CX Reinsurance v. Johnson

CX Reinsurance Company Limited and Liberty Mutual Mid-Atlantic Insurance Company
v. Devon S. Johnson, et al., No. 47, September Term, 2021. Opinion by Biran, J.
INSURANCE – GENERAL LIABILITY INSURANCE POLICIES – INTENDED
BENEFICIARIES – VESTING OF RIGHTS OF TORT CLAIMANTS – Petitioners
are insurance companies (the “Insurers”) that issued commercial general liability policies
(the “Policies”) to several Baltimore residential landlords (the “Landlords”) that included
coverage for bodily injuries resulting from lead paint exposure at the Landlords’ rental
properties. After allegedly discovering material misrepresentations in the Landlords’ initial
policy applications, one of the Insurers filed contract rescission actions against the
Landlords. Eventually, those rescission cases were settled. Under the terms of the
settlements, the coverage for lead paint-related losses was substantially reduced or, in some
instances, completely eliminated. Respondents are tort claimants (the “Claimants”) who
allege that they suffered bodily injuries as a result of their exposure to lead paint while
residing in the Landlords’ rental properties. The Court of Appeals held that the relevant
provisions of the Policies make clear that those Claimants who do not hold final judgments
against the Landlords (and who have not entered into settlement agreements with the
Landlords, with the Insurers’ approval) are not intended beneficiaries of the Policies. No
Maryland statute, regulation, or current public policy overrides the terms of the Policies
such as to make all tort claimants intended beneficiaries of general liability insurance
policies. The Claimants who did not have final judgments against their Landlords prior to
the settlements of the rescission cases do not have the right to enforce the pre-settlement
terms of the Policies, provided the settlements were made in good faith, rather than being
collusive. Under the terms of the Policies, those Claimants who obtained final judgments
before the settlements of the rescission cases became intended beneficiaries of the Policies
as of the date they obtained their judgments in the trial court and, therefore, have the right
to enforce the pre-settlement terms of the Policies.
Circuit Court for Baltimore City IN THE COURT OF APPEALS
Case No. 24-C-18-001930
Argued: April 4, 2022
OF MARYLAND
No. 47
September Term, 2021
CX REINSURANCE COMPANY LIMITED
AND LIBERTY MUTUAL MID-ATLANTIC
INSURANCE COMPANY
v.
DEVON S. JOHNSON, ET AL.
*Getty, C.J.
Watts
Hotten
Booth
Biran
Harrell, Glenn T., Jr.
(Senior Judge, Specially Assigned)
McDonald, Robert N.
(Senior Judge, Specially Assigned),
JJ.
Opinion by Biran, J.
Filed: August 29, 2022
Pursuant to Maryland Uniform Electronic Legal
Materials Act
*Getty, C.J., now a Senior Judge, participated in the
(§§ 10-1601 et seq. of the State Government Article) this document is authentic.
hearing and conference of this case while an active
2022-08-29 member of this Court. After being recalled pursuant
15:21-04:00
to Md. Const., Art. IV, § 3A, he also participated in
the decision and adoption of this opinion.
Suzanne C. Johnson, Clerk
For many years, CX Reinsurance Company Limited and its predecessor entity
(“CX”), in combination with Liberty Mutual Mid-Atlantic Insurance Company and its
predecessor entity (“Liberty Mutual”), issued commercial general liability policies (the
“Policies”) to several Baltimore residential landlords (the “Landlords”) that included
coverage for bodily injuries resulting from lead paint exposure at the Landlords’ rental
properties. After allegedly discovering material misrepresentations in the Landlords’ initial
policy applications, CX filed contract rescission actions against the Landlords in 2015.
Eventually, CX and the Landlords settled the rescission cases. Under the terms of the
settlements, the coverage for lead paint-related losses was substantially reduced or, in some
instances, completely eliminated.
CX and Liberty Mutual (collectively, the “Insurers”) are the Petitioners in this case.
The Respondents are 15 tort claimants (the “Claimants”) who allege that they suffered
bodily injuries as a result of their exposure to lead paint while residing in the Landlords’
rental properties. The majority of the Claimants had not obtained final judgments against,
or entered into settlements with, the Landlords before CX and the Landlords settled the
rescission cases.
In the Circuit Court for Baltimore City, the Claimants filed suit against the Insurers
and the Landlords, seeking a declaration that: (1) the Claimants are “intended third-party
beneficiaries” of the Policies; and (2) the settlements between CX and the Landlords do
not modify or affect the insurance proceeds available under the Policies to indemnify the
Landlords with respect to judgments obtained by the Claimants against the Landlords. The
circuit court ruled that the Claimants are intended beneficiaries of the Policies and granted
summary judgment in the Claimants’ favor. The Court of Special Appeals affirmed.
As discussed below, the relevant provisions of the Policies make clear that those
Claimants who do not hold final judgments against the Landlords (and who have not
entered into approved settlement agreements with the Landlords) are not the primary
parties in interest under the Policies. No Maryland statute, regulation, or public policy
recognizes tort claimants who do not hold judgments against insureds as intended
beneficiaries of general liability insurance policies. That being the case, the language of
the Policies controls here. To the extent the Claimants do not hold judgments against, and
have not entered into approved settlement agreements with, the Landlords, they are not
intended beneficiaries of the Policies. Therefore, assuming that they eventually do obtain
judgments against, or enter into settlements with, their Landlords, those Claimants will not
have the right to enforce the terms of Policies as they existed prior to the rescission case
settlements, provided that those settlements were the product of good-faith, non-collusive
negotiations. Those Claimants who obtained final judgments against their Landlords prior
to the settlements of the applicable rescission cases may enforce the pre-settlement terms
of the Policies.
2
I
Background
As stated above, the circuit court granted the Claimants’ motion for summary
judgment. In the light most favorable to the Insurers,1 the record reflects the following:
A. The Policies
Beginning in 1997, the Landlords submitted applications to CX to obtain
commercial general liability insurance policies. The applications included Question 16, in
which CX asked whether “the Insured [has] ever had any lead paint violations in the
building(s)?” Each of the Landlords answered “No” to this question on the application
itself or, if they left that question blank, they allegedly otherwise provided CX with a
negative response to that question. Based on these negative responses, CX issued the
Policies, which included coverage relating to bodily injuries resulting from exposure to
lead-based paint at the Landlords’ covered properties during the policy term. Specifically,
the Policies provided that
we[2] will pay those sums that the Insured becomes legally obligated to pay
as damages because of “bodily injury” or “property damage” arising out of
the Ingestion, Inhalation, absorption of, or exposure to lead, lead-paint or
other lead-based products of any kind, form or nature whatsoever to which
the insurance provided by this endorsement applies. We will have the right
and duty to defend any “suit” seeking those damages. We may at our
1
See, e.g., Rossello v. Zurich Am. Ins. Co., 468 Md. 92, 103 (2020) (when analyzing
a grant of summary judgment, an appellate court “review[s] the record in the light most
favorable to the nonmoving party and construe[s] any reasonable inferences that may be
drawn from the facts against the moving party”) (internal quotation marks and citation
omitted).
In the Policies, “we” or “us” referred to the Insurers, and “you” referred to the
2
“Named Insureds” (as relevant here, the Landlords).
