On Air Ent Corp v. Nat'l Indemnity Co ( 2000 )

Opinions of the United
2000 Decisions States Court of Appeals
for the Third Circuit
3-29-2000
On Air Ent Corp v Nat'l Indemnity Co
Precedential or Non-Precedential:
Docket 98-2038 and 98-2039
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Recommended Citation
"On Air Ent Corp v Nat'l Indemnity Co" (2000). 2000 Decisions. Paper 70.
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Filed March 29, 2000
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 98-2038 & 98-2039
ON AIR ENTERTAINMENT CORP.;
NISE PRODUCTIONS, INC.; MICHAEL NISE,
Appellants at No. 98-2038
v.
NATIONAL INDEMNITY CO.
Appellant at No. 98-2039
APPEAL AND CROSS-APPEAL FROM THE
UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
(D.C. Civil Action No. 96-cv-02597)
(District Judge: Ronald L. Buckwalter)
ARGUED: October 20, 1999
BEFORE: SCIRICA, COWEN, and MAGILL,* Circuit Judges
(Opinion Filed March 29, 2000)
Michael R. Needle, Esquire
(ARGUED)
Law Offices of Michael R. Needle
2401 Pennsylvania Avenue
Suite 1C-44
Philadelphia, PA 19130
Counsel for Appellants/Cross-
Appellees
_________________________________________________________________
* Honorable Frank Magill, Senior United States Circuit Judge for the
Eighth Circuit Court of Appeals, sitting by designation.
Nancy F. Peters, Esquire (ARGUED)
National Indemnity Company
4016 Farnam Street
Omaha, NE 68131
Barry L. Kroll, Esquire
Williams & Montgomery
20 North Wacker Drive
2100 Opera Building
Chicago, IL 60606
Peggy B. Greenfeld, Esquire
Klett, Lieber, Rooney & Schorling
18th & Arch Streets
Two Logan Square, 12th Floor
Philadelphia, PA 19103
Counsel for Appellee/Cross-
Appellant
OPINION OF THE COURT
MAGILL, Senior Circuit Judge.
This appeal raises issues concerning the extent of
coverage provided by Owner's, Landlord's and Tenant's
Liability (OL&T) insurance policies. The appeal arises out of
a suit by On Air Entertainment Corp. (On Air) against
National Indemnity Co. (National) in which On Air, under
an OL&T policy from National, sought defense costs and
damages for bad faith in connection with the defense of two
lawsuits (Suit One and Suit Two).1 On Air appeals the
District Court's grant of National's motion for judgment as
a matter of law on its bad faith claims, the Court's denial
of its request to amend its complaint to add a fraud claim,
and the Court's ruling that a release that it signed was
enforceable and barred its action against National for
damages in connection with Suit Two. National cross-
appeals the District Court's finding that coverage exists
_________________________________________________________________
1. We refer generically to the lawsuits filed against On Air in order to
protect the privacy of the alleged minor rape victims who brought the
suits. See generally 18 U.S.C.A. S 3509.
2
under the OL&T policy for Suit One and also appeals the
District Court's holding that New Jersey law applies to the
coverage issues. We affirm all of the District Court's rulings
from which On Air appeals and reverse the District Court's
holding of coverage and attorneys' fees under the OL&T
policy.
I. BACKGROUND
In 1988, On Air purchased a standard OL&T insurance
policy (Policy) from National to insure its premises.2 On Air
produced two syndicated television teen dance shows called
Dancing on Air and Dance Party USA (Dance Shows) on its
premises. Edward O'Neil (O'Neil) was one of the hosts of the
Dance Shows. In 1987, directors of On Air met with O'Neil
regarding his off-show conduct with minor females who
appeared on the Dance Shows and instructed him to not
have any further involvement with underage females.
Despite these warnings, O'Neil continued in a relationship
with an underage female and was subsequently removed as
a host of the Dance Shows. However, in 1989, On Air
reinstated O'Neil as a host of the Dance Shows. Shortly
after his reinstatement, O'Neil allegedly raped two minor
females who were dancers on the Dance Shows. Both of the
alleged rapes occurred on social occasions off On Air's
premises.
