On Air Entertainment Corp.; Nise Productions, Inc.; Michael Nise, Appellants at No. 98-2038 v. National Indemnity Co. Appellant at No. 98-2039, 210 F.3d 146 (3d Cir. 2000)

This appeal raises issues concerning the extent of coverage provided by Owner's, Landlord's and Tenant's Liability (OL&T) insurance policies. The appeal arises out of a suit by On Air Entertainment Corp. (On Air) against National Indemnity Co. (National) in which On Air, under an OL&T policy from National, sought defense costs and damages for bad faith in connection with the defense of two lawsuits (Suit One and Suit Two).¹  On Air appeals the District Court's grant of National's motion for judgment as a matter of law on its bad faith claims, the Court's denial of its request to amend its complaint to add a fraud claim, and the Court's ruling that a release that it signed was enforceable and barred its action against National for damages in connection with Suit Two. National cross-appeals the District Court's finding that coverage exists under the OL&T policy for Suit One and also appeals the District Court's holding that New Jersey law applies to the coverage issues. We affirm all of the District Court's rulings from which On Air appeals and reverse the District Court's holding of coverage and attorneys' fees under the OL&T policy.

In 1988, On Air purchased a standard OL&T insurance policy (Policy) from National to insure its premises.²  On Air produced two syndicated television teen dance shows called Dancing on Air and Dance Party USA (Dance Shows) on its premises. Edward O'Neil (O'Neil) was one of the hosts of the Dance Shows. In 1987, directors of On Air met with O'Neil regarding his off-show conduct with minor females who appeared on the Dance Shows and instructed him to not have any further involvement with underage females. Despite these warnings, O'Neil continued in a relationship with an underage female and was subsequently removed as a host of the Dance Shows. However, in 1989, On Air reinstated O'Neil as a host of the Dance Shows. Shortly after his reinstatement, O'Neil allegedly raped two minor females who were dancers on the Dance Shows. Both of the alleged rapes occurred on social occasions off On Air's premises.

In January 1991, Suit One was filed against On Air alleging that On Air's negligent hiring and supervision of O'Neil contributed to the alleged rape of one of the underage females. On Air tendered Suit One to National, but National initially denied coverage under the Policy for various reasons. In October 1991, Suit Two was filed against On Air and contained similar allegations of negligent hiring and supervision. After receiving notice of Suit Two, National determined that while there was no coverage for either suit, it would defend both suits under a full and complete reservation of rights, pending a declaratory judgment action.

Shortly after National agreed to take over the defense of the suits, Suit Two was settled by On Air's private counsel for $30,000 and National agreed to contribute $13,500 in exchange for a complete release of On Air. In connection with the settlement, On Air released National from all claims arising from Suit Two, including claims for coverage and attorneys' fees.³  Suit One settled in April 1994, and National paid the alleged rape victim $101,000 in exchange for a complete release of On Air.

On March 29, 1996, On Air brought the current suit against National alleging bad faith in connection with Suit One and Suit Two and claiming that it was entitled to attorneys' fees in connection with the defense of the suits. The District Court denied National's motion for summary judgment on its claim that the Policy did not provide coverage for Suit One and Suit Two and ruled that New Jersey law applied to the coverage issues. On Air's suit was scheduled for a jury trial on September 30, 1997. Prior to trial, the District Court ruled that the Policy provided coverage to On Air for Suit One and Suit Two. The Court proceeded to trial on the remaining issues of whether National had acted in bad faith in connection with the suits, and the amount of attorneys' fees owed to On Air by National.

On the third day of trial, the District Court informed On Air that it had not made a showing of bad faith by National. The Court allowed On Air to proffer all of its remaining evidence in order to make a showing of bad faith. Following On Air's proffer, the District Court granted National's motion for judgment as a matter of law on the bad faith claims. The Court scheduled the remaining issue, the amount of attorneys' fees to which On Air was entitled, for trial in June 1998. Prior to the June 1998 trial, the District Court granted National's motion claiming that On Air was not entitled to any attorneys' fees in connection with Suit Two because On Air had signed a release of any potential claims.⁴  Following a bench trial on the issue of attorneys' fees in connection with Suit One, the Court awarded On Air $63,600.08 for attorneys' fees, plus interest accrued. Subsequently, the District Court denied National's motion for an order to vacate the judgment or for a new trial, and this appeal and cross-appeal followed.

