PECO Energy Co. v. Boden ( 1995 )

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
8-31-1995
PECO v Boden
Precedential or Non-Precedential:
Docket 94-1883
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
____________
NO. 94-1883
____________
PECO ENERGY COMPANY
v.
KENNETH HENRY EDMUND BODEN; LONDON & HULL MARITIME
INSURANCE COMPANY LIMITED; INSURANCE COMPANY OF
NORTH AMERICA (U.K.) LIMITED; THE YORKSHIRE INSURANCE
COMPANY LIMITED; INDEMNITY MARITIME ASSURANCE COMPANY
LIMITED,
Appellants
____________
Appeal from the United States District Court
for the Eastern District of Pennsylvania
D.C. No. 93-cv-001100
____________
Argued June 15, 1995
Before: STAPLETON, McKEE, and ROSENN, Circuit Judges
Opinion Filed August 31, 1995
____________
DANTE MATTIONI, ESQUIRE
Mattioni, Mattioni & Mattioni
399 Market Street
2nd Floor
Philadelphia, PA 19106
MICHAEL G. CHALOS, ESQUIRE
HARRY A. GAVALAS, ESQUIRE
MARTIN F. MARVET, ESQUIRE (Argued)
Chalos & Brown
300 East 42nd Street
New York, New York 10017
Attorneys for Appellants
ELIZABETH K. AINSLIE, ESQUIRE (Argued)
Ainslie & Bronson
2630 One Reading Center
1101 Market Street
Philadelphia, PA 19107
1
Attorneys for Appellee
____________
OPINION OF THE COURT
ROSENN, Circuit Judge.
This appeal primarily raises a number of intriguing
insurance law questions, one of which, the allocation of a
deductible among several insurance carriers, is novel. The
insured entered into a series of "all risks" policies covering
property losses during the policy period. When the insurers
rejected the claim of the insured, PECO Energy Company (PECO), it
brought a diversity action in the United States District Court
for the Eastern District of Pennsylvania. The jury found that
PECO sustained theft losses aggregating $1,229,029 over a period
of six years.
The district court held that the combined thefts
constituted a single occurrence and that it took place in the
sixth year of the insurance coverage. The court therefore
applied the $100,000 deductible set forth in the policy for that
year. Accordingly, it entered judgment of $1,129,029 for PECO
against Kenneth Henry Edmund Boden representing Lloyds
Underwriters, London & Hull Maritime Insurance Company Limited,
Insurance Company of North America (U.K.) Limited, The Yorkshire
Insurance Company Limited, Indemnity Maritime Assurance Company
Limited (collectively the Underwriters). The Underwriters timely
appealed. We vacate and remand.
I.
2
PECO is a Pennsylvania electric utility with its
principal place of business in Philadelphia. In September 1984,
it contracted with Diesel Services, Inc. (DSI), an independent
trucking company, to haul its fuel oil to various PECO generating
facilities. DSI transported PECO oil until November 1990 when
PECO discovered that DSI had been stealing a portion of the oil
on a regular basis.
In November 1985 PECO entered into a contract for
insurance covering property losses for one year from four
independent insurance companies and six syndicates at Lloyds of
London. Between November 1986 and October 1991, PECO and the
Underwriters renewed five one-year insurance policies . The
Underwriters for each policy varied from year to year, but the
policies remained essentially the same. The policies insured
"GOODS and/or MERCHANDISE OF EVERY DESCRIPTION WHATSOEVER
incidental to [PECO's] business but consisting principally of
FUELS . . . shipped in and/or over . . . [a]gainst all risks of
physical losses or damage however caused." Both parties agree
that these policies cover the theft of fuel oil.
Each policy provided that covered losses were subject
to a deductible. The 1985-86 policy states that:
from the amount of each loss or combination
of losses arising out of any one occurrence,
an amount equal to 1% of the total value of
the property to which loss or damage occurred
shall be deducted. This deductible, however,
shall not be less than $10,000, nor more than
$20,000.
3
Each of the remaining policies provided that there shall be
deducted "from the amount of each loss or combination of losses
arising out of any one occurrence, US$100,000 any one loss or
occurrence."
