CX Reinsurance Co. v. Johnson

CX Reinsurance Company Limited, et al. v. Devon Johnson, et al., No. 691, September
Term 2020. Opinion by Beachley, J.
INTENDED THIRD-PARTY BENEFICIARIES—INSURANCE POLICIES—
PUBLIC POLICY FOR INJURED TORT CLAIMANTS—RIGHTS VEST AT
TIME OF INJURY
Numerous plaintiffs, who were children in the 1990s and early 2000s, were
allegedly exposed to lead paint while residing in homes owned by certain landlords. These
landlords had obtained insurance policies through commercial general liability policies
with appellants CX Reinsurance Limited Company (“CX”) and Liberty Mutual Mid-
Atlantic Insurance Company (“Liberty Mutual”), (“Insurers”). The insurance policies
required the Insurers to defend against and potentially indemnify the landlords for liability
as to lead paint injuries sustained on their properties.
In 2015, CX filed contract rescission actions against the landlords in federal court,
alleging that the landlords had made fraudulent misrepresentations in their insurance
applications. CX and the landlords eventually reached settlement agreements (the
“Rescission Settlement Agreements”) that either eliminated or greatly reduced the
insurance coverage for lead paint injuries under the insurance policies. The Rescission
Settlement Agreements consequently modified the plaintiffs’ abilities to recover damages
from their landlords for their alleged lead paint injuries.
Thereafter, the plaintiffs filed a complaint in the Circuit Court for Baltimore City
seeking a declaratory judgment against the Insurers that: 1) the plaintiffs were intended
third-party beneficiaries of the insurance policies, 2) that they had vested rights in those
insurance policies prior to the execution of the Rescission Settlement Agreements, and 3)
that the Rescission Settlement Agreements did not impact those vested rights.
The circuit court granted the plaintiffs’ request for declaratory judgment, and the
Insurers appealed.
Held: Judgment affirmed. Although there is no case in Maryland that explicitly
holds that injured tort claimants such as the plaintiffs in this case constitute intended third-
party beneficiaries of insurance policies, Maryland appellate courts have consistently
asserted, albeit in dicta, that they are. Accordingly, the plaintiffs here, who are injured tort
claimants, are intended third-party beneficiaries of the insurance policies and therefore
possess vested rights to enforce those policies.
By virtue of their status as intended third-party beneficiaries, the plaintiffs’ rights to
enforce the insurance policies vested at the time of their injuries. Although there is no
Maryland authority directly on point, the overwhelming weight of authority in other
jurisdictions and secondary sources indicates that an intended third-party beneficiary’s
right to enforce an insurance policy vests at the time of injury, and may not be subsequently
modified by the insurer and the insured. Accordingly, the plaintiffs’ rights to enforce the
insurance policies vested when they suffered their injuries at the landlords’ properties, and
the Rescission Settlement Agreements were ineffective in modifying those vested rights.
Circuit Court for Baltimore City
Case No. 24-C-18-001930
REPORTED
IN THE COURT OF SPECIAL APPEALS
OF MARYLAND
No. 691
September Term, 2020
CX REINSURANCE COMPANY LIMITED,
ET AL.
v.
DEVON JOHNSON, ET AL.
Beachley,
Ripken,
Moylan, Charles E., Jr.
(Senior Judge, Specially Assigned),
JJ.
Opinion by Beachley, J.
Filed: September 7, 2021
Pursuant to Maryland Uniform Electronic Legal
Materials Act
(§§ 10-1601 et seq. of the State Government Article) this document is authentic.
2021-09-07 15:32-04:00
Suzanne C. Johnson, Clerk
In this case, we are asked to determine whether the Circuit Court for Baltimore City
erred when it granted, pursuant to a motion for summary judgment, a declaratory judgment
in favor of appellees and against appellants. Appellants consist of insurance companies
CX Reinsurance Limited Company (“CX”) and Liberty Mutual Mid-Atlantic Insurance
Company, formerly Merchants and Business Men’s Mutual Insurance Company (“Liberty
Mutual”) (collectively, the “Insurers”) that provided liability coverage to certain landlords
through insurance policies (the “Policies”). Appellees consist of a group of tort claimants
(“Plaintiffs”) who either have proven in court or allege to be the victims of lead poisoning
while living at properties owned by the landlords in the 1990s and 2000s when the
landlords were insured by the Insurers’ Policies.1
In 2015, CX filed contract rescission actions against the landlords, alleging that the
landlords made fraudulent misrepresentations in their insurance applications. Ultimately,
CX reached settlement agreements (the “Rescission Settlement Agreements”) with the
landlords that either eliminated or greatly reduced the insurance coverage that would be
available to compensate Plaintiffs for their alleged lead injuries. Subsequently, the
Plaintiffs filed a complaint for declaratory judgment against the Insurers, seeking a
1
Appellees Lea Gardner, Devon Johnson, Chauncey Liles, Jr., and Shyliyah Streeter
have already obtained judgments against their respective landlords in their underlying tort
actions. Appellees Nakia Allen, Shakeia Allen, Katiara Harper, Shalita Harris, Tyrone
Height, Ashley Mackey, Dale Mackey, Jr., Kayla Shy’Kira McKnight, Kahlil Tyler,
Raegina Vincent, and Aaliyah Williams have filed tort actions against their respective
landlords, but the matters have not been tried to verdict. As we shall explain below, the
parties dispute whether appellees were required to secure judgments against their
respective landlords before filing their complaints for declaratory judgment against the
Insurers.
declaration that they are third-party beneficiaries of the Policies with vested rights to
enforce those Polices, and that the Rescission Settlement Agreements do not affect those
rights.
After a hearing on July 29, 2020, where the court considered the parties’ competing
motions for summary judgment, the circuit court granted Plaintiffs’ request for a
declaratory judgment. The court declared:
1) that Plaintiffs are third-party beneficiaries of the Policies; 2) that Plaintiffs
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) that the Rescission
Settlement Agreements do not affect Plaintiffs’ vested rights in the Policies,
and the Rescission Settlement Agreements are ineffective as to Plaintiffs[.]
The Insurers timely appealed and present the following issues for our review, which we
have consolidated and rephrased as follows:
1. Did the circuit court err in concluding that Plaintiffs are intended third-
party beneficiaries of the Policies?
2. Did the circuit court err in concluding that Plaintiffs’ rights in the Policies
vested prior to the execution of the Rescission Settlement Agreements,
and that the Rescission Settlement Agreements were ineffective as to
Plaintiffs’ vested rights?
We hold that the Plaintiffs are intended third-party beneficiaries of the Policies, that
their rights to enforce the Policies vested when they suffered their injuries, and that the
Rescission Settlement Agreements did not modify or affect those vested rights.
Accordingly, we shall affirm.
FACTS AND PROCEEDINGS
In 1997, certain landlords applied for commercial general liability coverage with
2
CX for their rental properties in Baltimore. As part of the applications, landlords were
required to indicate if “the [landlord] ever had any lead paint violations in the building(s)?”
Apparently, every landlord answered this question in the negative.2 CX then proceeded to
issue these landlords general liability policies which, relevant here, provided coverage for
bodily injuries resulting from lead paint exposure at the specified properties.3 The Policies
also contained a “changes” provision which stated that CX and the first named insured
could amend or waive the terms of the Policy at any time and without obtaining any other
insured’s consent, as well as a “cancellation” provision, which stated that the first named
insured could cancel the Policy. Thereafter, CX renewed the landlords’ coverage, and
starting in 1999, CX issued subsequent renewal policies through what would later become
Liberty Mutual. All Plaintiffs resided in properties covered by these Policies during the
late 1990s or early 2000s, and have alleged that they suffered lead exposure during their
respective tenancies.
