Capital City Real Estate, LLC v. Certain Underwriters at Lloyd's London, Subscribing to Policy Number: Arte018240

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 14-1239
CAPITAL CITY REAL ESTATE, LLC,
Plaintiff - Appellant,
v.
CERTAIN UNDERWRITERS AT LLOYD’S LONDON, Subscribing to
Policy Number: ARTE018240,
Defendant - Appellee.
Appeal from the United States District Court for the District of
Maryland, at Baltimore. Marvin J. Garbis, Senior District
Judge. (1:13-cv-01384-MJG)
Argued: January 29, 2015 Decided: June 10, 2015
Before WILKINSON, GREGORY, and SHEDD, Circuit Judges.
Vacated and remanded with instructions by published opinion.
Judge Gregory wrote the opinion, in which Judge Wilkinson and
Judge Shedd joined.
ARGUED: Robert Lawrence Ferguson, Jr., FERGUSON, SCHETELICH
& BALLEW, PA, Baltimore, Maryland, for Appellant. Georgia S.
Foerstner, CLARK & FOX, Cherry Hill, New Jersey, for Appellee.
ON BRIEF: Ann D. Ware, FERGUSON, SCHETELICH & BALLEW, PA,
Baltimore, Maryland, for Appellant. John M. Clark, CLARK & FOX,
Cherry Hill, New Jersey, for Appellee.
GREGORY, Circuit Judge:
Capital City Real Estate, LLC (“Capital City”) initiated
this declaratory judgment action in the District of Maryland,
seeking a declaration that Certain Underwriters at Lloyd’s
London (“Underwriters”) were obligated to defend and indemnify
Capital City against a negligence lawsuit filed in the Superior
Court for the District of Columbia. The district court granted
summary judgment in favor of the Underwriters, concluding that
it had no duty to defend or indemnify Capital City. Because the
district court erred in granting summary judgment to the
Underwriters, we vacate and remand.
I.
Central to this dispute is the common wall shared by the
structures located at 55 Bryant Street, NW, Washington, DC (“55
Bryant Street”) and 57 Bryant Street, NW, Washington, DC (“57
Bryant Street”). 55 Bryant Street was owned by Leon Yates
(“Yates”) and insured by The Standard Fire Insurance Company
(“Standard Fire”). Capital City, a real estate development
company with its principal place of business in Washington, DC,
was operating as the general contractor for the renovation of 57
Bryant Street in 2008 and 2009.
Capital City subcontracted the foundation, structural, and
underpinning work for the 57 Bryant Street renovations to
2
Marquez Brick Work, Inc. (“Marquez”), a “corporation engaged in
the business of concrete, bricks, blocks, and foundation work
with its principal place of business located in Maryland.” J.A.
268. “The subcontract between Capital City and Marquez Brick
required Marquez Brick to indemnify Capital City for damages
caused by its [Marquez’s] work and further required Marquez
Brick to maintain certain general liability insurance naming
Capital City as an additional insured.” J.A. 269. Accordingly,
on November 17, 2008, the Underwriters issued an insurance
policy (the “Policy”) to Marquez, effective from November 17,
2008, through November 17, 2009. In December 2008, the
Underwriters also issued an Endorsement (the “Endorsement”) to
the Policy listing Capital City as an additional insured party
on the Policy. As relevant to this case, the Endorsement amends
the Policy to cover Capital City as an additional insured,
but only with respect to liability for . . . “property
damage” . . . caused in whole or in part by:
1. [Marquez’s] acts or omissions; or
2. The acts or omissions of those acting on
[Marquez’s] behalf;
in the performance of [Marquez’s] ongoing operations
for [Capital City in Washington, D.C.].
J.A. 109.
On June 9, 2009, during the course of Marquez’s work on the
underpinning of 57 Bryant Street, the common wall shared by 57
Bryant Street and 55 Bryant Street collapsed. Capital City’s
3
insurer sent a letter to the Underwriters notifying them of the
collapse, and tendering to the Underwriters “all claims that are
being or will be asserted by Mr. Yates and/or others” as a
result of the incident. J.A. 161. No response was received to
either the initial letter, or to several letters and emails
subsequently sent by counsel for Capital City.