3
discretion investigate any “occurrence” and settle any claim or “suit” that
may result.
Included in the Policies was a “Schedule of Named Insureds,” identifying the first
Named Insured as well as other Named Insureds and identifying the insured properties in
a “Schedule of Locations.” The Policies also contained a “Changes” provision stating:
This policy contains all the agreements between you and us concerning the
insurance afforded. The first Named Insured shown in the Declarations is
authorized to make changes in the terms of this policy with our consent. This
policy’s terms can be amended or waived only by endorsement issued by us
and made a part of this policy.
The Policies also included a “Cancellation” provision allowing CX or the first Named
Insured to cancel the policy. Nothing in the Policies required CX or the first Named Insured
to obtain the consent of any other Named Insured or any other person or entity before
exercising the right of cancellation or agreeing to a change in terms.
In addition, the policies included a “Legal Action Against Us” provision, stating
that:
No person or organization has a right under this Coverage Part:
a. To join us as a party or otherwise bring us into a “suit” asking for damages
from an insured; or
b. To sue us on this Coverage Part, unless all of its terms have been fully
complied with.
A person or organization may sue us to recover on an agreed settlement or
on a final judgment against an insured obtained after an actual trial; but we
will not be liable for damages that are not payable under the terms of this
Coverage Part or that are in excess of the applicable limit of insurance. An
agreed settlement means a settlement and release of liability signed by us,
the insured and the claimant or the claimant’s legal representative.
4
For lead paint claims, the Policies purported to cover up to $1,000,000 for any one
“occurrence” and, depending on the policy, up to $1,000,000 or $2,000,000 in the
aggregate. The Insurers continually renewed the Policies for more than a decade.3
B. The Change in the Legal Landscape Regarding Liability for Lead-Paint Claims
In 1994, the Maryland General Assembly enacted the Reduction of Lead Risk in
Housing Act, which, among other things, effectively placed a $17,000 cap on lead-related
personal injury compensation by providing immunity from suit to owners of “affected
properties” who made “qualified offers” of up to $17,000 to persons “at risk” of ingesting
lead at the properties. H.B. 760, 1994 Leg., 408th Sess. (Md. 1994). Based, at least in part,
on this recently adopted legislation, the Insurers decided to offer their commercial general
liability insurance products to the Landlords. While the Policies on paper provided for up
to $1,000,000 in coverage per claim of bodily injury resulting from exposure to lead paint,
the Landlords’ liability for each such claim effectively was capped at $17,000.
The landscape relating to lead-paint claims changed with this Court’s 2011 decision
in Jackson v. Dackman Co., 422 Md. 357 (2011). In that case, we held that the immunity
provisions in the Reduction of Lead Risk in Housing Act violated Article 19 of the
Maryland Declaration of Rights. Id. at 382-83. As a result, the Insurers’ potential exposure
for lead-related personal injury claims under the Polices increased substantially.
3
Beginning in 1999, CX’s underwriting agent, Continental Coverage Corporation
(“CCC”), issued the renewal policies to the Landlords on behalf of Liberty Mutual. Under
a “Fronting Arrangement,” CCC made the underwriting decisions with respect to the
Policies issued by Liberty Mutual, and CX was responsible for the administration and
payment of covered claims.
5
C. The Rescission Actions
In 2015, CX filed actions against the Landlords in the United States District Court
for the District of Maryland, seeking recission of the Policies. Among other theories, CX
claimed that the Landlords had made material misrepresentations in their initial
applications for insurance by falsely answering Question 16 concerning prior “lead paint
violations in the building(s)[.]” According to CX’s Complaints, prior to the Landlords
submitting their applications, the Baltimore Department of Health had cited the Landlords
and/or other Named Insureds for lead paint violations in numerous buildings included on
the Policies’ Schedules of Locations. CX further alleged that, if the Landlords had
truthfully answered Question 16, CX would not have issued the Policies.
Over the next several years, CX and the Landlords litigated the various rescission
cases. Eventually, the parties entered into settlements to resolve CX’s claims. Six of the
settlements resulted in amendments to the Policies that reduced, but did not fully eliminate,
coverage; three of the agreements resulted in mutual rescission of the underlying policies
altogether.
D. This Litigation
In April 2018, one of the Claimants, Devon S. Johnson, filed a Complaint for
Declaratory Judgment against his former Landlord and CX in the Circuit Court for
Baltimore City. As the litigation progressed, more Claimants joined the action, and their
former Landlords, as well as Liberty Mutual, were added as defendants.
The operative complaint in the case is the Third Amended Complaint for
Declaratory Judgment, which the Claimants filed in June 2019. The Claimants allege that
6
they are former residents of insured properties owned by the Landlords, and that they were
damaged as a result of their exposure to lead paint existing at those properties. They further
allege that they were not parties to the agreements between CX and the Landlords that
settled CX’s rescission cases, and that they did not consent to the purported modifications
and rescissions of the Policies. The Claimants sought a declaration that, among other
things, they are “intended third party beneficiaries” of the Policies, and that the settlements
between CX and the Landlords do not operate to reduce the applicable policy limits of the
Policies with respect to themselves or to “any other claimant who has vested rights” in the
Policies.
Of the 15 Claimants, three (Devon Johnson, Chauncey Liles, and Shyliyah Streeter)
obtained judgments against their Landlords for lead paint-related injuries prior to the
settlement of the applicable rescission actions between CX and the Landlords.4
The parties filed cross-motions for summary judgment. After conducting a hearing,
the circuit court granted the Claimants’ motion for summary judgment and denied the
Insurers’ motions for summary judgment. The court ruled that: (1) the Claimants “are third-
party beneficiaries of the Policies”; (2) the Claimants “have vested rights in the Policies as
they existed before being rescinded by agreement or modified pursuant to the Rescission
Settlement Agreements between [CX] and the Landlord Defendants”; and (3) the
“Rescission Settlement Agreements do not affect [the Claimants’] vested rights in the
4
A fourth Claimant, Lea Gardner, obtained a final judgment against her former
Landlord on January 24, 2019. The record reflects that CX and Ms. Gardner’s former
Landlord settled their rescission case on or about August 16, 2016.
7
Policies, and the Rescission Settlement Agreements are ineffective as to [the
Claimants]….”
The Insurers appealed, and the Court of Special Appeals affirmed the judgment of
the circuit court. CX Reinsurance Co. Ltd. v. Johnson, 252 Md. App. 393 (2021). The Court
of Special Appeals concluded that “injured tort claimants are intended third-party
beneficiaries of liability insurance policies.” Id. at 414. The court rejected the notion “that
to be an intended third-party beneficiary of an insurance policy, the injured party must first
obtain a judgment or execute a settlement agreement with a covered insured.” Id. at 415.
The intermediate appellate court further held that the Claimants “obtained vested rights in
[the] Policies when they suffered their injuries.” Id. at 426. That being the case, “the
Insurers and [L]andlords could not subsequently modify [the Policies] pursuant to the
Rescission Settlement Agreements.” Id.
The Insurers filed a petition for writ of certiorari with this Court, which we granted.