According to the Plaintiffs, a significant event relevant to this litigation occurred in
2011. Specifically, “the Court of Appeals invalidated Maryland’s $17,000 liability cap on
lead-related personal injury actions” in Jackson v. Dackman Co., 422 Md. 357, 381-83
(2011). There, the Court of Appeals held that the $17,000 statutory cap then in place
2
Landlord Singer Realty, Inc. did not answer this question in its Supplemental
Application, but according to CX, Singer Realty, through its retail insurance broker,
indicated that it had never had any lead paint violations in its buildings.
3
All of the relevant policies are “occurrence” policies, i.e., the policies cover events
that occur during the applicable policy term.
3
violated the Maryland Declaration of Rights, stating, “For a child who is found to be
permanently brain damaged from ingesting lead paint, proximately caused by the
landlord’s negligence, the maximum amount of compensation under a qualified offer is
miniscule. It is almost no compensation.” Id. at 382. The Court held that the cap’s
significant limitation on the amount of possible recovery violated Article 19 of the
Maryland Declaration of Rights. Id. at 383. Plaintiffs allege that this shift in the law
created a significant problem for the Insurers in light of the “countless pending lead paint
claims against its insureds.” Simply put, Jackson dramatically increased the Insurers’
potential liability to injured tort claimants who successfully sued the insured landlords for
lead poisoning. Plaintiffs claim that, in light of this shift in the law, CX “devised a sinister
strategy to avoid its financial obligations at the expense of [Plaintiffs] and other lead paint
victims.”4
That strategy, according to Plaintiffs, was to procure the Rescission Settlement
Agreements at issue in this case. Those settlement agreements came about as follows. In
2015, CX sued the landlords in the United States District Court for the District of Maryland,
seeking rescission of the Policies on the grounds that the landlords had made fraudulent
misrepresentations in the insurance applications. Specifically, CX alleged that the
landlords lied regarding whether there had ever been any lead paint violations in the
buildings to be insured. Ultimately, CX and the landlords entered into the Rescission
4
Nothing in this opinion should be construed as giving credence to Plaintiffs’
characterization of the Insurers’ actions in this case. Indeed, those characterizations are
wholly irrelevant to our resolution of the issues on appeal.
4
Settlement Agreements, which resulted in either mutual rescissions of the Policies or
amendatory endorsements that reduced, but did not completely eliminate, the insurance
coverage afforded by the Policies. Thus, CX’s federal action against the landlords was not
tried to judgment. The Plaintiffs were not parties to the Rescission Settlement Agreements.
In April 2018, a single Plaintiff who held a judgment against a landlord initiated the
instant action by filing a complaint for declaratory judgment against CX and the
appropriate landlord. By June 2019, the litigation had grown to add numerous Plaintiffs
and landlord defendants, as well as Liberty Mutual. The Plaintiffs’ Third Amended
Complaint for Declaratory Judgment stated that the Plaintiffs were former residents of
properties owned by the landlord defendants and insured by the Insurers. The Plaintiffs
alleged that they had been injured by lead paint at these properties, and that the Insurers
were responsible for defending and indemnifying the landlords for these lead paint claims.
Recognizing the existence of the Rescission Settlement Agreements between the Insurers
and the landlords, the Plaintiffs sought a declaration that they were intended third-party
beneficiaries of the insurance Policies, and, concomitantly, that the Rescission Settlement
Agreements had no legal effect on their vested rights to enforce the Policies.
Following a motion and cross-motion for summary judgment, the circuit court
issued a memorandum opinion and corresponding declaration. As noted above, the court
declared that: 1) the Plaintiffs are intended third-party beneficiaries of the Policies, 2)
Plaintiffs’ rights in the Policies vested before the Insurers and landlords executed the
Rescission Settlement Agreements, and 3) the Rescission Settlement Agreements did not
5
affect the Plaintiffs’ vested rights in the Policies and are ineffective as to the Plaintiffs. We
shall provide additional facts as necessary.
DISCUSSION
The parties agree on the applicable standard of review where the circuit court grants
summary judgment:
We review the Circuit Court’s grant of summary judgment as a matter
of law. Goodwich v. Sinai Hosp. of Balt., Inc., 343 Md. 185, 204, 680 A.2d
1067, 1076 (1996) (“The standard of review for a grant of summary
judgment is whether the trial court was legally correct.” (citation omitted)).
Before determining whether the Circuit Court was legally correct in entering
judgment as a matter of law in favor of [appellees], we independently review
the record to determine whether there were any genuine disputes of material
fact. Hill v. Cross Country Settlements, LLC, 402 Md. 281, 294, 936 A.2d
343, 351 (2007). A genuine dispute of material fact exists when there is
evidence “upon which the jury could reasonably find for the plaintiff.”
Beatty v. Trailmaster Prods., Inc., 330 Md. 726, 739, 625 A.2d 1005, 1011
(1993) (citation 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.” Myers v. Kayhoe, 391 Md.
188, 203, 892 A.2d 520, 529 (2006) (citation omitted).
Windesheim v. Larocca, 443 Md. 312, 326 (2015). In their reply brief, the Insurers allege
that there are disputed facts in this case, such as whether the Insurers’ federal rescission
claims against the landlords were “meritless,” and whether the Insurers “colluded with their
insureds to defeat coverage.” In its memorandum opinion, the circuit court noted that these
matters were immaterial, and we agree. See footnote 3, supra. Although these facts are
“in dispute,” they are not material to the outcome of this declaratory judgment action
because whether the Rescission Settlement Agreements were collusive or not is irrelevant
to the vesting of the Plaintiffs’ rights. Accordingly, our review is simply de novo.
6
Against this backdrop, we turn to the issues presented. As we shall explain, the
Plaintiffs constitute intended third-party beneficiaries of the Policies. As intended third-
party beneficiaries, the Plaintiffs are entitled to enforce the Policies. Additionally, the
Plaintiffs’ rights to enforce the Policies vested upon injury during their tenancies at the
insured landlords’ properties, and the Insurers and landlords, as the contracting parties to
the Policies, could not subsequently modify those vested rights pursuant to the Rescission
Settlement Agreements.
I. PLAINTIFFS ARE INTENDED THIRD-PARTY BENEFICIARIES
The first issue we must resolve is whether the Plaintiffs are “intended” or merely
“incidental” third-party beneficiaries of the Policies. The Insurers argue that the Plaintiffs
are, at most, only “incidental” third-party beneficiaries, while the Plaintiffs contend that
they are “intended” third-party beneficiaries.
The parties agree that in Maryland, “insurance policies are treated like other
contracts.” Mesmer v. Md. Auto. Ins. Fund, 353 Md. 241, 252 (1999). Accordingly,
“Except as modified by statutes or regulations, the legal principles applicable to contracts
generally are also applicable to insurance policies.” Id. (citing Kendall v. Nationwide Ins.