In January 1991, Suit One was filed against On Air
alleging that On Air's negligent hiring and supervision of
O'Neil contributed to the alleged rape of one of the
underage females. On Air tendered Suit One to National,
but National initially denied coverage under the Policy for
various reasons. In October 1991, Suit Two was filed
against On Air and contained similar allegations of
negligent hiring and supervision. After receiving notice of
Suit Two, National determined that while there was no
coverage for either suit, it would defend both suits under a
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2. The 1989 policy covered the period from December 31, 1988, to
December 31, 1989. National first sold the OL&T insurance policy to On
Air in 1985. The policy was renewed annually, the 1989 policy being the
fourth renewal.
3
full and complete reservation of rights, pending a
declaratory judgment action.
Shortly after National agreed to take over the defense of
the suits, Suit Two was settled by On Air's private counsel
for $30,000 and National agreed to contribute $13,500 in
exchange for a complete release of On Air. In connection
with the settlement, On Air released National from all
claims arising from Suit Two, including claims for coverage
and attorneys' fees.3 Suit One settled in April 1994, and
National paid the alleged rape victim $101,000 in exchange
for a complete release of On Air.
On March 29, 1996, On Air brought the current suit
against National alleging bad faith in connection with Suit
One and Suit Two and claiming that it was entitled to
attorneys' fees in connection with the defense of the suits.
The District Court denied National's motion for summary
judgment on its claim that the Policy did not provide
coverage for Suit One and Suit Two and ruled that New
Jersey law applied to the coverage issues. On Air's suit was
scheduled for a jury trial on September 30, 1997. Prior to
trial, the District Court ruled that the Policy provided
coverage to On Air for Suit One and Suit Two. The Court
proceeded to trial on the remaining issues of whether
National had acted in bad faith in connection with the
suits, and the amount of attorneys' fees owed to On Air by
National.
On the third day of trial, the District Court informed On
Air that it had not made a showing of bad faith by National.
The Court allowed On Air to proffer all of its remaining
evidence in order to make a showing of bad faith. Following
On Air's proffer, the District Court granted National's
motion for judgment as a matter of law on the bad faith
claims. The Court scheduled the remaining issue, the
_________________________________________________________________
3. The Release provided, in relevant part:
Further, this "Settlement Agreement" contemplates and extinguishes
any claims which the "insureds" may have for expenses, interest,
costs, punitive damages, and/or attorney's fees arising out of
claims
made as a result of the occurrence. The "insureds" acknowledge that
"National Indemnity" has made a good faith effort to resolve their
demands for judgment under the subject policy.
4
amount of attorneys' fees to which On Air was entitled, for
trial in June 1998. Prior to the June 1998 trial, the District
Court granted National's motion claiming that On Air was
not entitled to any attorneys' fees in connection with Suit
Two because On Air had signed a release of any potential
claims.4 Following a bench trial on the issue of attorneys'
fees in connection with Suit One, the Court awarded On Air
$63,600.08 for attorneys' fees, plus interest accrued.
Subsequently, the District Court denied National's motion
for an order to vacate the judgment or for a new trial, and
this appeal and cross-appeal followed.
II. ANALYSIS
A. Choice of Law Issue
National cross-appeals the District Court's ruling that
New Jersey law controls the case and argues that
Pennsylvania law should control. Because this is a diversity
case, we apply the choice of law principles of Pennsylvania,
the forum state. See Klaxon Co. v. Stentor Elec. Mfg. Co.,
313 U.S. 487, 496-97, 61 S. Ct. 1020, 1021 (1941). The
District Court applied Pennsylvania's choice of law test,
which it termed "a combination of the ``most significant' test
and an ``interest' analysis," and held that New Jersey, and
not Pennsylvania, law controls the case.
National contends that the District Court misapplied
Pennsylvania's choice of law test, and that Pennsylvania
law should control the case. However, before a choice of law
question arises, there must actually be a conflict between
the potentially applicable bodies of law. See Lucker Mfg. v.
