Valley Forge Ins. Co. v. Jefferson

• Decision Date: 07 February 1986
• Docket Number: 85-109.,Civ. A. No. 85-29
• Citation: 628 F. Supp. 502
• Parties: VALLEY FORGE INSURANCE COMPANY, and Ellen P. Williams, Plaintiffs, v. Andrew M. JEFFERSON, Valley Forge Insurance Company and Continental Casualty Company, Defendants.
• Court: U.S. District Court — District of Delaware

628 F. Supp. 502

VALLEY FORGE INSURANCE COMPANY, and Ellen P. Williams, Plaintiffs, v. Andrew M. JEFFERSON, Valley Forge Insurance Company and Continental Casualty Company, Defendants.

Civ. A. Nos. 85-29, 85-109.

United States District Court, D. Delaware.

January 16, 1986.

Opinion On Reargument February 7, 1986.

John G. Mulford, of Theisen, Lank, Mulford & Goldberg, P.A., Wilmington, Del., for Valley Forge Ins. Co. and Continental Cas. Co.

F. Alton Tybout, of Tybout, Redfearn, Casarino & Pell, Wilmington, Del., for Ellen P. Williams.

J. Michael Johnson, of Biggs & Battaglia, Wilmington, Del., for Andrew M. Jefferson.

MURRAY M. SCHWARTZ, Chief Judge.

This diversity action arises out of a verdict and judgment received by Ellen Williams in her suit against Andrew Jefferson for injuries sustained when Jefferson's automobile collided with hers. Williams was awarded $250,000 compensatory damages and $100,000 punitive damages in the Superior Court of the State of Delaware in and for New Castle County. Thus far, Williams has received $250,000 from Jefferson's automobile liability insurer. The Court is asked to decide whether the terms of two liability-insurance contracts covering Jefferson require his insurers to pay the $100,000 in punitive damages.

At the time of the accident, Jefferson, a minor, was insured for $300,000 under an automobile liability policy issued in his name by Valley Forge Insurance Company ("Valley Forge"). Jefferson was also insured under a "Personal Umbrella Excess Policy" issued by Continental Casualty Company ("Continental") to Edward and Naomi Jefferson, Andrew Jefferson's parents.

After entry of judgment against Andrew Jefferson, Valley Forge paid Williams the $250,000 compensatory-damages award, but refused to pay any punitive damages on the ground Jefferson's policy did not cover punitive damages. Continental has refused to pay the $50,000 in damages which exceeds the Valley Forge policy limits, arguing this accident is not covered under Jefferson's parents' policy because the policy covers automobile accidents only if the automobile involved was owned by the parents.

Plaintiff Valley Forge brought an action for declaratory judgment against its insured, Andrew Jefferson, who has counterclaimed for declaratory judgment. Their dispute centers on whether Valley Forge is liable under the terms of its policy with Jefferson to pay Ellen Williams the jury award of punitive damages that she received against Jefferson. This action was joined with an action brought by Williams against Valley Forge and Continental. Williams is seeking summary judgment against Valley Forge in the amount of $50,000, the sum remaining on Jefferson's liability policy, and summary judgment against Continental as excess liability insurer in the amount of $50,000. Valley Forge and Continental are each seeking a declaratory judgment that their respective policies do not obligate them to pay Williams.

Analysis

A. Applicable Law for Decision

Since this action arises under the Court's diversity jurisdiction, 28 U.S.C. § 1332, this Court is bound to apply the law that would be applied by the State of Delaware, the state in which it sits. Erie R.R. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). Furthermore, the Court must apply the choice-of-law rule that a Delaware court would apply in this case. Klaxon v. Stentor Elec. Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941).

In Oliver B. Cannon & Son v. Dorr-Oliver, Inc., 394 A.2d 1160, 1166 (Del. 1978), the Delaware Supreme Court applied the "most significant relationship" test of the Restatement (Second) of Conflict of Laws § 188 (1971), for choice-of-law questions in a contract case. Under this approach, "the rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties...." Restatement (Second), supra, § 188, at 575. The Valley Forge policy covered a Delaware-registered automobile garaged in Delaware and owned by a Delaware resident, and is therefore governed by Delaware law. The Continental policy covered Delaware citizens who were domiciled in Delaware and is thus also governed by Delaware law.

B. The Valley Forge Policy

The first question is whether Valley Forge is obligated to pay Williams punitive damages of $50,000, which, when combined with the $250,000 in compensatory damages she has already received from Valley Forge, will exhaust the $300,000 liability limitation in the insurance contract purchased by Jefferson. Valley Forge refuses to pay, claiming first that the contract is limited by its terms to compensatory damages, and second that to pay punitive damages on an automobile liability insurance contract would violate public policy.