Co., 348 Md. 157, 165-66 (1997)). Whether the Plaintiffs constitute “intended” or
“incidental” third-party beneficiaries is important because intended third-party
beneficiaries are permitted “to bring suit in order to enforce the terms of a contract.” 120
W. Fayette St., LLLP v. Mayor of Balt., 426 Md. 14, 35-36 (2012) (citing Dickerson v.
Longoria, 414 Md. 419, 452 (2010)). Incidental third-party beneficiaries, however, possess
7
no such rights. Id. at 36 (citing Lovell Land, Inc. v. State Highway Admin., 408 Md. 242,
261 (2009)). In 120 W. Fayette St., LLLP, the Court of Appeals explained:
“An individual is a third-party beneficiary to 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.’” [Dickerson v. Longoria, 414 Md. 419, 452 (2010)
(alteration in original) (quoting Shillman v. Hobstetter, 249 Md. 678, 687
(1968))]. It is not enough that the contract merely operates to an individual’s
benefit: “An incidental beneficiary acquires by virtue of the promise no right
against the promisor or the promisee.” Lovell Land, Inc. v. State Highway
Admin., 408 Md. 242, 261, 969 A.2d 284, 295 (2009) (citation omitted).
426 Md. at 36.
In 120 W. Fayette St., LLLP, the Court of Appeals was tasked with determining
whether a property owner constituted an intended third-party beneficiary. There, the
Baltimore City Council enacted an urban renewal plan in order to renew a five-block area
in West Baltimore. Id. at 16. As part of the renewal plan, The Mayor and City Council of
Baltimore (the “City”) and the Maryland Historical Trust (the “Trust”) entered into a
Memorandum of Agreement (the “MOA”) regarding the treatment of historic properties.
Id. at 17. Essentially, the MOA required the City to submit its redevelopment plans to the
Trust for review and approval. Id. “The Trust’s Director and the State Historic
Preservation Officer, J. Rodney Little, rejected the first four sets of redevelopment plans
submitted by the City.” Id. Mr. Little did, however, provide conditional approval of the
City’s fifth set of plans. Id. Shortly thereafter, 120 West Fayette filed a complaint seeking
a declaration of rights pursuant to the MOA, requesting a declaration that Mr. Little’s
conditional approval was “ultra vires, ab initio.” Id. The circuit court dismissed 120 West
8
Fayette’s complaint on the grounds that it was neither a party to, nor an intended
beneficiary of, the MOA. Id.In affirming the circuit court, the Court of Appeals explained that, as part of the
renewal plan, the General Assembly appropriated $11.5 million dollars to rebuild a
performing arts center, but that appropriation “came with the condition that $1 million of
the expenditure hinged” on the City and the Trust reaching an agreement concerning how
to minimize the demolition of significant historic structures. Id. at 18. When Mr. Little
granted approval of the City’s development plan, he implied that he had only done so
because of the “non-negotiable business model for redevelopment” of the plan. Id. at 21-
22. 120 West Fayette suggested that Mr. Little only approved the plan due to “intense
political pressure.” Id. at 21 n.7. Once the Trust learned of Mr. Little’s conditional
approval, it took a vote and asked him to rescind, which Mr. Little declined to do. Id. at
22. Although the Trust contacted the Office of the Attorney General “for advice on the
legal viability of challenging Mr. Little’s approval[,]” ultimately, “the Trust took no further
action, legal or otherwise, to challenge Mr. Little’s conditional approval.” Id. Thus, 120
West Fayette was the only party challenging Mr. Little’s decision that he made on behalf
of the Trust.
The Court of Appeals rejected 120 West Fayette’s arguments that it had standing to
bring the action pursuant to its status as a taxpayer or as an adjoining property owner. Id.
at 25-35. “120 West Fayette therefore [was] left only with principles of contract law to
establish its entitlement to press a claim for declaratory relief.” Id. at 35. The Court of
Appeals had no difficulty concluding that 120 West Fayette was, at most, an incidental
9
third-party beneficiary who lacked standing. Id. at 37. After noting that 120 West Fayette
was not a party to the MOA entered into by the City and the Trust, the Court stated that
“The promises and benefits set forth in the MOA are directed solely to the City and the
Trust. Nowhere in the MOA is it contemplated that 120 West Fayette is to receive a
benefit.” Id. at 36. The Court further noted that 120 West Fayette was not a donee or
creditor beneficiary of the MOA, nor was it claiming a direct right to compensation from
the MOA.5 Id. In light of these facts, the Court concluded that 120 West Fayette was, “at
best an incidental beneficiary to the MOA” and was precluded from filing a suit “requesting
declaratory judgment that interprets and enforces an agreement to which it has no part.”
Id. at 37.
In CR-RSC Tower I, LLC v. RSC Tower I, LLC, the Court of Appeals further
elaborated on the line of demarcation between an intended and incidental beneficiary. 429
Md. 387 (2012). There, two developers entered into separate ground leases with landlords
to develop adjoining properties. Id. at 398. As the developers sought financing for their
projects, the landlords informed them that they were not in compliance with the terms of
the leases. Id. at 400. Because of the time it took for the developers and landlords to
determine whether the developers were in compliance with the terms of the leases, the
developers were ultimately unable to secure financing, and the projects stalled. Id. at 401-
02. When the building permits expired, the developers chose to sue the landlords for
5
We will more fully explore the “donee” and “creditor” beneficiary statuses in Part
II of our opinion.
10
damages rather than attempt to move forward with the projects. Id. at 402. “The verdict
was large. The jury awarded damages of $36,350,239 against [the landlords], jointly and
severally[.]” Id. at 403.
On appeal, the landlords argued that the damages should not have been awarded
jointly and severally because the jury had erred in construing each of the developers as an
intended third-party beneficiary of the other’s lease. Id. at 455. The developers disagreed,
asserting that their plans to create two “‘intertwined,’ mutually-dependent towers—under
which ‘[n]either ground lease would have been executed had the other not been executed
simultaneously’—‘amply supported the jury’s conclusion that each [developer] was a third
party beneficiary of the other’s ground lease.’” Id. at 456.
The Court of Appeals began its analysis by noting the distinction between “intended
third-party beneficiaries” and “incidental third-party beneficiaries”:
In Lovell Land, Inc. v. State Highway Admin., we explained the third-
party beneficiary standard in more detail. We said the “decisive[ ]
distinction” was between “intended and incidental beneficiaries,” with the
“crucial fact” being whether the pertinent provisions in the contract were
“inserted . . . to benefit” the third party. 408 Md. 242, 261, 265, 969 A.2d
284, 296, 298 (2009). Another “factor to consider,” we said, is whether the
third party is named in the contract or its “antecedent agreements.” Id. at
265, 969 A.2d at 297-98.
CR-RSC Tower I, LLC, 429 Md. at 457. The Court also noted its agreement with Section
302 of the Restatement (Second) of Contracts (1981), which provides:
(1) Unless 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
11
(a) the performance of the promise will satisfy an obligation of the
promisee to pay money to the beneficiary; or
(b) the circumstances indicate that the promisee intends to give the
beneficiary the benefit of the promised performance.
(2) An incidental beneficiary is a beneficiary who is not an intended
beneficiary.
The Court further explained that, “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[.]’” Id. at 458 (quoting Ferguson v. Cramer, 349 Md.
760, 767 (1998)).
Against this backdrop, the Court summarized the only two cases cited by the
developers:
In Shillman v. Hobstetter, a residential developer and a lender agreed that the
lender would issue conditional commitments for certain planned homes if the
developer would refund certain purchasers’ deposits. 249 Md. at 682–83,
241 A.2d at 572–73. The only thing the developer 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. Id. at 690, 241 A.2d at 576–77. Similarly, in Prescott v.
