In its recent decision in Austin James Associates, Inc. v. American International Specialty Lines Insurance Co., 2012 U.S. Dist. LEXIS 144449 (M.D. Penn. Oct. 5, 2012), the United States District Court for the Middle District of Pennsylvania had occasion to consider the application of the reasonable expectations doctrine to a commercial insured.

Austin James was insured under a remediation cost cap insurance policy issued by American International Specialty Lines Insurance Co (“AISLIC”).  Austin James paid its premium to AISLIC in February 2004 with the expectation that the policy would become effective on March 1, 2004 and would have a five (5) year duration.  For reasons not reflected in the opinion, AISLIC changed both the inception date and the policy period at the time of policy issuance.  Years later, when Austin James sought reimbursement for remediation costs under the policy, it first learned that the policy reflected an inception date of May 20, 2004 instead of March 1, 2004, and that the policy period was four years and four months instead of five years.  AISLIC denied Austin James’ demand for reimbursement under the policy on the basis that the policy had already expired.  Austin James subsequently brought a declaratory judgment action against AISLIC alleging breach of contract. 

AISLIC moved to dismiss Austin James’ suit on two grounds, the first being that Austin James’ suit was barred based on its own failure to have read the policy at the time it was issued.  AISLIC argued that under Pennsylvania law, a breach of contract claim cannot be sustained on a contention that a party to the contract did not read or understand the contract.  Austin James countered that based Pennsylvania’s “reasonable expectations” doctrine, applicable in the insurance context, it had no duty to have read the policy, and that its understanding of the policy period controlled.  The court agreed, explaining:

Under [the reasonable expectations] doctrine, an insurance policy exclusion will not apply where the insurer or agent has created in the insured a reasonable expectation of coverage.  Here, plaintiff prepaid for insurance for a particular policy period.  The defendant changed that period unilaterally.  Defendant provided a copy of the policy to plaintiff but did not provide separate notice of this change.  Therefore, plaintiff reasonably expected the policy to accurately reflect the agreed-upon starting date and term length. 

In reaching its conclusion, the court considered and rejected AISLIC’s argument that Pennsylvania’s “reasonable expectations” doctrine applies only in the context of individual policyholders, and not to commercial enterprises – an issue that remains unresolved under Pennsylvania law.  The court noted that in Reliance Ins. Co. v. Moessner, 121 F.3d 895 (3d Cir. 1997), the Third Circuit, applying Pennsylvania law predicted that the doctrine would apply even when the insured is a “sophisticated purchaser” of insurance, i.e., a large commercial enterprise.  AISLIC argued that in Madison Construction Co. v. Harleysville Mutual Ins., 735 A.2d 100 (Pa. 1999), Pennsylvania’s Supreme Court refused to extend the doctrine to commercial enterprises. 

Observing that the issue was not fully briefed in Madison Construction and that the Supreme Court’s consideration of the issue was limited to a brief mention in a footnote, the Middle District concluded that Madison Construction did not overrule Moessner, noting:

This footnote, which merely explains that the court declined to address an argument, is not the equivalent of the court holding that commercial entities are not protected by the reasonable expectations doctrine.

The Middle District further noted that the Third Circuit continued to apply the reasonable expectations doctrine to commercial insureds even after Madison Construction, as reflected in its decision in UPMC Health System v. Metropolitan Life Ins. Co., 391 F.3d 497 (3d Cir. 2004).   In light of the Third Circuit decisions, and the lack of any clear authority to the contrary from Pennsylvania’s Supreme Court, the Middle District of Pennsylvania rejected AISLIC’s argument that the reasonable expectations doctrine cannot apply to commercial entities. 

AISLIC argued as a secondary basis for dismissal that Austin James’ suit was barred by Pennsylvania’s four-year statute of limitation.  Specifically, AISLIC contended that the statute began running sometime in 2004 when the policy was issued.  The court rejected this, noting that on a breach of contract claim, the statute of limitations began running from the time of AISLIC’s denial of coverage in 2009, not in 2004 when the policy was issued.