At trial, PECO acknowledged that it did not have any
direct evidence of DSI thefts, except for a limited number
observed by PECO investigators in 1990. Nonetheless, PECO
posited at trial that DSI had been stealing from it for the
duration of the contract between them and that these thefts
aggregated between 9.1% and 20% of the oil transported by DSI
during the 62 month period that the Underwriters insured PECO.
The jury found that the DSI stole $1,229,029 worth of
fuel from PECO, equal to 6.1% of the fuel transported by DSI, and
that the thefts were part of a single continuous plan or scheme.
The jury also determined that the Underwriters had not acted in
bad faith toward the insured. The district court held that DSI's
thefts constituted one occurrence because they were part of a
single continuous scheme and that this occurrence took place
during the 1990-91 policy period. The court applied the $100,000
deductible provided for in the 1990-91 policy and entered
judgment of $1,129,029 for PECO against the 1990-91 Underwriters.
The Underwriters then moved to amend or correct the judgment
and/or for a new trial or a judgment as a matter of law. The
district court denied these motions and the Underwriters timely
appealed.1
1
The district court possessed subject matter jurisdiction
pursuant to 28 U.S.C. section 1332. This court has appellate
4
II.
A federal court must apply the choice of law rules of
the forum state when it is sitting in diversity. Klaxon Co. v.
Stentor Elec. Mfg. Co., 313 U.S. 487 (1941). Pennsylvania law
provides that "the place having the most interest in the problem
and which is the most intimately concerned with the outcome is
the forum whose law should be applied." In re Complaint of
Bankers Trust Co., 752 F.2d 874, 882 (3d Cir. 1984). PECO and
the Underwriters executed the insurance contracts at issue in
this case in Pennsylvania and the oil which DSI stole was
transported within Pennsylvania. Additionally, the policies
contain a choice of law clause designating Pennsylvania law as
the law controlling any disputes which arise under the polices.
Therefore, the district court correctly concluded that
Pennsylvania law applies to this case.
In Pennsylvania, interpreting an insurance contract is
a question of law to be resolved by a court. Vale Chemical Co. v.
Hartford Acci. & Indem. Co., 490 A.2d 896, 899 n.4 (Pa.Super.
1985), rev'd on other grounds, 516 A.2d 684 (Pa. 1986). We apply
plenary review to legal determinations made by the district
court. Louis W. Epstein Family Partnership v. KMart Corp., 13
F.3d 762, 765-766 (3d Cir. 1994).
On appeal, the Underwriters contend that: (1) the
series of thefts is not one occurrence; (2) if all of the thefts
are one occurrence, the occurrence took place in 1984, when the
jurisdiction over the district court's final judgment under 28
U.S.C. section 1291.
5
Underwriters did not insure PECO; (3) a full deductible applies
to each theft in which event the defendants would have no
liability or alternatively a full deductible applies to each
policy period which would reduce liability substantially; (4) the
jury made mathematical errors in calculating PECO's damages; (5)
the district court erred in awarding damages to PECO for oil
stolen after March 1988 because PECO failed to take reasonable
measures to stop DSI stealing after having been warned of DSI
thefts; and (6) the district court abused its discretion by
admitting certain testimony into evidence.
III.
The threshold question on appeal is whether the
multitude of thefts over the six-year period constituted a single
occurrence. In a careful and exhaustive opinion denying the
Underwriters' post-trial motions, the district court held that
the thefts in this case constituted a single occurrence. Whether
the losses here constituted one occurrence or amounted to a
number of occurrences, as contended by the Underwriters, can have
a significant impact on the amount of the liability, if any.
Unfortunately, the policies do not provide a relevant definition
of occurrence.2 If each theft amounted to an occurrence, then
each became subject to the deductible provisions of the policy.
If, however, all of the thefts constituted a single occurrence,
2
The first two polices do state that an occurrence is "any one
loss, disaster or casualty or series of losses, disasters or
casualties arising out of one event." However, this definition
only applied to additional building construction risks, not the
entire policy.
6
then the deductible provision of the policy surfaced only once.
We therefore look to other sources for assistance in defining
this term. To determine "whether bodily injury or property
damage is the result of one occurrence or multiple occurrences,
the majority of courts have looked to the cause or causes of the
bodily injury or property damage . . . ." B.R. Ostrager & T.R.