CX Reinsurance Co. Ltd. v. Johnson, 476 Md. 583 (2021). We combine the three questions
the Insurers asked us to review into one: Did the trial court properly grant summary
judgment to the Claimants on the ground that they are intended beneficiaries of the
Policies?5
5
The Insurers sought review of these questions:
(1) Whether the [Court of Special Appeals] erred in refusing to interpret
insurance policies like other contracts, concluding that “sound public
policy dictates that liability insurance policies should be construed to
protect injured tort claimants” notwithstanding their terms?
8
II
Standard of Review
Because “[t]he question of whether a trial court’s grant of summary judgment was
proper is a question of law,” this Court reviews it de novo, without deference to the
decisions of the lower courts. Rossello v. Zurich Am. Ins. Co., 468 Md. 92, 102 (2020)
(internal quotation marks and citations omitted). “In reviewing a grant of summary
judgment …, we independently review the record to determine whether the parties properly
generated a dispute of material fact and, if not, whether the moving party is entitled to
judgment as a matter of law.” Id. at 102-03 (internal quotation marks and citations omitted).
“We review the record in the light most favorable to the nonmoving party and construe any
reasonable inferences that may be drawn from the facts against the moving party.” Id. at
103 (internal quotation marks and citation omitted).
(2) Whether the [Court of Special Appeals] erred in holding that all
claimants, who have asserted or will assert claims, are intended
beneficiaries of insurance policies, with vested interests in those
policies from the date of their alleged injuries, and have the same
rights under those policies as claimants, who have obtained judgments
or entered into settlements?
(3) Whether the [Court of Special Appeals] erred in holding that an
insured and its insurer cannot resolve litigation by entering a
settlement, in good faith, that modifies or reduces insurance coverage
without the consent of all current and future tort claimants?
9
III
Discussion
The Claimants maintain that the Insurers and the Landlords did not have the power
to reduce or eliminate coverage under the Policies to the detriment of the Claimants. The
parties agree that the validity of that contention depends, in the first instance, on whether
the Claimants are “intended beneficiaries” of the Policies or, instead, whether they are
“incidental beneficiaries.” If the Claimants are not intended beneficiaries, but merely
incidental beneficiaries, then they have no vested rights in the Policies.
According to the Insurers, the Policies do not manifest any intention to make the
Claimants the primary parties in interest until they either hold a final judgment against their
Landlords or have entered into an approved settlement with their Landlords. The Insurers
contend that the Policies are designed to protect the financial interests of the Landlords in
exchange for the payment of premiums to the Insurers. Further, the Insurers contend that
no Maryland statute, regulation, or public policy dictates that tort claimants are intended
beneficiaries of general liability insurance policies prior to the entry of a final judgment
against an insured. Therefore, the language of the Policies is dispositive and requires this
Court to conclude that the Claimants are not intended beneficiaries of the Policies to the
extent they have not obtained final judgments against, or entered into approved settlements
with, their Landlords. Rather, they are incidental beneficiaries of the Policies, and are
subject to changes in the Policies that result from good-faith litigation settlements between
the Insurers and the Landlords.
10
The Claimants argue that prior Maryland cases, as well as persuasive out-of-state
authority, compel the conclusion that tort claimants are intended beneficiaries of general
liability insurance policies, and that they have vested rights in such policies from the
moment they are injured. As such, they argue, CX and the Landlords could not rescind or
modify the coverages that were contained in the Policies to the detriment of the Claimants
and others similarly situated.
For the reasons stated below, we agree with the Insurers.
A. Governing Principles
1. Construction of Insurance Policies
“Maryland does not follow the rule, adopted in many jurisdictions, that an insurance
policy is to be construed most strongly against the insurer. Rather, following the rule
applicable to the construction of contracts generally, … the intention of the parties is to be
ascertained if reasonably possible from the policy as a whole.” Kendall v. Nationwide Ins.
Co., 348 Md. 157, 166 (1997) (internal quotation marks and citation omitted); see also
Mesmer v. Maryland Auto. Ins. Fund, 353 Md. 241, 252 (1999) (“In Maryland, insurance
policies are treated like other contracts.”). Thus, “[e]xcept as modified by statutes or
regulations, the legal principles applicable to contracts generally are also applicable to
insurance policies.” Mesmer, 353 Md. at 252. This means that “any clause in an insurance
policy that is contrary to the public policy of this State, as set forth in any statute, is invalid
and unenforceable.” Harleysville Mut. Ins. Co. v. Zelinski, 393 Md. 83, 88-89 (internal
quotation marks and citation omitted).
11
In most circumstances, the duty of an insurer to defend against actions and
indemnify an insured in the event of an adverse judgment arises from, and is governed by,
the terms of the applicable insurance policy. See Mesmer, 353 Md. at 257-58 (“We have
repeatedly indicated that the obligation to defend and the obligation to indemnify are
entirely contractual.”); see also Brohawn v. Transamerica Ins. Co., 276 Md. 396, 409
(1975) (“The promise to defend the insured, as well as the promise to indemnify, is the
consideration received by the insured for payment of the policy premiums.”).
2. Intended Beneficiaries Versus Incidental Beneficiaries
At common law, only a party to a contract could initiate an action to enforce its
terms. 120 W. Fayette St., LLLP v. Mayor and City Council of Baltimore, 426 Md. 14, 35
(2012). However, the law has evolved since, such that certain beneficiaries to a contract
may also bring an action to enforce its terms. Id. at 35-36. Not all third parties that may
benefit from a contract have the power to initiate an action to enforce its terms. See id. at
36 (“It is not enough that the contract merely operates to an individual’s benefit[.]”).
Rather, a third party has the right to enforce a contract “if the contract was intended for his
[or her] benefit and it ... clearly appear[s] that the parties intended to recognize him [or her]
as the primary party in interest and as privy to the promise.” Id. (internal quotation marks
and citation omitted). Such a third party is referred to as an “intended beneficiary.” Id. at
35-36.
The “crucial fact” in determining whether a third party is an intended beneficiary of
a contract is “whether the pertinent provisions in the contract were ‘inserted … to benefit’
the third party.” CR-RSC Tower I, LLC v. RSC Tower I, LLC, 429 Md. 387, 457 (2012)
12
(quoting Lovell Land, Inc. v. State Highway Admin., 408 Md. 242, 261, 265 (2009)).
Another “factor to consider … is whether the third party is named in the contract or its
antecedent agreements.” Id. (internal quotation marks and citation omitted); see also
Restatement (Second) of Contracts § 302(1) (Am. Law Inst. 1981) (“Restatement”) (stating
that, “[u]nless otherwise agreed between promisor and promisee, a beneficiary of a promise
is an intended beneficiary if recognition of a right to performance in the beneficiary is
appropriate to effectuate the intention of the parties” and either “the performance of the
promise will satisfy an obligation of the promisee to pay money to the beneficiary” or “the
circumstances indicate that the promisee intends to give the beneficiary the benefit of the
promised performance”); Lovell Land, 408 Md. at 262 & n.6 (citing with approval the
distinction between intended and incidental beneficiaries set forth in Restatement § 302).
