionis rule has also been held to be inapplicable in cases where the insured and the insurer have roughly equal bargaining power. Brokers Title Company, Inc. v. St. Paul Fire & Marine Insurance Co., 610 F.2d 1174 (C.A.3, 1979).²

The reasons for and scope of these exceptions can best be understood if one examines the rationale underlying the Hionis rule. The Hionis rule is based upon the recognition by the Pennsylvania courts of the fact that most insurance contracts are contracts of adhesion, and are consequently often not "arrived at by the normal processes of negotiation between parties in substantially equal bargaining positions" that is contemplated by traditional contract theory. 7 S. Williston, Contracts § 900 at 29 (3rd ed. 1963). Contracts of adhesion are usually contracts between parties of unequal bargaining power where the majority of the terms and conditions are contained in a form contract which has been prepared by the party with superior bargaining power. The only real bargaining which takes place concerns certain essential conditions, such as price, type of coverage and amount of coverage. The other terms contained in the form contract are usually offered by the party which prepared the contract on a "take it or leave it" basis. Moreover, these terms, which are...