Opinions of the United
1994 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


10-7-1994

Bensalem Twp. v. Int.nat'l Surplus Lines Ins. Co.
Precedential or Non-Precedential:

Docket 93-1071 & 93-1072




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                  UNITED STATES COURT OF APPEALS
                      FOR THE THIRD CIRCUIT

                           ___________

                     Nos. 93-1071 and 93-1072
                           ___________


                        BENSALEM TOWNSHIP,

                                         Appellant

                                v.

         INTERNATIONAL SURPLUS LINES INSURANCE COMPANY;
           CRUM & FORSTER MANAGERS CORPORATION (ILL),

                           ___________

         On Appeal from the United States District Court
            for the Eastern District of Pennsylvania
                 (D.C. Civil Action No. 91-05315)
                            __________


                     Argued on August 2, 1993


     Before:   STAPLETON, HUTCHINSON and ROTH, Circuit Judges


                 (Opinion Filed: October 7, l994)

                           ___________



Neil A. Morris, Esquire (Argued)
Neil A. Morris Associates, P.C.
The Curtis Center, Suite 1100
Independence Square West
601 Walnut Street
Philadelphia, PA 19106
          Attorney for Appellant
Peter G. Thompson, Esquire (Argued)
Charles I. Hadden, Esquire
Douglas R.M. Nazarian, Esquire
Ross, Dixon & Masback
601 Pennsylvania Avenue, N.W.
North Building
Washington, D.C. 20004-2688

Frank Michael D'Amore, Esquire
Saul, Ewing, Remick & Saul
3800 Centre Square West
Philadelphia, PA 19102
          Attorneys for Appellees

                           ___________

                       OPINION OF THE COURT
                           ___________



ROTH, Circuit Judge:


          In this action, plaintiff Bensalem Township (Township)

appeals the district court order dismissing its complaint against

defendants, International Surplus Lines Insurance Co. and Crum &

Forster Managers Corp. (Insurers), for failure to state a claim

pursuant to Fed. R. Civ. P. 12(b)(6).    Township had contracted

with Insurers for professional liability insurance covering all

civil claims first made against the town or its officials during

the policy period.   The agreement included a typical exclusion

clause that barred coverage of any claims arising from pre-policy

litigation.   When Township renewed its policy in 1989, Insurers

added language expanding the scope of what Township had come to

expect as the standard prior litigation exclusion clause.    The

new exclusion limited coverage to claims completely unrelated to
any prior matter, regardless of whether the matter involved

litigation for money damages.    Thereafter, Blanche Road Corp.

(Blanche Road), a real estate developer, filed a federal civil

rights complaint naming several Township officials as defendants.

The lawsuit was the result of years of friction between Blanche

Road and Township regarding the development of certain parcels of

land located in Township.    After several attempts to obtain

coverage under the insurance policy for the cost of defending the

Blanche Road litigation, Township filed the instant complaint.

The district court subsequently granted Insurers' motion to

dismiss, concluding that the Blanche Road lawsuit fell within the

express terms of the policy's exclusion clause.    It held that the

provision barred coverage because the federal cause of action

involved the same underlying facts and circumstances as several

pre-policy state disputes.    Township challenges this decision,

arguing that the new language added to the exclusion clause is

inconsistent with the parties' reasonable expectations.

Moreover, Township maintains that the district court erred by not

giving it the opportunity to prove its contention through further

development of the record.

          Township also appeals the district court order imposing

a sanction pursuant to Fed. R. Civ. P. 11.   The court imposed a

$2000 sanction on Township after finding that it had failed to

conduct a reasonable inquiry when it filed a motion to determine

the Rule 59(e) motion in the district court while a petition for
rehearing was pending on appeal.     Township contends that the

motion was reasonable under the circumstances because a premature

appeal does not divest the district court of jurisdiction to

consider a pending Rule 59(e) motion.

          For the reasons set forth below, we will reverse the

dismissal of the complaint and remand for further proceedings

consistent with this opinion.   We will also reverse the order

imposing a Rule 11 sanction against Township.

                                I.

          Township, a Bucks County, Pennsylvania, municipality,

filed its complaint in state court on July 29, 1991.    Insurers

subsequently removed the action to the United States District

Court for the Eastern District of Pennsylvania.     We accept as

true the following allegations, contained in Township's

complaint, in light of Insurers' motion to dismiss.     See Holder

v. City of Allentown, 

, 194 (3d Cir. 1993).
                    A. The Insurance Policy

          In April 1989, Township renewed its Public Officials'

and Employees' Liability Insurance Policy with Insurers for one

year, commencing April 15, 1989.     Although aware of the addition

to the prior litigation exclusion clause, Township apparently

believed it was receiving essentially the same type of insurance

policy it had always received from Insurers, subject in essence

to the usual exclusions.
          The agreement covers any monetary loss up to $1,000,000

for civil claims made during the policy period arising from

wrongful acts of the insured.   The policy states:

               A.   The company will pay on behalf of
          the Insureds all Loss which the Insureds
          shall be legally obligated to pay for any
          civil claim or claims first made against them
          because of a Wrongful Act, provided that the
          claim is first made during the policy period
          and written notice of said claim is received
          by the Company during the policy period.

               B.   The Company will reimburse the
          Public Entity for all Loss for which the
          Public entity shall be required by law to
          indemnify the Insureds for any civil claim or
          claims first made against them because of a
          Wrongful Act, provided that the claim is
          first made during the policy period and
          written notice of said claim is received by
          the Company during the policy period.



(emphasis added).

          While the claims made portion of the policy is

identical to that of the prior agreement, there is a significant

difference in the policy's exclusion provision.      In the past, the

parties had agreed to a typical prior litigation exclusion clause

that bars all claims relating to pre-policy lawsuits.     When the

policy was renewed, however, Insurers expanded the scope of that

provision.   The new exclusion states:

          It is understood and agreed that the insurer
          shall not be responsible for making any
          payment for loss in connection with any claim
          made against any insured based upon, arising
          out of, or in consequence of or in any way
          involving:
          (1)   any prior and/or pending litigation
                as of 2/1/89 [pre-policy period]
                including but not limited to
                matters before local, state, or
                federal boards, commissions, or
                administrative agencies, or

          (2)   any fact, or circumstance, or
                situation underlying or alleged in
                such litigation or matter.



