Maryland Accounting Services, Inc. et al v. CNA Insurance Co.

Filing 19

MEMORANDUM. Signed by Judge Catherine C. Blake on 11/21/11. (hmls, Deputy Clerk)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
MARYLAND ACCOUNTING
SERVICES, INC., et al.
Plaintiffs,
v.
CONTINENTAL CASUALTY
COMPANY,
Defendant.

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Case No. CCB-11-CV-00145

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MEMORANDUM
Plaintiffs Maryland Accounting Services, Inc. (“MAS”) and Ivan A. Jaramillo
(“Jaramillo”) filed a complaint for declaratory judgment in state court against Defendant
Continental Casualty Company (“Continental”).

Continental has removed the declaratory

judgment action to this court, based on diversity of citizenship. MAS and Jaramillo seek a court
ruling that Continental, which underwrites Plaintiffs’ business insurance policy, has a duty to
defend and indemnify Plaintiffs in an underlying lawsuit, Injured Workers’ Insurance Fund v.
Jaramillo, Case No. 03-C-07-014047, currently pending in the Circuit Court for Baltimore
County. Both parties have moved for summary judgment. The issues have been fully briefed
and no hearing is necessary. See Local Rule 105.6 (D. Md. 2011). For the reasons stated below,
Continental’s motion for summary judgment will be granted and Jaramillo’s and MAS’s motion
will be denied. Declaratory judgment will be entered for Continental.
I. Factual Background
MAS is a Maryland corporation with a principal place of business in Baltimore.
Jaramillo, a Maryland resident, works as an accountant for MAS. In January 2007, MAS
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obtained a business insurance policy (“the Policy”) from insurer Continental, an Illinois
corporation with a principal place of business in Illinois. MAS’s coverage under the Policy
began on January 19, 2007 and included coverage for prior acts committed by MAS and its
employees from January 19, 2006 until the Policy’s start date. The Policy requires Continental
to defend and indemnify MAS and its employees in lawsuits relating to professional services
they render. These contractual duties are limited by a number of specific exclusions and by
limitations on the definition of “professional services.”
On or about December 20, 2007, Jaramillo and MAS were served with a complaint filed
by the Injured Workers’ Insurance Fund (“the Fund”). The Fund, an independent state agency, is
a non-profit insurer that offers workers’ compensation insurance to Maryland employers. The
Fund considers a number of factors when determining what premium to charge an insured
business; these factors include the number of employees an insured business has, the size of the
business’s payroll, and whether the business uses uninsured subcontractors.
In the case filed by the Fund (the “Injured Workers’ Insurance Fund case”), the Fund
alleges that MAS, Jaramillo, and a number of third parties defrauded the Fund by underreporting the number of employees, payroll size, and use of subcontractors for a variety of small
Maryland businesses. The Fund’s complaint includes several different theories of recovery,
including that Jaramillo and MAS either negligently or intentionally provided advice and
services that allowed the other defendants to defraud the Fund of over $1 million in insurance
premiums.
On December 27, 2007, Jaramillo and MAS notified Continental of the Injured Workers’
Insurance Fund case and asked Continental to defend and indemnify Jaramillo and MAS
pursuant to the Policy’s terms. On February 1, 2008, Continental refused to either defend or

