State Automobile Mutual Insurance Company v. Old Republic Insurance Company et al
MEMORANDUM OPINION. Signed by Judge Richard D Bennett on 7/16/2015. (ca2s, Deputy Clerk)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
STATE AUTOMOBILE MUTUAL
OLD REPUBLIC INSURANCE
COMPANY, et al.,
Civil Action No. RDB-14-2989
Plaintiff State Automobile Mutual Insurance Company (“Plaintiff” or “State
Automobile”) brings this action against Defendants Old Republic Insurance Company (“Old
Republic”), Fidelity Engineering Corporation (“Fidelity”), and AMCP-1, LLC (“AMCP-1”),
seeking a declaratory judgment pursuant to 28 U.S.C. § 2201, equitable subrogation, and
equitable contribution. State Automobile claims that Old Republic breached its duties to
defend and indemnify Fidelity in a pending action in the Circuit Court for Anne Arundel
County, Maryland (the “Underlying Action”).
Currently pending before this Court are Plaintiff State Automobile’s Motion for
Partial Summary Judgment (ECF No. 25); Defendant Fidelity’s Motion for Partial Summary
Judgment (ECF No. 26); and Defendant Old Republic’s Cross-Motion for Summary
Judgment (ECF No. 27). On July 13, 2015 this Court held a hearing on the pending motions.
For the reasons that follow, Plaintiff State Automobile’s Motion for Partial Summary
Judgment (ECF No. 25) is GRANTED; Defendant Fidelity’s Motion for Partial Summary
Judgment (ECF No. 26) is GRANTED; and Defendant Old Republic’s Cross-Motion for
Summary Judgment (ECF No. 27) is DENIED. In sum, Old Republic has a duty to defend
Fidelity in the Underlying Action.1
In ruling on a motion for summary judgment, this Court reviews the facts and all
reasonable inferences in the light most favorable to the nonmoving party. Scott v. Harris, 550
U.S. 372, 378 (2007); see also Hardwick ex rel. Hardwick v. Heyward, 711 F.3d 426, 433 (4th Cir.
2013). When both parties file motions for summary judgment, as here, the court applies the
same standard of review to both motions, with this Court considering “each motion
separately on its own merits to determine whether either [side] deserves judgment as a matter
of law.” Rossignol v. Voorhaar, 316 F.3d 516, 523 (4th Cir. 2003), cert denied, 540 U.S. 822
(2003); see also havePower, LLC v. Gen. Elec. Co., 256 F. Supp. 2d 402, 406 (D. Md. 2003)
(citing 10A Charles A. Wright & Arthur R. Miller, Federal Practice & Procedure § 2720 (3d ed.
1983)). During the July 13, 2010 hearing, the parties agreed that, in the present action, no
facts are at issue.
The subject action arises out of successive commercial general liability (“CGL”)
policies issued by Defendant Old Republic and Plaintiff State Automobile to Defendant
This Memorandum Opinion addresses only Old Republic’s duty to defend Fidelity in the Underlying Action. The
issue of indemnification and the determination of each insurer’s share of defense costs will be resolved at the
conclusion of the Underlying Action in the Circuit Court for Anne Arundel County. The parties acknowledged at
the hearing of July 13, 2015 that these issues must be resolved by that court.
Fidelity. Mem. in Supp. of Pl.’s Mot. for Partial Summ. J., 3, ECF No. 25-1. Old Republic
issued two policies to Fidelity, the first running from April 1, 2008-April 1, 2009, and the
second from April 1, 2009-April 1, 2010. Id. State Auto then issued Fidelity four policies,
running in sum from April 1, 2010-April 1, 2014. Id. at 3-4. Under the policies, each insurer
agreed to defend Fidelity against any suit seeking damages for “property damage” caused by
an “occurrence.” Pl.’s Mot. for Partial Summ. J. Exs. E, F, ECF Nos. 25-6, 25-7 (Old
Republic CGL Policies). Essentially, the Old Republic and State Automobile policies were
identical and adopted the language of the standard 1986 CGL policy.
In May 2008, Defendant AMCP-1 entered into a contract with Hostetter
Construction Corporation (“Hostetter”) to construct a mixed office/retail building in Anne
Arundel County, Maryland (the “Project”). Id. at 2. Hostetter then contracted with Fidelity,
wherein Fidelity would perform all HVAC and plumbing requirements for the Project. Id.