(emphasis added).   Insurers added language that effectively

restricts coverage to only those claims completely unrelated to

any pre-policy dispute, regardless of whether the dispute

involved a legal claim covered by the policy.

          Township has argued both before us and before the

district court that it did not expect that the new exclusionary

language would bar claims that had not previously been presented

to it as insurable claims, e.g., petitions for injunctive relief

or proceedings before administrative agencies.
                    B.   The Blanche Road Dispute

           In December 1989, Blanche Road named Township and many

of its current and former officials and employees in a federal

civil rights suit pursuant to 42 U.S.C. § 1983.      See Blanche Road

Corp. v. Township, No. 89-9040 (E.D. Pa. filed December 20,

1989).   The suit was the culmination of several years of

contention arising from the development of the Blanche Road

Industrial Park located in Township.

           In 1987, Blanche Road commenced development of certain

parcels of land by securing the necessary town building permits
and entering into agreements of sale with several buyers.

Subsequently, Township made some financial demands which Blanche

Road alleged were not required by any town ordinance.   Township

then issued a stop work order and cited Blanche Road with certain

town ordinance violations.    On December 30, 1987, Blanche Road

appealed the order to the Town Code Appeals Board.    While the

appeal was pending, Township revoked Blanche Road's building

permits and issued a second stop work order.

            Thereafter, on January 20, 1988, Blanche Road filed a

complaint in quo warranto in the Court of Common Pleas of Bucks

County, Pennsylvania.    It sought an order declaring that the Town

Code Appeals Board members' appointments were null and void.

Blanche Road wanted the members excluded from serving on the

Board.

            Blanche Road also filed an equity action in state court

on February 19, 1988.    In that suit, Blanche Road sought

injunctive and declaratory relief as well as some ancillary

damages.    Blanche Road asked the court to enjoin Township from

enforcing a stop work order and levying fines or penalties.

Moreover, it wanted the court to declare the stop work order null

and void.    The only damages Blanche Road sought were for the

delay of some construction work and certain related interest and

wages.   The suit was settled when both parties stipulated that

the building permits would be reinstated.1

1
 .        We note that there were two other state court
proceedings that related to the Blanche Road dispute. Neither of
          Blanche Road subsequently filed its federal civil

rights complaint alleging that certain Township officials had

violated the Due Process Clause by attempting to coerce payments

not required by law and by impeding Blanche Road's development of

the Industrial Park.   In addition, Blanche Road claimed that

Township had violated the Equal Protection Clause by applying

different standards from those used for other developers.     This

was the first time that Blanche Road filed a federal action

against Township seeking money damages.   It was also the first

time that Blanche Road raised constitutional claims and the first

time that many of the town officials were named as defendants.       A

trial was held, and a jury entered a verdict in favor of Blanche

Road in the amount of $2,000,000 plus interest, costs, and

attorneys' fees.   The district court subsequently granted

Township's motion for a new trial.   That trial is apparently

still pending.
           C.    Township's Declaratory Judgment Action

          Once the Blanche Road federal litigation commenced,

Township filed a claim with Insurers under the terms of the
(..continued)
the proceedings were initiated by Blanche Road. In one case,
certain individual owners of lots within the Industrial Park
filed a complaint in mandamus naming the Town Board of
Supervisors as defendants. The owners sought to compel the Board
to approve certain improvements they made to their property and
to release the owners from their obligations under a letter of
credit.
          In another related case, a Township official swore out
a private criminal complaint in District Justice Court against
one of Blanche Road's principals. The complaint related to a
dispute over one of the lots in the Industrial Park.
insurance policy.   Township believed it was entitled to coverage

because the civil rights complaint was filed during the policy

period and it was the first time Blanche Road had filed a federal

suit seeking money damages.   Township had not filed a claim with

Insurers for any of the prior state Blanche Road proceedings

because they involved equitable relief not covered under the

general provisions of the policy.

          After a dispute arose between Insurers and Township

regarding coverage under the policy, Township filed the instant

complaint in the Court of Common Pleas for Bucks County,

Pennsylvania, seeking both declaratory and monetary relief.

Insurers removed the action to the United States District Court

for the Eastern District of Pennsylvania.   Township alleged that

the insurance policy covered the Blanche Road litigation and that

Insurers had a contractual duty to pay defense costs.   Township

also alleged that certain aspects of the policy were ambiguous

and should be construed in favor of coverage.

          Insurers filed a motion to dismiss Township's complaint

for failing to state a claim upon which relief could be granted

pursuant to Fed. R. Civ. P. 12(b)(6).   They argued that the

policy exclusion barred coverage because the Blanche Road federal
litigation involved similar facts and issues as the five prior

state proceedings for equitable relief.   While under the former

exclusion provision claims would only be barred if they related

to prior litigation, Insurers maintained that the language in the
new policy specifically barred claims relating to any prior

administrative proceeding or matter.

          Township opposed Insurers' motion and in connection

with this opposition requested that it be permitted to conduct

discovery to demonstrate its reasonable expectation that

litigation, such as the Blanche Road case, would be covered by

the policy.    Township gave the following explanation of the areas

in which it needed to take discovery and the underlying reasons

for this discovery:
          b.   Defendants have relied, in their Motion to
               dismiss, on Endorsement No. 1 as an exclusionary
               clause, concerning prior claims and litigation.
               Plaintiff's need to discover what, if any,
               discussions, explanations or other information
               Defendants', their agents or representatives gave
               to the Plaintiff explaining this exclusion, how it
               would impact on the Township and relate to other
               conflicting exclusions in the said policy, i.e., §
               111 Definition, ¶ 4(a), excluding all claims for
               "non-money" damages. Written discovery and
               depositions of Defendants' agents and employees
               would be necessary.

