Bankers & Shippers Insurance v. Electro Enterprises Inc.

Eldridge, J., delivered the opinion of the Court. The petitioner, Bankers and Shippers Insurance Company of New York (hereinafter "Bankers”), brought an action for a declaratory judgment that its insurance policy did not provide either coverage for or an obligation to defend its insureds against claims resulting from an airplane crash. After the declaratory judgment action was finally terminated, the defendants in that action brought the instant suit for attorneys’ fees and expenses. The issues on this appeal are whether the insurer is obligated to reimburse the defendants in the declaratory judgment proceedings for reasonable attorneys’ fees and expenses incurred as a result of the insurer’s disclaimer of coverage, and whether the insurer is prevented by the declaratory judgment from raising certain defenses against the claims for attorneys’ fees and expenses.

On April 30, 1973, Bankers issued an aircraft insurance policy on a Cessna airplane owned by the respondent Electro ⁶⁴⁴ Enterprises, Inc., of Hagerstown, Maryland (hereinafter "Electro”). The policy, with certain exclusions that will be set forth later, provided coverage for personal injury and property damage claims arising from an occurrence while the airplane was in flight. In addition, the policy provided that Bankers would defend the insured against claims within the policy’s coverage. While on a business trip from Hagerstown to Scottsdale, Arizona, in 1974, Electro’s airplane crashed, killing everyone aboard.

These included Earl Bittle (a pilot employed by Electro), Paul Erickson (another pilot and president of Electro), Caswell Nuger (an employee of Electro), Irvin Turner and Joseph Urie. As a result of the crash, three negligence actions were filed in the Circuit Court for Washington County by the survivors and personal representatives of Nuger, Turner and Urie, all presumably passengers on the flight. The three actions were as follows: Rosalie L. Turner filed suit against Electro; Marie Rogers Urie sued Electro and sued Sandra E. Mose and Deborah E. Gigeous, personal representatives of Paul Erickson’s estate; Lillian Nuger sued Mose and Gigeous as personal representatives of Erickson’s estate, sued Juanita Bittle who was personal representative of Earl Bittle’s estate, and sued Cessna Aircraft Co. The Nuger action also included, as a plaintiff, the Pennsylvania Manufacturers Association Insurance Company which claimed a right of subrogation for Workmen’s Compensation benefits paid to the Nuger estate. The defendants in these tort actions demanded that Bankers provide them with a defense.

Shortly thereafter, Bankers filed a declaratory judgment action, in the Circuit Court for Washington County, seeking a declaration that its policy did not afford any insurance coverage for the tort claims or duty to defend them. Bankers named as defendants all of the plaintiffs and defendants in the wrongful death suits. The policy language upon which Bankers relied for its argument of noncoverage was as follows (Item 7 of the Declarations): "The coverage afforded by this policy shall not apply while the aircraft is operated in flight by other than the following pilots: Paul Erickson ⁶⁴⁵ and Wilford Goldman.” The policy exclusions further provided: "This Policy does not apply: 2. to any occurrence or to any loss or damage occurring while the aircraft is operated in flight by other than the pilot or pilots set forth under Item 7 of the Declarations.” Bankers raised two arguments based on this language. First, noting that Bittle had not been named as an approved pilot in Item 7 of the Declarations, Bankers appeared to argue that Bittle was actually operating the plane when it crashed.

Bankers contended that there was no coverage when Bittle was piloting the plane. Second, Bankers argued in the alternative that the language in Item 7 of the Declarations should be interpreted as providing coverage only if Goldman was in the plane along with Erickson, and as not providing coverage if Goldman did not accompany Erickson while the plane was in flight. Consequently, according to Bankers, it was legally irrelevant whether, as a factual matter, Erickson alone, Bittle alone, or Erickson and Bittle together were operating the plane at the time of the crash. Because Goldman was not in the plane, as allegedly required by the policy, Bankers argued that the policy would not provide any coverage, and consequently, it did not have a duty to defend.