Home Ins. Co., 23 F.3d 808, 813 (3d Cir. 1994); Williams v.
Stone, 109 F.3d 890, 893 (3d Cir. 1997). National admits
that it cannot point to any differences between
Pennsylvania and New Jersey law relevant to this case. In
addition, our own research has not identified any relevant
differences. Under these circumstances, there is no conflict
_________________________________________________________________
4. On Air appeals the District Court's holding that the release was
enforceable. On Air's claim has no merit and the District Court's ruling
is affirmed without further discussion.
5
of law, and the court should avoid the choice of law
question. See Lucker, 23 F.3d at 813. The court can,
therefore, refer interchangeably to the laws of New Jersey
and Pennsylvania in discussing the law applicable to the
case. See id.
B. Coverage under the Policy
The District Court held that the Policy provided coverage
in this case, but did not give the reasons for its ruling.5 On
cross-appeal, National argues, among other things, that
_________________________________________________________________
5. The relevant portions of the Policy state:
The company will pay on behalf of the insured all sums which the
insured shall become legally obligated to pay as damages because of
A. bodily injury or
B. property damage
to which this insurance applies, caused by an occurrence and
arising out of the ownership, maintenance, or use of the insured
premises and all operations necessary or incidental thereto, and
the
company shall have the right and duty to defend any suit against
the insured seeking damages on account of such bodily injury or
property damage, even if any of the allegations of the suit are
groundless, false or fraudulent, and may make such investigation
and settlement of any claim or suit as it deems expedient, . . .
"Occurrence" is defined in the Policy as:
An accident, including continuous or repeated exposure to
conditions, which results in bodily injury or property damage
neither expected nor intended from the standpoint of the insured.
"Insured premises" is defined in the Policy as:
(1) the premises designated in the declarations, (2) premises
alienated by the named insured (other than premises constructed
for sale by the named insured), if possession has been relinquished
to others, and (3) premises as to which the named insured acquires
ownership or control and reports his intention to insure such
premises under this policy and no other within 30 days after such
acquisition; and includes the ways immediately adjoining such
premises on land.
"Operations" are defined in the policy as: Teen dance TV shows, r/a
theaters, motion pictures or television studios (including 10 remotes).
6
there is no coverage in this case because the Policy is an
OL&T policy, a limited form of insurance which does not
provide coverage for off-premises injuries. Our review of the
District Court's coverage ruling is plenary. See Carey v.
Employers Mut. Cas. Co., 189 F.3d 414, 417 (3d Cir. 1999).
National argues that OL&T policies, in contrast to
broader comprehensive general liability policies, do not
cover off-premises injuries such as those in the present
case. On Air counters that the underlying lawsuits alleged
that its negligence in hiring and supervising O'Neil resulted
in the alleged rapes of the plaintiffs. On Air claims that
because hiring and supervising necessary personnel,
including the host, is "necessary or incidental" to the Dance
Shows, one of the "operations" conducted on the insured
premises, the injuries alleged in the lawsuit therefore
"aris[e] out of the ownership, maintenance or use of the
insured premises and all operations necessary or incidental
thereto."
Neither the parties' briefs nor our research reveal a
decision by either New Jersey or Pennsylvania courts on the
coverage provided by OL&T policies for off-premises
injuries. Therefore, it is appropriate for the court to
consider other state court decisions, federal decisions, and
the general weight and trend of authority. See Farmers
Alliance Mut. Ins. Co. v. Salazar, 77 F.3d 1291, 1294-95
(10th Cir. 1996). In construing the policy language, we
must keep in mind that it is well established that ambiguity
in insurance contracts must be construed in favor of the
insured. See Nationwide Mut. Fire Ins. Co. v. Pipher, 140
F.3d 222, 227 (3d Cir. 1998).
In construing the "operations necessary or incidental
thereto" language in OL&T policies, one court has noted
that "[n]umerous courts have addressed whether off-site
injuries may be covered by such language in a premises
liability policy, and there is a definite lack of consensus as
to the correct result." Hartford Fire Ins. Co. v. Annapolis
Bay Charters, Inc., 69 F. Supp. 2d 756, 761-62 (D. Md.