Fidelity agreed to provide all labor and necessary equipment and materials to install the
HVAC system, including all related piping. Id. Fidelity also agreed to perform the initial
treatment of the water in the HVAC system, as well as all water treatments for a period of
one year following the completion of the Project. Id. Fidelity, in turn, entered into a subcontract with Hydro-Logic, Inc. (“Hydro-Logic”) to perform the stipulated water treatment.
On August 30, 2013, AMCP-1 filed the Underlying Action in the Circuit Court for
Anne Arundel County against Fidelity,2 alleging that Fidelity failed to perform the necessary
HVAC water treatment, resulting in damage to the pipes and other components of the
HVAC system.3 Id. AMCP-1 claims that the alleged leaks began during the “Spring of 2010,”
but does not provide a more specific timeframe. Id. at 3. During Fidelity’s investigation into
the source of the leaks in the HVAC system, it discovered that the water had never been
treated. Id. Although Fidelity attempted to repair the system, AMCP-1 contends that it
continued to experience leaks in the pipes and other consequential damages. Id. According
to AMCP-1, any equipment exposed to the untreated water required replacing. Id.
When Fidelity notified State Auto and Old Republic of the Underlying Action, State
Auto accepted its duty to defend, pursuant to a reservation of rights. Id. at 4. Old Republic
denied coverage, informing Fidelity that the property damage at issue was not an
“occurrence” within the meaning of the CGL policy. Id. State Auto filed the subject action
on September 22, 2014, seeking a declaratory judgment ordering Old Republic to participate
in the defense of Fidelity in the Underlying Action and indemnify Fidelity, if needed.
Compl., ECF No. 1. State Auto subsequently moved for partial summary judgment solely on
the issue of the duty to defend. Pl.’s Mot. for Partial Summ. J., ECF No. 25. Fidelity has also
moved for partial summary judgment on the issue of Old Republic’s duty to defend.
Fidelity’s Mot. for Partial Summ. J., ECF No. 26. In response, Old Republic filed a CrossThe Underlying Action, AMCP-1, LLC v. Fidelity Engineering Corp., Case No. 02-C-13-181445, remains pending in
the Circuit Court for Anne Arundel County. Id.
3 Fidelity has filed a third-party complaint in the Underlying Action against Hydro-Logic for indemnification
and/or contribution. Id.
Motion for Summary Judgment (ECF No. 27), denying any duties to defend or indemnify
Fidelity in the Underlying Action.
STANDARD OF REVIEW
Rule 56 of the Federal Rules of Civil Procedure provides that a court “shall grant
summary judgment if the movant shows that there is no genuine dispute as to any material
fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c). A
material fact is one that “might affect the outcome of the suit under the governing law.”
Libertarian Party of Va. v. Judd, 718 F.3d 308, 313 (quoting Anderson v. Liberty Lobby, Inc., 477
U.S. 242, 248 (1986)). A genuine issue over a material fact exists “if the evidence is such that
a reasonable jury could return a verdict for the nonmoving party.” Anderson, 477 U.S. at 248.
When considering a motion for summary judgment, a judge’s function is limited to
determining whether sufficient evidence exists on a claimed factual dispute to warrant
submission of the matter to a jury for resolution at trial. Id. at 249.
In undertaking this inquiry, this Court must consider the facts and all reasonable
inferences in the light most favorable to the nonmoving party. Libertarian Party of Va., 718
F.3d at 312; see also Scott v. Harris, 550 U.S. 372, 378 (2007). In so doing, this Court “must
not weigh evidence or make credibility determinations.” Foster v. University of Md.-Eastern
Shore, --- F.3d ----, 2015 WL 2405266, *3 (4th Cir. May 21, 2015) (citing Mercantile Peninsula
Bank v. French, 499 F.3d 345, 352 (4th Cir. 2007)). However, this Court must also abide by its
affirmative obligation to prevent factually unsupported claims and defenses from going to
trial. Drewitt v. Pratt, 999 F.2d 774, 778-79 (4th Cir. 1993). If the evidence presented by the
nonmoving party is merely colorable, or is not significantly probative, summary judgment
must be granted. Anderson, 477 U.S. at 249-50. On the other hand, a party opposing
summary judgment must “do more than simply show that there is some metaphysical doubt
as to the material facts.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586
(1986); see also In re Apex Express Corp., 190 F.3d 624, 633 (4th Cir. 1999). As this Court has
previously explained, a “party cannot create a genuine dispute of material fact through mere
speculation or compilation of inferences.” Shin v. Shalala, 166 F. Supp. 2d 373, 375 (D. Md.
