By Whitney Pakalka
The Fourth Circuit issued a published opinion on June 10, 2015 in the civil case of Capital City Real Estate, LLC v. Certain Underwriters at Lloyd’s London. Capital City Real Estate (Capital City) filed a declaratory action against Underwriters at Lloyd’s London (Underwriters) seeking a declaration that the Underwriters had a duty to defend Capital City in an underlying tort action. Finding that the insurance policy covered Capital City as an additional insured in the underlying tort claim, the Fourth Circuit reversed the District Court of Maryland’s grant of summary judgment in favor of the Underwriters.
The Insurance Policy and Underlying Tort Claim
Capital City was the general contractor on a renovation project in Washington D.C., a project that required excavation, structural, and underpinning work. Capital City hired Marquez Brick Work, Inc. (Marquez) as a subcontractor to complete the foundational, structural, and underpinning work. Capital City and Marquez entered into a sub-contract that required Marquez to indemnify Capital City for damage caused by Marquez’s work and to maintain general liability insurance with a policy that named Capital City as an additional insured. Underwriters issued an insurance policy to Marquez, and shortly thereafter issued an endorsement amending the policy to provide coverage to Capital City, but only with respect to liability caused, in whole or in part, by the acts or omissions of Marquez.
After the policy became effective, a support wall at the site collapsed and damaged the adjacent property, which was owned by Leon Yates and insured by Standard Fire Insurance Company (Standard Fire). Standard Fire filed suit against Capital City and others, but made no mention of Marquez in the complaint. The complaint alleged that Capital City submitted plans for a building permit that did not detail the excavation or the plans for support to the underpinnings or common walls of the project. The complaint attributed the wall’s collapse to the negligence of Capital City. Capital City filed a third-party suit against Marquez, alleging that the subcontract required Marquez to defend and indemnify Capital City against claims for liability where the subject of the suit was Marquez’s work.
After the Underwriters denied coverage, Capital City filed a declaratory judgment action in the District Court of Maryland, seeking a declaration that Underwriters have a duty to defend the company in the underlying tort action. Both parties filed cross-motions for summary judgment, and the District Court ruled in favor of the Underwriters.
Choice of Law and the Test for Determining an Insurer’s Duty to Defend
The Fourth Circuit determined that Maryland law applied because the appeal stems from a diversity action filed in the District of Maryland and because Maryland follows the principle of lex loci contractus. This principle requires the application of the state’s law where the contact was made, as indicated by where the ultimate act occurred that made the contract binding. Perini/Tompkins Joint Venture v. Ace Am. Ins. Co., 738 F.3d 95, 100 (4th Cir. 2013). Here, the ultimate act that made the policy binding was its delivery, which occurred in Maryland.
To determine whether the insurer has a duty to defend an insured in an underlying action, Maryland courts apply the two-part test articulated in St. Paul Fire & Maritime Insurance Co. v. Pryeski, 438 A.2d 282 (Md. 1981). The test first considers the scope of the coverage and the defenses available under the policy based on the language and requirements of the policy, and then considers whether the underlying tort allegations for which coverage is sought potentially bring the claim within the policy’s coverage. Id. at 285.
The Fourth Circuit noted that Maryland does not follow the traditional rule that insurance policies are to be construed against the insured, but instead follows ordinary contract principles. Empire Fire & Marine Ins. Co. v. Liberty Mut. Ins. Co., 699 A.2d 482, 494 (Md. 1997). One such principle is that a policy is to be construed against the drafter, in this case, Underwriters. Id. The Court articulated the well-established principle that when a contract’s terms are unambiguous, they must be given their ordinary meaning. Kendall v. Nationwide Ins. Co., 702 A.2d 767, 76 (Md. 1997).
In Maryland, an insurer must defend against the underlying claim if there is potentiality that the claim could be covered by the policy. Cont’l Cas. Co. v. Bd. of Educ., 489 A.2d 536, 542 (Md. 1985). To determine whether there is potentiality of coverage, courts generally look to the pleadings, but the insured may use extrinsic evidence to demonstrate potentiality where the allegations of the complaint are unclear. Aetna Cas. & Sur. Co. v. Cochran, 651 A.2d 859, 863, 866 (Md. 1995). This policy ensures that an insured “is not foreclosed from receiving the defense to which it is entitled merely because the complaint fails to plead allegations that establish potentiality of coverage.” Id.
The Fourth Circuit Determined that the Underlying Tort Claim was Within the Scope of Coverage and that the Underwriters Owed a Duty to Defend Capital City
The Court found that the relevant part of the policy was based upon a form supplied by the Insurance Services Office (ISO), which develops standard policy forms that it files with each state’s insurance regulators. Although the Maryland appellate courts have not addressed the language at issue here, the Fourth Circuit looked to interpretations by the Fifth Circuit Court of Appeals as well as by insurance law commentators in deciding that the language of the policy covers Capital City in the underlying tort claim. These sources both teach that the language of a policy creates a duty to defend if the underlying claim alleges that the named insured or one acting on its behalf caused the damage. In this case, Underwriters argued that the policy only covered Capital City against vicarious or derivative liability, but the Fourth Circuit rejected this argument because the policy omitted any such limitation. The Court concluded that the plain language “provides for exactly what it says: coverage to Capital City for property damage caused by Marquez.” The Court further found that, even if construed as ambiguous, the policy covered Capital City for property damage caused in whole or in part by Marquez because the Court is obligated to construe the policy against the Underwriters, as the drafters of the contract.
The Fourth Circuit next considered whether the underlying allegations brought by Standard Fire potentially brought the tort claim within the coverage of the policy. The Court found that although the underlying complaint was silent about Marquez’s involvement in the wall’s collapse, it alleged that Capital City negligently failed to properly excavate and support the structure. It was, however, undisputed that Marquez was involved in the excavation and support work. Additionally, Capital City filed a third-party action against Marquez and also proffered extrinsic evidence to demonstrate that Marquez caused the wall’s collapse. Underwriters contended that the underlying complaint sought damages on the theory that Capital City failed to submit appropriate construction plans in its application for a building permit. The Fourth Circuit found that it would be “absurd to think that such allegations rest solely on the submission of construction plans,” and not on negligence in the actual construction work. The Court found that there is potentiality of coverage and that the Underwriters have a duty to defend Capital City in the underlying tort action.
Grant of Summary Judgment Vacated and Remanded
The Fourth Circuit held that the policy coverage extended beyond the acts or omissions of Marquez for which Capital City was vicariously liable, and covered the underlying tort claim. It further concluded that the underlying tort complaint created a potentiality of coverage. The Court therefore reversed the grant of summary judgment and remanded for a determination of whether Capital City is entitled to recover its expenses, including attorney’s fees.