Philadelphia Indemnity Insurance Company v. Federal Insurance Company

1
NOT PRECEDENTIAL
IN THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Case No: 04-2667
PHILADELPHIA INDEMNITY INSURANCE COMPANY,
Appellant
v.
FEDERAL INSURANCE COMPANY; CHUBB GROUP OF INSURANCE
COMPANIES; THE CHUBB CORPORATION
_________________________________
On appeal from the United States District Court
for the Eastern District of Pennsylvania
District Court No.: 02-CV-7247
District Judge: The Honorable James McGirr Kelly
__________________________________
Submitted pursuant to LAR 34.1(a)
June 29, 2005
Before: NYGAARD, SMITH, and FISHER, Circuit Judges
(Filed: July 27, 2005)
____________________
OPINION OF THE COURT
_____________________
SMITH, Circuit Judge.
Philadelphia Indemnity Insurance Company (“PII”) appeals the District Court’s
grant of summary judgment in favor of defendant Federal Insurance Company (“Federal”)

-- 1 of 5 --

The parties agree that the Policy is governed by Pennsylvania law.1
2
and its corporate parent. Because we write only for the parties, we restrict our discussion
to the facts and legal principles necessary to resolve this appeal.
PII is an insurance company that was reinsured by Federal. The Federal-PII
insurance policy (“the Policy”) contained a provision requiring PII to provide notice to
Federal in connection with claims against PII that could trigger liability on the part of
Federal under the Policy. Compliance with this notice provision was explicitly1
delineated as a “condition precedent” to PII’s exercise of its rights under the Policy. The
District Court granted summary judgment in favor of Federal, holding that Federal had
permissibly refused to pay a claim submitted by PII, on the ground that PII had failed to
comply with the condition precedent established by the applicable notice provision. We
will affirm the judgment of the District Court.
The notice provision at issue in this appeal states:
The Insured(s) [PII] shall, as a condition precedent to exercising their rights under
this Policy, give to the Company [Federal] written notice as soon as practicable . . .
of any Claim made against [PII] for a Wrongful Act, of which the Insured’s [PII’s]
General Counsel or equivalent officer first becomes aware of such Claim.
PII does not dispute that one of its policyholders filed a lawsuit against PII on January 24,
2001, and that this lawsuit contained a “Claim” for a “Wrongful Act,” as those terms are
defined in the Policy. PII also acknowledges that its Vice-President of Claims, William
Benecke, received a copy of the complaint shortly after it was filed.
PII does not have a general counsel, but it concedes that Benecke was an

-- 2 of 5 --

3
“equivalent officer” who bore responsibility for notifying Federal of claims against PII
pursuant to the Policy notice provision quoted above. Benecke did not read the
complaint, however, and instead forwarded it to an in-house PII attorney, who proceeded
with the aid of outside counsel to litigate the case over a sixteen month period. During
this period, no notice was provided to Federal concerning the claim against PII. During
this period, PII rejected an offer by the policyholder plaintiffs to settle the case for
$600,000, an offer of which Federal was never informed.
The litigation arising from the claim against PII resulted in a decision by the
policyholder plaintiffs to depose Benecke. Despite having received the complaint in
January 2001, Benecke did not read it in the ensuing months, and he apparently did not
review it even after being informed he was to be deposed. Benecke eventually wrote to
Federal concerning the claim after having what PII’s counsel describes as a “‘light bulb’
moment” during his May 7, 2002 deposition preparation. Written notice was provided by
PII to Federal on May 13, 2002, approximately sixteen months after the filing of the
complaint containing claims subject to the Policy’s notice provision.
The policyholders’ lawsuit against PII was later settled for $1.6 million. Federal
declined to cover the settlement costs under the Policy, arguing that PII failed to satisfy
the Policy’s condition precedent because it did not timely notify Federal of the existence
of the claim. PII sued, and argues that Benecke’s failure to read the complaint means that
Benecke was not initially “aware” of a claim against PII for a “Wrongful Act,” and that

-- 3 of 5 --

4
PII’s notification obligation under the Policy was not triggered until Benecke obtained
such awareness in May 2002.
The District Court properly rejected PII’s argument, noting that Benecke and two
other PII “equivalent officers” had received the complaint well before May 2002, but had
apparently failed to make even a cursory examination of its contents. PII’s notification
obligation under the Policy is triggered by awareness on the part of particular PII officials
of a claim alleging a “Wrongful Act” by PII. This implies a corresponding obligation of
such officials, when provided with a complaint, to make good faith inquiries concerning
whether the allegations contained therein include such a claim. Such an obligation could
be easily satisfied by scanning the complaint to ascertain whether it contains allegations
of a “Wrongful Act,” which is broadly defined in the Policy as “any error, misstatement,
misleading statement, act, omission, neglect or breach of duty” committed by PII or its
employees in connection with insurance coverage or financial services provided by PII.
It is difficult to imagine a complaint by a PII policyholder (other than perhaps a
declaratory judgment action) that would not incorporate a “Claim made against [PII] for a
Wrongful Act.” Thus, it is apparent that the mere receipt by PII of a complaint filed by
PII policyholders places PII on notice that there is a high likelihood PII is facing a claim
that triggers its notification obligations under the Policy. To say that PII’s officers can
ignore this underlying reality and avoid their notification obligations by simply refusing
to read the complaint would, as the District Court observed, countenance an “ostrich farm

-- 4 of 5 --

5
defense” that seems inconsistent with any reasonable construction of the Policy. See
Comm. Union Ins. Co. v. Int’l Flavors & Fragrances, Inc., 822 F.2d 267, 272 (2d Cir.
1987) (test for determining whether insurance policy’s notice provision has been triggered
is whether the circumstances known to the insured at the time would have suggested to a
reasonable person the possibility of a claim).
Of course, PII is within its rights to adopt internal procedures that call for
subordinate employees to review complaints in the first instance. However, to the extent
such employees fail properly to fulfill their duties by failing to apprise an appropriate PII
officer of a claim covered by the Policy’s notification provision, the burden of such
failure must be borne by PII, and not, as PII would have it, by Federal. See, e.g.,
Travelers Cas. & Sur. Co. v. Castegnaro, 772 A.2d 456, 460 (Pa. 2001) (imputing
responsibility for acts of insurance agent to insurance company where agent acted within
scope of his duties); St. Louis Fire & Marine Ins. Co. v. Whitney, 96 F. Supp. 555, 561
(M.D. Pa. 1951) (“[n]otice to the agent, when it is the duty of the agent to act upon such
notice, or communicate to his principal in the proper discharge of his duty as an agent, is
notice to the principal, and applies to the agents of corporations as well as of others”).
We have considered PII’s other arguments in addition to those discussed above,
and find them to be without merit. The judgment of the District Court is affirmed.

-- 5 of 5 --