Commercial Union Insurance v. Porter Hayden Co.

HARRELL, Judge. On 21 September 1990, Porter Hayden Company (Porter Hayden), appellee/cross-appellant, filed a complaint in the Circuit Court for Baltimore City, seeking a declaration of the duty of Commercial Union Insurance Company (Commercial Union), appellant/cross-appellee, to defend and potentially to indemnify Porter Hayden in connection with certain asbestos liability lawsuits filed against Porter Hayden. The parties filed competing motions for summary judgment and partial summary judgment with respect to numerous issues raised in the litigation. After hearings in January 1992, the circuit court, on 14 February 1992, issued a series of decisions and orders that resolved the summary judgment motions in favor of Porter Hayden.

On 12 March 1992, the circuit court modified its rulings in certain respects pursuant to Commercial Union’s motions to alter or amend the judgment. The court entered final judgment on the same date. These appeals followed. FACTS Porter Hayden is a Maryland Corporation that was formed in 1966 upon the merger of its predecessors, H.W. Porter & ⁴⁴⁵ Company, Inc., a New Jersey corporation, and Reid Hayden, Inc., a Maryland corporation. 1 Since the 1920’s, Porter Hayden has been an insulation contractor that sells and installs insulation in industrial facilities located in the Mid-Atlantic region.

Until some time in the 1970’s, these insulation products contained asbestos. In August 1976, the first of what were to become many lawsuits alleging bodily injury from exposure to asbestos-containing insulation products was filed against and served upon Porter Hayden. Upon receipt of service of this initial lawsuit, Porter Hayden, by way of letter from its counsel, directed its insurance broker to give notice of the suit to whichever of Porter Hayden’s various liability insurers that were “properly chargeable with the defense under [its] policy obligations.” Commercial Union was not one of the insurers subsequently contacted by the broker; it is not clear from the record whether Commercial Union was “properly chargeable” with Porter Hayden’s defense in the initial lawsuit. In any event, Commercial Union did not receive actual notice of any asbestos-related litigation involving Porter Hayden until early August 1978.

At that time, Employers Insurance of Wausau, Porter Hayden’s then comprehensive general liability (CGL) insurer, informed Commercial Union of a pending asbestos lawsuit against Porter Hayden and requested that Commercial Union acknowledge that its policy or policies would provide coverage for Porter Hayden for the claims of alleged exposure to asbestos during the Commercial Union policy periods. Shortly thereafter, by letter dated 8 August 1978, Porter Hayden requested that Commercial Union participate in Porter Hayden’s defense. It based its request on its assertion that Commercial Union’s predecessor-in-interest, the Employers’ Liability Assurance Corporation, Ltd. (ELAC), provided standard CGL insurance coverage from 1951 to 1952 under policy number CL-234270. ⁴⁴⁶ In a letter dated 16 August 1978, Commercial Union responded to Porter Hayden’s request by indicating that it was unable to confirm through its home office that ELAC insured Porter Hayden for the time period and under the policy referred to by Porter Hayden. On 25 August 1978, Porter Hayden renewed its request for a defense and provided Commercial Union with a copy of an insurance certificate indicating CGL coverage under ELAC policy CL-234270 for the policy period 25 November 1951 to 25 November 1952.

Commercial Union responded in writing on 18 September 1978, stating that it required a copy of the declarations page of the policy to determine whether Porter Hayden had purchased coverage from ELAC for products liability claims, because that information was not available on the insurance certificate. Thus, while Commercial Union did not deny that there was standard CGL coverage during the 1951-52 policy period, it did indicate to Porter Hayden that it could not affirm the existence of coverage for the subject claims absent evidence that Porter Hayden had purchased “products hazard” coverage as insurance against products liability claims. Porter Hayden subsequently produced two ELAC policies for the periods of 25 November 1948 to 25 November 1949 and 25 November 1949 to 25 November 1950 (the 1949 and 1950 policies). These policies afforded coverage for liability in damages to third parties for bodily injury, sickness, or disease arising from Porter Hayden’s “operations” during the policy periods.