          c.    Plaintiff needs to discover prior drafts and
                Defendants' internal memos and discussions
                concerning the insurance policy in issue as well
                as Endorsement No. 1. This, we believe, will also
                defelop proof that Defendants' generally do not
                enforce or even attempt to apply Endorsement No. 1
                as they have in this case, i.e., to prior
                uninsurable claims.

          d.     The instant policy does not define what an
                 insurable claim is except by negative inference in
                 III Definitions, ¶ 4(a), i.e., money damages only.
                 Plaintiff needs to take written and oral discovery
                 on this issue. Plaintiff believes that discovery
                 will reveal that had the 'prior claims and facts
                 related thereto' been timely filed under
                 Defendants' policy, Defendants would have rejected
                the claims anyway. Thus., Plaintiff will be able
                to prove that Defendants' "prior claim" exclusion,
                if not ambiguous (but it is), really meant "prior
                insurable claims."

          g.    Plaintiff will need to take the depositions of
                former Bensalem Township officials,
                representatives and/or employees, who no longer
                work for the Township, with respect to their
                knowledge, understanding and discussions with
                Defendants and their agents concerning the policy,
                claims and exclusions in issue...


Appellant's Brief at 9 (footnote omitted).    Insurers moved to

stay discovery pending resolution of their motion to dismiss.

The district court granted the stay on March 27.    The issue of

further discovery was then mooted when, by order entered June 15,

1992, the district court granted Insurers' motion to dismiss.

          In its memorandum, dismissing the complaint, the

district court held that the policy exclusion expressly precluded

coverage because the Blanche Road federal litigation involved the

same underlying circumstances as the pre-policy state

proceedings.   It concluded that the exclusion was unambiguous and

should be enforced according to its plain language.
                   D.   Post-Judgment Proceedings

          On June 23, 1992, Township sent a letter to the court,

stating that the order was unclear because it did not indicate

whether it was with or without prejudice and it did not specify

both defendants.   Township also stated that, if the dismissal was

without prejudice, it would move to file an amended complaint.

It appears that Township intended the letter as a motion to amend

the district court order pursuant to Fed. R. Civ. P. 59(e).        On
July 7, 1992, prior to receiving a response from the court,

Township filed its amended complaint.    On July 8, 1992, Township

filed a notice of appeal.   On July 9, 1992, the district court

denied Township's motion to file an amended complaint.   The order

did not address the Rule 59(e) motion.

           By order entered October 13, 1992, we dismissed

Township's July 8, 1992, appeal for lack of jurisdiction.

Township subsequently filed a petition for rehearing in this

Court and a motion to determine the Rule 59(e) motion in the

district court.   Insurers filed a response to the district court

motion, indicating that the petition for rehearing divested the

district court of jurisdiction.   Insurers also filed a motion for

sanctions pursuant to Fed. R. Civ. P. 11 stating that it incurred

legal fees of $8,800 responding to the "unnecessary" district

court motion.   The district court dismissed Township's motion to

determine the Rule 59(e) motion for lack of jurisdiction.

           On November 30, 1992, we granted Township's request for

panel rehearing and issued an opinion affirming and clarifying

our earlier decision dismissing Township's appeal for lack of

jurisdiction.   We held that the appeal was premature because

Township's June 23, 1992, letter to the district court was a Rule

59(e) motion that tolled the time for appeal until thirty days

after the district court disposed of the motion.   Fed. R. App. P.

4(a)(4).
            On December 2, 1992, Township renewed its motion to

determine the Rule 59(e) motion in the district court.    By order

entered January 14, 1993, the district court denied Township's

motion.   On the same day, the court entered a separate order,

granting Insurers' motion for Rule 11 sanctions.    The court

awarded Insurers $2000.    Township's timely appeals followed.

                                II.

            The district court had diversity jurisdiction of this

action pursuant to 28 U.S.C. § 1332.    We have jurisdiction

pursuant to 28 U.S.C. § 1291.

            We exercise plenary review of the district court's

dismissal of a complaint under Fed. R. Civ. P. 12(b)(6).       Ditri

v. Coldwell Banker Residential Affiliates, Inc., 

,

871 (3d Cir. 1992).    We review the district court order imposing

Rule 11 sanctions for abuse of discretion.     Cooter & Gell v.

Hartmarx Corp., 

, 385 (1990).

                                III.

            We first address the issue of whether Township's

complaint was properly dismissed pursuant to Fed. R. Civ. P.

12(b)(6).     We accept all well-pleaded allegations in Township's

complaint as true and construe all reasonable inferences from the

avowed facts in favor of Township.     We may affirm the dismissal

only if it appears certain that no relief could be granted under

any provable set of facts.    Blaw Knox Retirement Income Plan v.
White Consol. Indus., Inc., 

, 1188 (3d Cir. 1993),

cert. denied, 

(1994).

           The district court exercised diversity jurisdiction and

was obliged to apply the substantive law of the state in which it

sits.   Klaxon Co. v. Stentor Elec. Mfg. Co., 

(1941).

The parties agree that Pennsylvania law governs this case.
                    A. Reasonable Expectations

           We find that the district court should not have

dismissed the complaint without allowing discovery on the issue

of whether the new language added to the insurance policy's prior

litigation exclusion clause is inconsistent with Township's

reasonable expectation of the type of coverage provided under the

agreement.   While Township may have known of the change in the

language of the exclusion clause when it renewed the policy, it

should nevertheless have the opportunity to discover and submit

evidence that Insurers had created in it a reasonable expectation

that the policy would cover claims such as that presented by the

federal Blanche Road litigation.

           Insurers dispute the notion that we should consider

what the parties' reasonable expectations might have been,

arguing that such an inquiry is precluded under Pennsylvania law

where the terms of a policy are clear and unambiguous.   Indeed,

Insurers correctly state what appears to be the general rule in

Pennsylvania.   Thus, in the run of cases, "[w]here ... the

language of the contract is clear and unambiguous, a court is
required to give effect to that language."     Standard Venetian

Blind Co. v. American Empire Ins. Co., 

, 

,

566 (1983).     Insurers point to the new language added to the

exclusion clause which, they argue, expressly bars coverage of

the Blanche Road federal litigation because the dispute arises

from the same facts and circumstances as the pre-policy state and

local proceedings.