Bankers sought a declaratory judgment that it should be "relieved of any obligation to defend”Mose, Gigeous, Electro and Bittle and that it had "no coverage under the policy ... [for] any liability that may be adjudged” against them. (Emphasis supplied.) In response, the declaratory judgment defendants disputed Bankers’ interpretation of the policy provisions, argued that the policy would provide coverage as long as one of the named pilots was operating the plane, and maintained that Erickson was operating the plane. According to the defendants, there would be coverage if Erickson were ⁶⁴⁶ operating the plane regardless of whether or not Goldman was in the plane. 1 They requested a jury trial to decide the factual issue of whether Erickson or Bittle was operating the plane at the time of the crash. After a full trial, the jury found that Erickson, and not Bittle, was operating the plane at the time of the crash.

The trial court then interpreted the disputed policy provisions, concluding that the policy afforded coverage if Erickson were operating the plane, regardless of Goldman’s absence or presence. The court declared that there was coverage under the policy and that "[t]he plaintiff is not relieved from defending cases filed against it in related proceedings arising out of the said accident.” The declaratory judgment was affirmed by the Court of Special Appeals, Bankers & Shippers Ins. v. Urie, 38 Md. App. 232 , 380 A.2d 243 (1977), and this Court denied a petition for a writ of certiorari, 282 Md. 729 (1978). Thereafter, all of the declaratory judgment defendants brought the present action, again in the Circuit Court for Washington County, pursuant to Maryland Code (1974, 1980 Repl. Vol.), § 3-412 (a) of the Courts and Judicial Proceedings Article, for the reimbursement of the attorneys’ fees and other expenses incurred in defending against the declaratory judgment action. 2 Moreover, Electro, Mose, Gigeous and Bittle additionally sought the attorneys’ fees and other expenses incurred when they were forced to begin providing their own defense in the underlying wrongful death actions.

In response, Bankers generally denied that it was liable for any attorneys’ fees. With regard to the fees incurred by Mose, Gigeous and Bittle, Bankers contended that it could be liable for their attorneys’ fees only if it were required to ⁶⁴⁷ provide them with a defense in the underlying tort actions. Bankers maintained that it was not obligated to defend them because the policy expressly excluded from coverage the tort claims against them. As to Bittle, Bankers argued that any tort claim against Bittle would necessarily have to allege, in order to recover, that Bittle was operating the plane at the time of the crash.

However, because Bittle was not a named pilot in the policy and because Item 7 of the Declarations expressly excluded coverage if the plane were operated by other than a named pilot, Bankers argued that any claim against Bittle would have to allege facts that placed the claim outside of the coverage of the policy. Bankers argued that the Nuger tort action against Mose and Gigeous was excluded from coverage because the claim was, in effect, by an Electro employee (Nuger) against a fellow employee (Erickson) and, in addition, was covered by Workmen’s Compensation insurance paid to the Nuger estate. After a hearing, the trial court held that all declaratory judgment defendants were entitled to the attorneys’ fees and expenses incurred in the declaratory judgment action. The court based its decision on the belief that an insurer who unsuccessfully brings a declaratory judgment action, attempting to disclaim coverage, must reimburse the successful defendants for the attorneys’ fees incurred in that proceeding.

However, because the fee petitions, according to the court, also included fees for work performed in the personal injury suits, the court decided that each party should receive 30% of the amount sought. All parties took appeals from the order awarding fees. Before any proceedings were held in the Court of Special Appeals, this Court issued a writ of certiorari. I. In the insurance policy issued to Electro, Bankers agreed that: "1.

Defense, Settlement, Supplementary Payments. With respect to such insurance as is afforded ⁶⁴⁸ by this Policy for bodily injury liability and for property damage liability coverages the Company shall: (a) defend any suit against the Insured alleging such injury, sickness, disease or destruction and seeking damages on account thereof, even if such suit is groundless, false or fraudulent; but the Company may make such investigation, negotiation and settlement of any claim or suit as it deems expedient. * * * (e) reimburse the Insured for all reasonable expenses, other than loss of earnings, incurred at the Company’s request.” With respect to similar policy provisions, this Court has held that an insurer is liable for the damages, including attorneys’ fees, incurred by an insured as a result of the insurer’s breach of its contractual obligation to defend the insured against a claim potentially within the policy’s coverage, and this is so whether the attorneys’ fees are incurred in defending against the underlying damage claim or in a declaratory judgment action to determine coverage and a duty to defend. Brohawn v. Transamerica Ins. Co., 276 Md. 396 , 347 A.2d 842 (1975); Gov’t Employees Ins. v. Taylor, 270 Md. 11, 22 , 310 A.2d 49 (1973); Cohen v. Am.

