Century I Joint Venture v. United States Fidelity & Guaranty Co.

BLOOM, Judge. The developers of a condominium project sought a declaratory judgment that their insurer was obligated to defend and indemnify them in an action for faulty design and construction that was brought by the purchasers of the individual condominium units. Alternately, the developers sought a declaratory judgment that their insurance broker was negligent or breached its contract with them by failing to procure proper and adequate insurance. The Circuit Court for Worcester County first sustained the broker’s demurrer to appellants’ petition, without leave to amend, then granted a motion for summary judgment on behalf of the insurance company, whereupon the developers filed a timely appeal to this court.

Background Appellant Century I Joint Venture (Joint Venture) is a development company that was formed in 1972 for the purpose of constructing a twenty-seven story high-rise condominium in Ocean City, Maryland. While Joint Venture handled the financing and marketing aspects of the project, it employed a general contractor to erect the building and two architectural firms to design the structure and oversee ⁵⁴⁹ the actual construction. Shortly before the completion of the project in July of 1974, Joint Venture created appellant Century I Leasehold Corporation (Leasehold Corporation) as a marketing device through which it could transfer leasehold interests to the purchasers of the individual condominium units. In October of 1980 the owners of the condominium units, acting through the Century I Condominium Corporation, an incorporated condominium association, brought suit against Joint Venture, Leasehold Corporation, the general contractor, the two architectural firms, and a mechanical engineer, asserting various claims relating to “faulty design and improper construction.” The declaration included counts for negligence and breach of implied warranties under Md.Real Prop.Code Ann. § 10-203 against all the named defendants; it also asserted fraudulent misrepresentation and breach of fiduciary duty on the part of the appellants. 1 Joint Venture and Leasehold Corporation notified their insurance broker, appellee Avery W. Hall Insurance Agency, Inc., of the impending lawsuit and stated that they expected their insurer, appellee United States Fidelity & Guaranty Company (USF & G), to provide them with a defense to the suit.

The broker had previously procured two policies of liability insurance from USF & G for the appellants. The first policy was a comprehensive general liability (CGL) policy that provided coverage in the amount of $100,000 for ⁵⁵⁰ all suras 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 [insurer] 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 the suit are groundless, false or fraudulent____ (Emphasis in original). The second policy, entitled “Comprehensive Excess Indemnity Policy,” provided liability coverage of up to $1,000,000 per occurrence, for all sums which the Insured shall become obligated to pay as damages and expenses, (all as defined herein as included within the term “ultimate net loss ”) by reason of liability imposed upon the Insured by law, or by contractual liability, because of (1) personal injury or property damage caused by, or (2) advertising liability arising out of an occurrence which takes place anywhere. (Emphasis in original).

In limiting the insured’s coverage under this policy to the “ultimate net loss,” the excess policy encompassed those damages and expenses that would not be covered by any underlying liability insurance. By letter dated December 16, 1980, USF & G informed counsel for appellants that it disclaimed any obligation under either policy to indemnify appellants or to provide them with a defense. Appellants thereupon brought this action against USF & G and Avery W. Hall Insurance Agency, Inc., requesting a declaration that USF & G was obligated to indemnify and defend them in the condominium association’s suit or, alternatively, that the broker was negligent and had breached its contract with and had violated its fiduciary duty to the appellants by failing to procure appropriate and adequate liability insurance coverage for the Century I condominium ⁵⁵¹ project. Appellants also sought an award of damages for the expenses they had incurred thus far in defending themselves in the prior lawsuit.

