Unitrin Auto and Home Insurance Company v. Karp et al
Filing
67
MEMORANDUM OPINION. Signed by Judge Stephanie A. Gallagher on 8/24/2020. (bmhs, Deputy Clerk)
Case 1:17-cv-03341-SAG Document 67 Filed 08/24/20 Page 1 of 21
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
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UNITRIN AUTO AND HOME
INSURANCE COMPANY,
Plaintiff,
v.
ROBERT KARP, et al.,
Defendants.
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Civil Case No. SAG-17-3341
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MEMORANDUM OPINION
Plaintiff Unitrin Auto and Home Insurance Company (“Unitrin”) filed this declaratory
judgment action against Defendants Robert and Chaya Karp (“the Karps”) and PennyMac Loan
Services (“PennyMac”), seeking declaratory relief defining the scope of coverage of an insurance
policy covering the Karps’ home. ECF 1. PennyMac, the mortgage holder for the Karps’ property,
filed a counterclaim against Unitrin, seeking contradictory declaratory relief, in addition to
monetary damages for Unitrin’s alleged breach of contract and failure to act in good faith. ECF
37. Unitrin and PennyMac have now filed cross-motions for summary judgment. ECF 59, 61. I
have reviewed those motions, along with the relevant oppositions and replies. ECF 62, 65. No
hearing is necessary. See Loc. R. 105.6 (D. Md. 2018). For the reasons that follow, Unitrin’s
Motion for Summary Judgment, ECF 59, will be denied, although this Court will dismiss Count
Three of the Counterclaim, without prejudice, for lack of subject matter jurisdiction, and
PennyMac’s Cross-Motion for Summary Judgment, ECF 61, will be granted in part and denied in
part. Unitrin’s Motion for Default Judgment as to the Karps, ECF 60, will be denied. Finally,
Unitrin’s Motion to Strike PennyMac’s Reply, ECF 66, will also be denied.
Case 1:17-cv-03341-SAG Document 67 Filed 08/24/20 Page 2 of 21
I.
FACTUAL BACKGROUND
The Karps purchased “Kemper Preferred” policy number RC 761778 from Unitrin (“the
Policy”) to insure their residence at 3911 Glengyle Avenue, Baltimore, Maryland. ECF 59-4. The
Policy’s effective dates were July 6, 2016 through July 6, 2017. Id. The Policy insures against
direct loss to property, but also contains an exclusion (“the absolute pollution exclusion”) which
provides:
[w]e do not insure loss. . . :
2.
Caused by:
e. Any of the following:
...
5) Discharge, dispersal, seepage, migration, release or
escape of pollutants unless the discharge, dispersal, seepage, migration, release or
escape is itself caused by a Peril Insured Against under Coverage C of this policy.
ECF 59-4 at 20. The Policy defines “pollutants” to include “any solid, liquid, gaseous or thermal
irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”
Id.
On or about June 2, 2017, the Karps’ son discovered a hole in a copper feed line between
the oil tank and the furnace. ECF 59-16 at 1. Home heating oil had leaked from the hole onto the
tile floor of their basement. ECF 59-13 at 2. The Karps filed a claim under their Unitrin policy,
which was originally processed by the “fast response unit” in Unitrin’s Charlotte Claims Center.
ECF 59-6 at 69:12-70:15; 132:16-133:11.
After receiving the Karps’ claim, Unitrin began
remediating the damage to their basement. ECF 59-7 at 518:1-519:10.
In September of 2017, approximately three months after the incident, Unitrin assigned
senior claim representative Allen Stack to review and manage the claim process. ECF 59-16 at 1.
Stack reviewed the Karps’ Policy, and informed Robert Karp and the public adjuster retained by
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the Karps, Adam Levitt, that he believed the pollution exclusion excluded coverage for the loss.
ECF 59-7 at 516:17-21; ECF 59-8 at 192:5-16. On November 9, 2017, Unitrin issued a formal
coverage denial letter to the Karps, which explained that although coverage would be denied,
Unitrin would complete payment of any clean-up and remediation expenses it had agreed to pay
before issuing the coverage denial letter. ECF 59-9. Levitt confirmed, at his deposition, that
Unitrin paid all of the expenses it had agreed to pay for remediation. ECF 59-8 at 190:9-191:2;
215:12-15; 216:16-217:8.
In total, Unitrin paid $86,988.93 for the Karps’ loss, including
$57,198.71 to remediate the damage to the residence. ECF 61-11.
The Karps’ health was adversely affected by the discharge of home heating oil, such that
they vacated the dwelling and eventually stopped making mortgage payments to their mortgagor,
PennyMac. ECF 61-12 at 157:2-19. Because PennyMac, as mortgagor, also enjoyed certain rights
under the Policy, both Robert Karp and PennyMac filed complaints, at separate times, with the
Maryland Insurance Administration (“MIA”), alleging that Unitrin engaged in unfair claims
practices by denying the claim. 1 The MIA decided in favor of Unitrin as to the issues raised by
Robert Karp. ECF 59-13. Karp appealed the decision to the Office of Administrative Hearings,
which held a two-day evidentiary hearing. ECF 59-14. After hearing the evidence, the
Administrative Law Judge upheld the MIA’s determination that Unitrin had not engaged in unfair
claim settlement practices by denying Karp’s claim. ECF 59-15. The Final Order issued on
October 22, 2018, and it was not appealed. Id. On September 10, 2018, PennyMac filed its own
complaint with the MIA. ECF 59-18.