1999) (citation omitted). The cases construing OL&T
policies can be grouped into three general categories: (1)
cases holding that OL&T policies only protect against
liability arising from the condition or use of a building and
7
not liability arising from the nature of the operations or
activity conducted therein;6 (2) cases holding that OL&T
policies can cover liability arising from the nature of the
operations or activity conducted therein if the injury occurs
on the insured premises;7 and (3) cases holding that OL&T
policies cover liability arising from accidents occurring off
_________________________________________________________________
6. In the first category are cases such as Harvey v. Mr. Lynn's Inc., 416
So. 2d 960 (La. Ct. App. 1982), where the court said that:
The purpose of owners', landlords' and tenants' liability insurance
is
to protect against liability arising from the condition or use of a
building. This must be distinguished from insurance against
liability
arising from the nature of the enterprise or activity conducted
therein. Put another way, an OLT policy does not cover liability
arising from the type of business activity which the insured
conducts in the building.
Id. at 962 (citation omitted). Similarly, in American Empire Surplus Lines
Ins. Co. v. Bay Area Cab Lease, Inc., 756 F. Supp. 1287 (N.D. Cal. 1991),
the court said that:
The policy issued to Cab. Co. is a Landlord's Owner's & Tenant's
policy, and is limited by its terms to ``accidents' occurring ``on
the
premises.' The type of policy issued to Cab Co. is intended ``simply
to protect against liability arising from the condition or use of
the
building as a building [and] must be distinguished from insurance
against liability arising from the nature of the enterprise or
activity
conducted therein.'
Id. at 1289 (quoting 11 Couch on Insurance Sd 44:379, at 551-552 (Rev.
ed. 1982 and supp. 1989)).
7. In the second category are cases such as Walthers v. Travelers
Casualty and Surety Co., 1999 WL 793939 (D. Or. 1999), where the
court held that the word "incidental" makes the OL&T provision
extremely inclusive and that such a policy covers a corporation's
negligence in hiring and supervision of a dentist and the making of
dental appointments where the actions occurred on the insured
premises. See id. at *5. See also Hartford Fire Ins. Co. v. Annapolis Bay
Charters, Inc., 69 F. Supp. 2d 756, 761 (D. Md. 1999) (holding that an
OL&T policy which stated that the relevant premises were the "offices-
general" and "hardware-retail" areas of a certain building offered some
coverage for business operations related to general office or hardware-
retail activities, but the specialized business operation of chartering
watercraft to be used off-site, even though the chartering occurred on
the insured premises, did not qualify as a "use .. . of the premises").
8
the insured premises if the injury has a sufficient nexus to
the operations conducted on the insured premises. 8
Although we believe that OL&T policies should not be
confused with more comprehensive general liability policies,
there is no need for us to decide which category of cases we
agree with because even if we were to hold that OL&T
policies provide coverage for off-premises accidents, there
would still be no coverage in this case. An OL&T policy
requires a causal connection between the injury and the
ownership, maintenance or use of the premises. See
Paraclete, 857 F. Supp. at 835 (stating that a sufficient
connection exists when there is a reasonable causal
connection between the ownership, maintenance or use of
the premises and the injury). Unlike the cases where courts
have found accidents arising out of the operations of an
insured to be covered,9 in our case the accidents did not
_________________________________________________________________
8. In the third category of cases, courts have held that, in certain
circumstances, off-premises accidents can be covered under OL&T
policies. In Servants of the Paraclete, Inc. v. Great American Insurance
Co., 857 F. Supp. 822 (D.N.M. 1994), the court said:
if Great American intended its insured to understand that the
policy
only covered the physical condition of the Servants' facilities, it
should have so stated. At a minimum, it should have omitted the
language "and all operations necessary or incidental thereto . . ."
and limited coverage to accidents arising out of the"ownership,
maintenance or use of the insured premises . . . ." Any accident
resulting solely from the physical condition of the facilities
would
be
included within the more limited language. Great American's
contention makes superfluous the language "and all operations
necessary or incidental thereto . . . ."