The broker’s demurrer to the petition was sustained without leave to amend, the court merely stating that “the action should be brought as a negligence case, American Home Assurance v. Osbourn [ 47 Md.App. 73 , 422 A.2d 8 (1980) ] was a negligence case.” USF & G filed a motion for summary judgment, relying solely upon exclusions contained in both policies, which they appended to the motion. These exclusions provided: 2 This insurance does not apply: iff # * * * * (n) to property damage to the Named Insured’s products arising out of such products or any part of such products; !jC Sfc tit ![« * He (o) to property damage to work performed by or on behalf of the Named Insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith. (Emphasis in original). Both policies defined “Named Insured’s products” as goods or products manufactured, sold, handled or distributed by the Named Insured or by others trading under his name, including any container thereof (other than a vehicle), but “Named Insured’s products” shall not include a vending machine or any property other than such container, rented to or located for use of others but not sold.

(Emphasis in original). After hearing testimony regarding the motion, the trial judge concluded: ⁵⁵² I don’t think the intention of the policy, such as this, or that the language of it, when you consider the exclusions was intended to allow a developer to defray the damages created from its own inferior product off on an insurance company. I believe in this particular case that the named insured was the developer, and the work product and work performed was the building of this building. To me the language is crystal clear.

Appellants contend on appeal that 1. Summary judgment for the insurer was erroneous because the policy exclusions relied on are inapplicable, ambiguous, or required a factual predicate which was lacking or disputed. 2. The circuit court erred in sustaining Hall’s demurrer without leave to amend. The court properly granted summary judgment on behalf of the insurance carrier, but it erred in sustaining the broker’s demurrer without leave to amend.

We will, therefore, affirm the judgment in favor of USF & G but reverse the judgment in favor of Avery W. Hall Insurance Agency, Inc. I. Summary Judgment as to USF & G Summary judgment is appropriate only when “there is no genuine dispute as to any material fact” and the moving party “is entitled to judgment as a matter of law.” Md.Rule 2-501. The summary judgment procedure is not a substitute for a trial, but rather is a hearing to determine whether a trial is necessary. Wolfe v. Lamar & Wallace, Inc., 261 Md. 174 , 274 A.2d 121 (1971); Hill v. Lewis, 21 Md.App. 121 , 318 A.2d 850 (1974). All inferences which may be drawn from the pleadings, affidavits or from admissions must be resolved against the moving party.

Merchants Mortgage Co. v. Lubow, 275 Md. 208 , 339 A.2d 664 (1975). Thus, if an affidavit or other evidence reveals a genuine conflict, the motion should be denied. Wolfe v. Lamar & Wallace, Inc., supra. ⁵⁵³ In contesting the propriety of the circuit court’s grant of summary judgment for the insured, appellants assert that exclusions (n) and (o) are inapplicable because the Century I condominium building is neither their “work product” nor “work performed” by them. These types of exclusions, commonly referred to as “business risks exclusions,” are frequently used to limit an insurance company’s liability policies.

Courts have uniformly held that the purpose of exclusions such as these, for damages to the insured’s work product or work project out of which an accident arises, is to remove any obligation of the insured to pay for the repair or replacement of the policyholder’s own defective work or defective product. See, e.g., Volf v. Ocean Accident and Guarantee Corp., 50 Cal.2d 373 , 325 P.2d 987 (1958) (en banc); Kendall Plumbing, Inc. v. St. Paul Mercury Insurance Co., 189 Kan. 528 , 370 P.2d 396 (1962); Minnicks, Inc. v. Reliance Insurance Co., 47 Md.App. 329 , 422 A.2d 1028 (1980); see also 12 G. Couch, Couch on Insurance ¶ 44:464 (2d ed. 1964); 7A J. Appleman, Insurance Law and Practice § 4508 (rev. ed. 1972). Conversely, it is equally well established that such business risk exclusions permit coverage for damages to other property or for other accidental loss caused by the defective product or defective work. Vobill Homes, Inc. v. Hartford Accident and Indemnity Co., 179 So.2d 496 (La.App.1966); see Bundy Tubing Co. v. Royal Indemnity Co., 298 F.2d 151 (6th Cir.1962).