          As we read the Pennsylvania case law, courts have

justified this rule based in part on the supposition that in most

cases the language of an insurance policy will provide the best

indication of the content of the parties' reasonable

expectations.    The courts have made it clear that the parties'

reasonable expectations are to be the touchstone of any inquiry

into the meaning of an insurance policy. Yet
          [a]ny reasonable expectation which would be
          imputed to the parties by this or any court
          must necessarily rely upon, and be reasonably
          consistent with, the written document and
          phraseology, simply because any
          interpretation advanced contrary to the
          contents of the written document could hardly
          be viewed as "reasonable" to assert; unless
          good reason in law is advanced for the
          disregarding of the clearly contrary
          phraseology.


J.H. France Refractories Co. v. Allstate Ins. Co., 

, 

, 472 (1990) (emphasis added), aff'd in part and

rev'd in part, 

, 

(1993).     See also

Tonkovic v. State Farm Mut. Auto. Ins. Co., 

, 

, 926 (1987) ("Courts should be concerned with assuring that
the insurance purchasing public's reasonable expectations are

fulfilled.") (quoting Collister v. Nationwide Life Ins. Co., 

, 

, 1353 (1978), cert. denied, 

(1979)); Frain v. Keystone Ins. Co., ___ Pa. Super. ___, 

, 1354 (1994) ("While reasonable expectations of the insured

are the focal points in interpreting the contract language of

insurance policies, an insured may not complain that his or her

reasonable expectations were frustrated by policy limitations

which are clear and unambiguous.") (citations omitted); Everett

Cash Mut. Ins. Co. v. Krawitz, 

, 

,

216 (1993) ("[C]ourts must focus on the reasonable expectation of

the insured in an insurance transaction.") (citations omitted);

Dibble v. Security of American Life Ins. Co., 

,

, 354 (1991) ("[T]he proper focus regarding issues of

coverage under insurance contracts is the reasonable expectation

of the insured.   Courts must examine the totality of the

insurance transaction involved to ascertain the reasonable

expectation of the insured.") (citations omitted); Harford Mut.

Ins. Co. v. Moorhead, 

, 

, 495

(1990) ("[O]verly-subtle or technical interpretations may not be

used to defeat reasonable expectations of insureds."), appeal
denied, 

, 

(1991).   Accordingly, in

certain situations the insured's reasonable expectations will be

allowed to defeat the express language of an insurance policy.
          The Pennsylvania Supreme Court first began to carve out

exceptions to the general rule in Collister.2   The court began

its analysis by observing that transactions between insurers and

insureds are fundamentally different from those between parties

to contracts as envisioned by the common law.
          The traditional contractual approach fails to
          consider the true nature of the relationship
          between the insurer and its insureds. Only
          through the recognition that insurance
          contracts are not freely negotiated
          agreements entered into by parties of equal
          status; only by acknowledging that the
          conditions of an insurance contract are for
          the most part dictated by the insurance
          companies and that the insured cannot
          "bargain" over anything more than the
          monetary amount of coverage purchased, does
          our analysis approach the realities of an
          insurance transaction.




2
 . The process actually started with Justice Manderino's opinion
in Rempel v. Nationwide Life Ins. Co., 

, 

(1977), with which two justices concurred while the remaining
three concurred in the judgment without opinion. The opinion
stated: "Consumers ... view an insurance agent ... as one
possessing expertise in a complicated subject. It is therefore
not unreasonable for consumers to rely on the representations of
the expert rather than on the contents of the insurance policy

. Moreover, the opinion noted, in
response to Nationwide's assertion that allowing the plaintiff's
misrepresentation theory to succeed would lead to an increase in
fraudulent claims, that the court had "very little sympathy for
Nationwide's alleged concerns in view of the fact that its
procedures necessitate reliance by a consumer on the
representations of an insurance agent." 

This notion
that insurers bring these lawsuits upon themselves through their
arcane practices is something of a theme in the Pennsylvania
Supreme Court's subsequent cases on the subject.


.    Because of the unique dynamics of

this relationship between insurers and insureds, certain

principles must guide the interpretation of insurance policies.
          Courts should be concerned with assuring that
          the insurance purchasing public's reasonable
          expectations are fulfilled. Thus, regardless
          of the ambiguity, or lack thereof, inherent
          in a given set of insurance documents
          (whether they be applications, conditional
          receipts, riders, policies, or whatever), the
          public has a right to expect that they will
          receive something of comparable value in
          return for the premium paid. Courts should
          also keep alert to the fact that the
          expectations of the insured are in large
          measure created by the insurance industry
          itself. Through the use of lengthy, complex
          and cumbersomely written applications,
          conditional receipts, riders, and policies,
          to name a just a few, the insurance industry
          forces the insurance consumer to rely upon
          the oral representations of the insurance
          agent. Such representations may or may not
          accurately reflect the contents of the
          written document and therefore the insurer is
          often in a position to reap the benefit of
          the insured's lack of understanding of the
          transaction.

Pennsylvania seemed to have taken a

significant step toward adopting the reasonable expectations

principle as stated by then-Professor Keeton in his landmark

article.3   See Roger C. Henderson, The Doctrine of Reasonable

3
 . Robert E. Keeton, Insurance Law Rights at Variance with
Policy Provisions, 83 Harv. L. Rev. 961, 967 (1970) (providing
the following formulation of the reasonable expectations
principle: "The objectively reasonable expectations of applicants
and intended beneficiaries regarding the terms of insurance
contracts will be honored even though painstaking study of the
Expectations in Insurance Law After Two Decades, 51 Ohio St. L.J.

823, 829 (1990).4    Five years later, however, the court appeared

to pull back from its enthusiastic endorsement of the doctrine.

Indeed, in Standard Venetian Blind Co. v. American Empire Ins.

