APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA (D.C. Civil No. 76-1547)
Before Aldisert, Rosenn and Garth, Circuit Judges.
The question for decision in this diversity case interpreting Pennsylvania law is whether a professional title insurance broker may avoid the effect of an unambiguous contract clause on the basis of his uncommunicated, subjective misunderstanding of that clause when the other party to the contract had no notice of the misunderstanding and the parties are of relatively equal bargaining power. Because we believe that Pennsylvania would not allow such avoidance, we reverse the district court's determination to the contrary.
Brokers Title Company is a Pennsylvania corporation engaged in the business of placing title insurance. Between 1969 and 1975 it served as the Philadelphia area agent for Title Guarantee Company, a Maryland corporation. St. Paul Fire and Marine Insurance Company, appellant in this case, is in the general insurance and surety business and had issued to Brokers an "errors and omissions" insurance policy. The present controversy stems from St. Paul's refusal to defend a claim for which Brokers was found legally liable because of its negligence in a real estate closing.
In August 1969, Brokers, representing Title Guarantee, issued a title report on certain real estate in Montgomery County, Pennsylvania. The document was signed by employees from both companies. At the closing, which was conducted in Brokers' office, Brokers received $1,951.40 from the grantors of the property to satisfy outstanding tax liens. Brokers mailed the check for taxes to the City of Philadelphia, however, instead of to Montgomery County. By the time the mistake was discovered the real estate had been sold at a tax sale. The purchasers of the title insurance policy sued Brokers and Title Guarantee in district court for the loss of the real estate. The court determined that Brokers acted negligently in failing to remit the money to the proper taxing authority and that Brokers' negligence was the proximate cause of the purchasers' loss. Judgment was entered against Title Guarantee holding it liable for the negligence of its agent, Brokers, and Brokers was, in turn, held liable to Title Guarantee for the amount of the judgment. Brokers then instituted the present proceedings to recover from St. Paul under the "errors and omissions" policy.*fn1 The district court rejected St. Paul's defense that the transaction was excluded by a specific clause of the policy, concluding that under the circumstances of this case the exclusionary clause did not apply. Brokers Title Co. v. St. Paul Fire & Marine Insurance Co., 466 F. Supp. 1174 (E.D.Pa.1979). St. Paul has appealed.
The primary question with which we are confronted is whether St. Paul as insurer is liable under the law of Pennsylvania for Brokers' negligence when it bound itself by the errors and omissions policy to pay "all sums which (Brokers) . . . shall become obligated to pay by reason of the liability . . . caused by any negligent act, error or omission" of Brokers, while at the same time providing in exclusion (G) of the policy that:
THIS POLICY DOES NOT APPLY:
(G) To claims based upon or arising out of handling or disbursement of funds.
The district court's findings of fact reveal that the policy was sold by a sub-agent of St. Paul, Eugene Murray, to Verne Mockler, the president of Brokers.*fn2 Murray went to Brokers' office to sell the errors and omissions policy. He read the coverage and the exclusions of the policy to Mockler, and although he read each exclusion aloud, he did not attempt to explain their effect to Mockler because Mockler asked no questions about them. The court also found
that Mr. Mockler was not aware of the effects of Exclusion G, nor did he understand them. That is, he was not aware that many activities of his company (those involving handling of funds) were, in St. Paul's opinion, not covered by the errors and omissions insurance policy.
Mr. Mockler understood the construction of a typical insurance policy. He understood that there is coverage and that there are exclusions from coverage in many and perhaps most policies. However, his experience with the St. Paul errors and omissions policy was his first exposure to such coverage; and, regrettably, he did not understand its terms.
The district court concluded as a matter of law that exclusion (G) was not ambiguous, and that Brokers as the insured must be considered to have been aware of the language of the exclusion to the same extent as if Mockler had read it himself. Id. at 1177. However, the court applied the rule of Hionis v. Northern Mutual Insurance Co., 230 Pa.Super. 511, 327 A.2d 363 (1974), and held that because the effect of exclusion (G) was not explained to Mockler, and because he did not understand its effect, coverage existed under the policy for the judgment against Brokers' negligent handling of the tax funds. 466 F. Supp. at 1179.
Both Hionis and Purdy v. Commercial Union Insurance Co., 50 Pa.D. & C.2d 230 (1970), the other case relied on by the district court, involved lay plaintiffs. Consequently appellant argues that because the purchaser in this case, Brokers, was experienced in insurance matters, the Hionis rule should not apply. We agree.
Fundamental principles of contract law are squarely at issue here; choosing, interpreting and applying the appropriate principle cannot be avoided by resort to fact finding. Many sins in the law have at times been swept under a jurisprudential rug in the guise of fact finding, but neither justice nor reason, neither public policy nor logic, compels us to do so here. When questions of law dominate uncontroverted material facts, resort to fact finding from a congeries of irrelevant evidence is unnecessary. Even if such data were to be considered, the fact finder is never permitted to draw inferences that run counter to probable human experience. We believe the trial court erred in the choice of law, in the interpretation of that law, and in its application to the uncontroverted material facts of this case. And were we to reach the point which we do not, we would conclude without difficulty that some of the facts found by the trial court were clearly erroneous.
Our basic disagreement with the district court concerns its attempt to structure a contract of adhesion in a relationship between Murray, a sub-agent of St. Paul, and Mockler, a title insurance broker and president of his own firm. Both Murray and Mockler were insurance professionals. Both dealt with insurance policies, one in the business of insuring against negligence, the other in insuring against real estate title defects. Both dealt with policies that contained exclusions or exceptions. Indeed, the documentary evidence in this case indicates that the title report that gave rise to liability, and thereby brought the St. Paul policy into play, consisted of three pages: one page contained a legal description of the real estate, the two remaining pages consisted of the exceptions (exclusions) that would appear "in the title insurance policy or policies to be issued unless removed." Appendix at 10a-12a.
Mockler testified that his business consisted of his wife and himself, that he would solicit real estate brokers and try to get orders for title insurance, that he would order a title report through a searching company and then close title, recording the various documents, discharging liens, and disbursing funds. In this latter regard he testified that in every settlement, funds had to be handled. It was for this reason that he purchased an errors and omissions policy. He stated:
The reason I purchased an Errors and Omissions Insurance Policy was to protect myself and my insurance company against any erroneous act of myself or my employees in handling of funds at settlement, sending out checks, or failing to record instruments. That was the sole purpose of buying this policy.
Although the district court took Mockler at his word, it specifically credited the testimony of Murray that he read aloud to Mockler, presumably word for word, the critical exclusion (G). When Murray read the exclusion to him, Mockler made no ...