Usx Corp. v. Liberty Mut. Ins. Co.

• Decision Date: 10 April 2006
• Docket Number: No. 04-1277.,No. 04-1300.,04-1277.,04-1300.
• Citation: 444 F.3d 192
• Parties: USX CORPORATION v. LIBERTY MUTUAL INSURANCE COMPANY, Appellant USX Corporation, Appellant v. Liberty Mutual Insurance Company.
• Court: U.S. Court of Appeals — Third Circuit

444 F.3d 192

USX CORPORATION v. LIBERTY MUTUAL INSURANCE COMPANY, Appellant USX Corporation, Appellant v. Liberty Mutual Insurance Company.

No. 04-1277.

No. 04-1300.

United States Court of Appeals, Third Circuit.

Argued March 7, 2006.

Filed April 10, 2006.

COPYRIGHT MATERIAL OMITTED

Mark A. Aronchick (argued), Daniel Segal, Hangley, Aronchick, Segal & Pudlin, Philadelphia, PA, Joseph G. Blute, Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, P.C., Boston, MA, for Appellant/Cross-Appellee.

Joseph J. Bosick (argued), Alfred S. Pelaez (argued), Pietragallo, Bosick & Gordon, Pittsburgh, PA, for Appellee/Cross-Appellant.

Mark F. Horning, Steptoe & Johnson, Washington, D.C., for Amici Curiae American Insurance Association, Property Casualty Insurers Association of America, The Insurance Federation of Pennsylvania Inc., and the Pennsylvania Compensation Rating Bureau.

Laura A. Foggan, John C. Yang, Washington, DC, for Amici Curiae Complex Insurance Claims Litigation Association.

Before ROTH and GREENBERG, Circuit Judges, and BUCKWALTER, District Judge.^*

GREENBERG, Circuit Judge.

I. INTRODUCTION

This matter comes on before the court on an appeal by defendant Liberty Mutual Insurance Company ("Liberty Mutual") from an order of the district court entered on June 27, 2002, granting partial summary judgment in favor of plaintiff USX Corporation ("USX") on its contract claims arising out of Liberty Mutual's refusal to defend and indemnify USX in various actions brought against it under a Workmen's Compensation/Employers' liability policy ("WC/EL policy") that Liberty Mutual had issued to USX.¹ Liberty Mutual also appeals from the final judgment entered in favor of USX on January 9, 2004. The case is also before us on a cross-appeal that USX filed from the portion of the district court's order of June 27, 2002, granting Liberty Mutual partial summary judgment and the judgment entered on January 9, 2004, in favor of Liberty Mutual on USX's claim charging bad faith denial of insurance coverage. For the reasons we set forth below, we will reverse the order of June 27, 2002, and the judgment of January 9, 2004, to the extent that they are in favor of USX and will affirm the order and judgment to the extent that they are in favor of Liberty Mutual. Furthermore, we will remand the case to the district court to enter a final summary judgment in favor of Liberty Mutual on the portions of the summary judgment that we are reversing.

II. FACTUAL AND PROCEDURAL BACKGROUND

A. The Parties and the Relevant Insurance Contract

USX is a Delaware corporation with its principal place of business in Pennsylvania, and Liberty Mutual is a mutual insurance company founded by an act of the Massachusetts Legislature with its principal place of business in that state.² In 1912, Liberty Mutual issued to USX a standard form WC/EL policy, which the parties annually renewed until January 1, 1980.³ Although issued in Pennsylvania, the WC/EL policy provided coverage to USX for specified operations in identified states, including some USX operations in Texas.

The WC/EL policy had two parts: "Coverage A- Workmen's Compensation" ("Coverage A") provided coverage for USX's statutory liability for workmen's compensation claims; and "Coverage B-Employers' Liability" ("Coverage B") provided coverage for liability that the exclusivity provisions of the applicable workmen's compensation statute did not bar. Thus, ordinarily, at least, Coverage B covered workmen's claims that were not based on no fault workmen's compensation statutory provisions.⁴ The portion of the WC/EL policy most germane to this appeal is Coverage B, which covered "all sums which [USX] shall become legally obligated to pay as damages because of bodily injury by accident or disease[.]" J.A. at 662. The WC/EL policy contained a single "Definitions" section, applicable to both Coverage A and Coverage B, containing the following definition:

Bodily Injury by Accident; Bodily Injury by Disease The contraction of disease is not an accident within the meaning of the word `accident' in the term `bodily injury by accident' and only such disease as results directly from a bodily injury by accident is included within the term `bodily injury by accident.' The term `bodily injury by disease' includes only such disease as is not within the term `bodily injury by accident.'

J.A. at 662.⁵ The policy did not define "accident" or "disease."