On June 7, 2012, Standard Fire, as subrogee, filed suit
against 57 Bryant Street, NW Limited Partnership, Bryant St.,
LLC, and Capital City in the Superior Court for the District of
Columbia. Standard Fire alleges in its complaint (the
“underlying complaint”) that Capital City applied for and
obtained from the District of Columbia a building permit to
perform renovations at 57 Bryant Street. Standard Fire further
alleges that “[t]he plan submitted to the District of Columbia
did not detail the excavation details or any plans for providing
any underpinning support or other support to the common walls
and other structures of the premises.” J.A. 80. The underlying
complaint does not mention Marquez or explicitly seek any
damages for any of its acts or omissions. Rather, the complaint
attributes the June 9, 2009 collapse and resulting damage to 55
Bryant Street to negligence on the part of the named defendants.
J.A. 81 (“The failure of the Defendants to properly excavate and
support the structure located at 57 Bryant Street . . .
constitutes negligence in that they failed to comply with the
4
applicable standard of care while performing said
renovations.”). Standard Fire paid for the repairs per its
insurance policy with Yates, and requested $600,000 in damages,
plus attorney’s fees, costs, and interest.
Capital City responded in part by filing a third party
complaint against both Marquez and its owner, Feliciano Marquez.
Capital City alleges that its contract with Marquez requires
Marquez “to pay for defending and indemnify [Capital City]
against all claims for liability that were a result of or
partially resulting from Marquez’s breach of any term of the”
contract, and also requires “that if [Capital City] is sued and
the subject of the suit is [Marquez’s] work or the direct or
indirect result of it, [Marquez] shall indemnify [Capital City]
against all liabilities” and reimburse it for any damages or
fees. J.A. 89.
Thereafter, counsel for the Underwriters responded by email
and indicated that the tender of claims was under review. On
April 13, 2013, counsel for the Underwriters sent a letter to
counsel for Capital City denying coverage.
Capital City then filed this declaratory judgment action on
May 10, 2013 against the Underwriters in the District of
Maryland, seeking a declaration from the court that the
Underwriters have a duty to defend Capital City under the
Policy. The parties filed cross-motions for summary judgment,
5
and the district court ruled in favor of the Underwriters.
Capital City timely filed this appeal.
II.
Our review of a district court’s grant of summary judgment
is de novo. French v. Assurance Co. of Am., 448 F.3d 693, 700
(4th Cir. 2006). “Summary judgment is appropriate when there is
no genuine issue of material fact and the moving party is
entitled to judgment as a matter of law.” Id. Here, we apply
Maryland law because the Policy was delivered in Maryland and
this diversity action was filed in the District of Maryland.
Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496-97
(1941) (holding that a federal court exercising diversity
jurisdiction applies the choice of law principles of the state
where the federal court is located); Perini/Tompkins Joint
Venture v. Ace Am. Ins. Co., 738 F.3d 95, 100 (4th Cir. 2013)
(“In insurance contract disputes, Maryland follows the principle
of lex loci contractus, which applies the law of the
jurisdiction where the contract was made. For choice of law
purposes, a contract is made where ‘the last act is performed
which makes the agreement a binding contract. Typically, this
is where the policy is delivered and the premiums paid.’”
(citation omitted)).
6
Capital City advances two arguments on appeal. First, it
contends that the district court erred in concluding that the
Underwriters would have a duty to defend only if the underlying
complaint had alleged that Capital City was vicariously liable
for the actions of its subcontractor. Second, Capital City
argues that the district court should have made clear that, if
the Underwriters owe it a duty to defend, then Capital City is
entitled to recover expenses, including attorney’s fees.
III.
In determining whether an insurer has a duty to defend under
an insurance policy, Maryland courts apply the following test:
(1) what is the coverage and what are the defenses
under the terms and requirements of the insurance
policy? (2) do the allegations in the tort action
potentially bring the tort claim within the policy’s
coverage? The first question focuses upon the
language and requirements of the policy, and the
second question focuses on the allegations of the tort
suit. At times these two questions involve separate
and distinct matters, and at other times they are
intertwined, perhaps involving an identical issue.
St. Paul Fire & Marine Ins. Co. v. Pryseski, 438 A.2d 282, 285
(Md. 1981). We address the two steps of the test in turn.