The policies clearly indicated that Porter Hayden had not obtained “products hazard” coverage. Over the next approximately two years, the parties exchanged numerous letters. In these letters, Porter Hayden insisted that Commercial Union was obligated to share in the defense against the asbestos-related lawsuits. 2 Commercial ⁴⁴⁷ Union repeatedly rejected Porter Hayden’s position on the ground that there was no evidence that the company carried products liability coverage during the relevant time period. In November 1980, Porter Hayden sent to each of its primary and excess liability carriers from 1945 to 1980 copies of all of the asbestos-related complaints that it had received since 1976.

Porter Hayden indicated in correspondence to these carriers that it expected them to assume their obligations under their insurance policies and participate in Porter Hayden’s defense. Commercial Union was one of the carriers so notified. In July 1982, the Hartford Accident and Indemnity Company, which also was one of Porter Hayden’s carriers at some time during the 1945-1980 time frame, instituted a declaratory judgment action against Porter Hayden and its other primary carriers, including Commercial Union. Hartford sought a declaration that, to the extent that Porter Hayden could establish that Hartford had provided products liability coverage, Hartford would be obligated to pay only a pro rata share of the indemnity and defense costs, subject to the terms and conditions of the policy.

But before this action proceeded further, the parties to the Hartford action entered into an “Agreement” (the Hartford Agreement or the Agreement), effective 1 November 1982, pursuant to which they agreed (1) to share, on an interim basis, in Porter Hayden’s defense in pending and anticipated asbestos-related tort suits and (2) that the Hartford action would be stayed until 1 March 1985. The parties explicitly and fully reserved their claims and defenses with regard to the coverage litigation. During the pendency of the Agreement, the parties stipulated to repeated extensions of the time to plead in the Hartford action, with the last extension expiring on 31 March 1987. The Agreement ⁴⁴⁸ expired as between Commercial Union and Porter Hayden on 31 December 1986. 3 The dispute between Commercial Union and Porter Hayden regarding the insurance company’s alleged duty to defend resumed later in the summer of 1987.

On 31 August 1987, Porter Hayden sent copies of five additional asbestos-related complaints filed against and served upon it to Commercial Union and requested the insurer to defend and indemnify Porter Hayden in each case. The plaintiffs in these lawsuits asserted claims for damages against numerous asbestos manufacturers, suppliers, and insulation installers based on several theories of tort liability set forth in the “Master Complaint.” 4 Commercial Union responded on 18 September 1987. In denying Porter Hayden’s request, Commercial Union once again noted, among other things, Porter Hayden’s lack of products hazard coverage. In the insurer’s view, the standard CGL policies that covered Porter Hayden in the 1940’s and 1950’s did not apply to the exposure to asbestos products alleged by the plaintiffs in the 1987 lawsuits.

Porter Hayden instituted a declaratory judgment action against Commercial Union on 21 September 1990. This complaint sought declarations of insurance coverage with respect to: (1) the five asbestos cases tendered to Commercial Union in August 1987; and (2) “such other personal injury cases” filed -against Porter Hayden “which may be tendered” to Commercial Union, excluding cases filed before 1 January 1987. The complaint also requested reasonable attorneys’ fees and expenses. Beginning in September 1991, the parties sought summary relief as to numerous issues in the case.

Porter Hayden ⁴⁴⁹ moved for partial summary judgment on the issue of Commercial Union’s duty to defend and potentially to indemnify Porter Hayden with respect to claims that fell within the 1948-49 and 1949-50 policy periods. Commercial Union filed several summary judgment motions. Specifically, Commercial Union (1) moved for summary judgment that the asbestos-related claims against Porter Hayden were properly matters of “products hazard” coverage and that, because Porter Hayden failed to purchase that coverage, Commercial Union owed no duty to defend or to indemnify; (2) moved for summary judgment that Porter Hayden’s request for declaratory relief was barred by the statute of limitations; (3) moved for summary judgment that Porter Hayden’s request for relief was foreclosed by its failure to comply with the notice-of-occurrence provisions of the alleged insurance policies; and (4) moved for partial summary judgment that any coverage obligation by Commercial Union to Porter Hayden could be based only on the 1949 and 1950 policies actually produced by Porter Hayden and not on the “missing policies” that Porter Hayden alleged provided coverage from 1941 to 1953. The parties subsequently filed oppositions to the motions and replies to the oppositions.