Newman, Handbook on Insurance Coverage Disputes § 9.02 (7th ed.
1994) (internal quotation, emphasis and brackets omitted).
In Appalachian Ins. Co. v. Liberty Mut. Ins. Co., we
held that "an occurrence is determined by the cause or causes of
the resulting injury" and noted that a court should determine "if
there was but one proximate, uninterrupted, and continuing cause
which resulted in all of the injuries and damage." 676 F.2d 56,
61 (3d Cir. 1982) (citations and internal quotation omitted). If
there is only one cause for all of the losses, they are part of a
single occurrence. Id.; see also Armotek Industries, Inc. v.
Employers Ins. of Wausau, 952 F.2d 756, 762 (3d Cir. 1991)
(policy defined "occurrence" as "``an accident, including
continuous or repeated exposure to conditions, which results in .
. . property damage . . ..'"); Business Interiors, Inc. v. Aetna
Cas. & Sur. Co., 751 F.2d 361 (10th Cir. 1984) (series of forty
acts of forgery by dishonest employee are deemed a single
occurrence).
The jury found that DSI instituted its scheme to steal
from PECO in 1984 and continued stealing from PECO until it
discovered the thefts in 1990. The jury also found that each
theft was a part of a larger scheme and that the scheme to steal
7
was the proximate cause of each theft. We therefore hold that
when a scheme to steal property is the proximate and continuing
cause of a series or combination of thefts, the losses for
liability insurance purposes constitute part of a single
occurrence. Accordingly, the district court committed no error
in concluding that numerous thefts by DSI amount to one
occurrence.
B.
The district court concluded that the policies in this
case were "occurrence" policies. "An occurrence policy provides
coverage for any 'occurrence' which takes place during the policy
period. Under this type of policy, it is irrelevant whether the
resulting claim is brought against the insured during or after
the policy period, as long as the injury-causing event happens
during the policy period." B. Ostrager & T.R. Newman § 8.03(a).
See Gereboff v. Home Indemnity Co., 383 A.2d 1024, 1026 n.1 (R.I.
1978), quoting 7A Appleman, Insurance Law and Practice § 4504.3
at 104-15 (Cum. Supp. 1974). The district court therefore
followed this court's holding in Appalachian, 676 F.2d at 61-62,
and held that "the occurrence took place on November 21, 1990,"
the date the jury found that PECO first knew of the thefts. The
court accordingly ruled that the 1990-91 policy bore the
liability subject to a single $100,000 deduction.
The policies in this case, however, insured "[a]gainst
all risks of physical losses or damage however caused." (emphasis
added). Thus, the policies in this case are "all risks"
policies, not "occurrence" policies, and provided coverage for
8
all losses which took place during the policy period. See e.g.
Intermetal Mexicana, S.A. v. Insurance Co. of N. America, 866
F.2d 71, 74-75 (3d Cir. 1989); Rorer Group v. Insurance Co. of
North America, 655 A.2d 123, 124 (Pa.Super. 1995).3
This court need not consider the Underwriters'
contention that the district court erred by holding that the
occurrence at issue in this case took place in 1990, because the
date of the occurrence is irrelevant. Under an all risks
insurance policy, the Underwriters are liable for all losses
which PECO suffered during the relevant policy periods,
regardless of when the occurrence which triggered those losses
took place. Thus, the district court erred in placing the total
liability for all of PECO's losses on the 1990-91 underwriters.
C.
The jury calculated PECO's losses during each policy
period. The Underwriters are liable for those losses minus the
appropriate deductible. The district court correctly applied a
single deductible to PECO's total loss. However, the court
applied the deductible against the full liability it imposed for
all of PECO's losses on the 1990-91 Underwriters. The policies
divide liability on an annual basis because of their "all risks"
language, but they call for one deductible per occurrence. We
3
"Under Pennsylvania law, when language in an insurance policy is
clear and unambiguous, a court must give effect to that
language." Armotek Indus., 952 F.2d at 762 (citing Northern
Insurance Co. v. Aardvark Associates, 942 F.2d 189, 193 (3d Cir.
1991); Gene and Harvey Builders, Inc. v. Pennsylvania Mfrs' Asso.
Ins. Co., 517 A.2d 910, 913 (Pa. 1986)).
