Defense Digest

Even in a Judicial Hellhole, a Non-Party to an Insurance Contract is a Non-Party

On November 11, 2003, The Philadelphia Daily News ran an article that stated, "Philadelphia is among a baker's dozen of 'judicial hellholes' across the country that attract lawsuits because it is seen as plaintiff-friendly and a place where defendants can't get a fair shake... ."  (See November 11, 2003, Edition of the Philadelphia Daily News, article by Michael Hinkelman.)  Despite this "hellhole" label, the Court of Common Pleas of Philadelphia County, Civil Division, and later the Superior Court of Pennsylvania, held that a non-insured who is not a third party beneficiary cannot successfully maintain an action against a carrier for "bad faith breach of contract" for refusing to defend and indemnify.

In Tremco, Inc. v. Manufacturers Association Insurance Company, the Superior Court of Pennsylvania upheld the trial court's grant of summary judgment in favor of the insurer.  The Superior Court determined that Tremco sold roofing products to Gooding Simpson & Mackes (GS&M), a contractor, pursuant to a Certified Contractor Agreement for use in the reconstruction of a local junior high school.  During the roofing portion of the project, several students and teachers allegedly suffered injuries as a result of "exposure to toxic fumes."  These students and teachers brought suit against GS&M, Tremco, and several other defendants for their alleged injuries.

Relying on the hold harmless clause contained in the contract between GS&M and itself and claiming to be an insured under the GS&M policy issued by Pennsylvania Manufacturers Association Insurance Company (PMAIC), Tremco brought an action directly against PMAIC.  The Tremco action sought payment of its defense costs and counsel fees, in addition to a claim for punitive damages for PMAIC's alleged "bad faith breach of contract" in refusing to defend and indemnify Tremco.  Tremco's standing to sue was based upon its argument that it was an insured under the policy or as a third party beneficiary of the insurance contract.

The contract between GS&M and Tremco contained the following obligations on behalf of GS&M:

E.  The Roofing Contractor (GS&M) agrees to indemnify and hold Tremco Incorporated, its officers and employees, harmless from any and all losses, costs, expenses (including court costs, attorney's fees, interest and profits),  claims, demands and suits for any bodily injury, illness, or death of any person, . . .

GS&M's policy with PMAIC also defined "insured contract" as:

That part of any other contract or agreement pertaining to our business (including an indemnification of a municipality in connection with work performed for a municipality) under which you assume the tort liability of another party to pay for 'bodily injury' or 'property damage' to a third person or organization.  Tort liability means a liability that would be imposed by law in the absence of any contract or agreement.

The Superior Court held that because the language of the contract between GS&M and Tremco obligated GS&M to assume liability for tort claims against Tremco arising out of GS&M's negligence, the construction contract was an "insured contract" within the terms of the PMAIC contract, and GS&M was entitled to coverage for the indemnity claim brought against it by Tremco.  Yet, an issue remained whether Tremco could directly enforce the terms of the policy as it was not listed as an additional insured on the policy despite paragraph D.  Paragraph D of the policy stated: 

D.  Tremco Incorporated shall be added as an additional insured on the general liability coverage . . . .

The trial court and the Superior Court each found that as Tremco was not actually named on the policy, it could not bring a direct action against the insurance carrier.  The Superior Court then summarily analyzed and dismissed Tremco's argument that it was entitled to bring the direct claim as a third party beneficiary.  Once again, the Superior Court agreed with the trial court's prior ruling and concluded that Tremco was not a third party beneficiary. 

The appellate opinion reiterated the standard for establishing a third party beneficiary, which included, "It is necessary to show both parties to the contract had an intent to benefit the third party through the contract and did, in fact, explicitly indicate this intent in the contract," citing Strutz v. State Farm Mut. Ins. Co., 415 Pa Super 371, 609 A.2d 569, 570 (Pa Super 1993).

The Superior Court found that although the insurance policy issued by PMAIC to GS&M "apparently envisioned" the existence of an "insured contract," such as the one between these parties, Tremco did not establish that both GS&M and PMAIC "explicitly indicated" their intent to benefit Tremco in particular in that policy.  Therefore, Tremco was not a third party beneficiary and could not bring suit directly against PMAIC for coverage under the policy.

This decision is instrumental for insurers writing contracts as it reinforces a principle being followed in the industry that the insurance procurement clause in a contact does not alter the terms of the insurance policy itself.  Here, the contract between Tremco and GS&M required GS&M to name Tremco as an additional insured on GS&M's policy.  GS&M's apparent failure to do so may have been a breach of the contract, but the performance of the contract between Tremco and GS&M could not alter the terms of the PMAIC policy.  With this decision, the underwriting process can be more accurately predicted and performed as insurers need not provide "insured" status for strangers to a policy who have not been identified or represented to the company.

*Mark, an  associate working in our Scranton office and a CPCU candidate, can be reached at 570-496-4613 or mfontanella@mdwcg.com.