On March 29, 2019, after PennyMac had filed its
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PennyMac is expressly named as the mortgagee in the Policy (ECF 59-4 at 4), and the Policy
includes a “mortgage clause” affording the mortgagee certain rights to recover losses incurred.
ECF 59-4 at 26.
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Counterclaim against Unitrin in this Court, the MIA also decided PennyMac’s complaint in
Unitrin’s favor. Id.
In its Complaint in this case, Unitrin seeks a declaratory judgment declaring that it owes
no coverage to the Karps or to PennyMac under the Policy, as a result of the absolute pollution
exclusion. ECF 1. PennyMac filed a Counterclaim, in which it seeks a declaratory judgment that
it is entitled to joint coverage with the Karps; that the damage from the incident is covered by the
Policy; that Unitrin is estopped from terminating coverage; and that the Policy requires Unitrin to
provide coverage to PennyMac, even if coverage is unavailable to the Karps. ECF 37. PennyMac
also asserts claims for monetary damages for breach of contract, and for failure to act in good faith.
Id.
II.
LEGAL STANDARD FOR SUMMARY JUDGMENT
Under Rule 56(a) of the Federal Rules of Civil Procedure, summary judgment is
appropriate only “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.” The moving party bears the burden of
showing that there is no genuine dispute of material facts. See Casey v. Geek Squad, 823 F. Supp.
2d 334, 348 (D. Md. 2011) (citing Pulliam Inv. Co. v. Cameo Props., 810 F.2d 1282, 1286 (4th
Cir. 1987)). If the moving party establishes that there is no evidence to support the non-moving
party’s case, the burden then shifts to the non-moving party to proffer specific facts to show a
genuine issue exists for trial. Id. The non-moving party must provide enough admissible evidence
to “carry the burden of proof in [its] claim at trial.” Id. at 349 (quoting Mitchell v. Data Gen.
Corp., 12 F.3d 1310, 1315-16 (4th Cir. 1993)). The mere existence of a scintilla of evidence in
support of the non-moving party’s position will be insufficient; there must be evidence on which
the jury could reasonably find in its favor. Id. at 348 (citing Anderson v. Liberty Lobby, Inc., 477
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U.S. 242, 251 (1986)).
Moreover, a genuine issue of material fact cannot rest on “mere
speculation, or building one inference upon another.” Id. at 349 (quoting Miskin v. Baxter
Healthcare Corp., 107 F. Supp. 2d 669, 671 (D. Md. 1999)).
Additionally, summary judgment shall be warranted if the non-moving party fails to
provide evidence that establishes an essential element of the case. Id. at 352. The non-moving
party “must produce competent evidence on each element of [its] claim.” Id. at 348-49 (quoting
Miskin, 107 F. Supp. 2d at 671). If the non-moving party fails to do so, “there can be no genuine
issue as to any material fact,” because the failure to prove an essential element of the case
“necessarily renders all other facts immaterial.” Id. at 352 (quoting Celotex Corp. v. Catrett, 477
U.S. 317, 322-23 (1986); Coleman v. United States, 369 F. App’x 459, 461 (4th Cir. 2010)
(unpublished)). In ruling on a motion for summary judgment, a court must view all of the facts,
including reasonable inferences to be drawn from them, “in the light most favorable to the party
opposing the motion.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587-88
(1986) (quoting United States v. Diebold, Inc., 369 U.S. 654, 655 (1962)).
III.
ANALYSIS
A. Motion to Strike PennyMac’s Reply
The Court will address Unitrin’s Motion to Strike first, to establish the scope of the
materials to be considered in addressing the substantive motions. Unitrin argues that PennyMac’s
Reply exceeded the scope of Unitrin’s Opposition to PennyMac’s (belatedly filed) Motion for
Summary Judgment, and instead constituted an impermissible surreply to Unitrin’s Motion for
Summary Judgment. ECF 66. Regardless of the merits of that position, this Court has repeatedly
expressed the view that a Motion to Strike is not an appropriate procedural vehicle to use in this
context. See, e.g., Dowdy v. Santander Consumer U.S.A., Inc., Civil No. SAG-19-01386, 2019
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WL 5455554, at *5 (D. Md. Oct. 14, 2019) (citing Maxtena, Inc. v. Marks, Civil No. DKC-110945, 2012 WL 113386 (D. Md. Jan. 12, 2012) for the proposition that the “Federal Rules of Civil
Procedure only permit a motion to strike matters contained in pleadings, not those contained in
other motions, briefs, or attachments.”). Unitrin’s Motion to Strike will therefore be denied. The
Court notes, however, that no material that could be construed as a “surreply” proved dispositive
with respect to the merits of the parties’ positions.