Co., 

, 

(1983), the court failed even to

acknowledge its opinion in Collister while holding that "where

... the policy limitation relied upon by the insurer to deny

coverage is clearly worded and conspicuously displayed, the

insured may not avoid the consequences of that limitation by

proof that he failed to read the limitation or that he did not

understand 

.   Even so, the court noted that

(..continued)
policy provisions would have negated those expectations.").
Since Professor Keeton's article, a considerable number of trees
have been sacrificed in the name of reasonable expectations as
the academic community has debated what reasonable expectations
means, which courts have adopted the doctrine, and whether it is
desirable for them to have done so. See generally John D.
Ingram, Should an Insured Be Rewarded for Not Reading the
Policy?, 41 Drake L. Rev. 705 (1992); Roger C. Henderson, The
Doctrine of Reasonable Expectations in Insurance Law After Two
Decades, 51 Ohio St. L.J. 823 (1990); Stephen J. Ware, A Critique
of the Reasonable Expectations Doctrine, 56 U. Chi. L. Rev. 1461
(1989); Mark C. Rahdert, Reasonable Expectations Reconsidered, 

. Rev. 323 (1986); Kenneth S. Abraham, Judge-Made Law and
Judge-Made Insurance: Honoring the Reasonable Expectations of the
Insured, 

. Rev. 1151 (1981). Among the courts that have
not clearly adopted the doctrine, the statements of the
Pennsylvania Supreme Court are perhaps the most conflicting.
E.g., Henderson, 51 Ohio St. L.J. at 829-31.
4
 . As Professor Henderson points out, Professor Keeton, who by
that time had become Judge Keeton, read Collister as adopting the
doctrine of reasonable expectations "in a form explicitly going
beyond merely resolving ambiguities against insurers." Davenport
Peters Co. v. Royal Globe Ins. Co., 

, 291 & n.5
(D. Mass. 1980) (Keeton, J.).
"in light of the manifest inequality of bargaining power between

an insurance company and a purchaser of insurance, a court may on

occasion be justified in deviating from the plain language of a

contract of insurance."   

1987, the Pennsylvania Supreme Court

decided Tonkovic v. State Farm Mut. Auto Ins. Co., 

,

(1987).   In Tonkovic the insurer, following its

acceptance of the insured's application and payment, unilaterally

limited the scope of the coverage provided by the policy by

inserting an exclusion about which it never informed the insured.

Despite the unambiguity of the exclusion, the court felt that

Standard Venetian Blind was distinguishable.   In Standard

Venetian Blind, the court reasoned, the policy "was what it

purported to be, and what the insured purchased, a general

liability 

, with all the usual incidents

and exclusions.
          We find a crucial distinction between cases
          where one applies for a specific type of
          coverage and the insurer unilaterally limits
          that coverage, resulting in a policy quite
          different from what the insured requested,
          and cases where the insured received
          precisely the coverage that he requested but
          failed to read the policy to discover clauses
          that are the usual incident of the coverage
          applied for.

court held that "where ... an individual

applies and prepays for specific insurance coverage, the insurer

may not unilaterally change the coverage provided without an

affirmative showing that the insured was notified of, and
understood, the change, regardless of whether the insured read

the policy."   

(emphasis added).

          A couple of other points about the Tonkovic opinion

bear mentioning.   The first of these is that the court

specifically found that the trial court's jury instruction

correctly stated Pennsylvania law.   

significant

given the content of the charge:
          This is what the cases have said: the burden
          is upon the insurer ... to establish the
          insured's ... awareness and understanding of
          the exclusions. So, even though the initial
          burden in this case is with the plaintiff and
          it stays with the plaintiff, indeed, there is
          a burden upon the insurance company in this
          case to prove to you by a preponderance of
          the evidence, that [the insured] was aware
          and understood the exclusion that existed
          here ... .

(quoting the trial court).   The second point of

consequence is that the court expressly noted that its holding

was in accord with Collister, 

and proceeded to quote

the core provisions of the Collister opinion, including the

second block of language that we have quoted above.   

          Faced with Collister, Standard Venetian Blind, and

Tonkovic, we are unable to draw any categorical distinction

between the types of cases in which Pennsylvania courts will

allow the reasonable expectations of the insured to defeat the

unambiguous language of an insurance policy and those in which

the courts will follow the general rule of adhering to the

precise terms of the policy.   One theme that emerges from all the
cases, however, is that courts are to be chary about allowing

insurance companies to abuse their position vis-a-vis their

customers.   Thus we are confident that where the insurer or its

agent creates in the insured a reasonable expectation of coverage

that is not supported by the terms of the policy that expectation

will prevail over the language of the policy.   In many cases,

this is simply another way of saying what the supreme court made

clear in Tonkovic, that an insurer may not make unilateral

changes to an insurance policy unless it both notifies the

policyholder of the changes and ensures that the policyholder

understands their significance.   In other cases this requires a

more straightforward application of the principles of equitable

estoppel which, as this court has recognized, West American Ins.

Co. v. Park, 

, 1239 (3d Cir. 1991), underlie the

cases that we have discussed and are manifest in the supreme

court's repeated observations that the insurance industry and its

recondite practices are responsible for deviations from the

general rule.   In both types of cases the insured, as a result of

the insurer's either actively providing misinformation about the

scope of coverage provided by a policy or passively failing to

notify the insured of changes in the policy, receives something

other than what it thought it purchased.5   In consequence, as the

5
 . In contrast, cases like Standard Venetian Blind concern
situations where the insured has no reasonable basis for
believing that a policy covers events that it does not. That is,
the insurer has neither told the insurer that a policy would
cover certain events when by its terms it does not, nor made a
change in the terms of coverage after the insured has agreed to
supreme court was careful to point out in both 

, and 

, "the insurer is

often in a position to reap the benefit of the insured's lack of

understanding of the transaction."

          In this case had the district court permitted Township

to amend its complaint and proceed with discovery, Township might

have been able to assert one of these types of claims.    On

remand, Township might be able to demonstrate that Insurers did

not change the language of the exclusion until after it had

agreed to renew its policy with Insurers, and that Insurers

either did not notify Township of the change in the exclusion or

did not explain the significance of the change.

          Alternatively, Township might be able to demonstrate

that Insurers somehow misled it by indicating that, despite the

language of the policy, claims such as the one at issue here

would be covered.