9
agree with the district court and the jury that the entire scheme
of thefts constituted a single occurrence.
On appeal, the Underwriters contend that a full
deductible applies to each loss. Alternatively, they argue that
a full deductible applies to each policy year. We reject these
arguments because it would be inconsistent to break a single
occurrence into multiple occurrences for the purpose of applying
a deductible. The dissent, however, would aggregate six
deductibles and arrive at a total of $520,000 for a single
occurrence. The parties never contracted for such a result.
It seems to us that the most equitable and logical
application of the policies' language to the realities of this
case is to take the loss sustained by PECO each year and
determine what percentage of the total insured loss it
represents. We then apply the percentage thus derived to the
deductible for each policy year and the resulting figure is
deducted from the loss for that particular year. The
Underwriters of each annual policy are thus liable for a
percentage of PECO's total loss less that percentage of the
stated policy deductible.
The jury found that the total loss suffered by PECO
between November 1985 and December 31, 1990 was $1,229,029. They
then allocated this loss on an annual basis and found that PECO
lost: $142,218 in 1985-86; $371,287 in 1986-87; $202,561 in
1987-88; $235,008 in 1988-89; $241,933 in 1989-90; and $36,022 in
1990-91.
10
The percentage of the total losses sustained in each of
the foregoing years respectively, commencing in November 1985,
was: 11.6%, 30.2%, 16.5%, 19.1%, 19.7%, and 2.9%. Applying this
percentage to the deductible in each policy produces the
following figures: $2,320 for 1985-86;4 $30,200 for 1986-87;5
$16,500 for 1987-88; $19,100 for 1988-89; $19,700 for 1989-90;
and $2,900 for 1990-91.
As a consequence, we concluded that the liability under
the 1985-86 policy is $139,898 and the liabilities under the
succeeding policies are $341,087 for 1986-87; $186,061 for 1987-
88; $215,908 for 1988-89; $222,233 for 1989-90; $33,122 for 1990-
91.
These calculations equitably provide each group of
Underwriters with a deductible based on a single occurrence, as
the policies provide.
D.
The Underwriters next argue that the jury reached its
verdict through a strict mathematical formula and that it erred
in calculating that formula. The district court refused to
disturb the jury's damage award because it was not shockingly
excessive. The court noted that PECO presented three different
damage calculation methods and that the jury's verdict was
4
The deductible for 1985-86 is $20,000. See p. 3, supra, for its
specific terms. PECO demonstrated that it shipped $2,331,442
worth of fuel in 1985-86. 1% of this amount equals $23,314 which
exceeds $20,000. Therefore, this court will use a $20,000
deductible to calculate the liability of the underwriters for the
1985-86 policy.
5
This policy and the remaining policies provide for a $100,000
deductible.
11
reasonable in light of the evidence submitted at trial. We
agree.
The Underwriters concede that courts normally use the
shockingly excessive standard to review jury verdicts, but argue
that courts should review the calculation methods of a jury in
cases which are "susceptible to mathematical formula." Chuy v.
Philadelphia Eagles Football Club, 595 F.2d 1265, 1279 n.19 (3d
Cir. 1979). The Underwriters state the law correctly, but it
does not apply to this case. In the special interrogatories
submitted by the court, the jury found that PECO suffered losses
of $1,229,029. PECO presented three measures of loss ranging
from approximately 9.1% of DSI's deliveries to 20%. The jury
concluded that PECO had lost $1,229,029. This is equal to 6.1%
of the oil delivered by DSI, but the Underwriters do not show
that the jury arrived at this damage figure through a strict
mathematical calculation or that it misapplied a mathematical
formula in determining the amount of loss. The district court
did not err in refusing to review the jury's damage calculations,
except for excessiveness, and in concluding that the award in
this case was not excessive.
E.
The Underwriters also argue that the district court
erred in awarding damages to PECO for oil stolen after March,
1988. They contend that PECO's failure to discover DSI's thefts
after that date was a violation of PECO's obligation under the
insurance policy to avert or minimize loss.
12
This court has predicted that Pennsylvania will adopt
the Restatement of Contracts' requirement that an insured must
prove that losses were fortuitous before it can recover under an
all risks insurance policy. Compagnie des Bauxites de Guinee v.