Coppage, the trial court appointed a receiver for a savings and loan company
as well as a special counsel to assist him. Because the purpose of the court
order was to benefit the creditors, we found them to be third-party
beneficiaries entitled to recover against the special counsel. 266 Md. 562,
574, 296 A.2d 150, 156 (1972). In both cases, the contracts were created
specifically to benefit the third parties in question. In other words, it is fair
to say that the purchasers in Shillman and the creditors in Prescott were the
“primary part[ies] in interest” under those contracts, because the provisions
that named them were obviously “inserted . . . to benefit” them.
CR-RSC Tower I, LLC, 429 Md. at 459 (footnotes omitted).
Unlike the contracts in Shillman and Prescott, the Court held that the ground leases
12
in CR-RSC Tower I, LLC “were clearly entered into first and foremost for the benefit of
the parties that signed them.” Id. The Court noted 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.” Id. Noting that the
contractual provisions in Shillman and Prescott demonstrated that the third parties were
“owed . . . a duty under the contract[s],” the Court held that this “crucial fact” was not
present in the CR-RSC Tower I, LLC contracts. Id. at 459-60. Accordingly, the Court held
that neither developer could claim intended third-party beneficiary status. Id. at 461-62.
Although 120 W. Fayette St., LLLP and CR-RSC Tower I, LLC are instructive in
understanding the basic legal principles governing intended and incidental third-party
beneficiary relationships, neither case specifically addresses the unique context present
here—whether liability insurance policies are issued for the benefit of parties that are
injured by an insured’s negligence. Although no Maryland appellate court has
unequivocally held that a party injured by an insured is, as a matter of law, an intended
third-party beneficiary of a liability insurance policy, both the Court of Appeals and this
Court have suggested that they should be.
In Jones v. Hyatt Ins. Agency, Inc., 356 Md. 639, 641-42 (1999), the Court of
Appeals had to determine whether the statute of limitations for the plaintiffs’ breach of
contract claim began to run at the time they discovered the breach or from the time they
obtained a tort judgment against the insured. There, “a motor vehicle driven by Mr. Jones
was struck by a motor vehicle driven by Robert Smith, an employee of K & D Auto, Inc.”
13
Id. at 642. Twenty days prior to the accident, K & D had arranged with Hyatt Insurance
Agency to obtain liability insurance. Id. Based on conversations with a life insurance
agent who had business relationships with both Hyatt and K & D, “K & D believed that
Hyatt had secured motor vehicle liability insurance” prior to the accident. Id. When K &
D notified Hyatt of Mr. Jones’s claim, however, K & D learned that it had not actually
obtained vehicle liability insurance. Id.Mr. Jones and his wife filed suit against K & D as well as its employee, Robert
Smith. Id. at 643. “The Joneses obtained a default judgment against Smith, and K & D
stipulated to its liability for Smith’s accident on the ground of respondeat superior.” Id.Following a nonjury trial on damages, the court entered two judgments, each for
$450,000—one in favor of Mr. Jones for his personal injuries and the other in favor of Mr.
and Mrs. Jones for loss of consortium. Id. K & D thereafter “assigned to the Joneses its
claim against Hyatt for failing to procure motor vehicle liability insurance in the insurance
package K & D had requested from the agency.” Id.Shortly after the judgments and assignment, K & D and the Joneses as assignees
filed suit against Hyatt claiming both breach of contract and negligence in failing to procure
the motor vehicle insurance K & D had requested. Id. at 643-44. The court dismissed
these claims on limitations grounds, however, finding that K & D was aware of Hyatt’s
breaches and negligence more than three years before it filed suit. Id. at 644. The court
imputed the same limitations onto the Joneses as K & D’s assignees. Id. The court did
assert, however, that, had the Joneses pursued a “direct action” against Hyatt rather than
rely on the assignment, the statute of limitations would not commence until after the
14
Joneses secured their judgment against K & D in the underlying tort suit. Id.Relying on the court’s suggestion, the Joneses filed an amended complaint. Id. This
time, the Joneses brought a direct action against Hyatt, arguing that they were third-party
beneficiaries of the agreement between K & D and Hyatt to obtain motor vehicle liability
insurance. Id. Hyatt moved to dismiss the amended complaint, arguing that the Joneses
had no direct causes of action against Hyatt, but that, if they did, those actions were barred
by limitations. Id. at 644-45. The circuit court disagreed, holding that the Joneses’ rights,
either as third-party beneficiaries or otherwise, accrued after they obtained the judgments
against K & D. Id. at 645. When the Joneses prevailed on their actions in the circuit court,
Hyatt appealed to this Court. Id. at 645-46. Notably, we “assumed, without deciding, that
the Joneses, as third-party beneficiaries, did at one time have a viable contractual cause of
action against Hyatt,” but we ultimately concluded that the claims were barred by
limitations. Id. at 646.
On petition for writ of certiorari, the Court of Appeals began its analysis by stating:
We shall assume, arguendo, that the Joneses had a viable cause of
action in contract as third-party beneficiaries of the agreement between Hyatt
and K & D for Hyatt to procure motor vehicle liability insurance. 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. at 646-47 (citing Mesmer, 353 Md. at 267). In a footnote, the Court noted
Under the same public policy and contract law analyses underlying
the third-party beneficiary cause of action against the insurer, some
jurisdictions have recognized a third-party beneficiary cause of action against
an agent for breach of the contract to procure liability insurance. See, e.g.,
Gothberg v. Nemerovski, 58 Ill. App. 2d 372, 385-386, 208 N.E.2d 12, 20
15
(1965) (“Because of the peculiar significance of automobile liability
insurance as well as the provisions of the policy contemplated by the parties
. . . ,” the “plaintiffs can be considered third party beneficiaries of the contract
to procure insurance entered into between [the tortfeasor and the agent], that
is, they had a sufficient interest in such a contract to bring suit directly for its
breach. In entering into this contract to procure insurance, it is a fair and
reasonable inference that [the tortfeasor was] contemplating possible injury
to unidentified third parties, and the insurance coverage was for the direct
benefit of third parties who might be injured through [his] negligence”)[.]
Id. at 647 n.4.
Although the context in Jones concerned the procurement of motor vehicle
insurance, the Court specifically cited Harford Mut. Ins. Co. v. Woodfin Equities Corp.,
344 Md. 399 (1997), a case not involving motor vehicle insurance, in support of the
proposition that injured parties are intended beneficiaries of liability insurance policies.
Jones, 356 Md. at 647. Ultimately, the Court held that the Joneses’ claims were barred by
limitations, applying the principle that a third-party beneficiary is subject to the same
defenses that exist between the original promisor and promisee. Id. at 647-48.
Consistent with Jones, this Court has similarly suggested that injured tort claimants
are intended third-party beneficiaries of insurance policies. In Phillips v. Allstate Indem.
Co., Phillips purchased a motorcycle and then obtained an insurance policy from Allstate
Indemnity Company that provided protection against loss of the motorcycle. 156 Md. App.
729, 733 (2004). Shortly thereafter, “the motorcycle allegedly was stolen from a parking
space in front of Phillips’ apartment.” Id. Phillips notified Allstate of the theft, and
provided a recorded statement. Id. When Allstate sought to verify the information Phillips
provided, it learned that he had lied about his employment. Id. at 733-34. Allstate then
requested that Phillips complete an “Affidavit of Automobile Total Theft” form, but
16
because of inconsistencies in the information provided, Allstate requested that Phillips
submit to an “examination under oath.” Id. at 734. When Phillips declined, Allstate denied
his claim for lack of cooperation. Id. at 736. In response to this denial, Phillips filed a
breach of contract action against Allstate, later amending his complaint to include a
declaratory judgment count. Id. Allstate moved for summary judgment, and, following a
hearing, the circuit court, without explanation, granted Allstate’s motion. Id. at 736-37.