          In sum, we believe that Township could conceivably

prove that it had a reasonable expectation of coverage despite

policy language that appears to those not familiar with its

relationship with Insurers unambiguously to preclude coverage,

and that it therefore might be able to obtain coverage.     We

stress, however, that our holding must not be overstated.      If

Township was aware of the change in the exclusion provision

(..continued)
purchase insurance without informing the insured of the change
and its consequences.
before it elected to renew its policy with Insurers and Insurers

made no representation that the scope of coverage would not be

reduced, or if after Township agreed to renew Insurers informed

Township of the change and its significance, then Insurers must

prevail because, in our view, the policy unambiguously excludes

coverage for claims such as the one at issue here.

          We are thus persuaded by Township's argument that

dismissal pursuant to Rule 12(b)(6) was inappropriate.   Before

the district court denied the motion to amend and dismissed

Township's complaint for failure to state a claim, it should have

allowed discovery to enable it to review the circumstances

surrounding the insurance agreement in order to determine whether

Township might have had a reasonable expectation of coverage in

this situation despite the language of the policy.   We will

therefore reverse and remand so that the district court can take

these additional steps.
                      B. Unconscionability

          Township also argues that the new exclusion clause was

unconscionable because it effectively abrogated most, if not all,

of the coverage under the agreement and because only a handful of

carriers offered this type of coverage.   "Unconscionability

requires a two-fold determination: that the contractual terms are

unreasonably favorable to the drafter and that there is no

meaningful choice on the part of the other party regarding

acceptance of the provisions."   Worldwide Underwriters Ins. Co.
v. Brady, 

, 196 (3d Cir. 1992) (citing Koval v.

Liberty Mut. Ins. Co., 

, 

, 491

(1987)).   See also Bishop v. Washington, 

, 

, 1093 (1984); Robert E. Keeton & Alan I. Widiss,

Insurance Law § 6.3(b)(2) (1988) ("In some cases ... the

unambiguous language of an insurance policy provides so little

coverage that it would be unconscionable to permit the insurer to

enforce it.").

           Here Township argues that application of the exclusion

to claims arising from prior equitable, non-monetary disputes,

unreasonably favors Insurers.   Under the terms of the policy,

Insurers agreed to pay Township for all civil claims for money

damages.   The policy did not cover suits seeking strictly

equitable relief.6   Township argues that if it had filed a claim

at the commencement of the Blanche Road state dispute, Insurers

would have denied coverage under the express terms of the policy.

Township asserts that it is unfair for Insurers to apply the

exclusion broadly so as to deny coverage of the Blanche Road §

1983 action because it related to prior disputes, when these

disputes were of a nature which would not have been covered by



6
.   The policy excludes payments for
          4.   a. claims, demands seeking relief, or
          redress, in any form other than money
          damages;
               b. fees or expenses relating to claims,
          demands or actions seeking relief or redress,
          in any form other than money damages.
the insurance agreement and thus would not have been the basis of

a claim under it or under any similar prior policy.

           The exclusion is unconscionable, Township contends,

because the majority of its litigation originates in prior state

administrative proceedings.   Generally, a claimant will first

seek relief from a Township agency.7   Such disputes rarely ripen

into lawsuits for money damages unless the plaintiff finds he

cannot obtain adequate relief through the local agency

proceedings.   Because of this, Township believes that the

exclusion as interpreted by Insurers leaves it with virtually no

coverage, since claims for non-monetary relief that arise during

the policy period are not covered, and claims for monetary relief

will almost inevitably be somehow tied to pre-policy litigation

and therefore excluded.

           Township drastically overstates the extent to which the

exclusion reduces its coverage.   In reality, the exclusion only

creates a gap in Township's coverage for those claims that have

arisen in some form prior to the effective date of the policy.

This is because of Condition 4 of the policy, which states as

follows:
                If during the policy period or extended
           discovery period:
                (a) The Public Entity or the Insureds
           shall receive written or oral notice from any
7
 . Township maintains at least seventeen administrative
Commissions and Boards. Among them are the Township Council,
Board of Auditors, Code Appeals Board, Zoning Hearing Board,
Budget Committee, Environmental Advisory Board, and the Economic
Development Corp.
          party that it is the intention of such party
          to hold the Insureds responsible for the
          results of any specified Wrongful Act done or
          alleged to have been done by the Insureds
          while acting in the capacity aforementioned;
          or
               (b) The Public Entity or the Insureds
          shall become aware of any occurrence which
          may subsequently give rise to a claim being
          made against the Insureds in respect of any
          such Wrongful Act;
               Then the Public Entity or the Insureds
          shall as soon as practicable give written
          notice to the Company of the receipt of such
          written or oral notice under Clause 4(a) or
          of such occurrence under Clause 4(b). Upon
          the Insurer's receipt of such notice any
          claim which may subsequently be made against
          the Insureds arising out of such alleged
          Wrongful Act shall, for the purposes of this
          Policy, be treated as a claim made during the
          policy period in which such notice was given
          or if given during the extended discovery
          period as a claim made during such discovery
          period.


As a result of this provision Township can obtain coverage for

all its claims so long as it notifies Insurers of potential

claims during the policy period.     The only effects of the

additional exclusionary language, then, are to create the

aforementioned gap in coverage and to place the additional burden

of notification on Township.   Neither of these effects render the

policy unconscionable in our view.

                               IV.

          Lastly, we address Township's contention that the

district court abused its discretion by granting Insurers' cross

motion for sanctions under Rule 11.    After a hearing on the

motion, the district court imposed a sanction in the sum of
$20008 because Township had filed a motion with the district

court to determine the Rule 59(e) motion while a timely petition

for rehearing was pending before this Court.    Finding the motion

to be duplicative, the district court held that Township had

failed to conduct a reasonable inquiry prior to filing.     It

concluded that Insurers incurred needless expense in having to

respond to Township's jurisdictionally defective motion.

          We have held that Rule 11 sanctions may be awarded in

exceptional circumstances in order to "discourage plaintiffs from

bringing baseless actions or making frivolous motions."    Doering

v. Union County Bd. of Chosen Freeholders, 

, 194 (3d

Cir. 1988).     See also Morristown Daily Record, Inc. v. Graphic

Communications Union, Local 8N, 

, 32 n.1 (3d Cir.