A.
We first must determine the scope of coverage under the
Policy’s terms and conditions. Pryseski, 438 A.2d at 285. With
respect to interpretation of the Policy language and terms, we
7
note that, “[u]nlike the majority of other states, Maryland does
not follow the rule that insurance policies are to be most
strongly construed against the insurer.” Empire Fire & Marine
Ins. Co. v. Liberty Mut. Ins. Co., 699 A.2d 482, 494 (Md. 1997).
Rather, Maryland law applies ordinary contract principles to
insurance contracts. Id. “Nevertheless, under the general
principles of contract construction, if an insurance policy is
ambiguous, it will be construed liberally in favor of the
insured and against the insurer as drafter of the instrument.”
Id.
“If the policy’s language is clear and unambiguous, the
Court will assume the parties meant what they said. As with any
contractual dispute, we start with the relevant policy
provisions.” Perini/Tompkins, 738 F.3d at 101 (quotation marks
and ellipsis omitted); see also Prince George’s Cnty. v. Local
Gov’t Ins. Trust, 879 A.2d 81, 88 (Md. 2005) (“In interpreting
an insurance policy, as with any contract, the primary task of
the circuit court is to apply the terms of the policy itself.”).
As with other contracts, “we analyze the plain language of [an
insurance] contract according words and phrases their ordinary
and accepted meanings as defined by what a reasonably prudent
lay person would understand them to mean.” Kendall v.
Nationwide Ins. Co., 702 A.2d 767, 771 (Md. 1997). In so doing,
we read the Endorsement and the Policy together as a single
8
contract. Local Gov’t Ins. Trust, 879 A.2d at 88 (“In general,
the main insurance policy and an endorsement constitute a single
insurance contract, and an effort should be made to construe
them harmoniously.”). However, “[i]f the endorsement conflicts
with the main policy, the endorsement controls.” Id.
Here, the relevant portion of the Policy is the Endorsement
itself. The Endorsement in this case is the form provided by
the Insurance Services Office, Inc. (“ISO”) which “is the almost
exclusive source of support services in this country for
[commercial general liability] insurance.” Hartford Fire Ins.
Co. v. California, 509 U.S. 764, 772 (1993). It “develops
standard policy forms and files or lodges them with each State’s
insurance regulators; most [commercial general liability]
insurance written in the United States is written on these
forms.” Id. The Endorsement here, the CG 20 10 07 04 Form, was
copyrighted by the ISO in 2004. J.A. 109. It explicitly covers
Capital City as an additional insured for the 57 Bryant Street
renovation project, “but only with respect to liability for
. . . ‘property damage’ . . . caused in whole or in part by:
1. [Marquez’s] acts or omissions; or 2. The acts or omissions of
those acting on [Marquez’s] behalf.” J.A. 109.
The Maryland Court of Appeals has not construed the
Endorsement language presented in this case. However, the
language is quite clear that coverage is provided for Capital
9
City, as the additional insured, for “property damage . . .
caused in whole or in part by” Marquez. The Fifth Circuit has
construed the exact Endorsement language at issue here to mean
that an insurer has a duty to defend an additional insured “only
if the underlying pleadings allege that” the named insured, “or
someone acting on its behalf, proximately caused” the injury or
damage. Gilbane Bldg. Co. v. Admiral Ins. Co., 664 F.3d 589,
598 (5th Cir. 2011). Insurance law commentators have also
examined the language at issue and concluded that an additional
insured is covered where a named insured is at least partially
negligent. See, e.g., Scott C. Turner, Insurance Coverage of
Construction Disputes § 42:4 (2015) (stating that when the “ISO
issued revised versions of its additional insured endorsements”
in 2004, it “attempt[ed] to narrow coverage for additional
insureds” such that “for there to be insurance for the
additional insured . . . the named insured must be negligent at
least in part”). We thus conclude that the plain language of
the Endorsement provides for exactly what is says: coverage to
Capital City for property damage caused by Marquez, either in
whole or in part.
