Artra Group, Inc. v. American Motorists Insurance

BLOOM, Judge. In this declaratory judgment case, the Circuit Court for Baltimore City granted the relief sought by American Motorists Insurance Company (AMICO): a declaration that AMICO did not owe a duty to its insured, ARTRA Group, Inc. (AR-TRA), either to defend ARTRA in an environmental damage action brought against it by the Sherwin-Williams Company or to indemnify ARTRA for any damages Sherwin-Williams might recover in that action. Appealing from that judgment, ARTRA presents four issues: 1. Did the trial court err in ruling that Maryland law controls substantive contract issues governing the policies of insurance issued by AMICO to ARTRA? 2.

Did the trial court err in failing to deny AMICO’s motion for summary judgment under controlling Illinois law? 3. Even if Maryland law were deemed to apply, did the trial court err in granting summary judgment when a ⁷³¹ potentiality for coverage exists on claims for environmental damages asserted against ARTRA in the Sherwin-Williams suit? 4. Did the trial court err in denying ARTRA’s motion to dismiss AMICO’s complaint for declaratory relief to permit resolution of disputed factual issues in the Sherwin-Williams suit? Background On 25 August 1980, ARTRA sold five parcels of improved property, approximately twenty acres, located on Hollins Ferry Road in Baltimore City (the Hollins Ferry site) to SherwinWilliams.

The Hollins Ferry site had been operated as a paint manufacturing plant since the mid-1940’s. During the period from 1946 through 1960, the plant was operated by a partnership known as Baltimore Paint and Color Works. In June 1960, the tract was purchased by Baltimore Paint and Chemical Corporation, which later merged into ELT, Inc. ELT, Inc. subsequently changed its name to Dutch Boy, Inc.; the name was finally changed to ARTRA Group, Inc., in January 1981. The Insurance Policies .

From 1 April 1976 through April 1985, AMICO issued a series of nine comprehensive general liability policies to AR-TRA or its predecessor companies. Each of these policies contains the following general insuring obligation: [P]ay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages because of A. bodily injury or B. property damage to which this insurance applies, caused by an occurrence, and the company shall have the right and duty to defend any suit against the Insured seeking damages on account of such bodily injury or property damage, even if any of the allegations of this suit are groundless, false or fraudulent.... Each of the policies also contains a pollution exclusion, which limits the scope of the general insuring language. The ⁷³² policies provide a broad exclusion of coverage for pollution damages except where the damage is caused by an event that is “sudden and accidental.” The pertinent exclusion language of the policies reads: This insurance does not apply under Part 7: (f) to bodily injury or property damage arising out of the discharge, disbursal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any water course or body of water; but this exclusion does not apply if such discharge, disbursal, release or escape is sudden and accidental.

AMICO also issued a single Comprehensive Catastrophe Umbrella Policy, covering the period from 30 September 1976 through 1 May 1978. The Umbrella Policy contains virtually identical insuring language. Each AMICO policy insuring ARTRA and its predecessors was issued in Illinois. ARTRA, as was ELT, Inc., was headquartered in Northfield, Illinois. 1 AMICO is also headquartered in Illinois, and each of the policies was countersigned on behalf of AMICO in Illinois.

The Sherwin-Williams Suit In December 1991, Sherwin-Williams filed, in the United States District Court for the District of Maryland, a complaint ⁷³³ against ARTRA and other prior owners of the Hollins Ferry-site, asserting claims for cost recovery, compensatory damages, and declaratory relief relating to damages SherwinWilliams alleges it incurred, or may incur in the future, in response to the release and threatened release of hazardous substances at the Hollins Ferry plant site. ARTRA requested AMICO to defend the Sherwin-Williams suit, but AMICO refused either to defend that suit or to indemnify ARTRA in the event a judgment were awarded against ARTRA therein. That decision was based solely on AMICO’s review of the allegations against ARTRA in the Sherwin-Williams suit. The complaint filed by Sherwin-Williams contains broad ranging allegations regarding the means by which the Hollins Ferry site became contaminated.

The suit seeks to recover damages for the collective effects of these various forms of contamination. The spectrum of allegations range from claims of leaking storage drums and underground tanks to various spills and other releases of hazardous substances. Some allegations involve claims of contamination caused by long standing deficiencies in plant operation, whereas other alleged sources were relatively sudden releases caused during normal operations either by negligence or accident. AMICO’s Complaint For Declaratory Relief AMICO’s Complaint for Declaratory Relief, filed in the Circuit Court for Baltimore City, sought a declaration that it neither owed a duty to defend nor an obligation to indemnify ARTRA on the claims asserted in the Sherwin-Williams Suit.

ARTRA filed an Answer, together with a Counterclaim seeking a declaration that AMICO, at a minimum, owed a duty to defend ARTRA in the pending Sherwin-Williams suit, because a potentiality for coverage existed. ARTRA also filed a Motion to Dismiss AMICO’s Complaint for Declaratory Relief on the indemnity obligation, alleging that various key factual issues raised in the declaratory action were inextricably intertwined with facts to be determined in the Sherwin-Williams suit. Accordingly, ARTRA claimed that declaratory relief regarding AMICO’s obligation to indemnify ARTRA for ⁷³⁴ claims asserted in the Sherwin-Williams suit was both premature and prejudicial. AMICO opposed the Motion to Dismiss and simultaneously moved for summary judgment, stating there was no potentiality for coverage under the policies issued to ARTRA and therefore no obligation to provide a defense to ARTRA in the Sherwin-Williams suit.

