Legal Opinions - U.S. District Court, Maryland: August 25, 2008

Daily Record, The (Baltimore), Aug 25, 2008

Insurance

Duty to defend

BOTTOM LINE: District court granted partial summary judgment in favor of insured where Errors and Omissions insurance policy triggered insurer's duty to defend against subpoena issued by state attorney general offices.

CASE: Ace American Insurance Company v. Ascend One Corporation, USDMD No. CCB-06-3371 (decided Aug. 7, 2008) (Judge Blake).

FACTS: On October 23, 2006, the Consumer Protection Division of the Office of the Attorney General of Maryland served an Administrative Subpoena on Amerix Corporation, pursuant to CL II [section]13-405, part of the Maryland Consumer Protection Act.

On December 29, 2006, Amerix gave ACE American Insurance Company (ACE) notice of the subpoena via letter, and requested coverage under the 2006-07 Miscellaneous Errors and Omissions (E & O) and Directors and Officers Liability (D & O) insurance policies ACE issued to Amerix.

On February 12, 2007, the Texas Attorney General's Consumer Protection Division served a Civil Investigative Demand (Texas Demand), dated February 8, 2007, on Amerix pursuant to [section]17.61 of the Texas Deceptive Trade Practices and Consumer Protection Act (DTPA). The demand sought the same documents that Amerix produced to Maryland pursuant to its subpoena. Amerix notified ACE of this additional demand by letter on September 5, 2007.

ACE denied Amerix's claim for coverage. As a result of the denial of coverage, Amerix amended a counterclaim, on November 5, 2007, in order to seek a declaration of coverage for the present claim (Multi- State Claim). Amerix filed a motion for partial summary judgment, and Ace responded by filing a cross motion for summary judgment on the policy coverage issue.

The district court granted Amerix's motion for partial summary judgment and denied ACE's cross motion for summary judgment.

LAW: FRCP 56(c) provides that summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law."

The Supreme Court has clarified this does not mean that any factual dispute will defeat the motion: "By its very terms, this standard provides that the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986).

Under Maryland law, courts determine the meaning of contract language by adhering to the principle of the objective interpretation of contracts. See ABC Imaging of Washington, Inc. v. The Travelers Indemn. Co. of America, 150 Md. App. 390, 396 (2003). In addition, in Maryland, "an insurance policy is a contract and is to be read as any other contract," and "words of an insurance policy are to be given their ordinary meaning." Warfield-Dorsey Co., Inc. v. Travelers Cas. & Sur. Co. of Illinois, 66 F. Supp.2d 681, 685 (D. Md. 1999). Specifically, "when deciding the issue of coverage under an insurance policy, the primary principle of construction is to apply the terms of the insurance contract." Warfield-Dorsey, 66 F. Supp. at 685 (citing Bausch & Lomb v. Utica Mutual, 330 Md. 758, 779 (1993)).

In Maryland, the question of whether an insurance company has a duty to defend an insured is determined by a two-part inquiry to determine (1) the coverage and the defenses under the terms and requirements of the insurance policy, and (2) whether the allegations in the tort action potentially bring the tort claim within the policy's coverage. See St. Paul Fire & Marine Ins. Co. v. Pryseski, 292 Md. 187, 193 (1981).

Here, under the language of the '06-'07 E & O Policy, ACE was obligated to pay claims expenses because of a "Claim first made against the insured...by reason of a Wrongful Act." Section II.C of the policy defined "Claim" as "[a] civil, administrative or regulatory investigation against any Insured commenced by the filing of a notice of charges, investigative order or similar document." Id.

It is well-established in Maryland that an insurer may not use extrinsic evidence to contest coverage under an insurance policy if the tort complaint establishes a potentiality of coverage. See Aetna Cas. & Sur. Co. v. Cochran, 337 Md. 98, 107 (1995) (citing Brohawn v. Transamerica Insurance Co., 276 Md. 396 (1975)).

The Maryland Court of Appeals has interpreted Brohawn to allow an insured to present extrinsic evidence "if that reference is necessary to determine whether there is a potentiality of coverage under an insurance policy where the tort plaintiff's complaint neither conclusively establishes or negates a potentiality of coverage." Aetna, 337 Md. at 108.

On this basis, the Court of Appeals has stated that an insurer's duty to defend is triggered when "an examination of the policy, the complaint and appropriate extrinsic evidence discloses a potentiality of coverage under an insurance policy." Chantel Assoc. v. Mount Vernon Fire Ins. Co., 338 Md. 131, 141 (1995). An insured may submit extrinsic evidence to establish a potentiality of coverage. Aetna, 337 Md. at 107-08. Therefore, extrinsic evidence provided by an insured may be considered in determining the potentiality of coverage under the policy.