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indemnify Plaintiffs, stating that the conduct alleged in the Fund’s complaint falls outside of the
scope of the Policy.
II. Motions for Summary Judgment
A. Standard of Review
Under Rule 56(c), summary judgment “should be rendered if the pleadings, the discovery
and disclosure materials on file, and any affidavits show that there is no genuine dispute as to
any material fact and that the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P.
56(c). In considering a motion for summary judgment, “the judge's function is not . . . to weigh
the evidence and determine the truth of the matter but to determine whether there is a genuine
issue for trial.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986). A dispute about a
material fact is genuine “if the evidence is such that a reasonable jury could return a verdict for
the nonmoving party.” Id. at 248. The Court must “view the evidence in the light most favorable
to . . . the nonmovant, and draw all reasonable inferences in h[is] favor,” Dennis v. Columbia
Colleton Med. Ctr., Inc., 290 F.3d 639, 645 (4th Cir. 2002), but the Court also “must abide by
the affirmative obligation of the trial judge to prevent factually unsupported claims and defenses
from proceeding to trial,” Bouchat v. Baltimore Ravens Football Club, Inc., 346 F.3d 514, 526
(4th Cir. 2003).
In Maryland, “[t]he obligation of an insurer to defend its insured under a contract
provision such as here involved is determined by the allegations in the tort actions. If the
plaintiffs in the tort suits allege a claim covered by the policy, the insurer has a duty to defend.”
Brohawn v. Transamerica Ins. Co., 347 A.2d 842, 850 (Md. 1975). “Even if a tort plaintiff does
not allege facts which clearly bring the claim within or without the policy coverage, the insurer

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still must defend if there is a potentiality that the claim could be covered by the policy.” Id.; see
also Litz v. State Farm Fire & Cas. Co., 695 A.2d 566, 570 (Md. 1997).
To determine whether a liability insurer has a duty to provide its insured a defense in a
lawsuit, Maryland courts ask the following two questions: “(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 court action potentially bring the claim within the policy's coverage?” St. Paul Fire &
Marine Ins. Co. v. Pryseski, 438 A.2d 282, 285 (Md. 1991). In other words, “[a] court must
ascertain the scope and limitations of coverage under the ... insurance policy and then determine
whether the allegations in the [underlying] action would potentially be covered under the
policies.” Utica Mutual Insurance Co. v. Miller, 746 A.2d 935, 939 (Md. Ct. Spec. App. 2000)
(quoting Aetna Cas. & Sur. Co. v. Cochran, 651 A.2d 859, 862 (Md. 1995).
Maryland courts analyze insurance contracts just as they do other contracts. Fed. Ins. Co.
v. Firemen’s Ins. Co. of Washington, D.C., 769 F.Supp.2d 865, 871-72 (D. Md. 2011). “The
primary principle of construction is to apply the terms of the insurance contract itself,” Bausch &
Lomb, Inc. v. Utica Mutual Insurance Co., 735 A.2d 1081, 1089 (Md. 1999), and the contract’s
words are given their “usual, ordinary and accepted meaning” unless there is evidence that a
special or technical meaning was intended by the parties. Cheney v. Bell Nat'l Life Ins. Co., 556
A.2d 1135, 1138 (Md. 1989). If the contract’s language is plain and unambiguous, the court will
determine the meaning of the contract’s terms as a matter of law. Clendenin Bros., Inc. v. U.S.
Fire Ins. Co., 889 A.2d 387, 393 (Md. 2006).
B. Analysis
Jaramillo and MAS argue that Continental must defend and indemnify the Injured
Workers’ Insurance Fund case because the allegedly wrongful acts attributed to Jaramillo and

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MAS qualify as professional services covered by the Policy. Continental argues that the acts
alleged in the Fund’s complaint do not qualify as covered professional services, and further
argues that those acts are specifically excluded by the Policy’s financial products exclusion. The
plain language of the contract supports Continental’s position.
To determine whether Continental has a duty to defend and indemnify Jaramillo and
MAS in the Injured Workers’ Insurance Fund case, this Court must first determine the meaning
of the Policy’s terms, and then must determine whether the services attributed to Plaintiffs are
covered by the Policy. The Policy states that Continental has “the right and duty to defend any
claim, even if any of the allegations of the claim are groundless, false, or fraudulent.” Schirott
Dec. Ex. A., March 4, 2011, ¶ II. B. While it will not cover “any claim based on or arising out of
a dishonest, fraudulent, criminal, or malicious act by [the insured and/or its employees],” the
Policy does require Continental to provide the insured and/or its employees with “a defense of
such claim unless or until the dishonest, fraudulent, criminal or malicious act has been
determined by any trial verdict, court ruling, regulatory ruling or legal admission . . . .” Id. at ¶
II.D. The Policy defines “claim” as “a demand received by [the insured and/or its employees]
for money or services naming [the insured and/or its employees] and alleging an act or omission
. . . arising out of the rendering of professional services.” Id. at ¶ I.
The Policy also defines the term “professional services.” Professional services include,
among other things, preparing financial or accounting records; preparing, assembling or
compiling financial statements; preparing payroll records and payroll checks; and offering
services as a life insurance agent. Id. at ¶ I, Financial Planning Endorsement §2.
In the Injured Workers’ Insurance Fund case, the Fund accuses MAS and Jaramillo of
negligently or intentionally preparing fraudulent workers’ compensation insurance applications