B. Declaratory Judgment Counts
Turning to the substantive issues, both parties to this insurance coverage dispute suggest
that the other side is taking an unreasonable view of what they consider to be clearly binding
precedent, instead of recognizing what are in fact thorny legal issues presented by this case. Cases
throughout the country interpreting the absolute pollution exclusion, in various contexts, are both
legion and inconsistent. Even focusing one’s review on Maryland case law does not result in a
completely self-evident answer to the legal questions stemming from the incident in the Karps’
home.
The parties do, however, generally agree as to the principles governing this Court’s
interpretation of the Policy.
In assessing whether an exclusion in an insurance contract is
applicable, the insurer bears the burden of establishing that the exclusion applies. White Pine Ins.
Co. v. Taylor, 165 A.3d 624, 634 (2017). Maryland law treats insurance policies the same as any
other contract, and does not require that the policies “be construed most strongly against the
insurer.” Catalina Enters., Inc. Pension Tr. v. Hartford Fire Ins. Co., 67 F.3d 63, 65 (4th Cir.
1995) (citing Collier v. MD–Individual Practice Ass’n, 327 Md. 1, 5 (1992)). Instead, Maryland
courts must construe the policy as a whole in order to ascertain the parties’ intent. Cheney v. Bell
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Nat’l Life Ins. Co., 315 Md. 761, 766–67 (1989). “[W]here a contract is plain and unambiguous,
there is no room for construction.” Bd. of Trs. of State Colls. v. Sherman, 280 Md. 373, 380 (1977).
When looking at the policy’s text, courts must “accord words their ordinary and accepted
meanings,” or that meaning which “a reasonable person would attach to the term,” Pac. Indem.
Co. v. Interstate Fire & Cas. Co., 302 Md. 383, 388 (1985), absent evidence that the parties
intended to employ the term in question “in a special or technical sense,” Cheney, 315 Md. at 766.
The parties’ intent can also be derived from “the character of the contract, its object and purposes,
and the factual circumstances of the parties at the time of execution.” Catalina, 67 F.3d at 65
(citing Collier, 327 Md. at 5). Courts may determine questions of interpretation of a policy
provision as a matter of law, so long as (1) the provision’s text is unambiguous, or (2) if the text
is ambiguous, “if there is no factual dispute in the evidence.” Pac. Indem., 302 Md. at 389. Where
the text of a policy is ambiguous, the Court may consult extrinsic evidence. Clendenin Bros. v.
U.S. Fire Ins. Co., 390 Md. 449, 459 (2006). Ambiguity exists where a term in a policy, “when
read by a reasonably prudent person,” is “susceptible of more than one meaning.” United Servs.
Auto Ass’n v. Riley, 393 Md. 55, 80 (2006).
If, after considering extrinsic evidence, an ambiguity remains and there is no material
evidentiary factual dispute, the ambiguity is construed against the party who drafted the policy,
which is generally the insurer. See, e.g., Beale v. American Nat’l Lawyers Ins. Reciprocal (Risk
Retention Group), 379 Md. 643, 660 (2004); see also Haynes v. Am. Cas. Co., 228 Md. 394, 400
(1962) (“[W]here an insurance company, in attempting to limit coverage, employs ambiguous
language, the ambiguity will be resolved against [the insurer] as the one who drafted the
instrument, as is true in the construction of contracts generally.”).
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With these principles in mind, the Court begins by considering the issue at the heart of the
parties’ dispute: Maryland’s interpretation of the absolute pollution exclusion, and how it would
apply in the context of home heating oil. A review of the most relevant Maryland cases is
instructive.
Unitrin relies on Bernhardt v. Hartford Fire Ins. Co., 102 Md. App. 45 (1994), which was
decided by the Court of Special Appeals of Maryland. Bernhardt addressed a situation in which
tenants sued their landlord, Norman Bernhardt, for damages they suffered resulting from the
escape of carbon monoxide fumes from the central heating system in their building. Id. at 47.
Bernhardt tendered the tenants’ claims to his comprehensive business liability insurer, Hartford.
Id. at 48. Hartford denied coverage, citing the absolute pollution exclusion in Bernhardt’s policy.
Id.
Bernhardt did “not deny that carbon monoxide is a pollutant within the literal language of
the policy exclusion.” Id. at 50. Instead, in relevant part, he argued that policy’s language was
ambiguous, because the parties had intended to apply the exclusion “only to persistent industrial
pollution of the environment, and not to an accident of the kind generally covered by a
comprehensive business liability policy.” Id. After a lengthy review of the history of the absolute
pollution exclusion, the Court of Special Appeals determined, “Whether the absolute pollution
exclusion is viewed as clear and unambiguous will, of necessity, depend upon the facts of each
case to which it is applied.” Id. at 50–52. The Court disagreed “with the landlord’s contention
that the absolute pollution exclusion is ambiguous when applied to the facts of this case.” Id. at
53–54. It instead relied on the fact that, “The carbon monoxide gas in this case was a ‘gaseous .
