On August 22, 2018, in Encompass v Stone Mansion, the United States Court of Appeals for the Third Circuit (“Third Circuit”) filed a precedential decision holding an insurer is permitted to file an action for contribution against a licensee that allegedly serves a visibly intoxicated customer who causes injuries to a third-party. In holding Pennsylvania’s Dram Shop law is designed to protect society from the negligent service of alcohol, the Third Circuit rejected a licensee’s claim that the Dram Shop law precludes an insurer from seeking contribution on behalf of its insured.

The underlying case arose out of a tragic car crash that killed the intoxicated driver, who was allegedly overserved alcohol at Stone Mansion Restaurant Incorporated (“Stone Mansion”), and seriously injured the sole passenger. The passenger sued the driver’s estate for her injuries claiming the accident occurred because the driver had been driving while intoxicated. The driver’s estate then tendered its defense to Encompass Insurance Company (“Encompass”), the vehicle’s liability insurer. Ultimately, Encompass and the passenger entered a settlement agreement, and the passenger released all of her claims against all possible defendants, including Stone Mansion, to Encompass.

Encompass then brought an action in Pennsylvania state court alleging: (1) it stood in the shoes of the insured [the driver’s estate]; (2) Stone Mansion served alcohol to the driver while he was visibly intoxicated; (3) “[u]nder Pennsylvania’s Dram Shop law, a business or individual who serves alcohol to a visibly intoxicated person is legally responsible for any damage that person might cause”; and (4) Stone Mansion, as a joint tortfeasor under the Uniform Contribution Among Tort-feasors Act (“UCATA”), was liable to Encompass for contribution.

Although, Encompass objected, the action was removed to the United States District Court for the Western District of Pennsylvania. Once in District Court, Stone Mansion filed a motion to dismiss the action under Federal Rule of Civil Procedure 12(b)(6) – ultimately, the District Court granted Stone Mansion’s motion with prejudice based on “the plain, unambiguous reading of” Pennsylvania’s Dram Shop law. Encompass appealed.

The Third Circuit faced two issues on appeal: (1) whether the District Court erred in denying Encompass’ motion to remand the matter to the Pennsylvania state trial court; and (2) whether the District Court erred in dismissing the matter.

While the Third Circuit held the case was properly removed to federal court, it ruled the District Court erred in granting Stone Mansion’s motion to dismiss.

Specifically, the Third Circuit held that the UCATA establishes that “[t]he right of contribution exists among joint tort-feasors” and that a “joint tort-feasor who enters into a settlement with the injured person is not entitled to recover contribution from another joint tort-feasor whose liability to the injured person is not extinguished by the settlement.” The Third Circuit determined the Dram Shop law only permitted a third-party to recover for injuries sustained due to a customer of the licensee, if the licensee served alcohol to that customer when the customer was visibly intoxicated. Nevertheless, the Third Circuit noted equity was an important consideration in the matter and that nothing in the Dram Shop law shields licensees from responsibility for contribution among tortfeasors for harm caused to protected third-parties.

Further, while Encompass was not the type of third-party envisioned for protection under the Dram Shop law, the Third Circuit held that because Encompass’ settlement agreement with the passenger extinguished Stone Mansion’s potential liability to the passenger, Encompass was entitled to pursue a claim of contribution against Stone Mansion under UCATA. In finding Encompass presented a distinct claim for contribution under UCATA, it held that the District Court erred in dismissing the case based on the Dram Shop law.

Thanks to Lauren Berenbaum for her contribution to this post. Please email Vito A. Pinto for more information.