Home Assurance Co., 255 Md. 334, 363 , 258 A.2d 225 (1969); Anderson v. Md. Casualty Co., 123 Md. 67, 71-72 , 90 A. 780 (1914). As explained in Brohawn v. Transamerica Ins. Co., supra, 276 Md. at 409 -410: "The promise to defend the insured, as well as the promise to indemnify, is the consideration received by the insured for payment of the policy premiums. Although the type of policy here considered is most often referred to as liability insurance, it is 'litigation insurance’ as well, protecting the insured ⁶⁴⁹ from the expense of defending suits brought against him. ...

By clear and unequivocal language, . .. [the insurer] has assumed the obligation of relieving its insured of the expense of defending an action alleging and seeking damages within the policy coverage.” Therefore, whenever an insured must conduct his own defense at his own expense as a result of an insurer’s breach of a contractual duty to defend its insured, the insured may recover the expenses of that defense from the insurer. 7C J. Appleman, Insurance Law and Practice § 4691, pp. 238-240 (Berdal ed. 1979). Furthermore, the right of an insured to recover attorneys’ fees in such a situation applies not only to the named insured of the policy but also to any person who is within the policy definition of an insured and against whom a claim alleging a loss within the policy coverage has been filed. See, e.g., American States Insurance Company v. Angstman Motors, Inc., 343 F. Supp. 576 (D. Mont. 1972); Standard Accident Ins. Co. of Detroit v. Hull, 91 F. Supp. 65 (S.D. Cal. 1950).

II

Some of the defendants in the declaratory judgment suit, however, do not base their claims for attorneys’ fees on the theory that Bankers failed to provide them with a defense to which they were contractually entitled. These are the plaintiffs in the underlying wrongful death actions, namely Turner, Urie, Nuger and Pennsylvania Insurance. 3 They assert that they were "insureds” within the literal language of the policy and that, therefore, they should be reimbursed for attorneys’ fees pursuant to Bankers’ promise in paragraph I (e) of the policy "to reimburse the Insured for all reasonable expenses . . . incurred at the Company’s request.” The tort plaintiffs rely on the following policy language: "II. Definition of 'Insured.’ The unqualified word 'Insured’ wherever used in this Policy with respect ⁶⁵⁰ to Coverage . . . includes not only the Named Insured but also any person while using or riding in the aircraft and any person or organization legally responsible for its use, provided the actual use is with the permission of the Named Insured.” (Emphasis supplied.) Turner, Urie, Nuger and Pennsylvania argue that as representatives of or parties standing in the shoes of persons "using or riding in the aircraft,” they are insureds. It is asserted that Bankers knowingly "requested” that they incur the expenses of attorneys’ fees by naming them as defendants in the declaratory judgment action.

Accordingly, the tort plaintiffs maintain that as insureds, they may -recover their attorneys’ fees pursuant to Bankers’ promise in paragraph I (e). We disagree. Paragraph I of Bankers’ policy expressly conditioned the promise contained in paragraph I (e) to only those expenses incurred with "respect to such insurance as is afforded by this Policy for ... liability coverages.” (Emphasis supplied.) These coverage provisions provided that Bankers will "pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages ... caused by an occurrence and arising out of the ownership ... or use of the aircraft.” (Emphasis supplied.) Consequently, even though the tort plaintiffs may arguably be within the literal definition of insureds, the only expenses that Bankers agreed to reimburse were those relating to a claim filed against an insured for which the insured might become liable. These parties do not assert, and there is nothing in the record to indicate, that tort claims arising out of the crash for which they could become liable have ever been filed against them.

In fact, they are the ones asserting tort claims. It is apparent, therefore, that the policy language upon which the tort plaintiffs rely does not obligate Bankers to reimburse them for the fees which they incurred. We hold that the trial court erred in awarding any fees to Turner, Urie, Nuger and Pennsylvania Insurance. ⁶⁵¹ III. As a defendant in one of the personal injury suits, Cessna obviously had a claim asserted against it.