Id. at 836. The court held that coverage may exist under an OL&T policy
for an off-premises accident if "there exists a sufficient connection
between the injury and the insured's premises, including necessary or
incidental operations on the premises." Id. ; see also Henry v. General
Cas. Co. of Wis., 593 N.W.2d 913 (Ct. App. Wis. 1999) (holding that an
off-premises automobile accident was covered under an OL&T policy
where an automobile dealership provided a "loaner" to a customer whose
car was being repaired at the auto dealership because the loan of the car
was incidental to the dealership's auto business).
9. In Paraclete, a nonprofit organization that treated a priest for
pedophilia was sued for negligence in the treatment of the priest when
9
"arise out of . . . operations necessary or incidental" to the
insured premises because the sexual assaults occurred on
purely social outings and, thus, do not have the requisite
causal connection to the insured premises.
A sufficient causal connection cannot exist where the
injury arose out of a social activity that had no connection
to the operations of the insured. This principle was
exhibited in Berne v. Continental Ins. Co., 753 F.2d 27 (3d
Cir. 1995), where Berne, the insured owner of Berne's Ice
Company, Inc., met with Joseph Flynn, the general
manager of the Sapphire Beach Hotel, at the Slipaway Bar
in St. Thomas, Virgin Islands. See id. at 28. The purpose of
the meeting was to discuss the Hotel's indebtedness to
Berne's Ice Company. See id. Berne, licensed to carry a
pistol, brought his pistol with him to the meeting. See id.
While awaiting his turn in a game of darts, Berne realized
that the pistol he was carrying was loaded and moved to an
adjacent corridor to unload the pistol. See id. While he was
unloading the pistol, it accidently discharged and the bullet
passed through a wall and hit a customer of the bar. See
id. Berne contended that his OL&T policy provided coverage
because Berne carried the pistol in order to protect the
receipts of the ice business from robbery, and the pistol
was discharged during the course of a business meeting
with Flynn. See id. at 29. The insurer, naturally, contended
that the pistol was discharged after the business meeting
was over when Berne and Flynn were engaged in a purely
social game of darts. See id. The trial court found that the
_________________________________________________________________
the priest, during the course of his treatment, allegedly sexually abused
numerous parish children. See 857 F. Supp. at 826-27. The court found
that the requisite causal connection was satisfied because the alleged
negligence occurred within the insured facilities, and because one of the
missions of the insured was the rehabilitation of pedophiliac priests, the
alleged negligence detailed activities which were at least an "incidental"
use of the insured's premises. See id. at 837. In Henry, the loan of the
vehicle was directly related to the repair of the accident victim's car,
and,
thus, had a sufficient connection to the operations of the insured. See
593 N.W.2d at 918-19. Similarly, in Walthers, where the claim involved
the insured's negligent employment and supervision of a dentist, the
injuries occurred during the course of the dentist's duties. See 1999 WL
793939, at *1.
10
discharge of the pistol did not arise out of operations
necessary or incidental to Berne's Ice Company's business.
See id. The Third Circuit affirmed the district court's
holding, saying that there was evidence that the business
discussion between Berne and Flynn took only a few
minutes and that Berne carried a pistol not only for
business purposes, but also for personal reasons when not
engaged in business. Id.; see also Reznichek v. Grall, 442
N.W.2d 545 (Wis. Ct. App. 1989) (a bowling alley
proprietor's OL&T policy did not cover his negligent
transmission of genital herpes to a sixteen-year-old girl as
a result of sexual encounters that occurred on the bowling
alley premises because there was no causal relationship
between the plaintiff 's injury and the ownership,
maintenance or use of the premises as a bowling alley).