. . irritant or contaminant’ and constituted ‘fumes’ and ‘chemicals’ within the clear language of the
definition of ‘pollutant.’” Id. at 55. The Court also declined Bernhardt’s invitation to limit the
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absolute pollution exclusion to “industrial” or “industry-related” activities, because the exclusion
does not contain those words, and because the absolute pollution exclusion is included as an
endorsement in policies for non-industrial businesses and even for homeowners. Id. at 55–56.
While ruling in favor of the insurer in the Bernhardt case, the Court expressly warned that, “The
insurance industry has constructed an ‘absolute’ exclusion so broad in its application that it sweeps
away coverage well beyond that which might be required to meet the industry’s legitimate aims.
It has done so, however, at least in the context of this case, in contract language that is clear and
unambiguous.” Id. at 57.
Shortly after Bernhardt, the Court of Appeals of Maryland addressed the absolute pollution
exclusion in Sullins v. Allstate Ins. Co., 340 Md. 503 (1995). The Sullinses were landlords who
were sued by their tenant, who alleged that the tenant’s child had ingested lead paint at the
Sullinses’ residential property. Id. at 507. The Sullinses sought defense and indemnification from
Allstate, who had issued their homeowner’s policy, including an endorsement providing liability
coverage for their rental properties. Id. Allstate denied coverage, citing the absolute pollution
exclusion. Id. at 507–08.
The Court of Appeals considered first whether, in the context presented in Sullins, the
absolute pollution exclusion was ambiguous. Id. at 509–10. It reasoned that:
The terms in the exclusion, ‘contaminants’ and ‘pollutants,’ are susceptible of two
interpretations by a reasonably prudent layperson. By one interpretation, these
terms encompass lead paint; by another interpretation, they apply only to cases of
environmental pollution or contamination, and not to products such as lead paint.
Since no extrinsic evidence appears in the record at this time to clarify the intentions
of the parties in using these terms, the policy must be construed against Allstate as
the drafter of the policy.
Id. The Court noted other courts’ inconsistent findings regarding whether lead paint constitutes a
“contaminant” or “pollutant,” including court determinations that “products, despite their toxic
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nature, are not ‘pollutants’ or ‘contaminants’ when used intentionally and legally.” 2 Id. at 512.
After a lengthy recitation, similar to that in Bernhardt, of the history and evolution of the absolute
pollution exclusion, the Court explained:
It appears from the foregoing discussion that the insurance industry intended the
pollution exclusion to apply only to environmental pollution. That supports our
conclusion that a reasonably prudent layperson may interpret the terms “pollution”
and “contamination,” in the circumstances of the case now before us, as not
encompassing lead paint, a product used legally and intentionally. Since the terms
‘pollution’ and ‘contamination’ suggest more than one meaning to a reasonably
prudent layperson, they are ambiguous and must be construed against Allstate, the
drafter of the policy.
Id. at 515–16.
In 1998, the United States Court of Appeals for the Fourth Circuit considered and
reconciled Bernhardt and Sullins, in Assicurazioni Generali, S.p.A. v. Neil, 160 F.3d 997 (1998).
Neil arose out of carbon monoxide poisoning experienced by guests at a hotel establishment. Id.
at 999. The insurer denied coverage to the hotel, citing, in part, the absolute pollution exclusion.
Id. at 1000. The hotel owners argued that “a Maryland court would limit the applicability of any
pollution exclusion to instances of environmental pollution,” in light of the language in Sullins.
Id. at 1001. The district court had agreed, and had relied on Sullins to rule in favor of the hotel
owners, reasoning that Sullins “led to the inescapable conclusion that the [Court of Appeals of
Maryland] ‘would reverse Bernhardt if that decision were to reach it for review.’” Id. at 1003.
The Fourth Circuit disagreed, and found that the district court should have applied the
holding of the intermediate state court in Bernhardt. The Fourth Circuit noted that not only did
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The Sullins Court held “that conflicting opinions of policy language is not determinative of, but
is a factor to be considered in determining the existence of ambiguity. . . [I]f other judges have
held alternative interpretations of the same language to be reasonable, that certainly lends some
credence to the proposition that the language is ambiguous and must be resolved against the
drafter.” Id. at 518.