The Underwriters argue that the scope of coverage is
limited to Capital City’s vicarious liability for Marquez’s acts
or omissions. However, there is no mention of vicarious or
derivative liability in the Endorsement. As the Tenth Circuit
10
recognized in construing the language of the predecessor to the
CG 20 10 07 04 Form, “if the parties had intended coverage to be
limited to vicarious liability, language clearly embodying that
intention was available.” McIntosh v. Scottsdale Ins. Co., 992
F.2d 251, 255 (10th Cir. 1993) (original alterations omitted);
see also Am. Empire Surplus Lines Ins. Co. v. Crum & Forster
Specialty Ins. Co., No. Civ. H-06-0004, 2006 WL 1441854, at *7
(S.D. Tex. May 23, 2006) (construing the 2004 CG 20 10 07 04
Form and remarking that “nothing in the ‘whole or in part’
sentence of the Endorsement . . . expressly limits . . .
additional insured coverage to derivative or vicarious claims.
. . . The words ‘derivative’ and ‘vicarious’ are conspicuously
absent from the Endorsement”). Turner has observed that “[m]any
insurers maintain that the coverage provided to additional
insured is limited to the additional insured’s vicarious
liability for the acts or omissions of the named insured.”
Turner, Insurance Coverage of Construction Disputes § 42:4. But
he rightly notes that “[w]hile it is true that the additional
insured is covered for its vicarious liability stemming from the
named insured’s operations, the insurer’s attempt to limit
coverage to that alone ignores the language of the additional
insured endorsements.” Id.
Ultimately, it is the language of the Endorsement that must
control. See Perini/Tompkins, 738 F.3d at 101. Here, the
11
language of the Endorsement plainly lacks the vicarious
liability limitation that the Underwriters seek to impose. Even
if we were to view the Endorsement language as ambiguous, we
would be obligated to construe that ambiguity against the
Underwriters, see Empire Fire, 699 A.2d at 494, and to find that
the scope of the Endorsement extends to property damage caused
by Marquez, either in whole or in part, regardless of whether
the underlying complaint seeks to hold Capital City vicariously
liable for Marquez’s acts or omissions.
B.
Having determined the scope of the Endorsement, the Court
turns to the second question presented by the Pryseski test,
namely whether the “allegations in the tort action potentially
bring the tort claim within the policy’s coverage.” Pryseski,
438 A.3d at 285. As the Maryland Court of Appeals has stated,
“to give effect to the duty to defend where the allegations,
even if groundless, present claims both within and without the
policy coverage the rule in Maryland is that ‘the insurer still
must defend if there is a potentiality that the claim could be
covered by the policy.’” Continental Cas. Co. v. Bd. Of Educ.,
489 A.2d 536, 542 (Md. 1985) (quoting Brohawn v. Transamerica
Ins. Co., 347 A.2d 842, 850 (Md. 1975)); see also Baltimore Gas
& Elec. Co. v. Commercial Union Ins. Co., 688 A.2d 496, 505-06
(Md. Ct. Spec. App. 1997) (observing that the Maryland Court of
12
Appeals has held that “the duty to defend arises as long as the
plaintiff in a tort case alleges an ‘action that is potentially
covered by the policy, no matter how attenuated, frivolous, or
illogical that allegation may be.’” (quoting Sheets v. Brethren
Mut. Ins. Co., 679 A.2d 540, 543 (Md. 1996)).
Maryland courts generally look to the pleadings in the
underlying lawsuit to determine whether there is a potentiality
of coverage. Aetna Cas. & Sur. Co. v. Cochran, 651 A.2d 859,
863 (Md. 1995). While the Maryland Court of Appeals has “held
that an insurer may not use extrinsic evidence to contest
coverage if the tort suit complaint establishes a potentiality
of coverage,” it has set forth a different rule for an insured.
Id. at 863-64. Specifically, “where a potentiality of coverage
is uncertain from the allegations of a complaint, any doubt must
be resolved in favor of the insured.” Id. Moreover, “an
insured may establish a potentiality of coverage under an
insurance policy through the use of extrinsic evidence.” Id. at
866; see also Litz v. State Farm Fire & Cas. Co., 695 A.2d 566,
570 (Md. 1997) (“A potentiality of coverage is typically
established by the allegations in the tort plaintiff’s
complaint. Sometimes, however, extrinsic evidence may also be
used to establish a potentiality of coverage. When extrinsic
evidence, but not the allegations of the complaint, establish a
potentiality of coverage, the insured may rely on evidence
13
outside of the complaint.” (emphasis added) (citations
omitted)). The Maryland Court of Appeals has noted that its
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 a
potentiality of coverage under the insurance policies.”