One of the issues on appeal was “whether an insured’s failure to answer questions
is a failure to cooperate when a policy does not contain an express cooperation clause.” Id.
at 743 (footnote omitted). In resolving that issue, the Court discussed Md. Code (1995,
2017 Repl. Vol.), § 19-110 of the Insurance Article (“Ins.”), which concerns whether an
insurer may disclaim coverage on a liability policy where the insured has breached the
policy by failing to cooperate. With regard to that statute, we stated:
By its plain language, Ins. § 19-110 applies to a “liability insurance
policy.” A liability insurance policy is “generally issued for the benefit of
third parties who are injured and have a claim against a tortfeasor.” 7
Couch on Insurance § 104:8 (3d ed. 2003). Indeed, in the Maryland cases
that address Ins. § 19-110, the issue has been whether an insurer could
disclaim coverage and not pay benefits to a third party when the insured
either failed to cooperate or to give timely notice.
Id. at 746 (emphasis added).
Although the emphasized portion of the Court’s opinion is clearly dicta, we have
recently endorsed this principle. See Dolan v. Kemper Indep. Ins. Co., 237 Md. App. 610,
620 n.5 (2018) (“A liability insurance policy, however, is a policy issued to protect an
insured against the claims of injured third parties.” (citing Phillips, 156 Md. App. at 746));
see also Prudential Secs. Inc. v. E-Net, Inc., 140 Md. App. 194, 215 (2001) (“Nevertheless,
17
there are situations in which an injured third party may come to be identified as a general
class of persons sought to be among the intended beneficiaries of a contract. For example,
a tort claimant has been recognized as a third-party beneficiary of a contract of insurance.”
(citing Jones, 356 Md. at 658)). Furthermore, this language comports with the Court of
Appeals’s assertion in Jones that injured tort claimants are intended third-party
beneficiaries of insurance policies. See also Travelers Ins. Co. v. Godsey, 260 Md. 669,
674 (1971) (“As the third party beneficiary of the insurance contract, the claimant stands
in the shoes of the insured wrongdoer and vis-à-vis the insurer his rights are no greater than
those of the insured’s.” (citing Shillman, 249 Md. at 690)).
In summary, our review of the law demonstrates that Maryland appellate courts have
recognized that injured tort claimants are intended third-party beneficiaries of liability
policies. Although we acknowledge a split of authority on this issue in American
jurisprudence, we adopt what we believe is not only the better view, but the view that has
also been tacitly approved in Maryland appellate cases.6 We therefore hold that injured
6
At oral argument, the parties agreed that there is a split of authority regarding
whether injured tort claimants are intended third-party beneficiaries of liability policies.
Our research vindicates their assertion. Indeed, Appleman on Insurance has noted:
Thus, it has been popular to say, in recent cases, that liability policies are
carried for the benefit of the public in general, and that persons who are
injured are third party beneficiaries. That is an accurate statement, in some
respects; if they were not third party beneficiaries, they would have no rights
under the contract. However, as seen by the overwhelming weight of
authority those rights arise from, and are no greater than, the rights of the
contracting party from whom they are derived. Some courts, tired of all the
intricacies of reasoning, have stated flatly that injured persons are not third
(continued . . .)
18
tort claimants are intended third-party beneficiaries of liability insurance policies.7 Finally
party beneficiaries. Other decisions more properly state that, even if they are
such beneficiaries, their rights still are limited by the contract.
8 J.A. Appleman & J. Appleman, Insurance Law and Practice § 4811 at 346-48 (1981)
(footnotes omitted).
For cases stating that insurance liability policies are issued for the benefit of the
general public, see, e.g., Reliance Ins. Co. v. St. Paul Ins. Cos., 239 N.W.2d 922, 925
(Minn. 1976) (noting that a lawyer’s professional liability insurance “is not only a contract
between the insurer and the insured but also a contract for the benefit of the public”);
Odolecki v. Hartford Accident & Indem. Co., 264 A.2d 38, 42 (N.J. 1970) (stating that, in
the context of automobile insurance, “a liability insurance contract is for the benefit of the
public as well as for the benefit of the named or additional insured.”); Gov’t Emps. Ins. Co.
v. Dennis, 232 N.E.2d 750, 752 (Ill. App. Ct. 1967) (“We agree that automobile public
liability insurance assumes an importance to the general public beyond that normally found
in private contracts. Because the general public could be subjected to possible injury
through the operation of the car in question, its members may be treated as third-party
beneficiaries.”).
For cases rejecting the notion that insurance liability policies are issued for the
benefit of the general public, see, e.g., Molina v. Am. Alt. Ins. Corp., 699 N.W.2d 415, 419
(Neb. 2005) (“This court has never held that an injured person is a third-party beneficiary
of a liability insurance policy insuring the tort-feasor.”); Charles v. Stout, 308 P.3d 1138,
1141 (Alaska 2013) (construing tort victims as incidental beneficiaries); Mercado v.
Mitchell, 264 N.W.2d 532, 538 (Wis. 1978) (“In the absence of express provisions in the
policy or statutory provisions which can be read into the policy, a standard liability policy
does not make the injured party a third-party beneficiary.”).
7
In CX Reinsurance Co. Ltd. v. Leader Realty Co., No. JKB 15-3054, 2018 WL
2020182, Slip Op. at 3 (D. Md. May 1, 2018), Chief Judge James Bredar stated that “a sub-
strain of third-party beneficiary law apparently exists in Maryland because of a judicially
created qualification of the doctrine.” Chief Judge Bredar explained that this “sub-strain
of third-party beneficiary law” was apparently based on a public policy exception to
contract interpretation whereby liability insurance contracts are interpreted “as expressing
the insurer’s and the insured’s intent to make any potential tort claimant against the
insureds an intended third-party beneficiary, [Jones, 356 Md. at 646 & n.4] even though
the contract’s language may not support such an inference.” CX Reinsurance Co. Ltd., slip
op. at 3. That interpretation of Maryland law supports our own conclusion that Maryland
(continued . . .)
19
on this point, we reject the Insurers’ argument 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. To support this argument, the Insurers rely on the
language of the Policies themselves, which provide that
[The Insurers] will pay those sums that the insured becomes legally
obligated to pay as damages because of “bodily injury” . . . to which this
insurance applies. We will have the right and duty to defend any “suit”
seeking those damages. We may at our discretion investigate any
“occurrence” and settle any claim or “suit” that may result.
The Insurers proceed to argue that “the Policies are indemnification contracts that do not
obligate the insurer to pay anything, other than defense costs . . . unless, and until, the
appellate courts have indeed treated injured tort claimants as intended third-party
beneficiaries in the liability insurance context.
We note that Chief Judge Bredar’s opinion has not been published in the federal
reporter. In prior reported opinions, this Court has stated that “it is the policy of this Court
in its opinions not to cite for persuasive value any unreported federal or state court
opinion.” Kendall v. Howard Cty., 204 Md. App. 440, 445 (2012), aff’d, 431 Md. 590(2013); see also Poe v. IESI MD Corp., 243 Md. App. 243, 256 n.2 (2019); Oliveira v.