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Sullins decline to overrule Bernhardt, but it had actually cited Bernhardt multiple times while
recounting the history of the absolute pollution exclusion. Id. at 1004. Ultimately, the Fourth
Circuit found that Sullins had appropriately distinguished Bernhardt, because while the terms
“contaminants” and “pollutants” were ambiguous in the context of lead paint chips, “carbon
monoxide was clearly a ‘gaseous . . . irritant or contaminant’ and constituted ‘fumes’ and
‘chemicals’ within the clear language of the definition of pollutant.” Id. at 1005. In other words,
“notwithstanding its ultimate holding, nothing in Sullins would suggest disapproval of or
disinclination to follow the intermediate court’s decision in Bernhardt in a case, like the present
one, with unambiguous policy language.” Id. The Fourth Circuit emphasized that Maryland’s
high court had not concluded in Sullins that the absolute pollution exclusion was limited to
“injuries resulting from environmental pollution,” but instead had rested its holding “upon the
ambiguity in the exclusion language before it and its resolution of that ambiguity against the
insurer.” Id. In the end, the Court ruled:
For these reasons, we believe Sullins does not provide persuasive data that the
Maryland Court of Appeals would refuse to follow Bernhardt. Since Neil offers no
other persuasive data that Bernhardt does not accurately state Maryland law, we
must follow it and hold that the pollution exclusion bars coverage for the injuries
allegedly caused by carbon monoxide poisoning.
Id. at 1006.
The last significant entry in the series of relevant cases interpreting Maryland law is
Clendenin Bros., Inc. v. United States Fire Ins. Co., 390 Md. 449 (2006). Clendenin’s employees
sued their employer, alleging that “proper use of the Insured’s welding products produced harmful
localized fumes containing manganese which caused bodily harm and neurological damage.” Id.
at 452–53. Clendenin’s insurer, U.S. Fire, argued that the absolute pollution exclusion applied to
the welding-related claims. Id. The Court of Appeals noted that the issue of the exclusion’s
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application to “localized, workplace manganese welding fumes” was an issue of first impression,
id. at 454, but reviewed the relevant holdings in Bernhardt and Sullins, id. at 454–57. Echoing its
rationale in Sullins, the Court reasoned:
Guided by our principles of insurance contract interpretation, we conclude that the
language of the pollution exclusion in the present case is ambiguous in the context
of manganese welding fumes. A reasonably prudent person could construe the
pollution exclusion clause in the present case as both including and not including
manganese welding fumes.
Id. at 461. The Court found ambiguity because reasonably prudent persons (including, in a prior
case, the United States Court of Appeals for the Fourth Circuit) could conclude that “the
contractually defined term ‘pollutant’ encompasses manganese welding fumes,” which are
indisputably capable of harming human health. Id. at 461. Nevertheless, the Court of Appeals
noted that “manganese, in certain concentration forms, has positive applications and long has been
used in the normal course of business by welders,” such that “a reasonably prudent person might
not consider manganese generally to be an irritant or contaminant.” Id. at 462. The Court
emphasized that, in Sullins, it had “considered and rejected” the “potentially limitless view” that
any substance with the potential to irritate or damage some person or property could constitute a
pollutant subject to the exclusion. Id. at 464. Significantly, the Court went on to state, “[G]iven
our assessment in Sullins of the historical development of the pollution exclusion clause, in
conjunction with the conclusions reached by foreign courts reviewing similar policy language as
is presently before us, we conclude that the policy exclusion does not apply beyond traditional
environmental pollution situations.” Id. at 466. In conclusion, the Court stated, “Accordingly,
considering the policy as a whole, as well as the facts and circumstances surrounding its execution,
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we conclude that the language of the present total pollution exclusion is ambiguous in the context
of manganese welding fumes.” 3 Id. at 467.
A comparison of the absolute pollution exclusion clauses in the four cases reviewed above
reveals no meaningful distinctions in terms of wording. The analysis conducted by the Maryland
courts, instead, is a case-by-case analysis that turns on whether the substance at issue is exclusively
viewed as a pollutant, placing it squarely within the exclusion’s definitions, or whether the
substance instead serves some useful purpose as a non-pollutant, rendering its status ambiguous.
The home heating oil at issue in this case, which was intentionally introduced into the Karps’
residence to serve a useful purpose, is more akin to the manganese in Clendenin Bros. and the lead
paint chips in Sullins than it is to the carbon monoxide in Bernhardt and Neil. A reasonably
prudent person could contend that home heating oil, which causes known deleterious effects to the
occupants of the home when it is spilled, is a pollutant or contaminant, but a reasonably prudent
person could also argue that this same oil, which is brought into the home for productive use in
the furnace, is not a pollutant intended to be covered by the exclusion. This useful application,
which does not exist for the carbon monoxide in the cases so heavily relied upon by Unitrin, creates
the critical ambiguity here.
Tellingly, other courts interpreting the absolute pollution exclusion as it pertains to home
heating oil have reached varied results. Compare Eastern Cas. Inc. Co. v. Home Store, Inc., 19
Mass. L. Rptr. 363 (Sup. Ct. Mass. 2005) (finding that the absolute pollution exclusion did not
relieve the insure of its obligations to cover damages from a leak in the oil-fired heating system
3
After Clendenin Bros., the Court of Appeals of Maryland issued one additional case touching on
the absolute pollution exclusion, in Brownlee v. Liberty Mutual Fire Ins. Co., 456 Md. 579 (2017).
Because the Brownlee opinion decided the limited question of whether a Georgia court’s
interpretation of the absolute pollution exclusion violated Maryland public policy, it does not
directly bear upon the contractual interpretation issues relevant here.
