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District Court Erred in Granting Summary Judgment to Underwriters; Scope of Coverage Creates a Clear Duty to Defend Contractor Held Liable for Subcontractor’s Negligence
Capital City Real Estate, LLC v. Certain Underwriters at Lloyd’s London, Subscribing to Policy Number: ARTE018240
In Capital City v. Certain Underwriters at Lloyd’s London, No. 14-1239 (U.S. Court of Appeals for the Fourth Circuit, June 10, 2015), Capital City Real Estate, LLC (“Capital City”) appealed the district court order granting summary judgment to Certain Underwriters at Lloyd’s London (the “Underwriters”) on the grounds that the Underwriters had no duty to defend or indemnify Capital City. Capital City was operating as the general contractor for the renovations of 57 Bryant Street, which shared a wall with 55 Bryant Street. Capital City had subcontracted the foundation work on the property to Marquez Brick Work, Inc. (“Marquez”) and as such required Marquez to indemnify Capital City for damages caused by Marquez’s work. The Underwriters issued a policy (the “Policy”) to Marquez, and about a month afterward issued an Endorsement listing Capital City as an additional insured policy.
Several months after the policy was issued, the common wall between 57 Bryant Street and 55 Bryant Street collapsed. Immediately afterward, Capital City’s insurer sent a letter tendering to the Underwriters all claims brought as a result of the collapse, but received no response from the Underwriters. Subsequently, The Standard Fire and Insurance Company (“Standard Fire”), the insurer for 55 Bryant Street, as subrogee, filed suit against Capital City and the owner of 57 Bryant Street. The complaint did not mention Marquez. Capital City filed a third party complaint against Marquez. Thereafter, the Underwriters denied coverage.
Capital City filed a declaratory judgment action against the Underwriters in the District of Maryland, seeking a declaration from the court that the Underwriters have a duty to defend Capital City under the Policy. The parties filed cross motions for summary judgment and the district court ruled in favor of the Underwriters. Capital City appealed.
The Fourth Circuit applied a two-part test, used by Maryland courts to determine whether an insurer has a duty to defend under an insurance policy. The test is as follows: (1) what is the coverage and what are the defenses under the terms and requirements of the insurance policy? (2) do the allegations in the tort action potentially bring the tort claim within the policy’s coverage?
Maryland, unlike most other states, does not construe insurance policy more strongly against the insurer. Instead, Maryland applies ordinary principles of contract law and follows the clear and unambiguous language of the policy. To the extent that the language of the policy is ambiguous, it will be construed against the insurer as the drafter of the instrument. In following the plain language of the insurance policy, the Fourth Circuit read the Endorsement and the Policy together as a single contract.
The language of the Endorsement explicitly covers Capital City as an additional insured for the 57 Bryant Street renovation project “but only with respect to liability for … ‘property damage’ … caused in whole or in part by: [Marquez’s] acts or omissions.” The Underwriters argued that the scope of the coverage in the Endorsement was limited to Capital City’s vicarious liability for Marquez’s acts or omissions. Finding no mention of vicarious or derivative liability in the language of the Endorsement, the Fourth Circuit disagreed, instead finding that the Endorsement provided for exactly what it said: coverage to Capital City for damage caused by Marquez. The Fourth Circuit further added that even if the language in the Endorsement were ambiguous as to whether coverage was limited in scope as to vicarious liability, that ambiguity would be construed against the Underwriters.
The Maryland Court of Appeals has established a policy coverage rule in Maryland requiring the insurer to defend if there is a potentiality that the claim could be covered by the policy. Generally, Maryland courts will look to the pleadings to determine whether there is a potentiality of coverage. Insurers are barred from using extrinsic evidence to contest coverage, while insured entities may sometimes use extrinsic evidence to establish a potentiality of coverage when the allegations of the complaint alone do not establish such potentiality.
Here, the original complaint is silent as to Marquez’s involvement, but the third party complaint filed by Capital City specifically identifies Marquez. Because the original complaint does not make it clear that Marquez conducted the foundation work that led to the collapse of the common wall, Capital City is entitled to rely on extrinsic evidence to establish Marquez’s involvement and to thereby establish the potentiality of coverage. Extrinsic evidence clearly leaves Marquez’s involvement in the renovations undisputed.
The Underwriters argued that the original complaint, filed by Standard Fire, sought only to recover damages on the theory that Capital City itself was negligent for failing to submit appropriate construction plans to the District of Columbia. The Fourth Circuit agreed with the Underwriters that this was one part of the complaint. The original complaint, however, also faulted the named defendants for improperly excavating and supporting 57 Bryant Street and for failing to comply with the applicable standards of care while performing renovations. The court disagreed completely with the notion that the entire complaint rested on the submission of the construction plans rather than additionally seeking damages for negligence in the actual renovations.
Accordingly, the Fourth Circuit vacated the district court’s order granting summary judgment to the Underwriters and remanded the case back to the district court for an entry of summary judgment in favor of Capital City.
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