National cross-appeals the District Court's ruling that New Jersey law controls the case and argues that Pennsylvania law should control. Because this is a diversity case, we apply the choice of law principles of Pennsylvania, the forum state. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496-97, 61 S. Ct. 1020, 1021 (1941). The District Court applied Pennsylvania's choice of law test, which it termed "a combination of the `most significant' test and an `interest' analysis," and held that New Jersey, and not Pennsylvania, law controls the case.

National contends that the District Court misapplied Pennsylvania's choice of law test, and that Pennsylvania law should control the case. However, before a choice of law question arises, there must actually be a conflict between the potentially applicable bodies of law. See Lucker Mfg. v. Home Ins. Co., 23 F.3d 808, 813 (3d Cir. 1994); Williams v. Stone, 109 F.3d 890, 893 (3d Cir. 1997). National admits that it cannot point to any differences between Pennsylvania and New Jersey law relevant to this case. In addition, our own research has not identified any relevant differences. Under these circumstances, there is no conflict of law, and the court should avoid the choice of law question. See Lucker, 23 F.3d at 813. The court can, therefore, refer interchangeably to the laws of New Jersey and Pennsylvania in discussing the law applicable to the case. See id.

The District Court held that the Policy provided coverage in this case, but did not give the reasons for its ruling.⁵  On cross-appeal, National argues, among other things, that there is no coverage in this case because the Policy is an OL&T policy, a limited form of insurance which does not provide coverage for off-premises injuries. Our review of the District Court's coverage ruling is plenary. See Carey v. Employers Mut. Cas. Co., 189 F.3d 414, 417 (3d Cir. 1999).

National argues that OL&T policies, in contrast to broader comprehensive general liability policies, do not cover off-premises injuries such as those in the present case. On Air counters that the underlying lawsuits alleged that its negligence in hiring and supervising O'Neil resulted in the alleged rapes of the plaintiffs. On Air claims that because hiring and supervising necessary personnel, including the host, is "necessary or incidental" to the Dance Shows, one of the "operations" conducted on the insured premises, the injuries alleged in the lawsuit therefore "aris [e] out of the ownership, maintenance or use of the insured premises and all operations necessary or incidental thereto."

Neither the parties' briefs nor our research reveal a decision by either New Jersey or Pennsylvania courts on the coverage provided by OL&T policies for off-premises injuries. Therefore, it is appropriate for the court to consider other state court decisions, federal decisions, and the general weight and trend of authority. See Farmers Alliance Mut. Ins. Co. v. Salazar, 77 F.3d 1291, 1294-95 (10th Cir. 1996). In construing the policy language, we must keep in mind that it is well established that ambiguity in insurance contracts must be construed in favor of the insured. See Nationwide Mut. Fire Ins. Co. v. Pipher, 140 F.3d 222, 227 (3d Cir. 1998).

In construing the "operations necessary or incidental thereto" language in OL&T policies, one court has noted that " [n]umerous courts have addressed whether off-site injuries may be covered by such language in a premises liability policy, and there is a definite lack of consensus as to the correct result." Hartford Fire Ins. Co. v. Annapolis Bay Charters, Inc., 69 F. Supp. 2d 756, 761-62 (D. Md. 1999) (citation omitted). The cases construing OL&T policies can be grouped into three general categories: (1) cases holding that OL&T policies only protect against liability arising from the condition or use of a building and not liability arising from thenature of the operations or activity conducted therein;⁶  (2) cases holding that OL&T policies can cover liability arising from the nature of the operations or activity conducted therein if the injury occurs on the insured premises;⁷  and (3) cases holding that OL&T policies cover liability arising from accidents occurring off the insured premises if the injury has a sufficient nexus to the operations conducted on the insured premises.⁸ 

Although we believe that OL&T policies should not be confused with more comprehensive general liability policies, there is no need for us to decide which category of cases we agree with because even if we were to hold that OL&T policies provide coverage for off-premises accidents, there would still be no coverage in this case. An OL&T policy requires a causal connection between the injury and the ownership, maintenance or use of the premises. See Paraclete, 857 F. Supp. at 835 (stating that a sufficient connection exists when there is a reasonable causal connection between the ownership, maintenance or use of the premises and the injury). Unlike the cases where courts have found accidents arising out of the operations of an insured to be covered,⁹  in our case the accidents did not "arise out of . . . operations necessary or incidental" to the insured premises because the sexual assaults occurred on purely social outings and, thus, do not have the requisite causal connection to the insured premises.