After hearings in January 1992, the circuit court, on 14 February 1992, issued a series of decisions and orders that resolved the motions in Porter Hayden’s favor. The court also held that Porter Hayden was entitled to recover its reasonable attorneys’ fees and costs incurred in bringing the declaratory judgment action. After the court modified two of its rulings and then reduced its orders to final judgment, Commercial Union noted an appeal and Porter Hayden brought a cross-appeal. We will set forth additional facts as they are needed in our discussion of the individual issues that need to be addressed in resolving this appeal.

Commercial Union presents five issues on appeal: I. “Whether the court below erroneously concluded that Commercial Union owes defense coverage and, potentially, indemnification to Porter Hayden for underlying asbestos- ⁴⁵⁰ related products liability lawsuits despite Porter Hayden’s undisputed failure to purchase ‘Products Hazard’ coverage?” II. “Whether the court erroneously concluded that this action, based on an insurance coverage dispute that arose in 1978, was timely under the applicable statute, of limitations?” III. “Whether the court erroneously concluded that Porter Hayden provided timely notice of occurrence to Commercial Union?” IV. “Whether the court erroneously concluded that Porter Hayden demonstrated by ‘clear and convincing’ evidence the existence, terms and conditions of its alleged but missing Commercial Union policies?” V. “Whether the court’s award of reasonable attorneys’ fees and litigation costs to Porter Hayden is justified or remains viable under applicable law?” On cross-appeal, Porter Hayden presents two issues: VI. “Did the trial court err in holding that Porter Hayden’s coverage claims with respect to certain underlying asbestos actions aré barred by the Maryland statute of limitations?” VII. “Did the trial court err in holding as a matter of law that Porter Hayden is not entitled to recover its reasonable attorneys’ fees and costs incurred in proving the existence and material terms of the missing insurance policies?” DISCUSSION Summary Judgment A trial court shall enter judgment in favor of the moving party if there is no genuine dispute as to any material fact and the moving party is entitled to judgment as a matter of law. Md. Ride 2-501(e). The function of the summary judgment procedure is not to try the case, but merely to determine whether there are triable issues of fact. King v. Bankerd, 303 Md. 98, 111-12 , 492 A.2d 608 (1985); Coffey v. Derby Steel Co., 291 Md. 241, 247 , 434 A.2d 564 (1981). “In reviewing a ⁴⁵¹ disposition by summary judgment, we must decide whether a material factual issue exists, and in doing so, will resolve all factual inferences against the moving party.” Waller v. Maryland Nat’l Bank, 95 Md.App. 197, 209 , 620 A.2d 381 (1993).

When the movant has set forth sufficient grounds for summary judgment, the opposing party must identify with particularity the material facts that are disputed. King, 303 Md. at 112 , 492 A.2d 608 ; Bond v. NIBCO, Inc., 96 Md.App. 127, 135 , 623 A.2d 731 (1993). The proper standard for reviewing the grant or denial of a summary judgment motion 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).

Choice of Law In the trial court, the parties raised the issue of which state’s law should apply to this action — Maryland or New York. On appeal, only Commercial Union has addressed this question further, and it does so only briefly. Nevertheless, the choice-of-law issue is critical because its resolution -will result in a disposition of the notice-of-occurrence issue in this appeal such that none of the other issues of either party need be addressed. 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). Typically, “[t]he locus contractu of an insurance policy is the state in which the ⁴⁵² policy is delivered and the premiums are paid.” Aetna Casualty & Sur. Co. v. Souras, 78 Md.App. 71, 77, 552 A.2d 908 (1989).

See also Sting Sec., Inc., 791 F.Supp. at 558 (citing Aetna Casualty & Sur. Co.); Allstate Ins. Co. v. Hart, 327 Md. 526, 529 , 611 A.2d 100 (1992) (Maryland courts ordinarily apply the law of the jurisdiction where the contract was made); Mutual Life Ins. Co. v. Mullan, 107 Md. 457, 463 , 69 A. 385 (1908) (insurance contract was made where premium was paid and policy was delivered).