ARTRA opposed the Motion for Summary Judgment and asserted that controlling Illinois law dictated a finding that the pollution exclusion at issue was ambiguous and, therefore, must be construed against the insurer. ARTRA further argued that the factual record was insufficient to support the entry of summary judgment. Finally, ARTRA argued that, under either governing Illinois or Maryland law, a potentiality for coverage existed on the claims asserted against ARTRA in the Sherwin-Williams suit. Following argument on the motions, the court ruled that, although the contracts of insurance were entered into by AMICO and ARTRA in Illinois, for conflict of law purposes the court would apply the substantive law of Maryland, because of the strength of Maryland’s public policy on environmental issues.

The court further determined that, under Maryland law, the “sudden and accidental” policy exclusion was clear and unambiguous. Finally, the court concluded that the allegations against ARTRA in Sherwin-Williams’s complaint did not constitute “sudden and accidental” conduct and, therefore, no potentiality for coverage existed under AMICO’s policies. On those bases, the court entered summary judgment in favor of AMICO on its complaint for declaratory relief and denied ARTRA’s motion to dismiss as moot. I. The Court of Appeals has stated that, generally, the appellate courts of this State should review a grant of summary judgment only on the grounds relied on by the trial court.

Federated Dept. Stores, Inc. v. Le, 324 Md. 71, 79 , 595 A.2d 1067 (1991); Boyer v. State, 323 Md. 558, 588 , 594 A.2d 121 (1991). The proper standard for reviewing the grant or ⁷³⁵ denial of a summary judgment is whether the trial court was legally correct. Beatty v. Trailmaster Prods., Inc., 330 Md. 726, 737 , 625 A.2d 1005 (1993); Heat & Power Corp. v. Air Prods. & Chems., Inc., 320 Md. 584, 592 , 578 A.2d 1202 (1990).

In this case, the lower court judge was not legally correct on either the choice of law issue or the potentiality for coverage issue. A. AMICO argued on appeal, as it did below, that, if lex loci contractus factors lead to a determination that the contract was made in a forum other than Maryland, the court should then apply renvoi principles and look at the law of the other forum to see if it would refer back to Maryland on substantive law issues. AMICO asserts that the lower court was correct, setting forth the following analysis: 1) the court first determines where the contract was entered into, in this case, Illinois; 2) the court then must look to Illinois law to see what law Illinois would apply; 3) Illinois would apply the law of Maryland, because Illinois would deem Maryland, as the place where the property is located, as having the most significant interest; 4) therefore, the substantive law of Maryland should be applied. AMICO points out that Illinois follows § 193 of the Restatement (Second) of Conflict of Laws, which provides that the choice-of-law issue, with respect to casualty insurance contracts, is determined by the local law of the state which the parties understood was to be the principal location of the insured risk during the term of the policy, unless with respect to the particular issue, some other state has a more significant relationship ... to the transaction and the parties, in which event the local law of the other state will be applied.

Restatement (Second) of Conflict of Laws, § 193 (1971). This Court, in Commercial Union Insurance Co. v. Porter Hayden Co., 97 Md.App. 442 , 630 A.2d 261 , cert. granted, 333 Md. 201 , 634 A.2d 62 (1994), recently addressed the choice of law question. In Porter Hayden, an asbestos manufacturer ⁷³⁶ sought a declaration of the duty of its insurer, Commercial Union, to defend and potentially to indemnify Porter Hayden in connection with certain liability lawsuits filed against Porter Hayden. The lower court determined that Maryland law governed.

This Court held that New York law applied because the last act necessary to give the policy binding effect occurred in New York, when the policy was delivered to Porter Hayden’s insurance broker. Judge Harrell, for this Court, wrote: When presented with choice-of-law questions, Maryland courts generally follow the rule of lex loci contractus, which requires that the construction and validity of a contract be determined by the law of the state where the contract was made. Allstate Ins. Co. v. Hart, 327 Md. 526, 529 [ 611 A.2d 100 ] (1992); Kramer v. Bally’s Park Place, Inc., 311 Md. 387, 390 [ 535 A.2d 466 ] (1988); Comstock Ins.

Co. v. Thomas A. Hanson & Assocs., Inc., 77 Md.App. 431, 438 [ 550 A.2d 731 ] (1988). For choice-of-law purposes, a contract is made where the last act necessary to make the contract binding occurs. Sting Sec., Inc. v. First Mercury Syndicate, Inc., 791 F.Supp. 555, 558 (D.Md.1992); Travelers Indem. Co. v. Allied-Signal, Inc., 718 F.Supp. 1252, 1253 (D.Md.1989).

Porter Hayden, 97 Md.App. at 451 , 630 A.2d 261 . Each AMICO policy states, “[T]his policy shall not be valid unless countersigned ... by a duly authorized representative of the company.” AMICO countersigned the policy in Illinois; thus, Illinois is where the last act necessary occurred. Contrary to AMICO’s argument, Maryland has not ádopted the renvoi doctrine. AMICO relies heavily on Travelers Indemnity Co. v. Allied Signal, Inc., 718 F.Supp. 1252 (D.Md.1989), in which the United States District Court for the District of Maryland (Motz, J.), purportedly following Maryland law with respect to insurance policies in a case involving environmental clean-up costs, referred to the renvoi doctrine in holding that Maryland law applies because New York and New Jersey, where the policies were issued, would apply Maryland law.

We declined to adopt that reasoning in Porter ⁷³⁷ Hayden, continuing to follow the lex loci contractus rule despite the fact that New York, where the insurance policies were issued, would have applied Maryland law by virtue of § 193 of the Restatement (Second) of Conflicts of Laws. We noted that Maryland had not yet adopted § 193 of the Restatement although it had followed § 187 of the Restatement of Conflict of Laws (1971) in Kronovet v. Lipchin, 288 Md. 30 , 415 A.2d 1096 (1980). 97 Md.App. at 457 , 634 A.2d 62 . That section, however, is inapplicable in the case sub judice. Applying only to situations in which the contract contains a