As one commentator explained: The risk intended to be insured is the possibility that the goods, products or work of the insured, once relinquished or completed, will cause bodily injury or damage to property other than to the product or completed work itself, and for which the insured may be found liable____ The coverage is for tort liability for physical damages to others and not for contractual liability of the insured for economic loss because the product or completed work is not that for which the damaged person bargained. ⁵⁵⁴ Henderson, Insurance Protection For Products Liability And Completed Operations — What Every Lawyer Should Know, 50 Neb.L.Rev. 415, 441 (1970) (citation omitted). Although recognizing the purpose for which these exclusions are generally intended, appellants argue that in this instance they are inapplicable. With regard to exclusion (n), they assert that, by definition, a condominium building is not a “product.” They analogize to the use of the term “goods” under the Uniform Commercial Code, Md.Com.Law Code Ann. § 2-105(1), and conclude that “by ‘product’ the policy mean[t] to include only movable items capable of being manufactured, sold, handled and placed in the chain of distribution to consumers.” Alternatively, they assert that the term is ambiguous and therefore presented a question for the jury. National Grange Mutual Insurance Co. v. Pinkney, 284 Md. 694 , 399 A.2d 877 (1979) (if insurance contract is ambiguous, construction is for the jury with ambiguity resolved in favor of the insured).

In arguing against the applicability of exclusion (o), appellants claim that, as developers and vendors of the condominium project, they were primarily involved in the marketing and sales of the project and insuring its financial viability. Since they hired a general contractor and several architects to do the actual work of planning and constructing the building, they contend that any property damage attributable to the condominium’s construction or design is not work performed by them or on their behalf. In support of this argument, they point to Lowitt v. Pearsall Chemical Corp., 242 Md. 245 , 219 A.2d 67 (1966), in which the Court of Appeals held that the words “acting on behalf of the insured” do not encompass the work done by independent contractors such as the general contractor or the architects. At the very least, they contend, there was a factual dispute as to what work they did perform, making summary judgment inappropriate.

Although there are no Maryland decisions dealing with the precise questions raised under these exclusions, we ⁵⁵⁵ agree with the trial judge that the language is clear and unequivocal. Contracts of insurance are to be interpreted “like other contracts, according to the sense and meaning of the terms.” United States Fidelity & Guaranty Co. v. National Paving and Contracting Co., 228 Md. 40, 50 , 178 A.2d 872 (1962); see American Home Assurance Co. v. Osbourn, 47 Md.App. 73 , 422 A.2d 8 (1980). Words are to be given their customary and normal meaning. State Farm Mutual Auto Insurance Co. v. Treas, 254 Md. 615 , 255 A.2d 296 (1969). “Named insured’s product” is defined under the policy to include both goods and products “manufactured, sold, handled or distributed by the insured.” Obviously, then, the parties to the contract did not intend that the term “named insured’s product” would be restricted to just goods, or else the addition of the word “products” to the definition would be “mere surplusage.” Webster’s New Collegiate Dictionary defines “product” as “something produced.” The sense and meaning of exclusion (n) is that the policy did not insure against damages to the condominium arising from defects within the building itself.

Since appellants’ business consisted of the erection of a condominium building and the sale of individual condominium units therein, under a plain and ordinary interpretation of the exclusion, a condominium unit would be included within the definition “products ... sold ... by the named insured.” Cf. Biebel Brothers, Inc. v. United States Fidelity & Guaranty Co., 522 F.2d 1207 (8th Cir.1975); Stillwater Condominium Association v. American Home Assurance Co., 508 F.Supp. 1075 (D.Mont.1981), aff'd, 9th Cir., 688 F.2d 848 , cert. denied, 460 U.S. 1038 , 103 S.Ct. 1429 , 75 L.Ed.2d 789 (1983); Indiana Insurance Co. v. DeZutti, 408 N.E.2d 1275 (Ind.1980); Fresard v. Michigan Millers Mutual Insurance Co., 414 Mich. 686 , 327 N.W.2d 286 (1982); Vernon Williams & Son