Sugarman, 226 Md. App. 524, 553 (2016), aff’d, 451 Md. 208 (2017); Margolis v. Sandy
Spring Bank, 221 Md. App. 703, 718 n.3 (2015). The Court of Appeals has not adopted a
similar policy. See, e.g., Gables Constr., Inc. v. Red Coats, Inc., 468 Md. 632, 663 (2020)
(agreeing with an unreported decision of the United States District Court for the District of
Maryland); Finci v. Am. Cas. Co. of Reading, Pa., 323 Md. 358, 375-76 (1991) (citing as
support “recent unreported decisions” of federal district courts that “have rejected FDIC’s
public policy contention”).
In approving this opinion for reporting, the Court of Special Appeals announces that
it is no longer the Court’s policy to prohibit the citation of unreported opinions of federal
courts or the courts of other states for persuasive value, provided that the jurisdiction that
issued any particular opinion would permit it to be cited for that purpose. That change
does not apply to unreported opinions of this Court, which remain governed by Maryland
Rule 1-104.
20
insured becomes legally obligated to pay damages.”
Although we note the novelty of the Insurers’ argument, we are unaware of any
authority, either in Maryland or elsewhere, that specifically requires an injured party to
obtain a judgment or settlement against the tortfeasor as a prerequisite for intended third-
party beneficiary status. Indeed, such a requirement would directly conflict with Part II of
our opinion, where we will hold that an intended third-party beneficiary’s rights vest at the
time of injury. A rule requiring a party to obtain a judgment in order to become an intended
beneficiary would be illogical where that party’s rights vest at the time of injury. We
therefore reject the Insurers’ invitation to add such a requirement. Rather, based on the
cases discussed above, we conclude that sound public policy dictates that liability insurance
policies should be construed to protect injured tort claimants. This supports the notion that
injured parties are intended beneficiaries of those policies as a matter of law, regardless
whether they have obtained judgments or settlements. See Jones, 356 Md. at 646-47;
Phillips, 156 Md. App. at 746. Accordingly, we hold that the Plaintiffs here are intended
third-party beneficiaries of the Policies.8
8
Although we hold that the Plaintiffs constitute intended third-party beneficiaries
and, as such, have standing to pursue their declaratory judgment action, nothing in our
opinion should be construed as suggesting that the Plaintiffs may proceed by filing direct
actions against the Insurers in order to resolve their negligence claims. See Harford Mut.
Ins. Co., 344 Md. at 412. This is so because “public policy frowns upon the injection of
liability insurance in legal proceedings at which the insured defendant’s underlying tort
liability is being determined[.]” Id. Although Maryland disfavors direct actions against
insurers to resolve ultimate liability issues, appellate courts “have sanctioned ‘declaratory
(continued . . .)
21
II. PLAINTIFFS’ RIGHTS VESTED WHILE THE POLICIES WERE IN EFFECT
Having established that the Plaintiffs are intended third-party beneficiaries with
rights to enforce the Policies (regardless whether they have obtained judgments or
settlement agreements against the landlords), we must determine when those rights vested
and whether the Rescission Settlement Agreements modified those rights. The Insurers
insist that, because the Plaintiffs are not intended third-party beneficiaries, they have never
obtained vested rights to enforce the Policies. The Plaintiffs disagree and argue that their
rights to enforce the Policies vested at the time of their injuries.
We hold that, because the contracts at issue here are liability policies issued for the
benefit of injured tort claimants (as explained in Part I, supra), the Plaintiffs’ rights to
enforce the Policies vested at the time of their injuries. We further hold that the Rescission
Settlement Agreements were wholly ineffective in modifying those vested rights.
Although we are aware of no Maryland authority directly on point regarding the
vesting of a third-party beneficiary’s rights in the context of an insurance policy, Spates v.
Spates, 267 Md. 72, 77-79 (1972) provides a useful starting point for understanding third-
judgment actions by or against the tortfeasor’s liability insurer, in advance of a
determination of liability in a tort suit, . . . when the issues in the declaratory judgment
action are independent and separable from the claims of the tort claimant[.]’” Id. (quoting
Washington Metro. Area Transit Auth. v. Queen, 324 Md. 326, 333 n.6 (1991)). Regarding
direct actions against insurers, Maryland has adopted a “direct action” statute. See Ins. §
19-102(b)(2). This statute allows an injured party to file a claim directly against an insurer,
but only after the injured party has secured a judgment against the insured, but is unable to
recover the full amount of the final judgment from the insured.
22
party beneficiary vesting. In Spates, a son sought to assert his rights as an intended third-
party beneficiary of a separation agreement between his mother and father—namely, that
pursuant to the separation agreement, the mother would convey her indivisible interest in
real property to the father, and that the father would then grant his son an undivided 50%
interest in that same property. Id. at 73-75. Notably, the son was a 17-year-old minor at
the time the separation agreement was executed. Id. at 73. Although the Court ultimately
held that the son’s action against his father to enforce the separation agreement was barred
by limitations, the Court first considered whether and when the son’s rights to enforce the
separation agreement vested. Id. at 77-78.
The Court noted that there were two different rules to consider regarding vesting:
the general rule for adult beneficiaries; and a separate rule where the beneficiary was a
minor when the contract was executed. The Court explained the general rule applicable to
adult beneficiaries:
While we have been referred to no Maryland case, the old
Restatement rule is that the promisor and promisee can make no change in
the promise made to a donee beneficiary unless such a power is reserved,
Restatement, Contracts s 142, at 168 (1932). Nor can a change be made by
the promisor and promisee in the promise made to a creditor beneficiary if
he has changed his position in reliance on the promise, Restatement,
Contracts s 143, at 168 (1932).
Id. The Court also recognized an exception applicable to minors: “once an infant is made
the donee beneficiary of a contract between a promisor and promisee, his acceptance of the
benefit is assumed, and his rights under the contract are indefeasible, unless he rejects the
benefits, or a right to alter the provision made for him has been reserved[.]” Id. at 78 (citing
2 Williston on Contracts, § 356, p. 823 (3d ed. Jaeger 1959). The Court assumed, without
23
deciding, that the son’s rights vested as a matter of law upon execution of the separation
agreement pursuant to the rule applicable to minors, but proceeded to hold that the son’s
claim was barred by limitations.9 Id. at 79.
We pause here to note the Spates Court’s use of the terms “donee beneficiary” and
“creditor beneficiary.” The Restatement (First) of Contracts originally categorized
“intended beneficiaries” into two groups: donee beneficiaries and creditor beneficiaries.
Id. at 77-78. Under the Restatement (First) of Contracts § 133 (1932), a donee beneficiary
obtained such status where the purpose of the promise was to make a gift to the beneficiary
or to confer upon her a right against the promisor. A creditor beneficiary, on the other
hand, obtained such status by virtue of the fact that performance of the promise would
satisfy an actual or asserted duty that the promisee owed to the beneficiary.
Notably, under the Restatement (First) of Contracts, the promisor and promisee
could not modify an agreement to the detriment of a donee beneficiary unless such power
was expressly reserved in the agreement. Restatement (First) of Contracts § 142. As to
creditor beneficiaries, the promisor and promisee could not modify the agreement after the
9
We note that the exception for minors likely applies here—apparently all Plaintiffs
were minors during their tenancies at the properties when the Policies were in effect. The
minor rule recognized in Spates therefore arguably provides an alternative basis to affirm
the circuit court’s declaratory judgment that the Plaintiffs’ rights vested at some point prior
to execution of the Rescission Settlement Agreements. This issue is complicated by the
fact that injured tort plaintiffs do not fit neatly into either the donee or creditor beneficiary
classifications. We need not resolve this issue because, as we discuss infra, we shall hold
that the Plaintiffs’ rights vested upon suffering injuries on the insured premises.
