In American Western Home Insurance Company v. Donnelly Distribution, Inc., No. 11-3753, slip op. (3d Cir. April 26, 2013), available at 2013 WL 1777267, the United States Court of Appeals for the Third Circuit, applying Pennsylvania law, reversed the district court’s summary judgment order holding that a general liability insurer had a duty to defend and indemnify a policyholder in a lawsuit seeking damages resulting from an accident occurring off the policyholder’s premises.

The policyholder in American Western, a newspaper distributor, had been sued by a woman who claimed that she was injured when she slipped and fell on plastic ties that bind materials the policyholder distributes, and that its employees negligently discarded.  Id. at *1.  The policy at issue contained a provision “restricting coverage to bodily injuries ‘arising out of . . . [t]he ownership maintenance or use’ of [the Howard Street Premises] and operations ‘necessary or incidental’ to those premises.”  Id.  The parties did not contest that the accident occurred off the Howard Street Premises.  Id.  The insurer agreed to fund the policyholder’s defense of the underlying action under a reservation of rights, and eventually filed a declaratory judgment action in federal court. 

The policyholder contended that there was a duty to defend the underlying action because the alleged injury arose out of “‘operations necessary or incidental to the [Howard Street Premises.]’”  Id. at *2.  The court rejected this argument, stating that “[the policyholder’s] reading in effect means that any accident, occurring anywhere, that may be somehow connected to [the policyholder’s] paper distribution business is covered by the Policy simply because the Howard Street Premises are used as a pick up point in that business and are mentioned explicitly in the Policy’s Premises Provision.”  Id.  The court noted that, had the parties intended to provide for “business-wide coverage,” they would have done so in a clear manner.  Id.  The court further found that the disposal of plastic ties off of the Howard Street Premises was activity incidental to the policyholder’s business, and not the Howard Street Premises.  Id. at *3.

The court held that “[t]he Premises Provision by its terms only contemplates coverage of operations that are necessary or incidental to the insured premises, not the entirety of [the policyholder’s] business operations.”  Id.  Finding no causal relationship between the underlying lawsuit and the insured premises, the court held that the insurer had no duty to defend the policyholder.  Id.

The American Western opinion is important for at least two reasons.  First, the court narrowly construed the policy’s premises provision.  Second, in analyzing the duty to indemnify, the court narrowly interpreted a previous Third Circuit opinion, Pacific Indemnity v. Linn, 766 F.2d 754 (3d Cir. 1985), in which the court held that “the duty to indemnify followed the duty to defend where settlement of an underlying action involving multiple theories of liability and several competing insurers made it impossible to determine which of the multiple insurers had a duty to indemnify.”  American Western, 2013 WL 1777267 at *3.  The policyholder argued that, under Linn, the insurer was obligated to indemnify the policyholder for the underlying lawsuit because the action “settled while [the insurer] was believed to have a duty to defend [the policyholder].”  Id.  The court found the policyholder’s reading of Linn in American Western “expansive,” and held that “there is no blanket rule giving rise to a duty to indemnify where the insured settles the underlying action.”  Id. at *4. 

The court reasoned that nothing in American Western, unlike Linn, made it impossible to determine whether there was coverage under the policy, as the underlying lawsuit only implicated a single insurer and a single theory of liability.  Id.  Further, the court recognized that Pennsylvania courts have found that the very purpose of filing a declaratory judgment action in such disputes is to determine whether a duty to indemnify exists.  Id.  The court ultimately held that because there was no duty to defend the policyholder for the underlying lawsuit, there was also no duty to indemnify.  Id.