2001) (citations omitted).
This Court will consider State Automobile’s Motion for Partial Summary Judgment
and Fidelity’s Motion for Partial Summary Judgment together, as Fidelity specifically
incorporated State Automobile’s arguments for partial summary judgment.4 Old Republic’s
Response to Plaintiff’s Motion for Partial Summary Judgment is styled as both a response
and a cross-motion for summary judgment. Old Republic’s grounds for summary judgment
will thus be examined in concert with State Automobile and Fidelity’s respective motions.
In moving for partial summary judgment, State Automobile and Fidelity contend that
the property damages alleged by AMCP-1 in the Underlying Act constitute an “occurrence”
covered by the CGL policy held by Fidelity. As an “occurrence,” Old Republic, like State
Automobile, owes Fidelity a duty to defend under Maryland law. In response, Old Republic
Although Fidelity incorporated State Automobile’s arguments for partial summary judgment, it explicitly rejected
Plaintiff’s contention that Fidelity may not be indemnified for the costs of repairing Hydro-Logic’s defective work.
Mem. in Supp. of Fidelity’s Mot. for Partial Summ. J., 5, ECF No. 26-1. Fidelity wishes to reserve the right to seek
indemnification for any damages stemming from the Underlying Action. Id.
argues that no “occurrence” transpired, thereby forestalling any obligations of Old Republic
to defend Fidelity. Even if the alleged property damages are an “occurrence,” Old Republic
states that Exclusions b and l remove such damages from the purview of the CGL policy.
Each argument will be addressed in turn.
A. The Duty to Defend
In Maryland, the duty of an insurer to defend the insured is “determined by the
allegations in the tort actions.” Brohawn v. Transamerica Ins. Co., 347 A.2d 842, 850 (Md. 1975).
If the underlying claims are clearly covered by the insurance policy, then the insurer is
obligated to defend the insured. Id. Yet, under the “potentiality rule,” the insurer has a duty
to defend the insured “[e]ven if the [underlying] plaintiff does not allege facts which clearly
bring the claim within or without the policy coverage.” Id. (internal citations omitted). The
“potentiality rule” thus broadens the insurer’s duty to defend beyond the scope of the duty
to indemnify. Id. As a result, the allegations in the underlying complaint may trigger the duty
to defend where it is unclear whether the insurer is ultimately obligated to indemnify the
insured. Id.; see also St. Paul Fire & Mar. Ins. v. Pryseki, 438 A.2d 282, 285 (Md. 1981). Where
the duty to defend is contested, an insurer may not look outside the underlying pleadings to
deny its obligations. Aetna Cas. & Sur. Co. v. Cochran, 651 A.2d 859, 863 (Md. 1995). An
insured, however, may use extrinsic evidence to establish the potentiality of coverage. Id.at
Under the standard 1986 CGL policy,5 an insurer agrees to pay:
Those sums that the insured becomes legally obligated to pay as
damages because of “bodily injury” or “property damage” to
which this insurance applies. [The insurer] will have the right
and duty to defend the insured against any “suit” seeking those
damages. However, [the insurer] will have no duty to defend the
insured against any “suit” seeking damages for “bodily injury”
or “property damage” to which this insurance does not apply.
Pl.’s Mot. for Partial Summ. J. Exs. E, F (Old Republic CGL Policies). To trigger the duty to
defend, the requisite property damages must be the result of an “occurrence. The United
States Court of Appeals for the Fourth Circuit in French v. Assurance Co., 448 F.3d 693 (4th
Cir. 2006), has addressed the precise issue before this Court in discussing the meaning of an
“occurrence.” If there is no “occurrence,” then the insurer has no obligation to defend. Id.
An “occurrence” is an “accident, including continuous or repeated exposure to substantially
the same general harmful conditions.” Pl.’s Mot. for Partial Summ. J. Ex. E, at 24. In
Maryland, an “accident” is an “act of negligence . . . [where] the resulting damage takes place
without the insured’s actual foresight or expectation.” French, 448 F.3d at 698 (citing Sheets v.
Brethren Mut. Ins. Co., 679 A.2d 540, 548 (Md. 1996)). As the Maryland Court of Appeals
explained, Maryland uses a subjective test because an objective test that “excludes coverage
for damage that should have been foreseen or expected by the insured . . . would rend[er]
[CGL policies] all but meaningless.” Sheets, 679 A.2d at 549.