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because an objectively reasonable insured would expect the damage to be covered) with Barg v.
Encompass Home & Auto Ins. Co., Civil No. 16-6049, 2018 WL 487830, at *5 (E.D. Pa. 2018)
(finding that the absolute pollution exclusion applied to a home heating oil leak where “the record
contains extensive evidence that heating oil is a contaminant”).
Such conflicting judicial
interpretations, while not dispositive, further support the existence of ambiguity. See Sullins, 340
Md. at 518.
Unitrin argues that heating oil’s status as a pollutant is not ambiguous because, when it
spilled “it was not being used in the ordinary and expected course of business,” and thus no
reasonably prudent person could conclude the oil was not a pollutant. ECF 62 at 13. The heating
oil, however, was being used how an ordinary household would—brought in to supply the house
with heat—when it spilled. The spill was certainly not an intended result of the introduction of
heating oil into the house, but neither was the inhalation of toxic fumes as part of the welding
process in Clendenin nor the ingestion of lead paint in Sullins. Those cases teach that the ambiguity
analysis is not cabined solely to whether the form in which the substance caused the harm is useful,
but rather requires a broader view of the substance’s “positive applications.” The fact that a
reasonably prudent person could conclude that heating oil in its un-spilled form has a useful
application in the Karps’ furnace is enough to give rise to ambiguity here. 4
Unitrin attempts to distinguish Clendenin Bros. by pointing out that it involved a general
commercial insurance policy as opposed to the homeowner’s insurance policy at issue here, ECF
62 at 12, but that difference is not a substantive one insofar as this case is concerned. The terms
4
Unitrin’s emphasis that home heating oil in all of its forms is an irritant and thus satisfies the
literal wording of the policy, ECF 59 at 15, similarly falls short. The fact that it is an irritant, even
one that caused the Karps to move out, does not preclude the substance from having a useful
purpose and thus does not alter the ambiguity analysis. See Clendenin Bros., 390 Md. at 464.
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of the Policy here and the one in Clendenin Bros. are very similar. See ECF 59-4 at 20; Clendenin
Bros., 390 Md. at 453 (using similar language regarding “discharge, dispersal, seepage, migration,
release or escape of pollutants,” as well as the exact same definition of pollutant). Indeed,
Clendenin Bros. itself relied heavily on Sullins, which involved a homeowners insurance policy,
to inform its commercial insurance policy analysis, Clendenin Bros., 390 Md. at 463–67,
demonstrating that where such similar exclusionary language is at issue, courts need not erect a
formalistic wall between the types of insurance policies used in their interpretive efforts.
In light of the ambiguity described above, and the lack of extrinsic evidence suggesting the
parties’ intent with respect to coverage of home heating oil, the Policy must be construed against
its drafter, Unitrin. 5 As a result of this Court’s determination that the absolute pollution exclusion
is ambiguous in this context, Unitrin cannot invoke the exclusion to deny coverage under the
policy. PennyMac’s arguments about estoppel, and about its own coverage under the policy being
broader than that afforded to the Karps, need not be addressed, and Unitrin’s Motion for Summary
Judgment as to its Complaint seeking a declaratory judgment will be denied.
5
Alternatively, while not exceedingly clear, it also appears that the Court of Appeals, in Clendenin
Bros., expressed some intent to limit application of the absolute pollution exclusion to “traditional
environmental pollution situations.” See 390 Md. at 466 (“[W]e conclude that the policy exclusion
does not apply beyond traditional environmental pollution situations.”). While the Court did not
offer a precise definition of that term, and appears to ultimately have based its holding on the
ambiguity in the Clendenin Bros. policy, the Court of Appeals is disinclined to construe the total
pollution exclusion broadly in situations like that presented in this case. See id. at 468 (citing
approvingly the Sixth Circuit’s holding in Meridian Mut. Ins. Co. v. Kellman, 197 F.3d 1178 (6th
Cir. 1999), which concluded “the total pollution exclusion clause at bar does not shield the insurer
from liability for injuries caused by toxic substances that are still confined within the general area
of their intended use.”). Unitrin’s suggestion that the apparent seepage of the Karps’ home heating
oil into the soil below the basement converts this incident into “traditional environmental
pollution,” ECF 62-1 at 15–16, is unpersuasive. The soil issue here clearly emanated from a leak
within the Karps’ residence, remained confined to the “general area of intended use” even if there
is evidence of limited seepage into the immediate soil, and is not traditional environmental
pollution affecting the property from an external source.
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The Court does need to address Unitrin’s contention that PennyMac is barred by collateral
estoppel from asserting its own affirmative claims against Unitrin. The MIA’s disposition of
PennyMac’s complaint is not binding on this Court, and by law becomes a legal nullity upon the
filing of a court action. See Fakhoury v. Great N. Ins. Co., No. CIV. WDQ-12-0268, 2012 WL
1554487, at *3 (D. Md. Apr. 30, 2012) (noting that the MIA’s decision is a nullity once an insured
has filed a civil action under § 3-1701 of the Courts & Judicial Proceedings Article); Thompson v.