Similarly, in our case there is not a sufficient connection
between the underlying injuries and the use of the insured
premises because the injuries arose out of purely social
outings that were unconnected to any of the operations of
On Air. In Suit One, the complaint alleged that O'Neil asked
the minor plaintiff to go to the mall with him. On the
pretext of going to the mall, O'Neil told the plaintiff that he
had to stop at his grandmother's house to pick up
something. Upon arrival at his grandmother's house, O'Neil
enticed the plaintiff into his bedroom and forcibly assaulted
and raped her. Suit One involves injuries that arose from
purely social circumstances, and the injuries' connection to
On Air's operations are not sufficient to support a holding
that the injuries "arose out of . . . operations necessary or
incidental" to the premises. The District Court'sfinding of
coverage and attorneys' fees under the Policy must
therefore be reversed.
C. Bad Faith Claims
On Air appeals the District Court's grant of judgment as
a matter of law under Federal Rule of Civil Procedure 50(a)
on its bad faith claims against National. On October 3,
1997, the District Court, after having heard On Air's
witnesses' testimony and reviewing its exhibits and proffers
in support of its claims, orally directed that a judgment as
a matter of law be entered in favor of National on On Air's
11
claims of bad faith in disclaiming coverage under the Policy
and bad faith in the defense of Suit One and Suit Two as
well as its claim for intentional infliction of emotional
distress. On appeal, On Air argues that the District Court's
ruling was erroneous. Our review of the District Court's
grant of judgment as a matter of law is plenary. See Rego
v. ARC Water Treatment Co. of Pa., 181 F.3d 396, 400 (3d
Cir. 1999).
On Air's claims do not have any merit. Bad faith in denial
of coverage only exists if the insured's claim is not "fairly
debatable." See Robeson Indus. v. Hartford Accident &
Indem., 178 F.3d 160, 169 (3d Cir. 1999) (applying New
Jersey law).10 In order to prove that a claim is not "fairly
debatable," "the insured must ``show the absence of a
reasonable basis for denying benefits of the policy and the
defendant's knowledge or reckless disregard of the lack of
a reasonable basis for denying the claim.' " Id. (quoting
Pickett v. Lloyd's, 621 A.2d 445, 453 (N.J. 1993)). The
coverage issue in this case was "fairly debatable." On Air
cannot show the absence of a reasonable basis for denying
coverage, and, thus, On Air cannot show that National
acted in bad faith in denying coverage.11 Similarly, On Air
has not shown that National acted in bad faith in defense
_________________________________________________________________
10. Similar to New Jersey law, "[a] refusal, with no good cause, to
provide
a defense or to indemnify when the policy provides for coverage violates
Pennsylvania's bad faith insurance statute." Frog, Switch & Mfg. Co. v.
Travelers Ins. Co., 193 F.3d 742, 751 n.9 (3d Cir. 1999).
11. Courts construing New Jersey law have indicated that a finding of
coverage under the insurance policy is a predicate to a bad faith claim.
See Hudson Universal, Ltd. v. Aetna Ins. Co., 987 F. Supp. 337, 343 n.3
(D.N.J. 1997). On Air claims that even if there is no coverage under the
OL&T policy, National denied coverage in bad faith because, at the time
that it denied coverage, it based its decision on"occurrence" grounds
contradicted by known case law and the advice of its counsel. However,
courts have held that what is dispositive is whether, based on the facts
existing at the time of the denial, a reasonable insurer would have
denied the claim, so that even if the insurer gives an erroneous reason
for denying coverage, if there is a valid basis for denying coverage, the
insurer is not liable for bad faith. See Republic Ins. Co. v. Stoker, 903
S.W.2d 338, 340-41 (Tex. 1995).
12
of Suit One and Suit Two and we affirm the District Court's
dismissal of both claims under Rule 50(a).12
III. CONCLUSION
In sum, we affirm the District Court's rulings from which
On Air appeals, and reverse the District Court's holding of
coverage and attorneys' fees under the OL&T policy.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
_________________________________________________________________
12. On Air's other claims on appeal, that it is entitled to emotional
distress and punitive damages in connection with the bad faith claims,
and that it should have been allowed to amend its complaint to allege
fraud are without merit and warrant no discussion. The District Court's
rulings on those issues are affirmed.
13