1987) (noting that "Rule 11 is not to be used routinely when the

parties disagree about the correct resolution of a matter in

litigation").    The Rule provides in relevant part

          The signature of an attorney or party

          constitutes a certificate by the signer that

          the signer has read the pleading, motion, or

          other paper; that to the best of the signer's

          knowledge, information and belief formed

          after reasonable inquiry it is well grounded


8
 . Although Insurers first claimed that their costs associated
with answering the Rule 59(e) motion amounted to $8,800, and then
lowered that amount to $5,535, the court determined a reasonable
sanction to be $2000.
           in fact and is warranted by existing law or a

           good faith argument for the extension,

           modification, or reversal of existing law,

           and that it is not interposed for any

           improper purpose, such as to harass or to

           cause unnecessary delay or needless increase

           in the cost of litigation . . ..



           The Rule imposes an affirmative duty on the parties to

conduct a reasonable inquiry into the applicable law and facts

prior to filing.   Business Guides, Inc. v. Chromatic

Communications Enters., Inc., 

, 551 (1991).    See also

Garr v. U.S. Healthcare, Inc., 

(3d Cir. 1994).      An

inquiry is considered reasonable under the circumstances if it

provides the party with "an 'objective knowledge or belief at the

time of the filing of a challenged paper' that the claim was

well-grounded in law and fact."   Ford Motor Co. v. Summit Motor

Prods., Inc., 

, 289 (3d Cir. 1991), cert. denied, 

(1991) (quoting Jones v. Pittsburgh Nat'l Corp., 

, 1359 (3d Cir. 1990), cert. denied, 

(1991)).

           We dismissed Township's original appeal for lack of

jurisdiction without specifying the basis for our decision.

Instead of speculating about our rationale for this dismissal,

Township sought clarification of the order by filing a petition
for rehearing.   Apparently believing that the dismissal may have

been due to the pending Rule 59(e) motion, Township also filed a

motion in district court to determine that motion.

           The district court correctly noted the well settled

principle that, once a notice of appeal is filed, jurisdiction is

no longer vested in the district court.    Griggs v. Provident

Consumer Discount Co., 

, 58 (1982).     This rule

prevents "the confusion and inefficiency which would of necessity

result were two courts to be considering the same issue or issues

simultaneously."   Venen v. Sweet, 

, 121 (3d Cir.

1985).   There are, however, exceptions to this general rule.9

Specifically, "a premature notice of appeal does not divest the

district court of jurisdiction."   Mondrow v. Fountain House, 

, 800 (3d Cir. 1989) (emphasis added).      We have held that

in order to avoid delay at the trial level "district courts

should continue to exercise their jurisdiction when faced with

clearly premature notices of appeal."     

notice of appeal was premature, Township's filing of the motion

to determine the Rule 59(e) motion was not outside the bounds of

objective reasonableness.

           Insurers maintain that Mondrow does not apply to the
instant facts because it was not clear that Township's appeal was

9
 . For example, during the pendency of an appeal, the district
court may review applications for attorney's fees, grant or
modify injunctive relief, issue orders regarding the record on
appeal, and vacate a bail bond and order arrest. 

n.2.
premature.   We find this argument to be without merit.   There is

no doubt that Township's June 23, 1992, letter could be

considered to be a motion to amend pursuant to Rule 59(e).     The

letter expressly requested that the district court clarify

whether its order applied to all parties and whether it dismissed

the case without prejudice.   The letter also requested leave to

file an amended complaint.    While the court entered an order

denying the request to file an amended complaint, the order was

silent as to the Rule 59(e) motion.    As a result of the court's

failure to dispose of the motion, Township's appeal could well be

deemed to be premature.   If so, it would then be within the

bounds of reason for Township to file the motion to determine the

Rule 59(e) motion based on its conclusion that the district court

would continue to exercise jurisdiction.

          Furthermore, we can find no support for any allegation

that Township's motion was an attempt to harass Insurers or cause

unnecessary delay of the judicial proceedings.    To the contrary,

Township appeared to be endeavoring to cure the jurisdictional

defect in order to facilitate appellate review.   Indeed, Insurers

argue in support of the sanction that Township should have chosen

one of two realistic procedural options:   1)   seek rehearing in

this Court or 2) seek to persuade the district court that it had

not yet resolved its Rule 59 motion.   If Insurers can advocate

that Township should have taken action in either court, we do not

find it unreasonable that Township, unsure of the choice it
should make, sought to protect its case on the merits by taking

actions in both courts.

            There are grey areas surrounding the issues of

appealability, prematurity of appeals, and the situs of

jurisdiction during the period when a party is attempting to

clarify rulings by either or both the district court and the

appellate court.    When the issue of the ripeness of an appeal is

not clear, a party should not be sanctioned under Rule 11 for

taking reasonable steps to perfect the appeal or clarify its

status.    A more stringent rule would penalize the confused but

cautious litigant.    That is not the aim of Rule 11.

            For all of these reasons, we do not find that Township

so exceeded the bounds of Rule 11 that sanctions should be

imposed.    We find to the contrary that the district court abused

its discretion because appropriate circumstances to justify the

imposition of a Rule 11 sanction against Township did not exist.

                                 V.

            We will reverse the order dismissing the complaint

pursuant to Fed. R. Civ. P. 12(b)(6) and remand the case to the

district court for further proceedings consistent with this

opinion.    In addition, we will reverse the order of the district

court imposing a Rule 11 sanction against Township.
Bensalem Township v. International Surplus

Lines Insurance Company et al.

Nos. 93-1071 & 1072




HUTCHINSON, J., Concurring.




          I join the opinion of the Court.   I write separately

only to emphasize the distinction between this case and Standard

Venetian Blind Co. v. American Empire Ins. Co., 

, 

(1983), which embodies Pennsylvania's general practice

of applying the "plain language" rule to construe exclusionary

clauses in liability insurance contracts, instead of considering

the "reasonable expectations" of the insured.   Since Standard

Venetian Blind was decided, it appears to me that Pennsylvania

has created exceptions to the plain language rule which make that

rule inapplicable to the facts now before us.