“In applying this standard, we look to the intention of the parties to recognize a person or
class as a primary party in interest as expressed in the language of the instrument and
consideration of the surrounding circumstances as reflecting upon the parties’ intention[.]”
CR-RSC Tower I, 429 Md. at 458 (internal quotation marks and citation omitted).6
A beneficiary of a contract who is not an “intended beneficiary” is an “incidental
beneficiary,” who “acquires by virtue of the promise no right against the promisor or the
promisee.” 120 W. Fayette St., 426 Md. at 36 (quoting Lovell Land, 408 Md. at 261 (citation
6
We noted in CR-RSC Tower I that consideration of “surrounding circumstances”
was apparently “a deviation from the general rule for interpreting contracts, under which
we do not consider ‘extrinsic evidence’ of the parties’ intent unless the language of the
contract is ambiguous.” Id. at 458 n.61.
13
omitted)); see also Restatement § 302(2) (“An incidental beneficiary is a beneficiary who
is not an intended beneficiary.”).
In 120 W. Fayette Street, this Court highlighted the distinction between intended
and incidental third-party beneficiaries. In that case, Baltimore City entered into a
Memorandum of Agreement (“MOA”) with the Maryland Historical Trust (the “Trust”)
detailing how certain historic properties were to be treated under a plan to renew a
five-block area in the City. 426 Md. at 16-17. After the Trust’s director granted approval
of the City’s plans, 120 West Fayette Street, LLLP (“120 West Fayette”) filed an action
seeking a declaration of rights under the MOA in order to challenge the approval. See id.
at 17. The circuit court found that 120 West Fayette was neither a party to, nor a beneficiary
of, the MOA between the City and the Trust, and, based primarily on this finding, dismissed
the complaint for failure to state a claim upon which relief could be granted. Id. at 23-24.
When the case came before this Court, we considered whether 120 West Fayette
was an intended beneficiary, or rather an incidental beneficiary, of the MOA. Id. at 36. We
observed that “[t]he promises and benefits set forth in the MOA are directed solely to the
City and the Trust” and “[n]owhere in the MOA is it contemplated that 120 West Fayette
is to receive a benefit.” Id. Therefore, we concluded that “the parties to the MOA did not
intend to recognize 120 West Fayette as the primary party in interest and as privy to the
promise.” Id. at 37 (cleaned up). It followed “that 120 West Fayette, at best an incidental
beneficiary to the MOA, may not file a suit requesting declaratory judgment that interprets
and enforces an agreement to which it has no part.” Id. Thus, this Court recognized the
14
parties’ intent, as evidenced by the terms of the contract itself, as the primary determinant
of whether a third party is an intended or an incidental beneficiary to a given contract.
We also addressed the distinction between intended and incidental beneficiaries in
CR-RSC Tower I, 429 Md. at 457. In that case, we analyzed two separate ground leases
entered into between two landlords of adjoining properties and two developers who sought
to create two “intertwined, mutually-dependent towers.” See id. at 456 (cleaned up).
“Neither ground lease would have been executed had the other not been executed
simultaneously.” Id. (cleaned up). After project delays resulted in financing for the project
falling through, the developers sued the landlords. Id. at 401-03, 451 n.54. The jury found
in favor of the developers and entered an award of damages against the landlords jointly
and severally. Id. at 403. Each landlord was responsible for each developer’s damages
because “[t]he jury found that each [developer] was entitled to enforce the [other’s] ground
lease, either as a third-party beneficiary ... or a third-party entitled to the benefit of a
covenant running with the land[.]” Id. at 454 (internal quotation marks omitted). The Court
of Special Appeals reversed the damages award, concluding that there was insufficient
evidence to support either theory of joint and several liability. Id.
This Court affirmed. As to the intended beneficiary theory, we contrasted the
developers with the beneficiaries in Shillman v. Hobstetter, 249 Md. 678 (1968), and
Prescott v. Coppage, 266 Md. 562 (1972). CR-RSC Tower I, 429 Md. at 456-60. Shillman
involved an agreement between a residential developer and a lender under which the lender
agreed to issue conditional commitments for certain planned homes if the developer would
refund certain purchasers’ deposits. 249 Md. at 682-83. The Shillman Court held that the
15
purchasers to whom the deposits were to be returned were intended beneficiaries of the
contracts. Id. at 690. As we explained in CR-RSC Tower I, “[t]he only thing the developer
[in Shillman] promised to do under the agreement (return the deposits) was clearly intended
to benefit the purchasers, so logically we found that the purchasers were intended third-
party beneficiaries.” 429 Md. at 459 (citing Shillman, 249 Md. at 690).
Prescott v. Coppage concerned the receivership of Maryland Thrift Savings and
Loan Company (“Maryland Thrift”). Prescott was appointed special counsel to Maryland
Thrift’s receiver. 266 Md. at 574. Coppage sued the receiver, as well as Prescott and others,
after the receiver paid creditors with lower priority than Coppage, leaving insufficient
assets to fully pay the debt that Maryland Thrift owed to Coppage. Id. at 565-66. The order
appointing the receiver required the receiver “to take possession of [Maryland Thrift’s]
assets and property and hold or dispose of them under the direction, supervision and further
order of this Court.” Id. at 574 (internal quotation marks omitted). The order also required
the receiver “to mail a copy of the order of appointment to each creditor of Maryland
Thrift[.]” Id. (cleaned up). In reversing the trial court’s judgment in favor of Prescott, this
Court explained that “the order of appointment of [Maryland Thrift’s receiver] itself makes
clear that all creditors of Maryland Thrift were third party beneficiaries. The order of
appointment of Prescott by necessary implication bound him to those creditor
beneficiaries.” Id. Thus, this Court held that Prescott was jointly liable with the receiver to
Coppage. Id. at 576.
In CR-RSC Tower I, we observed that the documents at issue in Shillman and
Prescott “were created specifically to benefit the third parties in question.” CR-RSC Tower
16
I, 429 Md. at 459. “The same cannot be said of the ground leases” at issue in CR-RSC
Tower I, “which were clearly entered into first and foremost for the benefit of the parties
that signed them.” Id. Important in our analysis was that:
In each ground lease, the purported third-party beneficiary is mentioned only
briefly and in passing – to wit, in sections involving easements running
between the two parcels, plans for the development of common areas, and
overall site plans that mention both towers. The peripheral nature of these
provisions – which simply describe the joint nature of the two projects – is
substantially different from the central provisions in Shillman and Prescott,
which demonstrated how the third parties in those cases were “owed ... a duty
under the contract[s].” This, we said, was the “crucial fact” in support of
finding a third-party beneficiary, and it is not present here.
Id. at 459-60 (footnotes omitted).
B. The Claimants Are Not Intended Beneficiaries of the Policies Until They
Obtain a Final Judgment Against, or Enter into a Settlement Agreement with,
Their Landlords.