The circuit court determined that neither Commercial Union nor Porter Hayden established where the relevant last act in this case occurred. The court inferred that, in the absence of clear evidence to the contrary, the last act occurred in Maryland, where the 1949 and 1950 policies were ultimately delivered to Porter Hayden’s president at his headquarters in Baltimore. We conclude that the trial court was clearly erroneous in reaching this factual inference that resulted in its determining that Maryland law governed this litigation. See Md. Rule 8-131(c).

In our view, the evidence established that the last act necessary to give the policy binding effect occurred in New York. That act was the delivery of the policies by ELAC’s New York office to Porter Hayden’s insurance broker in New York. We explain. None of the material facts relevant to this issue is in dispute.

Although ELAC was incorporated in Massachusetts at the time, the 1949 and 1950 policies in the instant case were issued from ELAC’s New York office. These fully-executed and countersigned policies were delivered to the New York office of Johnson & Higgins, Porter Hayden’s insurance broker at that time. Johnson & Higgins, in turn, delivered the policies to Porter Hayden’s president, who maintained his headquarters in Baltimore. ELAC received the policy premiums from Johnson & Higgins in New York.

In these circumstances, our inquiry focuses on whether the insurance contracts became binding upon ELAC’s delivery to Johnson & Higgins in New York or upon Johnson & Higgins’s delivery to ⁴⁵³ Porter Hayden in Maryland. Determination of this issue turns on Johnson & Higgins’s role at the time it received the policies from ELAC: Was the broker an agent for the insured or the insurer? Whether a broker represents the insurer or insured depends on the facts of the case. Travelers Indem.

Co. v. National Indem. Co., 292 F.2d 214, 220 (8th Cir.1961); 16 John A. Appleman, Insurance Law & Practice § 8727, at 341 (1981) [hereinafter 16 Appleman]. The general rule in Maryland and elsewhere is that a broker is the agent of the insured. See Reserve Ins.

Co. v. Duckett, 240 Md. 591, 601 , 214 A.2d 754 (1965); Hankins v. Public Serv. Mut. Ins. Co., 192 Md. 68, 80 , 63 A.2d 606 (1949); Curran v. Industrial Comm’n of Ariz., 156 Ariz. 434, 436 , 752 P.2d 523, 525 (Ariz.Ct.App.1988); Continental Casualty Co. v. Aetna Ins.

Co., 82 Ill.App.3d 402, 407 , 37 Ill.Dec. 754, 759 , 402 N.E.2d 756, 761 (Ill.App.Ct.1980). Maryland has recognized, however, that in some circumstances a broker serves in a dual capacity. For example, a broker may act as an agent of the insured with respect to procuring insurance and then act as the insurer’s agent for purposes of delivering the policy and collecting the premium. Grain Dealers Mut.

Ins. Co. v. Van Buskirk, 241 Md. 58, 66 , 215 A.2d 467 (1965); Sun Ins. Office, Ltd. v. Mallick, 160 Md. 71, 82 , 153 A. 35 (1931). The rationale for this principle is that, even absent evidence of a consensual agency relationship between the insurer and the broker, the insurer, by sending the executed policy to the broker, has entrusted the broker with the delivery of the policy and the collection of the premium, thereby implicitly authorizing the broker to act on the insurer’s behalf.

See Barry S. Ostrager & Thomas R. Newman, Handbook on Insurance Coverage Disputes § 18.-02[c] (5th ed. 1992) [hereinafter Ostrager & Newman]; 16 Appleman § 8731, at 373. In the instant case, though, not only was there evidence that no consensual agency relationship existed between ELAC and Johnson & Higgins, but there was also uncontested evidence that Johnson & Higgins served as Porter Hay ⁴⁵⁴ den’s insurance agent from the 1940’s to the 1960’s. In a letter to Johnson & Higgins’s New York office in 1985, Porter Hayden’s counsel stated that “Johnson & Higgins served as insurance agent for [the Porter Hayden predecessor entities] for the period 1940 through 1964.” In 1991, Porter Hayden’s corporate designees, Mr. Charles W. Holtermann and Mr. Theodore O. Mannell, testified in depositions that they had no knowledge that was inconsistent with the statement in the 1985 letter that Johnson & Higgins acted as Porter Hayden’s agent from 1940 to 1964. In addition, Howard S. Bush, a former ELAC employee from 1927 to the 1950’s, testified that ELAC had no contractual or agency relationship with Johnson & Higgins during the period in question. 5 The situation in this case is similar to the one in Travelers Indemnity Co. v. Allied-Signal, Inc., 718 F.Supp. 1252 (D.Md. 1989).