Insurance Co. of N. Am., 724 F.2d 369, 372 (3d Cir. 1983). The
restatement defines a fortuitous event as:
an event which so far as the parties to the
contract are aware, is dependent on chance.
It may be beyond the power of any human being
to bring the event to pass; it may be within
the control of third persons; . . . provided
that the fact is unknown to the parties.
Id. (quoting Restatement of Contracts § 291 comment a (1932))
(emphasis in original); accord Intermetal Mexicana, 866 F.2d at
77.
The jury found that PECO had no actual knowledge of
DSI's thefts prior to November, 1990 but should have known of the
thefts as of March, 1988. The Underwriters argue that PECO had
constructive knowledge of DSI's thefts after March 1988 and that
the losses after that date were not fortuitous. Proving fortuity
is not particularly difficult. Intermetal Mexicana, 866 F.2d at
77. A party must only show that a loss was unplanned and
unintentional. See Peters Township School Dist. v. Hartford Acci.
and Indem. Co., 833 F.2d 32, 37 (3d Cir. 1987). The Underwriters
simply do not present any law which suggests that risks about
which a party should have known are not fortuitous.
The Underwriters essentially argue that PECO was
negligent in not discovering DSI's thefts. Both parties agree
that the policies in this case are "all risks" cargo transit
13
insurance. At trial, citing Commodities Reserve Co. v. St. Paul
Fire & Marine Ins. Co., 879 F.2d 640, 642 (9th Cir. 1989), the
Underwriters agreed that they would be liable for any losses if
the policies provided coverage for the proximate cause of those
losses, even if the losses were precipitated by a combination of
causes. Thus, the jury's determination that the DSI thefts were
the proximate cause of PECO's losses renders the negligence
element of the Underwriters' argument irrelevant. Therefore, the
district court properly ruled that PECO was not legally barred
from recovering damages for losses after March, 1988.
F.
Lastly, the Underwriters maintain that the district
court abused its discretion by admitting certain testimony into
evidence. At trial a PECO investigator, Ed Chiu, testified to a
conversation between him and Bill Joyce, a DSI driver.6 Chiu
testified that Joyce told him that the owner of DSI instructed
Joyce to steal from PECO. PECO used this evidence to show that
DSI implemented a long-term scheme to steal from PECO. The
Underwriters contend that the admission of this statement was
prejudicial error.
This court reviews district court decisions regarding
the admission of evidence for an abuse of discretion. In re
Merritt Logan, Inc., 901 F.2d 349, 359 (3d Cir. 1990). We find
no abuse of discretion here.
6
At trial, Joyce asserted his Fifth Amendment privilege and
refused to testify. The district court therefore found that he
was "unavailable" as a witness. See Fed. R. Evid. 804(a)(1). The
underwriters do not contest this finding.
14
Chiu testified that:
Mr. Joyce informed me that he was told by
[DSI owner] Danny Jackson to steal on
approximately 75% of the deliveries and he
was supposed to steal for between three and
five minutes.
The district court admitted this evidence as a statement against
interest under Rule 804(b)(3), Fed. R. Evid.7 The Underwriters
argue that this statement is not a statement against Joyce's
interest and thus does not fall within the exception. A person's
admission that he stole for someone else is as much against his
interest as an admission that he stole for himself. It subjects
him to possible criminal responsibility and civil liability. The
district court did not abuse its discretion by concluding that
Joyce's statement was against his interest and admitting Chiu's
testimony pertaining to Joyce's statement.
III.
Summarizing, we reject the Underwriters' claims that
the district court misapplied the law or abused its discretion in
refusing to reduce the jury's award, in allowing damages after
the date when PECO should have known of the thefts and in the
7
The rule provides that:
A statement which was at the time of its
making so far contrary to the declarant's
pecuniary or proprietary interest, or so far
tended to subject the declarant to civil or
criminal liability, or to render invalid a
claim by the declarant against another, that
a reasonable person in the declarant's
position would not have made the statement
unless believing it to be true [are not
excluded by the hearsay rule if the declarant
is unavailable as a witness].