A sufficient causal connection cannot exist where the injury arose out of a social activity that had no connection to the operations of the insured. This principle was exhibited in Berne v. Continental Ins. Co., 753 F.2d 27 (3d Cir. 1995), where Berne, the insured owner of Berne's Ice Company, Inc., met with Joseph Flynn, the general manager of the Sapphire Beach Hotel, at the Slipaway Bar in St. Thomas, Virgin Islands. See id. at 28. The purpose of the meeting was to discuss the Hotel's indebtedness to Berne's Ice Company. See id. Berne, licensed to carry a pistol, brought his pistol with him to the meeting. See id. While awaiting his turn in a game of darts, Berne realized that the pistol he was carrying was loaded and moved to an adjacent corridor to unload the pistol. See id. While he was unloading the pistol, it accidently discharged and the bullet passed through a wall and hit a customer of the bar. See id. Berne contended that his OL&T policy provided coverage because Berne carried the pistol in order to protect the receipts of the ice business from robbery, and the pistol was discharged during the course of a business meeting with Flynn. See id. at 29. The insurer, naturally, contended that the pistol was discharged after the business meeting was over when Berne and Flynn were engaged in a purely social game of darts. See id. The trial court found that the discharge of the pistol did not arise out of operations necessary or incidental to Berne's Ice Company's business. See id. The Third Circuit affirmed the district court's holding, saying that there was evidence that the business discussion between Berne and Flynn took only a few minutes and that Berne carried a pistol not only for business purposes, but also for personal reasons when not engaged in business. Id.; see also Reznichek v. Grall, 442 N.W.2d 545 (WiS. Ct. App. 1989) (a bowling alley proprietor's OL&T policy did not cover his negligent transmission of genital herpes to a sixteen-year-old girl as a result of sexual encounters that occurred on the bowling alley premises because there was no causal relationship between the plaintiff 's injury and the ownership, maintenance or use of the premises as a bowling alley).

Similarly, in our case there is not a sufficient connection between the underlying injuries and the use of the insured premises because the injuries arose out of purely social outings that were unconnected to any of the operations of On Air. In Suit One, the complaint alleged that O'Neil asked the minor plaintiff to go to the mall with him. On the pretext of going to the mall, O'Neil told the plaintiff that he had to stop at his grandmother's house to pick up something. Upon arrival at his grandmother's house, O'Neil enticed the plaintiff into his bedroom and forcibly assaulted and raped her. Suit One involves injuries that arose from purely social circumstances, and the injuries' connection to On Air's operations are not sufficient to support a holding that the injuries "arose out of . . . operations necessary or incidental" to the premises. The District Court's finding of coverage and attorneys' fees under the Policy must therefore be reversed.

On Air appeals the District Court's grant of judgment as a matter of law under Federal Rule of Civil Procedure 50(a) on its bad faith claims against National. On October 3, 1997, the District Court, after having heard On Air's witnesses' testimony and reviewing its exhibits and proffers in support of its claims, orally directed that a judgment as a matter of law be entered in favor of National on On Air's claims of bad faith in disclaiming coverage under the Policy and bad faith in the defense of Suit One and Suit Two as well as its claim for intentional infliction of emotional distress. On appeal, On Air argues that the District Court's ruling was erroneous. Our review of the District Court's grant of judgment as a matter of law is plenary. See Rego v. ARC Water Treatment Co. of Pa., 181 F.3d 396, 400 (3d Cir. 1999).

On Air's claims do not have any merit. Bad faith in denial of coverage only exists if the insured's claim is not "fairly debatable." See Robeson Indus. v. Hartford Accident & Indem., 178 F.3d 160, 169 (3d Cir. 1999) (applying New Jersey law).¹⁰  In order to prove that a claim is not "fairly debatable," "the insured must `show the absence of a reasonable basis for denying benefits of the policy and the defendant's knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.' " Id. (quoting Pickett v. Lloyd's, 621 A.2d 445, 453 (N.J. 1993)). The coverage issue in this case was "fairly debatable." On Air cannot show the absence of a reasonable basis for denying coverage, and, thus, On Air cannot show that National acted in bad faith in denying coverage.¹¹  Similarly, On Air has not shown that National acted in bad faith in defense of Suit One and Suit Two and we affirm the District Court's dismissal of both claims under Rule 50(a).¹² 

In sum, we affirm the District Court's rulings from which On Air appeals, and reverse the District Court's holding of coverage and attorneys' fees under the OL&T policy.