In the ordinary course, "the State's highest court is the best authority on its own law." Commissioner v. Estate of Bosch, 387 U.S. 456, 465, 87 S.Ct. 1776, 1782, 18 L.Ed.2d 886 (1967). The parties agree there are no Delaware cases on point. Therefore, a federal court must predict what the highest state court would do. Bernhardt v. Polygraphic Co. of Am., 350 U.S. 198, 209, 76 S.Ct. 273, 279, 100 L.Ed. 199 (1956) (Frankfurter, J., concurring).

To make this prognostication, we are not inflexibly confined by dicta or by lower state court decisions, although we should look to such statements as indicia of how the state's highest court might decide. Citation omitted. The policies underlying the applicable legal doctrines, the doctrinal trends indicated by these policies and the decisions of other courts may also inform our analysis.

Pennsylvania Glass Sand Corp. v. Caterpillar Tractor Co., 652 F.2d 1165, 1167 (3d Cir.1981) (quoted in Harsco Corp. v. Zlotnicki, 779 F.2d 906, 910 (3d Cir.1985)).

1. The Terms of the Insurance Contract

The Court looks first to the terms of the insurance contract between the parties. In the recent case of Hallowell v. State Farm Mutual Automobile Insurance Co., 443 A.2d 925 (Del.1982), the Delaware Supreme Court set forth the special rules of construction guiding its interpretation of insurance contracts. "When the language of an insurance contract is clear and unambiguous, a party will be bound by its plain meaning." Id. at 926 (citations omitted). If there is some ambiguity in the policy language, however, "an insurance contract is construed strongly against the insurer," who drafted the language, and in favor of the insured. Id. (citations omitted). "Ambiguity exists when the language in a contract permits two or more reasonable interpretations." Id. (citations omitted).

The Valley Forge insurance contract provides: "We will pay damages for bodily injury or property damage for which any covered person becomes legally responsible because of an auto accident." Dkt. 15A, at B-6. The policy does not define the term "damages for bodily injury."

No general agreement exists among the numerous courts that have examined the question whether an insurer is liable to pay punitive damages under the terms of its liability policy with the insured. Some courts have found contract language similar to that under review to be plain and unambiguous, and have concluded that "damages" includes compensatory and punitive damages. See, e.g., Norfolk & W. Ry. v. Hartford Acc. & Indem. Co., 420 F.Supp. 92, 94 n. 1 (N.D.Ind.1976); Price v. Hartford Acc. & Indem. Co., 108 Ariz. 485, 502 P.2d 522, 523 (1972); Southern Farm Bur. Cas. Ins. Co. v. Daniel, 246 Ark. 849, 440 S.W.2d 582, 584 (1969); Anthony v. Frith, 394 So.2d 867, 868 (Miss.1981); Mazza v. Medical Mut. Ins. Co., 311 N.C. 621, 319 S.E.2d 217, 219 (1984); Carroway v. Johnson, 245 S.C. 200, 139 S.E.2d 908, 910 (1965); State v. Glen Falls Ins. Co., 137 Vt. 313, 404 A.2d 101, 105 (1979); and Brown v. Maxey, 124 Wis.2d 426, 369 N.W.2d 677, 686 (1985). Other courts, reasoning that "damages" means only compensatory damages, have refused to require insurance companies to pay punitive damages as part of their contractual obligation to their insured. See, e.g., Universal Indem. Ins. Co. v. Tenery, 96 Colo. 10, 39 P.2d 776, 779 (1934); Schnuck Mkts., Inc. v. Transamerica Ins. Co., 652 S.W.2d 206, 209-10 (Mo.App.1983). Still other courts have found the language ambiguous. See, e.g., Greenwood Cemetery, Inc. v. Travelers Indem. Co., 238 Ga. 313, 232 S.E.2d 910, 913 (1977); Harrell v. Travelers Indem. Co., 279 Or. 199, 567 P.2d 1013, 1015 (1977).

I find that the contract language requiring Valley Forge to pay damages assessed against its insured is ambiguous. By the terms of the contract, Valley Forge did not promise to "pay for bodily injury or property damage." That is, it did not promise to compensate for actual injury incurred. Instead, the insurance contract is tied to a legal determination of damages: the policy commits Valley Forge to pay "damages for bodily injury or property damage for which any covered person becomes legally responsible because of an auto accident." (emphasis added).

The Valley Forge policy did not state it would pay only compensatory damages. The term "damages for bodily injury or property damage" may be read to mean "compensatory damages," as Valley Forge argues, but that is not the only possible interpretation. This phrase may be read to include punitive damages.

Punitive damages in a personal injury suit are assessed only "for bodily injury or property damage." See Cloroben Chem. Co. v. Comegys, 464 A.2d 887, 892 (Del. 1983) (citing Reynolds v. Willis, 58 Del. 368, 209 A.2d 760 (1965)) (award of punitive damages may not be disproportionate to the award for compensatory damage). They are also without question damages for which a person is "legally responsible." If the damages clause is construed as a whole ("damages ... because of an auto accident"), the clause may be interpreted as including all damages, however characterized by a jury, for bodily...