As discussed above, three of the Claimants obtained final judgments against their
Landlords prior to the settlements between their Landlords and CX in the rescission
actions. Thus, under the terms of the Policies, those Claimants became intended
beneficiaries of the Policies as of the date they obtained their judgments against the
Landlords in the trial court. After they secured the judgments, those three Claimants had
the right to enforce the pre-settlement terms of the Policies,7 both under the terms of the
7
Thus, the Court of Special Appeals’ holding that the Claimants are intended
beneficiaries of the Policies is correct as to these three Claimants (Devon Johnson,
Chauncey Liles, and Shyliyah Streeter). However, these Claimants’ rights under the
Policies vested at the time they obtained their judgments against the Landlords, not at the
time of injury. We therefore affirm the judgment of the Court of Special Appeals as to these
three Claimants on different grounds than the Court of Special Appeals articulated.
17
Policies themselves and under Maryland’s “direct action” statute, Md. Code Ann., Ins.
(“IN”) § 19-102(b) (1995, 2017 Repl. Vol).8 The Insurers acknowledge these points.9
Thus, we focus the remainder of our analysis on those Claimants who had not
obtained final judgments against their Landlords before CX and the Landlords purported
to reduce or eliminate the coverage available under the Policies through the settlements in
the rescission cases. We conclude that those 12 Claimants were not intended beneficiaries
of the Policies at the time of the rescission settlements. First, the plain language of the
Policies evinces no intent to make tort claimants, without final judgments against the
8
The Maryland “direct action” statute provides:
Each liability insurance policy issued in the State shall provide that:
(1) the bankruptcy or insolvency of the insured does not release the
insurer from liability; and
(2) if an injured person or another person claiming by, through, or
under the injured person is unable, after execution on a final judgment
entered in an action against an insured, to recover the full amount of
the final judgment, the person may bring an action against the
insured’s insurer in accordance with the terms of the policy for the
lesser of the amount of the judgment recovered in the action against
the insured or the amount of the policy.
IN § 19-102(b).
9
At oral argument, a Judge asked counsel for the Insurers: “So those Claimants who
had judgments, you agree that the rescission settlements don’t apply to them?” Counsel
replied: “They do not and they did not.” In response to follow-up questions, the Insurers’
counsel indicated that, in the instance “where there is a verdict which has not yet been
reduced to a judgment,” the tort claimant nevertheless would be deemed to have secured a
“final judgment” within the meaning of the “Legal Action Against Us” provision. In other
words, as counsel for the Insurers acknowledged, under the “Legal Action Against Us”
provision, a claimant becomes an intended beneficiary once he or she prevails against an
insured in the trial court.
18
Landlords (or who have not entered into approved settlements with the Landlords), primary
parties in interest. Second, no Maryland statute, regulation, or public policy overrides the
intent of the parties who entered into the insurance contracts at issue here.
1. The Language of the Policies Demonstrates That Only Tort Claimants Who
Have Obtained a Final Judgment Against, or Who Have Entered into an
Approved Settlement with, a Landlord Are Intended Beneficiaries.
Under the plain language of the Policies, tort claimants do not become intended
beneficiaries with the right to enforce the Policies’ terms until they hold final judgments
against the Landlords or have entered into approved settlements with the Landlords.
Several of the Policies’ terms lead to this conclusion.
First, the Policies provide that the Insurers “will pay those sums that the Insured
[Landlord] becomes legally obligated to pay as damages because of ‘bodily injury’ …
arising out of the Ingestion, Inhalation, absorption of, or exposure to lead, lead-paint or
other lead-based products of any kind[.]” (Emphasis added.) In the next sentence, the
Policies say that the Insurers “will have the right and duty to defend any ‘suit’ seeking
those damages.” (Emphasis added.) Based on the language of these provisions, it is clear
that the parties to these insurance contracts understood and agreed that the Landlords would
not “become legally obligated to pay” any damages until the conclusion of a “suit seeking
those damages.”
Second, the “Legal Action Against Us” provision states that “[n]o person or
organization has a right … [t]o join us as a party or to otherwise bring us into a ‘suit’ asking
for damages from an insured; or … [t]o sue us on this Coverage Part, unless all of its terms
have been fully complied with.” However, this provision goes on to state that “[a] person
19
or organization may sue us to recover on an agreed settlement or on a final judgment against
an insured obtained after an actual trial.”10 Thus, this provision evinces the parties’ intent
to create enforceable rights in the Policies for tort claimants only if and when claimants
obtain a judgment against a Landlord after a trial or enter into an approved settlement with
a Landlord.
Also relevant to our understanding of the parties’ intent with respect to tort
claimants are the “Changes” and “Cancellation” provisions. The “Changes” provision
states that “[t]he first Named Insured shown in the Declarations is authorized to make
changes in the terms of this policy with our consent.” The “Cancellation” provision allows
CX or the first Named Insured to cancel the policy. Nothing in these provisions requires
CX or the first Named Insured to obtain the consent of any other person or entity before
exercising the right of cancellation or agreeing to a change in terms. Read together with
the “Legal Action Against Us” provision, it is clear that the parties to the Policies intended
to allow the Insurers and the first Named Insureds to modify or eliminate coverage, but that
any such changes would not affect the vested rights in the Policies of tort claimants who
10
The Claimants contend that this provision “merely restates Maryland’s direct
action statute, which requires that each liability policy issued in the state include language
authorizing injured persons who obtained judgments to bring damages claims directly
against insurers.” The Claimants overlook that the “Legal Action Against Us” section goes
beyond the direct action statute by allowing individuals who are parties to approved
settlements to enforce those settlements directly against the Insurers in court. In any event,
the important point is that, with the exception of approved settlements, the Policies go no
further than the direct action statute in conferring rights on third parties to enforce the terms
of the Policies.
20
had secured judgments against, or entered into approved settlements with, their Landlords
prior to the time of the cancellation or modification of coverage.
These provisions of the Policies collectively reflect that the parties did not intend to
confer a benefit on a tort claimant who has not obtained a final judgment against, or who
has not entered into an approved settlement with, an insured. The “primary parties in
interest” in the Policies are the Landlords, who receive protection for losses, and the
Insurers, who provide that protection in exchange for the payment of premiums. Like the
ground leases in CR-RSC Tower I, the Policies at issue here “were clearly entered into first
and foremost for the benefit of the parties that signed them.” CR-RSC Tower I, 429 Md. at
459. Thus, tort claimants without final judgments or settlements are not additional parties
in interest under the plain language of the Policies. In other words, they are incidental
beneficiaries to the Policies.
The Claimants attempt to avoid this straightforward reading of the Policies’
language by contending that, under Megonnell v. USAA, 368 Md. 633 (2001), a tortfeasor
has a “legal obligation” to pay damages from the moment a claimant is injured as a result
of tortious conduct, rather than when the claimant enters into a settlement or prevails at
trial. Thus, according to the Claimants, when the Policies refer to the Landlords
“becom[ing] legally obligated to pay … damages,” the Policies must be interpreted to mean
the moment a potential tort claimant is harmed as a result of an insured’s acts or omissions.
In Megonnell, this Court observed that “[p]arties often become legally obligated
(‘liable’) to pay by way of contract, i.e., construction contracts, leases, insurance contracts,
etc., or by committing tortious acts. The verdict of a jury and the judgment of a court are
21
merely a determination that a legal obligation existed, and continues to exist. The verdict
of a jury and the judgment of the court do not, of themselves, create the underlying legal
obligation.” 368 Md. at 645.