While Coverage B insured USX for damages resulting from either "bodily injury by accident" or "bodily injury by disease," there was a notable limitation on the latter coverage in that the policy did not cover a claim for "bodily injury by disease" "unless prior to thirty-six months after the end of the policy period written claim is made or suit is brought against the insured for damages[.]" J.A. at 662. This thirty-six-month claim limitation period, by its terms, applies only to claims for "bodily injury by disease." J.A. at 662.

B. The Underlying Complaints and the Claim for Coverage

Beginning in 1990, certain of USX's former employees and their survivors filed hundreds of non-workmen's compensation actions against USX in Texas, seeking damages for injuries sustained by the former employees while allegedly being exposed to asbestos products and/or asbestos-contaminated premises.⁶ On June 27 1997, seven years after the former employees and their survivors filed the initial asbestos-related lawsuits against USX, USX sought coverage for defenses and indemnification from Liberty Mutual in the underlying actions. By letter dated February 28, 1998, from its in-house coverage counsel, Liberty Mutual denied USX's claim for coverage, explaining that there was no potential coverage and citing, inter alia, the thirty-six-month claim limitation provision.

C. The Proceedings in the District Court

In response to the Liberty Mutual disclaimer, USX filed this diversity of citizenship action on May 18, 2001, against Liberty Mutual in the district court asserting a claim for breach of insurance contract (Count I), seeking a declaratory judgment that there was coverage (Count II), claiming insurance bad faith under 42 Pa. Const. Stat. Ann. § 8371 (West 1998) (Count III), seeking indemnity (Count IV), and asking for contract reformation (Count V). In sum, USX alleged that the policy covers asbestos-related claims because they are for "bodily injury by accident," to which the thirty-six-month claim limitation provision does not apply, or, in the alternative, that the contract should be reformed as it "defeated the reasonable expectations of [USX] and is thus contrary to public policy." See J.A. 52. The district court referred the case to a magistrate judge under 28 U.S.C. §§ 636(b)(1)(A) and (B).

On October 1, 2001, Liberty Mutual filed a motion for summary judgment. As with its initial denial of coverage, Liberty Mutual asserted that the policy did not cover the underlying claims because they were for "bodily injury by disease" and thus the thirty-six-month claim limitation provision precluded coverage for them inasmuch as the plaintiffs did not file their actions within thirty-six months following the end of the policy period.⁷ On February 21, 2002, USX filed a cross-motion for summary judgment as to Counts I-IV.

The magistrate judge to whom the court referred the case issued a Report and Recommendation on May 15, 2002, recommending that the court grant summary judgment in favor of USX on its claims for breach of contract, declaratory relief and indemnity (Counts I, II, and IV, respectively), but that the court grant summary judgment in favor of Liberty Mutual on the insurance bad faith claim (Count III). The magistrate judge concluded with regard to Counts I, II and IV that the definition of "bodily injury by accident" was ambiguous and consequently recommended that the court construe it in favor of USX as the insured.

The magistrate judge in reaching her conclusion relied on the Pennsylvania Supreme Court opinion in J.H. France Refractories Co. v. Allstate Insurance Co., 534 Pa. 29, 626 A.2d 502 (1993), for the proposition that "exposure to asbestos causes immediate `bodily injury' under the terms of an insurance policy that offers coverage for `bodily injury.'" J.A. at 8. In light of this immediate bodily injury, the magistrate judge reasoned that because "no one intends to inhale asbestos fibers and develop asbestosis," "the injury [therefore] occurs by an accident that later results in a disease." J.A. at 13. According to the Report and Recommendation, this circumstance raises at least a "reasonable interpretation" that the underlying claims were for "bodily injury by accident" and thus the Liberty Mutual policy covered USX against them. J.A. at 11, 13. In view of the magistrate judge's recommendation with respect to the meaning of the policy, she recommended that the court dismiss Count V seeking reformation as moot. The magistrate judge, however, recommended that the court grant summary judgment in favor of Liberty Mutual on Count III because she believed that Liberty Mutual "demonstrated a reasonable basis for its refusal to defend and indemnify USX," specifically its reliance on authority from another jurisdiction in the absence of applicable precedent from the courts of Pennsylvania. J.A. 17.

Both parties filed timely objections to the magistrate judge's Report and Recommendation, following which the district court, after a de novo review, issued an order on June 27, 2002, which adopted the Report and Recommendation as the opinion of the court and dismissed Count V as moot.⁸ Subsequently, the parties agreed that Liberty Mutual as a result of the June 27, 2002 order, owed USX $2,200,000, subject to Liberty Mutual's right to appeal, for attorneys' fees, defense costs, and pre-judgment interest. The court then entered a final judgment on January 9, 2004, in favor of USX on Counts I, II, and IV and in favor of Liberty Mutual on Count III.⁹ The January 9, 2004...