E-Alert Case Updates

United States District Court for the District of Maryland finds that insured can plead quasi-contract claims alongside claims for breach of express contract

Am. Home Assurance Co. v. KBE Bldg. Corp.
No. 13-1941 (D. Md. March 14, 2014)
by Wayne C. Heavener, Associate
Semmes, Bowen & Semmes (www.semmes.com)

In American Home Assurance Company v. KBE Building Corporation, the United States District Court for the District of Maryland denied an insurer’s motion to dismiss quasi-contract and tort claims brought by an insured in a coverage dispute case. Writing for the Court, Judge Catherine C. Blake held that the insured’s quasi-contract claims should not be dismissed simply because the insured also pleaded breach of contract claims; rather, the claims could be pleaded in the alternative. The Court also held that it could not dismiss the insured’s actions for negligence and breach of the covenant of good faith and fair dealing because the propriety of those claims depended upon a choice of law analysis that the Court was ill-equipped to make at this time. Therefore, it denied the insurer’s motion to dismiss.

In 2006 and 2007, KBE Building Corporation (“KBE”) entered into contracts with Waldorf Land L.L.L.P. (“Waldorf”) and Gainesville Land L.L.L.P. (“Gainesville”) to construct “EZ Storage” buildings. Specifically, KBE was contracted to oversee and manage the projects as the general contractor. In 2009, both Waldorf and Gainesville filed actions against KBE seeking damages for allegedly defective work. KBE had purchased Commercial General Liability policies (collectively, the “Policy”) from American Home Assurance Company (“American”), which covered liability for bodily injury or property damage related to the Waldorf and Gainesville projects. In 2009, KBE filed claims with American for coverage under the Policy. KBE alleges that American failed to communicate promptly with KBE regarding its claims for coverage, and KBE was forced to retain engineering firms and prepare estimates of remediation in an attempt to mitigate possible damages. According to KBE, it entered into an agreement with American in 2009 (the “Agreement”), under which American agreed to reimburse KBE for the investigation, remediation, and repair of the Waldorf and Gainesville projects, so long as KBE provided American with updates as to the cost of its remediation efforts. In reliance of the Agreement, KBE began repairs on the Waldorf and Gainesville projects.

In 2010, American sent KBE two (2) reservation of rights letters. These letters stated that American would investigate and provide a defense in the underlying litigation, but that it also reserved American’s right to indemnification because the underlying suit may not fall within the Policy’s definitions of an “occurrence” or “property damage.” American then sent KBE an additional reservation of rights letter acknowledging receipt of a reimbursement request for work on the Waldorf Project, reserving its rights to determine if the claims were covered by the Policy, and requesting additional information. Eventually, American began refusing KBE’s reimbursement requests because American asserted that KBE’s claims were not covered by the Policy. KBE settled the underlying litigation without American’s participation. American filed a declaratory judgment action in the United States District Court for the District of Maryland, seeking a declaration that it was under to duty no indemnify KBE for the costs it incurred in remediating the allegedly defective work. KBE counterclaimed seeking a declaration that American is liable (Count I), and sought damages under theories of breach of contract (Counts II and III), promissory estoppel (Count IV), quantum meruit (Count V), breach of the implied covenant of good faith and fair dealing (Count VI), and negligence (Count VII). American moved to dismiss Counts IV through VII.

The Court denied American’s Motion to Dismiss as to both counts. The Court noted that the parties disputed whether Maryland, Connecticut, or Virginia law applied. American moved to dismiss KBE’s quasi-contract claims (Counts IV and V) because it asserted that an express contract governed the parties’ dispute. The Court acknowledged that under Maryland, Virginia, and Connecticut law, a party could not recover on quasi-contract claims where an express contract governed. A party is permitted, however, to plead in the alternative contractual and quasi-contractual theories where the terms of a contract are in dispute. The Court held that, in this case, KBE properly pled its quasi-contract claims. The Court also noted that the Policy was not the only contract at issue, and that KBE had asserted that the Agreement was also an express agreement. Given that American disputed the existence of the Agreement, the Court found that KBE could possibly recover reimbursement costs under quasi-contract theories.

As to Counts VI and VII — breach of the covenant of good faith and fair dealing and negligence, respectively — the Court held that dismissal would be improper until a factual record is developed that was sufficient enough to conduct a choice of law analysis. The Court noted that Connecticut law recognized a separate tort for the breach of the covenant of good faith and fair dealing, but Maryland and Virginia law do not. Therefore, KBE failed to state a claim under Maryland and Virginia law only. The Court concluded that the parties must develop a full factual record before this matter could be addressed because Maryland’s choice of law analysis is fact-intensive. The Court was factually ill-equipped to make such an analysis when considering American’s Motion to Dismiss. American was free, however, to renew its motion as to Counts VI and VII, dependent upon the Court’s choice of law analysis.