Megonnell did not involve the question of whether a tort claimant without a
judgment was an intended beneficiary of an insurance policy. Unlike most of the Claimants
here, the plaintiff in Megonnell obtained a $291,000 judgment against her husband (the
driver in a car accident), after which she made a claim for payment under the excess
coverage provision of her husband’s umbrella policy. Under that provision, the insurer
promised to “pay for injury or damage for which an insured becomes legally liable.” Id. at
639. Before the wife’s case came to trial, the insurer settled with two accident victims for
a total of $700,000. Id. at 638. The insurer denied the wife’s claim, among other reasons,
based on its contention that the two prior settlements did not count toward the $500,000
per accident limit in the husband’s primary auto policy. Id. at 645. The insurer contended
that “an insured cannot be legally liable until a jury or court finds that person liable,” which
therefore meant that the wife could not reach the excess coverage in the umbrella policy.
Id.
This Court rejected the insurer’s argument, holding that there was “no reason why
the $700,000 cumulative settlement with the [other claimants] should not be applied toward
the $500,000 per occurrence liability limits of the primary policy.” Id. at 646. In this regard,
the Court focused on the meaning of “damages,” and held that “[d]amages are not limited
to court-ordered payments; they can be claims made prior to trial that are resolved by
settlements requiring the payment of sums of money. If respondent chooses to settle a claim
22
for damages and actually pays the damages without a trial, the damages are still going
towards satisfying the limit of liability for all damages.” Id. at 648 (internal quotation
marks omitted).11 Thus, Megonnell’s holding is consistent with the Policies’ recognition of
approved settlements as providing vested rights to tort claimants.
The Claimants conflate tort “liability” in general with an insured “becom[ing]
legally obligated to pay … damages.” It is clear that the parties to the Policies intended that
only approved settlements with, and final judgments against, the Landlords would trigger
the Insurers’ legal obligation to pay damages. We do not read Megonnell as engrafting a
different meaning onto this provision of the Policies.
We also disagree with the Claimants’ contention that “[t]he surrounding
circumstances of liability insurance policies establish that those policies are not private
contracts between the insurer and policyholder to benefit only the policyholder.” In this
regard, the Claimants cite Phillips v. Allstate Indemnity Co., 156 Md. App. 729, 746 (2004),
for the proposition that a “liability insurance policy is ‘generally issued for the benefit of
third parties who are injured and have a claim against a tortfeasor.’” (quoting 7 COUCH ON
11
Similarly, in Nat’l Union Fire Ins. Co. of Pittsburgh, PA v. Porter Hayden Co.,
408 B.R. 66 (D. Md. 2009), the federal district court rejected the notion that Porter Hayden
(the insured) could not become “legally obligated to pay” damages to asbestos plaintiffs
following the discharge of its bankruptcy. Id. at 71-73. Citing Megonnell, the court
reasoned that “Porter Hayden has an underlying, though contingent, legal obligation to the
asbestos claimants because it committed [tortious] acts. That Porter Hayden had a legal
obligation to the claimants before entering bankruptcy, or in the absence of bankruptcy,
satisfies the requirement of a ‘legal obligation’ within the meaning of the policies.” Id. at
72. The court invoked Maryland’s direct action statute, noting that “bankruptcy or
insolvency of the insured does not release the insurer from liability.” Id. at 73 (quoting IN
§ 19-102(b)(1)). Porter Hayden, like Megonnell, did not involve the question of whether a
third party was an intended beneficiary under the policies at issue.
23
INSURANCE § 104:8 (3d ed. 2003)). However, Phillips and many of the other cases upon
which the Claimants rely involve compulsory motor vehicle liability insurance and,
therefore, are distinguishable from this case.
Motor vehicle liability insurance policies are subject to a different set of
considerations than other types of insurance policies. In Van Horn v. Atlantic Mut. Ins. Co.,
334 Md. 669 (1994), this Court considered whether Maryland’s statute compelling
automobile insurance, and specifically imposing certain policy termination requirements,
abrogated an insurance company’s general contractual right to rescind the contract. In
concluding that it did, this Court stated:
In situations where a motor vehicle insurance policy is compelled by law,
where the statutes do not expressly preserve the right of rescission ab initio,
and where claims of innocent parties are involved, the cases throughout the
country, with apparent unanimity, take the position that rescission ab initio
is inconsistent with the statutory scheme. Among the jurisdictions with
statutory enactments similar to Maryland’s, some cases rely on the statutory
requirement that insurance be maintained, some cases rely on provisions
similar to [Maryland statutory provisions] restricting the right to cancel, and
some cases rely on both types of statutes. Nevertheless, all of the cases reach
the same result, namely that rescission is impermissible to defeat claims like
those involved in this case.
Id. at 687. We further observed that “[a]ttempts by insurance companies, purporting to
exercise contract rights, to avoid the public policy of compulsory motor vehicle insurance
with mandated coverages, have repeatedly been rejected by this Court.” Id. at 686 (citations
omitted). By making motor vehicle liability insurance mandatory in Maryland, the General
Assembly established a public policy that every motor vehicle insurance contract is
intended to benefit the general public, not just the parties to the insurance contract.
24
Unlike primary motor vehicle liability coverage, lead-related insurance coverage,
and coverage under commercial general liability policies more broadly, is not mandatory
under Maryland law. Indeed, the General Assembly has made it clear that an “authorized
insurer may include in the policy a lead hazard coverage exclusion.” IN § 19-704(c)
(emphasis added). Unlike automobile insurance policies, lead-related insurance policies
have not been “modified by statutes or regulations” to be compulsory or otherwise adjusted
in a way that would change the applicability of the relevant contractual provisions. For this
reason, the Claimants’ reliance on motor vehicle liability insurance cases is misplaced.
Other cases upon which the Claimants rely are also inapposite for additional
reasons. Some of those cases, like Megonnell, involve plaintiffs who already had secured
final judgments. For example, in Travelers Ins. Co. v. Godsey, 260 Md. 669 (1971), the
jury had already returned a verdict for the plaintiff and the insurer had agreed to a consent
judgment when the insurer learned that the verdict was the result of collusion between the
insured and the plaintiff. Id. at 671-72. In explaining why the insurer was permitted to stop
payment on checks it had issued in satisfaction of the consent judgment, this Court stated:
[T]he right of the injured claimant to collect from the insurer of the one who
harmed him derives from the contract right of the tortfeasor to have the
insurer pay for him within the policy limit what otherwise he would be liable
to pay. As the third party beneficiary of the insurance contract, the claimant
stands in the shoes of the insured wrongdoer and vis-a-vis the insurer his
rights are no greater than those of the insured’s. See Shillman v. Hobstetter,
249 Md. 678, 690, 241 A.2d 570. It makes no difference that here the third
party beneficiary is suing on drafts issued by the insurer to pay the debt of its
insured to the claimant, rather than as is usually or often the case, seeking to
recover on an attachment laid in the hands of the insurer after judgment has
been recovered against the insured. Whatever procedural mode the claimant
follows, the effort is to compel the insurer to pay the insured’s obligation to
25
the claimant, and therefore in such a situation that which we call a rose by
any other name would smell as sweet.