24
creditor beneficiary materially changed her position in reliance on the promise.
Restatement (First) of Contracts § 143.
The Spates Court noted that a tentative draft of the Restatement (Second) of
Contracts proposed eliminating the distinction between donee and creditor beneficiaries,
and would instead only distinguish between “intended” and “incidental” beneficiaries. 267
Md. at 77-78 n.3. The Spates Court observed that the:
Restatement (Second), Contracts s 142 (Tent. Draft No. 3, 1967) eliminates
this distinction [between donee and creditor beneficiaries] and provides that
modification by the promisor and promisee is ineffective only if the
agreement so provides, unless the third-party beneficiary has changed his
position in reliance on the promise or has manifested assent to it.
Id. at 78. The current version of the Restatement (Second) of Contracts § 311 addresses
the modification of an intended third-party beneficiary’s rights, and provides:
(1) Discharge or modification of a duty to an intended beneficiary by conduct
of the promisee or by a subsequent agreement between promisor and
promisee is ineffective if a term of the promise creating the duty so provides.
(2) In the absence of such a term, the promisor and promisee retain power to
discharge or modify the duty by subsequent agreement.
(3) Such a power terminates when the beneficiary, before he receives
notification of the discharge or modification, materially changes his position
in justifiable reliance on the promise or brings suit on it or manifests assent
to it at the request of the promisor or promisee.
(4) If the promisee receives consideration for an attempted discharge or
modification of the promisor’s duty which is ineffective against the
beneficiary, the beneficiary can assert a right to the consideration so received.
The promisor’s duty is discharged to the extent of the amount received by
the beneficiary.
Thus, the donee and creditor beneficiary statuses identified in the Restatement (First) of
Contracts have been subsumed by the broader “intended beneficiary” category in the
25
Restatement (Second), and the general rule regarding the vesting of rights is meant to apply
to that new, broader category.
We note that in Part I of our opinion we made no effort to distinguish between donee
and creditor beneficiaries when we determined that the Plaintiffs constitute intended third-
party beneficiaries. Indeed, the Plaintiffs themselves have never asserted that they should
be so classified. This is not surprising. Numerous commentators have expressed concern
or disagreement with the Restatement (First) of Contracts’ two categories for all possible
intended third-party beneficiaries. See David M. Summers, Third Party Beneficiaries and
the Restatement (Second) of Contracts, 67 Cornell L. Rev. 880, 880-81 (1982) (“The first
Restatement attempted to supply a theoretical basis for third party recovery by defining
two categories of beneficiaries who could enforce a contract: donees and creditors. Courts
soon found, however, that many third party beneficiaries could not be classified within the
two categories.” (footnotes omitted)); Jessica Ansell Hauser, Nonconsensual Repeal of
Third-Party Beneficiary Contract Rights: Senior Creditors Under Subordination
Agreements, 8 Cardozo L. Rev. 1227, 1230-31 (1987) (“The Restatement’s distinction
between creditor and donee beneficiaries was almost useless. Courts found it increasingly
difficult to protect parties for whom third-party contracts were drafted while limiting
parties to the two assigned categories.”); Note, The Third Party Beneficiary Concept: A
Proposal, 57 Colum. L. Rev. 406, 417-18 (1957) (“The reasons advanced for the
distinction in legal relations created by the ‘donee’ or ‘creditor’ labels do not appear to
carry much weight.” (footnote omitted)).
26
The American Law Institute, which publishes the Restatement, recognized the
limitations of the donee/creditor beneficiary categories at its 44th Annual Meeting on May
18, 1967. In discussing a tentative draft of the Restatement (Second) of Contracts,
Professor Robert Braucher, a Reporter, discussed the problems with classifying all third-
party beneficiaries as either donees or creditors. ALI Proceedings 306 (1967). Professor
Braucher explained that there were some “fringe cases” where the donee and creditor
categories did not neatly fit, such as in the case of mortgagees or materialmen, and
suggested using the term “intended beneficiary” to encompass every type of beneficiary
who could enforce a contract. Id. at 305-07.
Though not specifically contemplated at that ALI Proceedings session, an injured
tort claimant seeking to enforce a liability insurance policy would appear to constitute what
Professor Braucher deemed a “fringe” case. It is difficult to classify a tort claimant as
either a donee or creditor beneficiary, and the “vesting” rule concerning manifestations of
assent or changing one’s position in reliance of the agreement would be extremely difficult
to apply to an injured third party seeking to recover pursuant to a liability policy.10
10
We note that no Maryland appellate court has expressly endorsed the Restatement
(Second) of Contracts § 311’s abandonment of the donee/creditor categories. Despite the
inherent limitations in reducing all forms of intended beneficiaries into these two
categories, nothing in this opinion should be construed as disavowing the donee/creditor
beneficiary statuses. Indeed, the Court of Appeals continues to recognize them. See Lovell
Land, Inc., 408 Md. at 263-64 (noting that “elimination of the donee/creditor categories
and the lumping of protected beneficiaries into one broad class” presents its own
challenges). We merely note that there are intended beneficiaries who fall outside a strict
interpretation of the donee/creditor beneficiary classifications.
27
Although we could hypothesize scenarios where an injured third-party beneficiary could
manifest assent to a liability policy or demonstrate detrimental reliance on the terms of the
policy, we are confident that those fact patterns would be rare in practice. Indeed, the
Restatement (Second) apparently recognized the limitations of its general “vesting” rule.
The Restatement (Second) of Contracts § 311 Comment e. proposes a different approach
where the beneficiary is an injured tort claimant and the contract is an insurance policy.
Comment “e” provides:
Effect of loss under insurance policy. The terms of the promise may
make the beneficiary’s right irrevocable in whole or in part or only upon a
condition. Thus a reserved power to change the beneficiary of a life
insurance policy terminates on the death of the insured. In general the power
of promisor and promisee to vary the duty to a beneficiary under other types
of insurance policies is understood to be subject to a similar limitation: when
an insured loss occurs, the power to vary the terms of the policy with respect
to that loss is terminated.
Illustration:
5. A contracts with B for liability insurance covering any person
operating A’s automobile with A’s permission. C incurs liability covered by
the policy. Thereafter A and B agree to rescind the policy. The attempted
rescission does not affect the rights of C or the person to whom he is liable.
(Emphasis added). This language captures two important principles that differ from the
general vesting rule that requires manifestation of assent or detrimental reliance: the
beneficiary’s rights vest when the loss or injury occurs, and the insurer and insured lose
their ability to modify the policy upon the occurrence of injury or loss.
Although we are aware of no Maryland authority expressly adopting the
Restatement (Second) of Contracts § 311 or Comment e., the overwhelming weight of
authority agrees that the intended beneficiary of a liability policy obtains a vested right in
that policy at the time of injury, and that the insured and insurer may not subsequently
28
modify that vested right. For example, Appleman on Insurance simply states that “it is the
general rule that an injured person’s rights cannot be defeated by a cancellation or
settlement after an accident has occurred.” 8B J.A. Appleman & J. Appleman, Insurance
Law and Practice § 5020, at 515-16 (1981).
Additionally, Couch on Insurance, when discussing whether the insured and insurer
may modify an insurance policy to the detriment of an injured third-party, states:
Where the contract of insurance provides for liability to third persons, the
insurer and the insured cannot terminate such a contract by their voluntary
action to the prejudice of a claimant’s rights which have already vested.