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on behalf of several MAS clients. The Fund alleges that these workers’ compensation insurance
applications included false financial statements and payroll records prepared by Jaramillo and
MAS.

The parties debate whether the preparation of workers’ compensation insurance

applications – including the preparation of financial statements and payroll records – qualifies as
the provision of professional services, and thus whether the acts alleged in the underlying lawsuit
trigger Continental’s duties to defend and indemnify.

Even if the services that MAS and

Jaramillo allegedly provided would otherwise qualify as professional services, those services are
excluded from the Policy by its financial products exclusion.
The financial products exclusion notes that “this Policy does not apply to . . . any claim
based on or arising out of . . . servicing of or providing advice on any products that are not
financial products.” Id. at Financial Planning Endorsement §3. “Financial products” are a small
group of items, including U.S. treasury bonds, mutual funds, and variable life insurance
contracts. Id. at §1. Workers’ compensation insurance policies are not included in this exclusive
group.
As mentioned above, the Fund alleges that MAS and Jaramillo advised their clients to
obtain workers’ compensation insurance and prepared their clients’ workers’ compensation
insurance applications. Even services that might otherwise be considered “professional services”
under the Policy, such as the preparation of payroll records, were rendered in the specific context
of helping clients obtain workers’ compensation insurance. The text of the Fund’s complaint
demonstrates that all services that are the subject of the Injured Workers’ Insurance Fund case
were services rendered in connection with workers’ compensation insurance, not in connection
with financial products.
331.
Defendant Jaramillo and his company instructed, advised, guided
and led the Defendants in applying to IWIF for workers’ compensation insurance.
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In this capacity Jaramillo and MAS prepared financial statements, payroll records
and other documentation for the Defendants, negligently set the Defendants on a
course that allowed them to defraud IWIF out of over $1 million in insurance
premiums.
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333.
Defendant Jaramillo’s negligent actions in this regard included, but
were not limited to, the following: assisting the other Defendants in creating and
submitting false applications . . .; advising and enabling the other Defendants,
through financial statements, payroll records and other documentation that IWIF
relied upon in issuing Workers’ Compensation insurance, to falsely deny the use
of uninsured subcontractors and to understate both the number of the business’s
employees and its payroll; advising and enabling the other Defendants to
repeatedly open an entity and then close it within one year in order to avoid
paying workers’ compensation insurance premiums.
Pl.’s Mot. for Summ. J., Exhibit A, ¶¶ 330-31, 333. The Fund’s complaint concerns services that
Jaramillo and MAS allegedly rendered in connection with a product – workers’ compensation
insurance – that is not a financial product as defined by the Policy. Such services are specifically
excluded from the scope of the Policy. Because the services attributed to Jaramillo and MAS are
specifically excluded from coverage, there is no potentiality that the claims made in the Injured
Workers’ Insurance Fund case could be covered by the business insurance policy MAS obtained
from Continental. Therefore, Continental has no obligation to defend and/or indemnify MAS
and Jaramillo in the Injured Workers’ Insurance Fund case. Continental’s motion for summary
judgment must be granted.
III. Conclusion
For the foregoing reasons, MAS’s and Jaramillo’s motion for summary judgment will be
denied and Continental’s motion for summary judgment will be granted. A separate Order
follows.
Dated: November 21, 2011

_______ _/s/______________
Catherine C. Blake
United States District Judge
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