Id. at 674. The reference to the plaintiff in Godsey as a “third party beneficiary” is of no
assistance to the Claimants. As the holder of a favorable jury verdict and a consent
judgment, the plaintiff in Godsey would be considered an intended beneficiary under the
Policies here as well.
In Jones v. Hyatt Ins. Agency, Inc., 356 Md. 639, 646-47 (1999), this Court assumed
for purposes of the opinion that the plaintiffs “had a viable cause of action in contract as
third-party beneficiaries” of an agreement between an insurance broker and its customer
under which the broker was supposed to procure motor vehicle liability insurance for the
customer. Explaining the basis for this assumption, the Court stated: “We have recognized
a similar third-party beneficiary cause of action in contract when a tort claimant sues the
tortfeasor’s liability insurer for a declaratory judgment concerning coverage or for breach
of the contractual duty to indemnify.” Id. As support for this proposition, the Court cited
two automobile cases – Mesmer, which we have cited above, and Washington Metro. Area
Transit Auth. v. Queen, 324 Md. 326, 332 (1991) – as well as Harford Mut. Ins. Co. v.
Woodfin Equities Corp., 344 Md. 399, 412-413 (1997).
Although Woodfin Equities is not an automobile insurance case, it does not support
the Claimants’ position. Far from endorsing a blanket rule under which every tort claimant
is deemed to be an intended beneficiary of a liability insurance policy that provides
coverage for the alleged tortfeasor, Woodfin Equities demonstrates that there is no such
26
rule. There, this Court distinguished between direct actions to enforce policy terms and
declaratory judgment actions to resolve coverage disputes:
Maryland public policy ordinarily does preclude an injured claimant from
initially bringing a direct action against the alleged tortfeasor’s liability
insurer to litigate the matter of the insured’s tort liability, as distinguished
from a declaratory judgment action concerning separate and independent
policy coverage issues…. [T]he Maryland restriction upon direct actions
against a defendant tortfeasor’s liability insurer applies only “until there has
been a determination of the insured’s liability in the tort action. Once there
is a verdict or judgment in the tort action, a direct action may be maintained
against the liability insurer.”
Woodfin Equities, 344 Md. at 413 (quoting Washington Metro. Area Transit Auth., 324
Md. at 332).
Woodfin Equities also demonstrates that the Claimants confuse their right to obtain
a ruling in this litigation under the Declaratory Judgment Act with the right to enforce the
Policies’ terms. As Woodfin Equities makes clear, a tort claimant’s ability to bring a
declaratory judgment action raising an issue related to coverage under a liability insurance
policy and the claimant’s ability to sue the insurer to enforce the terms of the policy are not
equivalent.
Under the Declaratory Judgment Act:
Any person interested under a deed, will, trust, land patent, written contract,
or other writing constituting a contract, or whose rights, status, or other legal
relations are affected by a statute, municipal ordinance, administrative rule
or regulation, contract, or franchise, may have determined any question of
construction or validity arising under the instrument, statute, ordinance,
administrative rule or regulation, land patent, contract, or franchise and
obtain a declaration of rights, status, or other legal relations under it.
Md. Code Ann., Cts. & Jud. Proc. § 3-406 (2020) (emphasis added).
27
The Claimants note that the Declaratory Judgment Act does not define what it means
to be “interested under a . . . written contract.” According to the Claimants, “120 West
Fayette fills in the gap, holding that for a third party to have a sufficient interest to bring a
declaratory judgment action to interpret a contract, that party cannot be a mere incidental
beneficiary of the contract.” Thus, the Claimants argue, because all acknowledge that they
have the right to bring this declaratory judgment action, they must be intended
beneficiaries, as opposed to incidental beneficiaries, of the Policies. We disagree.
In 120 West Fayette, the Court stated “that 120 West Fayette, at best an incidental
beneficiary to the [contract], may not file a suit requesting declaratory judgment that
interprets and enforces an agreement to which it has no part.” 426 Md. at 37 (emphasis
added). Had 120 West Fayette sought a declaration only “interpreting” and not also
“enforcing” the contract, perhaps it would have been deemed sufficiently “interested in”
the contract to have standing under the Declaratory Judgment Act. 120 West Fayette’s
request for a declaration enforcing the contract, however, implicated not just standing
under the Declaratory Judgment Act, but also Maryland contract law principles. It was
those principles that this Court relied on in holding that 120 West Fayette, as an incidental
beneficiary of the contract, had no right to enforce the contract.
2. No Maryland Statute, Regulation, or Public Policy Requires That All Tort
Claimants Be Treated as Intended Beneficiaries of General Liability Insurance
Policies.
The Claimants have not cited any Maryland statute or regulation that overrides the
intent of the parties to these insurance contracts to bestow enforcement rights only on those
Claimants who hold final judgments against, or who have entered into approved
28
settlements with, the Landlords. The only statute or regulation that governs the rights of
third parties in this context is the direct action statute, IN § 19-102(b), which restricts the
direct right of action against insurers to those claimants who are “unable, after execution
on a final judgment entered in an action against an insured, to recover the full amount of
the final judgment[.]”
Although the direct action statute does not itself provide all tort claimants with a
right of action to enforce liability insurance policy terms, the Claimants contend that it
nevertheless reflects the existence of a Maryland public policy to “recognize[] injured tort
claimants’ coverage rights, regardless whether they hold tort judgments.” According to the
Claimants, “[t]o adopt any other rule would permit insurers to defeat the purpose of the
direct action statute by doing exactly what Insurers attempt to do here: eliminate the
insurance at will after the injury but before judgment to prevent a tort claimant’s recovery
from the insurer.” In support of this proposition, the Claimants cite a treatise, which
observes (without citing supporting authority) that “[d]irect-action statutes have resulted
from the current public policy that recognizes that a liability insurance policy is generally
issued for the benefit of third parties who are injured and have a claim against the
tortfeasor.” 7 COUCH ON INSURANCE § 104:8 (3d ed. 2003).
We are not persuaded. If the General Assembly had intended to provide enforcement
rights to tort claimants who have not obtained judgments or entered into approved
settlements, it presumably would have drafted Maryland’s direct action statute differently.
None of the authorities the Claimants cite convinces us otherwise. As the Insurers note,
Corpus Juris Secundum states as the “general rule” that, “in the absence of policy or
29
statutory provisions to the contrary, one who suffers an injury which comes within the
provisions of a liability insurance policy is not in privity of contract with the insurance
company.” 46A C.J.S. Insurance § 1959, Westlaw (database updated May 2022). Thus, “a
third party ordinarily may not directly sue an insurance company in an attempt to obtain
the coverage allegedly due the insurer’s policyholder. The plaintiff is not in privity of
contract with either the defendant or the defendant’s insurance company under the liability
insurance policy and is not considered a third party beneficiary of the policy.” Id. (footnote
omitted). If direct action statutes like Maryland’s reflected a public policy to allow all tort
claimants to enforce general liability insurance policies, the “general rule” presumably
would be that all claimants are third party beneficiaries of general liability insurance
policies.
