In Hemphill v. Landmark American Insurance Co., the Third Circuit Court of Appeals outlined limits on an insured’s use of Pennsylvania’s “reasonable expectations” doctrine — the legal theory that purports to provide coverage under a policy based on the “reasonable expectations” of the insured — and found that, among other things, the doctrine does not apply to commercial insureds.
The case involved a coverage dispute for an underlying claim by an individual plaintiff against the insured, a temporary employee placement and visa application processing company. According to the underlying complaint, the insured recruited the plaintiff, a Mexican national, to work as a truck driver for an affiliated company in Pennsylvania. The plaintiff alleged that after the insured intentionally delayed his arrival, the insured confiscated his passport, provided him with “filthy, overcrowded, and vermin-infested” housing, required him to work tasks outside the scope of his employment, and underpaid him. The plaintiff then contacted the National Human Trafficking Hotline, to which the insured allegedly responded by reporting him to the police for trespassing. The insured then sought coverage from the insurer under its professional liability policy.
The insurer denied coverage, claiming that the allegations in the underlying lawsuit involved alleged intentional actions by the insured after the plaintiff was already an employee rather than negligent actions in the insured’s rendering of employee placement services. The insured disagreed, claiming that the underlying lawsuit contained a claim of implied negligent misrepresentation and that the carrier had previously defended a similar lawsuit brought against the insured, giving the insured a reasonable expectation of coverage regardless of whether the claims in the current lawsuit were covered by the policy.
Ruling on the former issue, the court applied Pennsylvania law to show that the claims in the lawsuit did not contain the factors necessary to state such a claim. Additionally, the court found that the policy explicitly carved out coverage of other allegations in the complaint, such as a breach of contract.
The crux of the court’s opinion, however, concerned whether the insured had a reasonable expectation of coverage because the carrier had previously provided coverage in prior, similar litigation. Upholding the lower court’s decision that the reasonable expectations doctrine did not apply in this case, the Third Circuit noted that the language of an insurance policy, in most cases, will provide “the best indication of the parties’ reasonable expectations.” An insured’s reasonable expectations will only prevail over the express terms of a policy in “very limited circumstances” involving noncommercial insureds where the policy terms are not readily apparent. As the court noted, the insured did not dispute whether the language of the policy was unclear or claim that the insurer engaged in deceptive tactics but instead based its claim of “reasonable expectations” solely on the fact that the carrier had defended the insured in a prior, similar lawsuit.
The court found no authority to support a reasonable expectation of coverage based merely on an insurer’s conduct in an unrelated lawsuit and in particular pointed out that, under Pennsylvania law, courts are to look at “the totality of the insurance transaction involved — not the totality of all other transactions between the parties.” The court noted that the insurer had defended the prior lawsuit under a complete reservation of rights, emphasizing the language therein “that nothing in the letter, nor any further actions taken by [the carrier], should be construed as a waiver of any rights or defenses … that may be available now or at any point in time.” That language further bolstered the court’s finding that the insured “could not reasonably expect that such a limited acceptance of coverage would extend to a separate, unrelated lawsuit.”