          It now seems apparent that Standard Venetian Blind did

not signal wholesale rejection of the reasonable expectations

principle foreshadowed in Rempel v. Nationwide Life Ins. Co.

Inc., 

, 

(1977), expressed in Collister v.

Nationwide Life Ins. Co., 

, 

(1978),

cert. denied, 

(1979), and reiterated in Tonkovic v.

State Farm Mut. Auto. Ins. Co., 

, 

(1987).

Instead, I think Standard Venetian Blind did no more than reject

the attempt of Hionis v. Northern Mut. Ins. Co., 

, 

(1974), to wholly divorce the construction of

exclusionary clauses from their text.   See 

affirmative duty to explain the effect of all policy exclusions

in precise, concrete terms without regard to the clarity of the

language of the policy or the reasonableness of the insured's

expectations).

          Thus, in Standard Venetian Blind, all members of the
Pennsylvania Supreme Court agreed that Hionis's failure to apply

the clear language of the exclusions of the general liability
policy was inconsistent with the objective theory of contracts.

The Hionis rationale would have covered insureds against risks as

to which they had no reasonable expectation of coverage.   Indeed,

the majority in Standard Venetian Blind recognized the "manifest

inequality of bargaining power between an insurance company and a

purchaser of insurance," reasoning that a court may on occasion

deviate from the plain language of a contract of insurance.

Standard Venetian Blind, 

, 469 A.2d at 567.

Accordingly, under Erie v. Tompkins, 

(1938), I think

the Court correctly decides that the insured Township should be

given an opportunity to pursue discovery for the purpose of

uncovering evidence that would tend to show Bensalem was not sold

the policy it asked International Surplus Lines to provide, was

not advised that this "claims-made" policy left it without

coverage for risks it wanted covered, or that the promises given

were made largely illusory because of the restrictive way the

exclusions the insurer relies on interact with the claims-made

policy.

          In the present case, as in Collister, the Township

claims that the policy it received was not the policy it wanted

to buy and, most significantly, was led by the insurer to believe

it was purchasing.   The discovery the insured seeks is designed

to support that allegation.   Therefore, I believe the Court

correctly decides that the Township should be given an

opportunity to discover evidence that would support its theory
that the policy it received did not cover risks it was reasonably

led to believe would be covered.

          This case is subject to much the same analysis that

Justice Manderino used in his plurality opinion announcing the

judgment of the court in Rempel.   That analysis to my mind

embodies an unobjectionable rule that an insurer should not be

allowed to disclaim coverage after a loss occurred of a risk that

its insured advised the company it wanted covered.   

, 370 A.2d at 371.

          Although the Pennsylvania Supreme Court in Standard

Venetian Blind did not adopt the Rempel principle in its broad

form, the antipathy the Rempel plurality expressed, to the

failure of insurance companies to alert their customers to

exclusions that are likely to remain hidden until a loss occurs,

was reiterated, this time by a majority, in Collister.   As the

Court points out, Collister took an important step towards the

reasonable expectation standard when the Pennsylvania Supreme

Court stated, "[c]ourts should be concerned with assuring that

the insurance purchasing public's reasonable expectations are

fulfilled."   

, 388 A.2d at 1353.
Furthermore, as the Court cogently demonstrates, this theme was

continued in Tonkovic, the Pennsylvania Supreme Court's most

recent pronouncement on this matter, and thereafter in the
decisions of the Pennsylvania Superior Court also cited in this

Court's opinion. See Majority Op. at 14-15.10



10
 . Tonkovic, which can be analyzed in terms of an illusory
promise, is relevant here because Bensalem Township's policy is a
"claims-made" policy. As such, it limits coverage to claims
filed within the policy's term. Standard Venetian Blind involved
an "occurrence-made" policy which provided coverage for any
covered event that occurred during the policy term, without
regard to when the claim was made. See American Gas. Co. of
Reading, Pennsylvania v. Confinisco, 

, 68 (3d Cir.
1994) (discussing differences between claims- and occurrence-made
policies). Claims-made policies allow the insurer to make a more
precise calculation of premiums based upon the costs of the risks
assumed, a calculation that is difficult, if not impossible, in
an occurrence-made policy where the insurer is faced with an
unlimited "tail" of potential liability extending beyond the
policy period.

    In a claims-made policy, however, limitation of coverage to
claims filed within the policy term can sometimes interact with
broad exclusions like those present here to defeat the
"reasonable expectations" of the insured or perhaps, in some
cases, make the promised coverage illusory. See Tonkovic, 

, 

; Worldwide Underwriters Ins. Co. v. Brady,

(3d Cir. 1992). Pennsylvania's exceptions to the
plain language rule of Standard Venetian Blind seek to balance
the relative advantages an insurance company has in underwriting
claims-made policies with the insured's reasonable expectations
of coverage. See Zuckerman v. National Union Fire Ins. Co., 

, 

(1985) (for an excellent discussion of the
discrete issues presented by claims and occurrence made
policies). Still, if insurance is to serve its basic purpose of
splitting economic loss that would be catastrophic to a single
insured among a group of persons facing similar risks, exclusion
of coverage for losses that a particular insured is more or less
certain to suffer is necessary. For who, as it was once said,
would not give up a peppercorn in exchange for a pound and who,
no matter how well endowed with pounds, could long continue such
an exchange? The exclusions in question here may be meant to do
no more than solve the problem of moral risk. Whether they go so
far as to deprive the insured of the coverage it reasonably
expected to receive remains to be seen.
            Accordingly, I agree with the Court that Pennsylvania

would not, under the circumstances here, apply Standard Venetian

Blind's plain language rule to exclude Bensalem Township from the

coverage it seeks if it can show that it reasonably expected such

coverage.    Instead, I think Pennsylvania would look beyond the

strict technical language of this policy's exclusion to determine

what coverage the insured told the insurer it wanted to buy and

whether the insurer reasonably led it to expect such coverage by

the terms of the policy it tendered.

            Accordingly, I join the opinion of the Court.