As the Court of Special Appeals observed, there is a split of authority in other
jurisdictions regarding whether injured tort claimants are intended third-party beneficiaries
of liability policies. CX Reinsurance, 252 Md. App. at 14 & n.6. The out-of-state cases
upon which the Claimants rely either are inapposite in that they concern automobile
insurance12 or are not in keeping with our understanding of Maryland public policy. In
particular, we note that, in Farm & City Ins. Co. v. Coover, 225 N.W.2d 335 (Iowa 1975),
the Supreme Court of Iowa stated:
Iowa’s direct action statute gives an injured person who obtains a judgment
the right to proceed against the insurer if his execution against the judgment
debtor is returned unsatisfied. This right does not accrue until after judgment
is obtained and an execution is returned unsatisfied. However, the statute
gives the injured person an interest in the liability insurance policy adverse
12
See, e.g., Bossert v. Douglas, 557 P.2d 1164 (Ok. Civ. App. 1976).
30
to both the insurer and insured at the time of the injury. The statute is
designed to protect the injured person, not the insurer or insured. It does not
permit the insurer and insured to do anything by litigation or agreement
between them alone to abrogate or compromise coverage existing at the time
of the accident.
Id. at 337 (citations omitted).
We do not read Maryland’s direct action statute as giving “the injured person an
interest in the liability insurance policy adverse to both the insurer and insured at the time
of the injury.” Reaching that conclusion would require a leap of logic that does not find
support in the statutory language. Also, we do not subscribe to the proposition that, with
respect to general liability insurance, Maryland’s direct action statute “does not permit the
insurer and insured to do anything by litigation or agreement between them alone to
abrogate or compromise coverage existing at the time of the accident.” As the Claimants
acknowledge, “[f]or non-mandatory insurance policies, like the Policies here, an insurer
can obtain a rescission judgment after a third party suffers a covered injury if the insurer
establishes a material misrepresentation by the policyholder in its insurance application.”
See North Am. Specialty Ins. Co. v. Savage, 977 F. Supp. 725, 730-31 (D. Md. 1997). The
insurer need not join all known (and unknown) tort claimants to such an action before
obtaining a judgment of rescission. That being the case, we see no reason why an insurer
and insured must involve all known and unknown tort claimants in negotiations to
effectively settle such an action, let alone obtain all such claimants’ consent to a settlement,
provided that any such settlement is made in good faith.13 It follows that, if the settlements
13
At oral argument, counsel for the Insurers acknowledged the requirement of good
faith in the settlement of lawsuits. See, e.g., Shenker v. Polage, 226 Md. App. 670, 687
31
of the rescission actions were made in good faith, they will be effective with respect to all
claimants who are not intended beneficiaries of the Policies – in this case, the 12 Claimants
who did not obtain judgments against the Landlords prior to the rescission case settlements.
Finally, accepting the Claimants’ position would lead to undesirable consequences.
We agree with the Insurers and Amicus Curiae Complex Insurance Claims Litigation
Association that recognizing all known and unknown tort claimants as intended
beneficiaries of general liability insurance policies will make it very difficult for insurers
and policyholders to resolve rescission cases fully and finally, at least where the policies
are likely to be claimed upon to cover damages awarded in “long-tail” tort cases (such as
lead-paint cases). See Kenneth S. Abraham, The Long-Tail Liability Revolution, 6 U. PENN.
J. LAW & PUB. AFF. 346, 348 (2021) (describing a “long-tail” claim as one that “involves
tortious or other liability-creating conduct that causes latent bodily injury or property
damage that then manifests itself only many years, and sometimes decades, after the harm-
causing conduct occurred”). This would run contrary to Maryland’s “strong public policy
to encourage settlement.” Matter of Collins, 468 Md. 672, 697 (2020). As the Insurers
explain:
[I]n order to reach a settlement with its insured that modifies an insurance
policy, the insurer would have to identify and sue all claimants within the
amorphous pool of potential personal injury claimants, many of whom are
(2016). The parties dispute whether CX and the Landlords settled the rescission cases in
good faith. The Claimants allege that the settlements were collusive. The Insurers claim
that the Landlords vigorously defended the rescission cases, and that the settlements were
the product of good-faith negotiations in light of both sides’ perceived litigation risks. For
our purposes, it is sufficient to observe that the Insurers generated a factual dispute on this
point, preventing the grant of summary judgment to the Claimants on this ground. On
remand, the trier of fact will need to decide this question.
32
unknown, because they have not yet asserted claims. In this case, that pool
would include not only all of the young children who resided in the insured
properties during the policy periods, but also all of the young children who
visited the insured properties during the policy periods. Claimants would
assert that everyone who alleged any exposure, at any time, had a vested right
upon first alleged exposure. There would be no practical means for an insurer
or insured to determine who, if anyone, allegedly had been injured and when.
In addition, we are concerned, as the Insurers put it, that “[b]y requiring this kind of
massive litigation, without the prospect of settlement,” the Claimants’ position would
“substantially reduce, and perhaps eliminate, rescission as a remedy for material
representations in insurance applications, thereby undermining an insurer’s ability to
obtain redress for an insured’s incomplete or inaccurate disclosures.”
For all of these reasons, we are not persuaded that existing Maryland public policy
makes all tort claimants intended beneficiaries of general liability insurance policies. If
there is to be such a policy, the General Assembly will need to state it expressly through
new legislation.
IV
Conclusion
For the reasons discussed above, we hold that injured tort claimants who have yet
to obtain a judgment against, or enter into an approved settlement with, an insured are not
intended beneficiaries of general liability insurance policies, absent public policy
modifications or contractual language to the contrary. As such, an injured tort claimant’s
rights under this type of policy do not vest until the claimant has obtained a judgment
against, or entered into a qualifying settlement with, an insured. In this case, the three
Claimants who obtained judgments against their Landlords before the rescission case
33
settlements became intended beneficiaries of the Policies with the right to enforce their
terms, as of the dates they obtained their verdicts in the trial court. The settlements of the
rescission cases had no effect on the rights of those Claimants. We therefore affirm the
judgment of the Court of Special Appeals as to Claimants Devon Johnson, Chauncey Liles,
and Shyliyah Streeter on different grounds than articulated by the Court of Special Appeals.
The Claimants who did not obtain final judgments against their Landlords prior to
the applicable rescission case settlements were incidental beneficiaries of the Policies at
the time of the settlements. To the extent those 12 Claimants since that time have obtained
judgments against their Landlords or may do so in the future, they will not be permitted to
enforce the pre-settlement terms of the Policies, provided that the settlements were made
in good faith. Accordingly, we reverse the judgment of the Court of Special Appeals as to
those 12 Claimants. On remand, the trier of fact shall decide whether CX and the Landlords
settled the rescission cases involving those Claimants’ Landlords in good faith.
JUDGMENT OF THE COURT OF
SPECIAL APPEALS AFFIRMED IN PART
AND REVERSED IN PART. THE CASE IS
REMANDED TO THAT COURT WITH
THE INSTRUCTION TO FURTHER
REMAND THE CASE TO THE CIRCUIT
COURT FOR BALTIMORE CITY FOR
FURTHER PROCEEDINGS CONSISTENT
WITH THIS OPINION. COSTS IN THE
COURT OF SPECIAL APPEALS AND
THIS COURT TO BE DIVIDED EQUALLY
BETWEEN THE PARTIES.
34