When determining whether an “occurrence” transpired, Maryland law divides
property damages into two categories. French, 448 F.3d at 703. The first category—
Old Republic provided insurance coverage to Fidelity under the standard 1986 CGL policy. See Pl.’s Mot. for
Partial Summ. J. Exs. E, F.
foreseeable or expected damage—is not an “occurrence,” and thus implicates no obligations
of the insurer under the CGL policy. Id. (citing Lerner Corp. v. Assurance Co. of America, 707
A.2d 906, 912-13 (Md. Court Spec. App. 1998)). The second category—damage to
“otherwise nondefective” work—is unexpected and unforeseen, thereby triggering the duty
of the insurer to defend the insured. French, 448 F.3d at 703-704.
In this case, the allegations in the Underlying Action constitute an “occurrence”
under the CGL policy, thereby triggering Old Republic’s duty to defend Fidelity. At least a
portion of the property damages alleged by AMCP-1 fall within the second category
articulated by the United States Court of Appeals for the Fourth Circuit in French, 448 F.3d
at 703-704.6 Otherwise non-defective components in the HVAC system, such as the pipes
installed by Fidelity, allegedly suffered damage in the “Spring of 2010” due to Hydro-Logic’s
failure to treat the HVAC water. This damage resulted in AMCP-1’s tenants’ loss of use of
the affected pipes, forcing AMCP-1 to compensate its tenants for such losses. Fidelity’s Mot.
for Partial Summ. J. Ex. 1, ECF No. 26-2 (AMCP-1’s Answers to Interrogatories). There is
no evidence that Fidelity subjectively expected that the non-defective pipes and other HVAC
components would incur damage from untreated water. In fact, AMCP-1’s underlying
allegations do not even assert a claim that Fidelity expected its sub-contractor, Hydro-Logic,
to fail to perform the contracted water treatment. As in French, the damage to the pipes was
As Fidelity expressly reserves its right to seek indemnification for any damages arising from the Underlying
Action, this Court will not consider whether the costs of repairing the defective work—here, Hydro-Logic’s failure
to treat the water for the HVAC system—are covered under the CGL policy. The damage to otherwise nondefective components, such as the pipes and other parts of the HVAC system, is an “occurrence” sufficient to
trigger Old Republic’s duty to defend.
unforeseeable, and thus constitutes an “occurrence.” Since Old Republic did not end its
coverage of Fidelity until April 1, 2010, the “occurrence” potentially transpired during its
coverage period. Under the potentiality rule, Old Republic is obligated to defend Fidelity in
the Underlying Action.
Old Republic urges this Court to ignore the controlling authority of the Fourth
Circuit’s reasoning in French, instead asserting that damage sustained by any part of the
HVAC system is foreseeable. In the case of foreseeable damage, there is no “occurrence,”
and thus no duty to defend.7 Relying on Woodfin Equities Corp. v. Harford Mut. Ins. Co., 678
A.2d 116, 133 (Md. Ct. Spec. App. 1996), rev’d in part on other grounds, 687 A.2d 652 (Md.
1997), Old Republic contends that any damage to the pipes is damage to the “product or
completed work of the insured,” which is not an “occurrence” under the CGL policy. Under
this reasoning, the insured is not covered for damage to any work that he contracted to
provide. This Court reached a similar conclusion in Harbor Court Assoc. v. Kiewit Construction
Co., 6 F. Supp. 2d 449 (D. Md. 1998). In Harbor Court, this Court held that the general
contractor is responsible for the entire project, thus any damage to a part of that project is
not an “occurrence.” Id. at 457.
Yet, the Fourth Circuit rejected this narrow definition of “occurrence” in French.8
First, the Fourth Circuit acknowledged that the Maryland Court of Appeals has yet to
Old Republic does not dispute that, if there is an occurrence, its duty to defend is triggered under the potentiality
rule. Old Republic’s coverage of Fidelity concluded on April 1, 2010, but the leaks allegedly began at some point in
the “Spring of 2010.” Old Republic thus potentially insured Fidelity when the property damages were allegedly
8 Although the Fourth Circuit never explicitly overrules Harbor Court, the reasoning behind its classification of the
consider this particular issue. French, 448 F.3d at 703. Dicta in Lerner Corp., 707 A.2d at 91213 and a “thoughtful opinion” by the Supreme Court of Wisconsin, American Family Mut. Ins.