Cochran, 651 A.2d at 866. However, “an insured cannot assert a
frivolous defense merely to establish a duty to defend on the
part of [its] insurer.” Id.
Here, the underlying complaint is silent as to the
involvement of Marquez. Indeed, Marquez is not named anywhere
in the complaint. However, Capital City has filed a third party
complaint against Marquez and its owner, and has introduced
extrinsic evidence that the collapse of the common wall between
55 Bryant Street and 57 Bryant Street was caused by Marquez.
Given that Standard Fire’s underlying complaint alleges that
“[t]he failure of the Defendants to properly excavate and
support the structure located at 57 Bryant Street” constituted
negligence “in that they failed to comply with the applicable
standard of care while performing” the 57 Bryant Street
renovations, J.A. 81, and given also that Marquez’s involvement
in those renovations is undisputed, it cannot be said that the
complaint does not seek to hold the named defendants liable for
property damage “caused in whole or in part” by Marquez.
14
Because the underlying complaint does not make clear that
Marquez conducted the foundation, structural, and underpinning
work that led to the collapse of the common wall, Capital City
is entitled to rely on its extrinsic evidence to establish those
facts and to thereby establish a potentiality of coverage. It
was error for the district court to conclude otherwise.
The Underwriters urge us to follow the rule set forth in
the Maryland Court of Special Appeals case, Baltimore Gas, which
held that an insurer had no duty to defend where the plaintiffs
in the underlying tort lawsuit dismissed their claims against
all of the defendants except for the general contractor. 688
A.2d at 511. But nothing in the Baltimore Gas case contradicts
our holding here. In that case, the plaintiffs in the
underlying lawsuit sued a general contractor, a subcontractor,
and others for injuries suffered after the plaintiffs’ car fell
into an excavation pit. The court observed that the plaintiffs
in the underlying lawsuit “[u]ltimately . . . chose to pursue
their claim only against BGE[, the general contractor], on the
theory that BGE was solely responsible for the occurrence” at
issue in the case “because of its own negligence.” Id. at 507.
The tort plaintiffs thus “expressly redefined their theory of
BGE’s liability.” Id. The court stated that “the tort
plaintiff’s [sic] allegations are central to the determination
of coverage.” Id. at 510 (original emphasis). It concluded:
15
BGE cannot compel [the insurer] to provide it with a
defense based on claims which, although at one time
asserted by the [plaintiffs in the underlying
lawsuit], were no longer asserted, because such claims
‘will not be generated at trial.’ The fact that the
plaintiffs never formally amended their complaint to
restate the allegations so as to reflect their revised
theory of BGE’s liability is of no moment.
Id. at 511. But crucial to the court’s holding was that
discovery showed that the general contractor – and not its
subcontractor – had the duty to fill the excavation pit into
which the plaintiffs’ car fell. While it was undisputed that
the subcontractor had been engaged to dig the pit, the evidence
also showed that BGE was responsible for filling the pit. 688
A.2d at 507-09. The plaintiffs chose to pursue their claims
only against BGE for its negligent failure to fulfill its duty,
leading the Baltimore Gas court to conclude that the insurer no
longer had a duty to defend.
By contrast, there is not such a clean delineation of which
actor owes which duty in this case, in part because the
underlying complaint fails to even mention Marquez. But the
underlying complaint in this case does not affirmatively present
a claim that falls outside the scope of the Policy. * Rather, it
*
It is for this reason that the Underwriters’ and the
district court’s reliance on G.E. Tignall & Co., Inc. v.