State Farm Mut. Auto. Ins. Co., 196 Md. App. 235, 251 (2010) (finding that the MIA record is not
before the court and the MIA decision appears to be a nullity once the insured files a civil action).
Thus, collateral estoppel does not bar PennyMac’s claims. PennyMac’s motion for summary
judgment as to Count One of its Counterclaim will be granted, to the extent it seeks a declaratory
judgment that the pollution exclusion does not exclude coverage for the incident.
C. Count Two of Counterclaim: Breach of Contract
Unitrin seeks summary judgment in its favor as to Count Two of the Counterclaim. ECF
59-3 at 1 (seeking summary judgment “as to all claims” in the Counterclaim).
While the
memorandum in support of Unitrin’s motion for summary judgment does not address Count Two
expressly, presumably Unitrin contends that it could not have breached its contract with
PennyMac, because it did not owe coverage in light of the exclusion.
As discussed above,
Unitrin’s position lacks merit, and its motion for summary judgment as to Count Two of the
Counterclaim will be denied.
PennyMac also moves for partial summary judgment as to its claims in Count Two. 6 On
the present record, that motion will be denied. Despite this Court’s conclusion that coverage is
6
Like Unitrin, this Court did not read PennyMac’s motion to include a claim for partial summary
judgment as to Count Two. However, in its Reply, PennyMac asserts that it did intend its motion
to encompass Count Two. ECF 65-1 at 2 n.1.
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available to PennyMac under the Policy, the record does not clearly establish that PennyMac has
expressly sought coverage for any monies it has expended, that have not been covered by Unitrin
to date.
D. Count Three: Good Faith
Both parties seek summary judgment as to the claim PennyMac asserts in Count Three:
that Unitrin failed to act in good faith in deciding the coverage issues, as it is required to do by
Md. Code. Ann., Inc. § 27-1001(a) and Md. Code Ann, Cts. and Jud. Proc. § 3-1701. The
Maryland statute requires an insurer to make “an informed judgment based on honesty and
diligence supported by evidence the insurer knew or should have known at the time the insurer
made a decision on the claim.” Md. Code Ann., Cts. and Jud. Proc. 3-1704(a)(4). An insurer’s
good faith is judged by the totality of the circumstances, including:
efforts or measures taken by the insurer to resolve the coverage dispute promptly
or in such a way as to limit any potential prejudice to the insured; the substance of
the coverage dispute or the weight of legal authority on the coverage issue; [and]
the insurer’s diligence and thoroughness in investigating the facts specifically
pertinent to coverage.
All Class Constr., LLC v. Mutual Ben. Ins. Co., 3 F. Supp. 3d 409, 416 (D. Md. 2014) (quoting
Cecilia Schwaber Trust Two v. Hartford Acc. and Indem. Co., 636 F. Supp. 2d 481, 486–87 (D.
Md. 2009)). Denial of policy benefits does not constitute a “lack of good faith,” because the
insured is entitled only to pursue contract remedies. Bierman Family Farm, LLC v. United Farm
Family Inc. Co., 265 F. Supp. 3d 633, 637–38 (D. Md. 2017).
Unitrin raises, for the first time in this Motion, a lack of subject matter jurisdiction, alleging
that PennyMac did not have the requisite final order from its administrative proceeding before the
MIA in advance of filing its Counterclaim in this Court. ECF 59-3 at 7–10. As Judge Theodore
D. Chuang recently reasoned:
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[T]he Maryland General Assembly has signaled that exhaustion of the MIA
administrative process is a jurisdictional prerequisite to a claim under Section 31701. Section 3-1701 states that absent certain circumstances not present here, “a
party may not file an action under this subtitle before the dates of a final decision
under § 27-1001 of the Insurance Article,” the provision describing an
administrative claim before the MIA. Cts. & Jud. Proc. § 3-1701(c)(1). Crucially,
this provision falls within Title 3 of the Courts and Judicial Proceedings Article of
the Maryland Code, which is entitled “Courts of General Jurisdiction—
Jurisdiction/Special Causes of Action.” Thus, the Maryland legislature has
expressed its intent that this exhaustion requirement constitute not merely an
element of a claim, but a jurisdictional prerequisite to the presentation of such a
claim in a Maryland court. Accordingly, an allegation that a plaintiff has failed to
exhaust administrative remedies before bringing a Section 3-1701 claim is properly
considered as a challenge to the Court’s subject matter jurisdiction. See Class
Produce Grp., LLC v. Harleysville Worcester Ins. Co., No. ELH-16-3431, 2017
WL 2377105, at *6 (D. Md. May 31, 2017) (stating that a motion to dismiss a claim
under Section 3-1701 for failure to exhaust administrative remedies is a challenge
to the court’s subject matter jurisdiction) (quoting Carlyle v. Travelers Home &
Marine Inc. Co., No. WDQ-13-2964, 2014 WL 2573381, at *3 (D. Md. June 5,
2014)).