Co. v. American Girl, Inc., 673 N.W.2d 65 (Wis. 2004), however, “conclusively persuade[d]”
the Fourth Circuit that the damage to otherwise non-defective components caused by a subcontractor’s defective work is an “occurrence.” French, 448 F.3d at 703. In French, as here, the
insured contracted with a sub-contractor to perform a subset of the insured’s work. The subcontractor’s defective work then allegedly damaged other parts of the insured’s project. The
non-defective parts affected by the sub-contractor’s negligence were thus a component of
the larger project for which the insured was responsible. In this case, Hydro-Logic’s failure
to treat the water may have resulted in damage to other parts of the HVAC system.
Although Fidelity contracted to provide a HVAC system, its sub-contractor’s defective work
caused the damage to non-defective HVAC components. As in French, this damage is an
“occurrence” that triggers Old Republic’s duty to defend.
B. Coverage Exclusions
In Maryland, an insurer relying on a CGL policy exclusion to deny coverage bears the
burden of proving that the exclusion applies. Finci v. Am. Cas. Co., 593 A.2d 1069, 1087 (Md.
1991); Warfield-Dorsey Co. v. Travelers Cas. & Sur. Co. of Illinois, 66 F. Supp. 2d 681, 689 (D.
Md. 1999). Neither exclusion offered by Old Republic—Exclusions b or l—releases Old
Republic from its duty to defend. Exclusion b, the “Contractual Liability” Exclusion,
excludes coverage for damage “which the insured is obligated to pay by reason of the
second category of damages as an “occurrence” flatly contradicts the principles of Harbor Court (and Woodfin).
assumption of liability in a contract or agreement.” Pl.’s Mot. for Partial Summ. J. Ex. E, at
12. Relying on Chang v. Brethren Mut. Ins. Co., 897 A.2d 854, 866 (Md. 2006), Old Republic
argues that Exclusion b thereby excludes coverage for any and all liability arising out of a
contract between the insured and the complaining party. Yet, the Maryland Court of Appeals
extended this exclusion to all contractual liability solely in dicta. Given the lack of controlling
authority in Maryland, this Court is persuaded by the Fourth Circuit’s narrower
interpretation of the contractual liability exclusion. In Provident Bank of Maryland v. Travelers
Property Cas. Corp., 236 F.3d 138, 148 (4th Cir. 2000), the Fourth Circuit concluded that
Exclusion b’s coverage is limited to agreements “by the insured to indemnify or hold
harmless third parties[.]” This interpretation distinguishes between those “obligations that
the insured assumed [and those] obligations that it incurred.” Id. (emphasis in original). Fidelity
certainly incurred the obligation to provide a functioning HVAC system when it entered into
the contract with Hostetter, but it did not contract to assume to liability of any third party.
Absent such an assumption of liability, Exclusion b does not apply.
Exclusion l, the “Damage to Your Work” Exclusion, excludes coverage to any
“’property damage’ to ‘your work’ arising out of it or any part of it[.]” Pl.’s Mot. for Partial
Summ. J. Ex. E, at 15. If the “damaged work or the work out of which the damage arises
was performed on your behalf by a sub-contractor,” then Exclusion l does not preclude
coverage. Id. Hydro-Logic, Fidelity’s sub-contractor, performed defective work by failing to
treat the water for the HVAC system. Even if Fidelity’s own work sustained the damage at
issue, Fidelity’s sub-contractor performed the defective work that directly caused the
damage. Exclusion l is thus inapplicable under the plain language of the “sub-contractor”
In sum, the allegations of the Underlying Action sufficiently establish an
“occurrence” under the CGL issued by Old Republic. Moreover, neither Exclusion b nor
Exclusion l precludes coverage. Accordingly, Old Republic has a duty to defend Fidelity in
the Underlying Action.
Plaintiff State Automobile’s Motion for Partial Summary Judgment (ECF No. 25) is
GRANTED; Defendant Fidelity’s Motion for Partial Summary Judgment (ECF No. 26) is
GRANTED; and Defendant Old Republic’s Cross-Motion for Summary Judgment (ECF
No. 27) is DENIED. Old Republic has a duty to defend Fidelity in the Underlying Action.
A separate Order follows.
Dated: July 16, 2015
Richard D. Bennett
United States District Judge
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