Reliance Nat’l Ins. Co., 102 F. Supp. 2d 300 (D. Md. 2000) is
misplaced. As an initial matter, to the extent that the Tignall
decision suggests that there is no potentiality of coverage
merely because the underlying lawsuit does not mention the named
(Continued)
16
clearly seeks recovery for property damage that was “caused in
whole or in part” by the failure to use the appropriate standard
of care in performing the renovations. Although Marquez is not
mentioned as performing the renovation work that led to the
collapse of the wall, Capital City, as the additional insured,
is entitled to introduce Marquez’s involvement by way of
extrinsic evidence. Litz, 695 A.2d at 570. Indeed, the
Maryland Court of Appeals has stated that
insured, 102 F. Supp. 2d at 307, it incorrectly interprets
Maryland law. See, e.g., Cochran, 651 A.2d at 866; Litz, 695
A.2d at 570. Indeed, the Tignall court explicitly recognized
that “[e]xtrinsic evidence may be used by the insured to
establish the potentiality of coverage.” Tignall, 102 F. Supp.
2d at 307. Second, we note that in holding that an underlying
tort plaintiff must plead a case of vicarious liability, id.,
the Tignall court was interpreting the predecessor to the CG 20
10 07 04 Form at issue in this case. As we held above, the
plain language of the Endorsement presented here does not
contemplate a restriction of coverage to claims of vicarious
liability. Finally, we note that the underlying complaint in
Tignall, unlike the underlying complaint in this case, stated
that the plaintiff “avers that all of these damages were and are
due solely to the wrongful and negligent acts and omissions of
the Defendants.” Tignall, 102 F. Supp. 2d at 307. It is worth
noting that the allegations here are not framed to affirmatively
exclude the negligent acts or omissions of parties other than
the named defendants. Even so, such allegations would not
necessarily resolve the question of potentiality of coverage
because, again, Maryland has refused to foreclose an insured
“from receiving the defense to which [it] is entitled merely
because the complaint fails to plead allegations that establish
a potentiality of coverage under the insurance policy.”
Cochran, 651 A.2d at 866; see also Litz, 695 A.2d at 570
(permitting an insured to introduce extrinsic evidence where a
complaint lacks allegations to establish potentiality of
coverage).
17
[t]here is an important difference between the duty to
defend a lawsuit that affirmatively makes a claim that
falls outside of the coverage of the policy, and the
duty to defend a lawsuit that fails to allege the
elements of a cause of action that if properly alleged
and proven would be within the coverage of policy.
Sheets, 679 A.2d at 544-45. And as noted above, Maryland law
rejects the notion that an insured would be “foreclosed from
receiving the defense to which [it] is entitled merely because
the complaint fails to plead allegations that establish a
potentiality of coverage under the insurance polic[y].”
Cochran, 651 A.2d at 866.
The Underwriters contend that Standard Fire seeks in the
underlying complaint to recover damages only on the theory that
Capital City failed to submit appropriate construction plans to
the District of Columbia. If the Underwriters were correct,
perhaps this would be a different case. However, the underlying
complaint faults the named defendants for improperly excavating
and supporting 57 Bryant Street and for failing “to comply with
the applicable standard of care while performing said
renovations.” J.A. 81 (emphasis added). It is absurd to think
that such allegations rest solely on the submission of
construction plans rather than additionally seeking damages for
negligence in actually conducting the construction and
renovation work. And again, it is undisputed that Marquez did
the foundation work during the course of the renovations. We
18
therefore find that there is a potentiality of coverage. The
Underwriters have a duty to defend Capital City in the
underlying tort lawsuit.
IV.
Capital City argues that the district court should have
made clear that, if the Underwriters owe it a duty to defend,
then Capital City is entitled to recover expenses, including
attorney’s fees. The district court did not address this issue
below, and the Underwriters did not respond to Capital City’s
expenses and fees arguments here. We decline to address the
question on appeal, and instead will give the district court the
opportunity to resolve the issue in the first instance.
V.
For the foregoing reasons, we conclude that the scope of
coverage under the Endorsement extends beyond acts or omissions
of Marquez for which Capital City was vicariously liable. The
plain language of the Endorsement creates a duty to defend
Capital City where Capital City is being held liable for the
acts or omissions of Marquez. Moreover, we find that the
allegations in the underlying complaint create a potentiality of
coverage. Accordingly, we vacate the district court’s order
granting summary judgment to the Underwriters and remand this
19
case for entry of summary judgment in favor of Capital City and
a determination of whether Capital City is entitled to expenses
and attorney’s fees.
VACATED AND REMANDED WITH INSTRUCTIONS
20