Chesapeake Physicians Professional Ass'n v. Home Insurance

ROSALYN B. BELL, Judge. Chesapeake Physicians Professional Association (CPPA), Medical Enterprise Development Company, Inc. (MEDCO), and Chesapeake Health Plan, Inc. (CHP) (collectively, the Chesapeake companies), appellants in this case, filed a declaratory judgment action in the Circuit Court for Baltimore City against The Home Insurance Company (Home). The Chesapeake companies sought a judgment declaring that ³⁸⁷ Home had a duty to defend and indemnify the Chesapeake companies against claims stated in a lawsuit against them (the Wilson litigation). The trial judge entered a judgment declaring, as a matter of law, that Home had no duty either to indemnify or defend under its policies with the Chesapeake companies, and the Chesapeake companies have appealed.

They contend that the trial judge erred: —in ruling that Home’s unilateral liability limitation endorsement to the insurance policies effectively converted the policies from comprehensive general liability (CGL) coverage to premises liability only; —in further ruling, under his interpretation of the policies, that the allegations of the Wilson complaint did not come within the insurance policies; and —in ruling that Home did not breach its duty to defend and/or indemnify the Chesapeake companies under the insurance policies. We will affirm the judgment of the Circuit Court for Baltimore City. FACTS CPPA is a nonprofit physicians professional association which, at the time of the events giving rise to the underlying litigation, provided administrative support services and administrative management to health care provider organizations. CHP is a Maryland health maintenance organization.

In 1984 and 1985, Chesapeake Administrative Services, Inc. (CAS) was a wholly owned subsidiary of CPPA and provided services to CHP, pursuant to an agreement under which CHP agreed to pay CAS for administrative and billing services. Effective July 1, 1985, CPPA divested itself of all interest in CAS. In November, 1986, CAS changed its name to MEDCO. Beginning in January, 1982, Home issued a series of Business Owners policies to CPPA.

By endorsement, CAS and CHP were added to these policies as additional insureds, with the same coverage as CPPA. In the exclusions provisions of the policies, Home specifically excluded cer ³⁸⁸ tain types of damages and claims from its broad comprehensive general liability (CGL) coverage. One of the specific exclusions in the Chesapeake companies’ policies was claims based on the rendering or failure to render professional services, while the definition of “occurrence” under the policy specifically excluded intentional wrongful conduct or conduct whose consequences were known or expected. Along with the insurance policies themselves, Home issued a Liability Limitation Endorsement to its CGL coverage, which is central to the dispute in this case.

As amended, the coverage provision read as follows: “The company will pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies, caused by an occurrence and arising out of the ownership, maintenance or use of the insured premises and all operations necessary or incidental thereto, 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 the suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient____” (Amended language emphasized.) Home contends that this language amounted to a limited premises liability coverage. The Chesapeake companies, on the other hand, contend that business operations conducted on or from the premises were covered under this language. In January, 1988, Joyce Wilson, on behalf of herself, the estate of her husband Hugh Wilson, and her children, Erica and Michelle Wilson, filed a complaint against CHP in the Circuit Court for Baltimore City. The complaint stated claims for fraud, negligent misrepresentation, negligence, intentional infliction of emotional distress, breach of con ³⁸⁹ tract, breach of the duty of good faith and fair dealing, and wrongful death.

The complaint alleged, in essence, that CHP and/or its employees had misrepresented the scope of its coverage for liver transplants, causing Hugh Wilson to be denied admission to a Pittsburgh hospital for liver transplant surgery. Before alternative financial arrangements could be made or another liver obtained, Hugh Wilson died. On August 11, 1988, Joyce Wilson filed an amended complaint, naming as additional defendants CPPA, MEDCO, and other entities not relevant to this case. On August 25, 1988, CPPA and MEDCO provided notice of the Wilson litigation to Home’s authorized agent, along with a demand that Home undertake their defense.

A week later, the agent informed CPPA and MEDCO that the Business Owners policies only provided property and premises liability. On March 17, 1989, the Circuit Court dismissed 25 of the 37 counts of the amended Wilson complaint. The 12 remaining counts alleged both intentional and negligent acts by the Chesapeake companies, in several cases in the alternative. In a letter dated July 31, 1989, counsel for CPPA and MEDCO submitted a copy of one of the Business Owners policies directly to Home and repeated the demand that Home undertake defense of the case.

In a letter dated August 24,1989, Home refused to undertake the defense of the Chesapeake companies. At that time, Home relied on two reasons for its refusal: (1) the definition of “occurrence” under the Chesapeake companies’ policies; and (2) the exclusion of coverage of damages arising from the rendering of professional services. On October 27, 1989, counsel for CPPA and MEDCO again sent a letter to Home, demanding that Home undertake the defense of the Wilson litigation. On January 17, 1990, Home reiterated its position that no coverage was available under its policies.

