ON AIR ENTERTAINMENT CORP.; NISE PRODUCTIONS, INC.; MICHAEL NISE, Appellants at No. 98-2038 v. NATIONAL INDEMNITY CO. Appellant at No. 98-2039
Nos. 98-2038 & 98-2039
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
March 29, 2000
SCIRICA, COWEN, and MAGILL, Circuit Judges
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.
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
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
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
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
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
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 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.
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 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).
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
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
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. 1985), 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 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‘s finding 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 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
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
Notes
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.
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).
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)).
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).