15
admission of the Chiu testimony. The court also concluded
correctly that the multitude of thefts constituted a single
occurrence. We hold, however, that when a group of underwriters
or insurers write all risks insurance against property losses
which take place during a policy term, the insurers are liable
for those losses sustained during the policy period. Further, we
hold that when multiple policies provide for one deductible per
occurrence, the appropriate and equitable manner of treating the
deductible under such circumstances is to calculate the
percentage of the loss sustained in each policy year to the total
loss to ascertain the deductible for that particular year.
Accordingly, the judgment of the district court will be
vacated and the case remanded with directions to enter judgment
in favor of PECO and against the appellants consistent with this
opinion.
Each side to bear its own costs.
16
PECO ENERGY CO. v. BODEN
No. 94-1883
STAPLETON, Circuit Judge, dissenting in part.
The court reads the policies in a way that make the
extent of each syndicate's liability depend on the insured's loss
experience before and after the period covered by its policy.
Because I believe this clearly was not intended by the parties, I
respectfully dissent.
I agree with the court that the syndicate of
underwriters that issued each particular policy should be held
liable for the harms that PECO suffered during the period that
the policy was in effect. The court and I part company on our
reading of the deductible clauses, however. I would hold that
PECO's recovery during each policy period should be offset by the
full amount of the deductible stated in the policy to be
applicable to losses during the policy period arising out of any
one occurrence.
Under each policy, a certain amount -- $20,000 or
$100,000 -- must be deducted "from the amount of each loss or
combination of losses arising out of any one occurrence." (See,
e.g., app. III at E-252.) Put another way, each policy requires
that the amount recoverable for losses suffered during the policy
year must be reduced by the total deductible for each
"occurrence" which led to the losses. For me, these policy
provisions preclude the court's conclusion that only one
17
deductible is applicable to the losses incurred over the six-year
period.
Suppose, for example, that PECO for some reason had
decided to sue only the syndicate that had issued the policy
covering PECO's losses between November 1989 and October 1990.
PECO suffered losses of $241,933 for that time period and the
1989-1990 syndicate accordingly would be liable to pay that
amount minus the applicable deductible. To calculate the
deductible, the court would be faced with the simple question:
are the losses here due to one occurrence or are they due to more
than one occurrence? As the court cogently explains, the covered
losses in each policy period had one cause -- the trucking firm's
single scheme pursuant to which the drivers were instructed to
continually syphon in the same manner -- and accordingly are all
due to one occurrence. In my view, the court in this
hypothetical case would be required to deduct a single deductible
of $100,000 from the total amount of PECO's losses, producing a
judgment of $141,933.
I would apply a similar analysis if PECO then decided
to sue the syndicate that insured its losses for the 1985 to 1986
time period or any other year-long time period. In that second
case, PECO would be entitled to recover the losses it suffered
during the covered year-long time period, minus the applicable
deductible. To calculate the deductible, the court again would
have to decide that the losses for the particular year all had
one cause and that there accordingly was only one occurrence. For
the 1986 to 1987 period, for example, the court would subtract
18
the $100,000 deductible from PECO's losses of $371,287 to yield a
judgment of $271,287.
This same analysis would govern how the court should
calculate the amount of PECO's recovery if it decided to sue each
of the six syndicates in six separate cases. The only difference
here is that rather than suing each syndicate separately, PECO
decided to sue the syndicates together in one case. That all of
the syndicates are together here as defendants should not change
the above analysis, however, nor should it affect the amount of
each syndicate's liability. Thus, in my view, each syndicate's
liability should be reduced by the deductible applicable to that
policy period.
Following the court's approach, however, the syndicate
sued in the first case would be entitled to a reduction of
liability for only a certain fraction of the deductible bargained
for and that fraction would depend on the total losses PECO
suffered during periods both before and after the 1989-1990
policy period. This result would follow regardless of whether
PECO decided to sue the other five syndicates in subsequent
suits. The end effect of this is that the 1989-1990 syndicate's
liability would be increased to reflect harms PECO suffered
during periods not covered by the policy period; that is, the
syndicate's liability would depend on losses PECO suffered during
periods which the syndicate never agreed to insure.
This cannot be what the parties intended. In my view,
each syndicate contracted for a deductible from covered losses
which took place during the policy period, and each is entitled
19
to one. Thus, I would instruct the district court to deduct the
full amount of the deductible for each policy period.
20