Jackson v. Standard Fire Ins. Co., Civil No. TDC-17-1612, 2018 WL 348148, at *3 (Jan. 9, 2018).
The timeline in this case is as follows: Unitrin filed its declaratory judgment action in this
Court on November 9, 2017. ECF 1. PennyMac filed its administrative claim with the MIA on
September 10, 2018, and filed its Counterclaim shortly thereafter, on October 24, 2018. ECF 37.
While this case was pending, on March 29, 2019, the MIA issued its opinion on the administrative
claim, which would constitute its final order under the statute. ECF 59-18. Although something
of a technicality, it is undisputed that PennyMac, at the time of the Counterclaim’s filing, lacked
the final order required to provide subject matter jurisdiction for its Counterclaim.
In order to remedy the procedural defect without prejudicing either party, rather than
granting summary judgment as urged by Unitrin, this Court will dismiss Count Three of the
Counterclaim sua sponte, without prejudice. However, although it is not the basis for this Court’s
ruling, it is worth noting that PennyMac would have an uphill battle establishing Unitrin’s failure
to act in good faith, in light of the close legal questions discussed above. Its contention that Unitrin
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“ignored legal authority” or “decided to terminate coverage without consideration for Clendenin
Brothers” is unpersuasive, in light of the somewhat balanced legal authority described above and
other courts’ determinations that home heating oil constitutes a pollutant. An insurer must be
permitted to litigate close, debatable coverage issues without incurring a finding that it did not act
in good faith, if a court ultimately rules for the insured. Moreover, there do not appear to be any
factual issues, relating to whether home heating oil is a pollutant that Unitrin either ignored or
failed to investigate.
In addition, PennyMac’s repeated contention that Unitrin did not properly remediate the
oil in the Karps’ basement is a red herring with respect to the coverage decision. Whether or not
the cleaning and remediation efforts were deficient, PennyMac has adduced no evidence linking
such deficiencies to Unitrin’s legal position or its subsequent denial of coverage. This case, then,
bears all the hallmarks of a traditional contractual coverage dispute, and not an instance of bad
faith. That said, because PennyMac subsequently obtained a final order from the MIA, Count
Three of its Counterclaim will be dismissed without prejudice to PennyMac filing a motion seeking
leave to amend its Counterclaim to re-assert a § 3-1701 claim, if it believes it to be viable.
E. Motion for Default Judgment
Finally, Unitrin seeks default judgment against the Karps, who did not appear in court or
defend this action. Despite a strong preference that cases be decided on the merits, “default
judgment is available when the adversary process has been halted because of an essentially
unresponsive party.” Disney Enters., Inc. v. Delane, 446 F. Supp. 2d 402, 405 (D. Md. 2006)
(citation and quotation marks omitted).
In considering a motion for default judgment, the Court generally “takes as true the wellpleaded factual allegations in the complaint, other than those pertaining to damages.” Choice
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Hotels Int'l, Inc. v. Vishal, Inc., No. PWG-13-2078, 2014 WL 6391092, at *2 (D. Md. Nov. 14,
2014) (Connelly, J.) (citing Ryan v. Homecomings Fin. Network, 253 F.3d 778. 780 (4th Cir.
2001)). In cases involving multiple defendants, Rule 54(b) “authorizes entry of a final judgment
as to one of multiple defendants in a civil action following an express finding that there is ‘no just
reason for delay.’” Choice Hotels Intl., Inc. v. Mander, Civil No. GJH-14-3159, 2015 WL
1880277 (Apr. 22, 2015) (citing Fed. R. Civ. P. 54(b)). However, entry of a default judgment
should not produce “logically inconsistent judgments resulting from an answering defendant's
success on the merits and another defendant's suffering of a default judgment.” Jefferson v. Briner,
Inc., 461 F. Supp. 2d 430, 434 (E.D. Va. 2006).
Given that this Court has ruled, on the merits, that Unitrin’s declaratory judgment action
lacks merit, it cannot enter default judgment against the Karps on Unitrin’s declaratory judgment
claim without producing inherently inconsistent judgments. Accordingly, Unitrin’s motion for
default judgment will be denied.
IV.
CONCLUSION
For the reasons set forth above, Unitrin’s Motion for Summary Judgment, ECF 59, will be
denied as to all counts, and PennyMac’s Motion for Partial Summary Judgment, ECF 61, will be
granted in part as to Count One, and otherwise denied. Specifically, PennyMac is entitled to a
declaration that the absolute pollution exclusion does not bar coverage for the losses arising from
the home heating oil leakage in the Karps’ basement. Genuine issues of material fact remain as to
the other claims, including the other claims for declaratory relief. Unitrin’s Motion for Default
Judgment, ECF 60, and its Motion to Strike, ECF 66, will also be denied. Count III of PennyMac’s
Counterclaim will be dismissed without prejudice for lack of subject matter jurisdiction. A
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separate Order follows, which will include information about a scheduling conference to discuss
the remaining proceedings in this litigation.
Dated: August 24, 2020
/s/
Stephanie A. Gallagher
United States District Judge
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