Illustrative of the foregoing, it has been held that a compensation policy
cannot be cancelled by the insurer, even with the assent of the insured, after
an injured employee’s rights thereunder have accrued, and even if the
employee did not have actual knowledge of the existence of the policy or his
or her rights thereunder since the employee is presumed to have accepted the
benefits of the policy.
2 Couch on Insurance § 31:49 (3d ed. 2020) (footnotes omitted). In support of the notion
that the insured and insurer may not modify a beneficiary’s vested rights, Couch cites to
several cases that have recognized that the injured party’s right to enforce vested at the
time of the injury. See Direct Auto Ins. Co. v. Bahena, 131 N.E.3d 1094, 1106 (Ill. App.
Ct. 2019) (stating that Illinois public policy “dictates that insurance is ‘not necessarily a
private matter between an insurer and its insured,’ and as such, an injured party’s rights
against the liability insurer vests at the moment of the accident giving rise to the underlying
claim.” “The injured party’s vested rights cannot be ‘defeated by the joint efforts of the
insured and the insurer.’” (citations omitted) (citing State Farm Fire & Casualty Co. v.
Perez, 899 N.E.2d 1231, 1234 (Ill. App. Ct. 2008))); Strojnik v. Gen. Ins. Co. of Am., 36
P.3d 1200, 1205 (Ariz. Ct. App. 2001) (construing state statute as prohibiting “an insurer
29
and its insured, after the occurrence of any ‘injury, death or damage’ for which the insured
may be liable, from invalidating their insurance policy as of a date prior to the covered
event.”); Detroit Auto. Inter-Ins. Exch. v. Ayvazian, 233 N.W.2d 200, 203 (Mich. Ct. App.
1975) (“The liability of the insurer with respect to insurance . . . becomes absolute
whenever injury or damage covered by such policy occurs. The policy may not be canceled
or annulled as to such liability by agreement between the insurer and the insured after the
occurrence of the injury or damage” (citing 1 Long, The Law of Liability Insurance, § 3.25
pp. 3-83-84)); Rendelman v. Levitt, 24 S.W.2d 211, 214 (Mo. Ct. App. 1930) (stating that
“[A]n attempted cancellation or rescission of a policy, issued under [the Worker’s
Compensation Act], after an injury to an employee has occurred, though assented to by the
employer, cannot defeat the right of the employee to recover on the policy,” and the
doctrine allowing rescission of a contract prior to the third-party’s acceptance or
detrimental reliance “has no application here.”); Cosmopolitan Mut. Ins. Co. v.
Lumbermen’s Mut. Cas. Co., 228 N.E.2d 893, 895 (N.Y. 1967) (“It is clear that
Lumbermen’s, while it was the only insurance carrier protecting the insured, could not have
effectively cancelled the binder insofar as the injured party was concerned after June 19,
the date of the accident. The right of Higgins, the injured party, to proceed against
Lumbermen’s had fully matured at that time.”); Chandler v. Valentine, 330 P.3d 1209,
1212-14 (Okla. 2014) (holding that under Oklahoma statute’s prohibition on retroactive
annulment of policy, an insurer may not cancel a “claims made” policy where insurer knew
of pending wrongful death claim.).
30
In addition to the cases cited in Couch, Plaintiffs have provided other out-of-state
cases that support the proposition that a beneficiary’s right to enforce vests at the time of
injury. See Douglass v. Nationwide Mut. Ins. Co., 913 S.W.2d 277, 282 (Ark. 1996)
(stating that “While we uphold the right of an insurance company to rescind coverages
based on fraud by the insured without consent of the insured or a declaratory judgment, we
underscore the point that this right is unavailable when third-party claims are at issue.”);
Farm & City Ins. Co. v. Coover, 225 N.W.2d 335, 337 (Iowa 1975) (stating that Iowa’s
direct action statute, which provided that an injured person who obtains judgment against
an insured may sue the insurer directly, also gives an injured third party an interest in the
liability policy at the time of injury, and that the 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”); Indem. Co. of Am. v. Pitts, 58
S.W.2d 53, 54 (Tex. Comm’n App. 1933) (holding that with regard to insurer and insured’s
attempted cancellation of policy, “[t]hat [the injured party], without her consent, could not
be deprived of her rights against the [insurer], by agreement between [the insured and the
insurer] after her rights had accrued, is perfectly plain. [The injured party’s] rights against
the company, subject to the terms and conditions of the policy, accrued the moment the
liability of [the insured] for the personal injuries suffered by her arose.”); Finkelberg v.
Cont’l Cas. Co., 219 P. 12, 14 (Wash. 1923) (stating that the insured “could neither destroy
the rights of [the intended third-party beneficiary] by his agreement with [the insurer] nor
by his neglect to give notice to [the insurer]”).
31
In summary, there is substantial authority for the proposition that an injured third
party’s rights to enforce a liability insurance policy vest at the time of injury, and that the
insured and insurer may not subsequently modify that policy to the detriment of the third
party. To permit an insurer and insured to enter into an agreement to defeat the injured
party’s rights under the policy would defy logic. Plaintiffs, as intended third-party
beneficiaries of the Policies, obtained vested rights in those Policies when they suffered
their injuries. Because those rights vested at the time of the injuries, the Insurers and
landlords could not subsequently modify them pursuant to the Rescission Settlement
Agreements.11
CONCLUSION
We hold that, in the context of a liability insurance policy, an injured tort claimant
constitutes an intended third-party beneficiary. We further hold that the injured tort
claimant’s rights to enforce the policy vest at the time of injury, and that the insurer and
insured may not subsequently modify those rights after they have vested. The Plaintiffs in
this case therefore constitute intended third-party beneficiaries of the Policies. Their rights
to enforce the Policies vested upon suffering their injuries at the landlords’ properties.
11
We note that the Insurers have provided no affirmative authority to the contrary,
i.e., they have failed to cite any authority stating that a third-party beneficiary’s rights do
not vest at the time of injury in the context of a liability policy. Rather, Insurers simply
double-down on their argument that Plaintiffs must first obtain a judgment as a condition
precedent to suing the Insurers. The Insurers further argue that the recognition of vested
rights at the time of injury would undermine Maryland’s public policy favoring settlement
of litigation. In this narrow circumstance, however, we believe that the public policy of
protecting tort plaintiffs’ rights outweighs the policy that favors settlements.
32
Finally, the Insurers and landlords could not, by virtue of the Rescission Settlement
Agreements, modify or undermine those vested rights. Accordingly, we affirm.12
JUDGMENT OF THE CIRCUIT COURT
FOR BALTIMORE CITY AFFIRMED.
COSTS TO BE PAID BY APPELLANTS.
12
We recognize that, “[a]s the third party beneficiary of the insurance contract, the
claimant stands in the shoes of the insured wrongdoer and vis-à-vis the insurer his rights
are no greater than those of the insured’s.” Travelers Ins. Co., 260 Md. at 674 (citing
Shillman, 249 Md. at 690). Thus, if the Policies were void ab initio due to the landlords’
fraudulent misrepresentations, then the Plaintiffs would not be able to recover damages
from the Insurers because they would stand in the shoes of the allegedly uninsured
landlords. Nevertheless, nowhere in the declaratory judgment action in the circuit court
did the Insurers seek their own declaration that the Policies were void ab initio, and that
the Plaintiffs are therefore unable to enforce the Policies against them. Nor did the Insurers
raise any such argument in this Court. Accordingly, because this issue is not before us, we
express no opinion on it.
33