No legal or factual basis for this determination was provided in the January 17 letter, however. ³⁹⁰ On April 5, 1990, the Chesapeake companies filed a Complaint for Declaratory Judgment, seeking a declaration: (1) that Home had an obligation to provide a defense to the Wilson litigation; (2) that Home had an obligation to indemnify the Chesapeake companies for any judgment against them based on negligence; and (3) that the Chesapeake companies were entitled to reimbursement of costs expended in defending the Wilson litigation and bringing the declaratory judgment action. In the declaratory judgment action, both Home and the Chesapeake companies filed motions for summary judgment. Initially, the trial judge denied both motions, ruling that the relevant policy provisions were ambiguous. Subsequently, the trial judge, sitting without a jury, heard testimony on the parties’ intent.

In his order, however, the trial judge found that the extrinsic evidence of intent “was not helpful,” and proceeded to interpret the policy provisions as a matter of law. He ruled that the liability limitation endorsement set forth above converted the CGL coverage to premises liability, and that the Wilson complaint therefore did not state a claim covered by the Chesapeake companies’ policies with Home. The Chesapeake companies then appealed to this Court. INTERPRETATION OF THE POLICIES In St. Paul Fire & Marine Insurance Co. v. Pryseski, 292 Md. 187 , 438 A.2d 282 (1981) and Brohawn v. Transamerica Insurance Co., 276 Md. 396 , 347 A.2d 842 (1975), the Court of Appeals established a two-part test for determining an insurer’s duty to defend its insured.

In Brohawn , the Court of Appeals held: “The obligation of an insurer to defend its insured under a contract provision such as here involved is determined by the allegations in the tort actions. If the plaintiffs in the tort suits allege a claim covered by the policy, the insurer has a duty to defend.” ³⁹¹ Brohawn, 276 Md. at 407 , 347 A.2d 842 . In that case, suit was brought against Brohawn, alleging assault (an intentional tort), or, in the alternative, negligence. The insurer filed a declaratory judgment action, seeking to avoid fulfilling its duty to defend on the grounds that its independent investigation of the circumstances of the tort claim led it to conclude that the insured had committed an intentional tort, whieh was explicitly excluded from coverage under the insurance policy.

Brohawn, 276 Md. at 401 , 347 A.2d 842 . The Court of Appeals held that, where the issues sought to be resolved in the declaratory judgment action are the same as the ultimate issues in the tort suit, a declaratory judgment action is inappropriate. Brohawn, 276 Md. at 405-406 , 347 A.2d 842 . In Pryseski , the Court of Appeals distinguished the question raised in Brohawn from the question of the extent of coverage provided by the insurance policy itself: “In determining whether a liability insurer has a duty to provide its insured with a defense in a tort suit, two types of questions ordinarily must be answered: (1) what is the coverage and what are the defenses under the terms and requirements of the insurance policy?

(2) do the allegations in the tort action potentially bring the tort claim within the policy’s coverage? The first question focuses upon the language and requirements of the policy, and the second question focuses upon the allegations of the tort suit.” Pryseski, 292 Md. at 193 , 438 A.2d 282 . The second, or “potentiality” question, follows the principles set forth in Brohawn , discussed above. The first question that must be answered, however, before ever reaching the “potentiality” issue, is the determination of the actual coverage provided by the terms of the insurance policy itself.

This analysis is made without reference to the allegations of the tort suit; it is simply a question of interpreting the insurance policy, applying basic contract rules of interpretation. “[I]n a declaratory judgment action like the instant one, presenting an independent coverage issue under the ³⁹² terms of the policy, it is the function of the court to interpret the policy and decide whether or not there is coverage. If such a coverage issue depends upon language of the policy which is ambiguous, the court in the declaratory judgment action nevertheless must resolve that ambiguity in favor of the insured before it can conclude that the insurer has or had an obligation to provide a tort defense.” Pryseski, 292 Md. at 194 , 438 A.2d 282 . In Allstate Insurance Co. v. Atwood, 319 Md. 247 , 572 A.2d 154 (1990), the Court of Appeals created an exception to the Brohawn general rule against an insurer litigating an issue also present in the underlying tort suit. In Atwood , Allstate had a contract with Atwood, whereby it had a duty to defend.

The contract, however, specifically excluded intentional conduct. In the underlying tort suit, the issue of negligent versus intentional conduct, by tacit agreement of the plaintiff and defendant, was never truly litigated. The Court of Appeals held: “Where ... the issue was not fairly litigated in the tort trial, considerations of public policy and fairness militate against holding that the insurer is bound by the outcome of the tort case. When, at the tort trial, there is nondisclosure of the actual facts, in an obvious effort to bring within insurance coverage a matter which is outside of that coverage, public policy is clearly offended.

To take any other position would be to promote fraud and collusion. If the effect of the tactics of both sides in a tort trial, which is supposed to be an adversarial undertaking, is to cooperate in persuading a jury that intentional wrongful conduct is mere ‘negligence,’ the administration of justice is subverted.” Atwood, 319 Md. at 262-63 , 572 A.2d 154 . Thus, the Court of Appeals held that, in limited circumstances, an insurer may intervene, after the completion of the tort trial, to assert that the