However, because Cessna was neither a named insured, a person riding in or using the aircraft, nor an organization responsible for the aircraft’s use, it does not even come within the definition of an insured in paragraph II of the policy. Therefore, there was no promise by Bankers either to defend Cessna or to reimburse it for its expenses. Consequently, we hold that Cessna also was not entitled to attorneys’ fees.

IV

The claims for attorneys’ fees and other expenses by Electro, Mose, Gigeous and Bittle rest on a different theory than the claims just considered. These parties, all defendants in the underlying tort actions, assert that they are entitled to recover their attorneys’ fees because Bankers breached its contractual obligation to defend them against claims for which they might become liable. In this Court, Bankers has conceded that Electro, as the named insured, is entitled to reimbursement for the attorneys’ fees that are properly established to have resulted from Bankers’ failure to defend, and it has tacitly conceded that it is liable for the attorneys’ fees incurred by Mose and Gigeous in defending against the Urie claim. 4 Bankers nevertheless reiterates the arguments made below that its policy did not provide any coverage for the claim against Bittle or for the Nuger claim against Mose and Gigeous. Therefore, according to Bankers, it was not required to defend them and, consequently, is not liable for the attorneys’ fees relating to these claims.

In response, Mose, Gigeous, Bittle and Electro contend that the matter of coverage and a duty to provide a defense to the insured tort defendants was already adjudicated by the declaratory ⁶⁵² judgment. Consequently, they argue that the doctrines of res judicata and/or collateral estoppel preclude Bankers from now offering new reasons or theories for denying the existence of coverage and a duty to defend them. As set forth by this Court in Alvey v. Alvey, 225 Md. 386, 390 , 171 A.2d 92 (1961): "The doctrine of res judicata is that a judgment between the same parties and their privies is a final bar to any other suit upon the same cause of action, and is conclusive, not only as to all matters that have been decided in the original suit, but as to all matters which with propriety could have been litigated in the first suit, where the court had jurisdiction, proceedings were regular, and his omission was due to his own negligence.” The distinction between res judicata and collateral estoppel was described in MPC, Inc. v. Kenny, 279 Md. 29, 32 , 367 A.2d 486 (1977), (quoting Sterling v. Local 438, Etc., 207 Md. 132, 140-141 , 113 A.2d 389 , cert. denied, 350 U.S. 875 , 76 S. Ct. 119 , 100 L. Ed. 773 (1955)): " '. . . If the second suit is between the same parties and is upon the same cause of action, a judgment in the earlier case on the merits is an absolute bar, not only as to all matters which were litigated in the earlier case, but as to all matters which could have been litigated [res judicata].

If, in a second suit between the same parties, even though the cause of action is different, any determination of fact, which was actually litigated in the first case, is conclusive in the second case [collateral estoppel].’ (citation omitted).” (Emphasis supplied.) It is clear that the traditional principles of res judicata as described above are inapplicable in the context, as in this case, of a statutory action for further relief based on a declaratory judgment. The Maryland Uniform Declaratory ⁶⁵³ Judgments Act, Code (1974, 1980 Repl. Vol.), § 3-401 etseq. of the Courts and Judicial Proceedings Article, provides in § 3-403 (a) that a court "may declare rights, status, and other legal relations whether or not further relief is or could be claimed,” and § 3-411 provides that the declaration of rights "has the force and effect of a fínal judgment or decree. ” (Emphases supplied.) Furthermore, the Act provides in § 3-412 (a) that "[fjurther relief based on a declaratory judgment or decree may be granted if necessary or proper.” 5 Thus, the statutory scheme expressly permits a party to bring one action requesting only a declaratory judgment and then to bring a separate action for further relief based on the rights determined by that judgment. In contrast, because res judicata precludes subsequent litigation of what could have been litigated in the first action, it requires that a party bring his entire claim, including a request for accrued damages or other relief, in one action, and prevents a second suit on the same cause of action for damages or other relief which had accrued but were not requested at the time of the first suit.

See, e.g., Missler v. Anne Arundel County, 271 Md. 70, 78-79 , 314 A.2d 451 (1974); Ex parte Carlin, 212 Md. 526 , 129 A.2d 827 (1957); Walzl v. King, 113 Md. 550