There, the insurer delivered the policies to the insured’s agent in New York, and the agent in turn delivered them to the insured at its headquarters in New Jersey. The district court held that Maryland law would govern the dispute after determining that the doctrine of renvoi, a public policy exception to the general Maryland rule of lex loci contractus (an exception not applicable to the instant case), should apply. 718 F.Supp. at 1253-54 . Nevertheless, the district court opined in dicta that under lex loci contractus New York law would apply. Emphasizing that the record was uncontradicted that the insurance broker was solely the agent of the insured, the court determined that delivery of the policies to the insured occurred in New York when the insurer delivered them to the broker.

Id. at 1253 n. 2, 1258-59. See also J.A.M. Assocs. of Baltimore v. Western World Ins. Co., 95 Md.App. 695, 705 , 622 A.2d 818 (1993) (notice of policy changes ⁴⁵⁵ to broker, who was employed as insured’s agent, constituted notice to insured). On the facts of the instant case, then, we conclude that the insurance policies became binding upon their delivery by ELAC to Johnson & Higgins in New York.

By virtue of Johnson & Higgins’s continuous representation of Porter Hayden over an extended period of years, we believe that ELAC’s mere entrusting of the delivery of the policies and collection of the premiums to Johnson & Higgins did not convert the broker to the status of agent for ELAC for these or any purposes. Johnson & Higgins retained its role as the insured’s agent, and Commercial Union’s delivery to Johnson & Higgins constituted delivery to the insured, Porter Hayden. Because delivery took place in New York, each contract is deemed to have been made in New York. Accordingly, New York law governs the substantive law issues in this case.

We acknowledge, however, that the application of the choice-of-law approach used by an increasing number of states, rather than lex loci contractus, may have resulted in a determination that Maryland law governs this case. Maryland’s loyalty to lex loci contractus keeps it among the majority of jurisdictions that continues to follow that rule. That majority, however, is shrinking. The rule has been criticized as mechanistic and inflexible.

A growing number of states have abandoned lex loci contractus in favor of the more flexible “most significant relationship” test of the Second Restatement of Conflict of Laws. See Eugene F. Scoles & Peter Hay, Conflict of Laws § 18.21 (2d ed. 1992). In these states, choice-of-law issues are decided by determining which state has the most significant contacts with the parties and the transaction. Restatement (Second) of Conflict of Laws § 188 (1971) [hereinafter Restatement].

See, e.g., Oliver B. Cannon & Son, Inc. v. Dorr-Oliver, Inc., 394 A.2d 1160, 1166 (Del. 1978); Unigard Ins. Group v. Royal Globe Ins. Co., 100 Idaho 123, 126 , 594 P.2d 633, 636 (1979); Lewis v. American Family Ins. Group, 555 S.W.2d 579, 581-82 (Ky.1977); Crown Center Redev.

Corp. v. Occidental Fire & Casualty Co. of N.C., 716 S.W.2d 348, 358 (Mo.Ct.App.1986); State Farm Mut. Auto. ⁴⁵⁶ Ins. Co. v. Estate of Simmons, 84 N.J. 28, 35 , 417 A.2d 488, 491-92 (1980); Seattle-First Nat’l Bank v. Schriber, 51 Or. App. 441, 445-47 , 625 P.2d 1370, 1372-74 (1981); Lee v. Saliga, 179 W.Va. 762, 769-70 , 373 S.E.2d 345, 352-53 (1988).

To determine which state has the most significant contacts, § 188 calls for an evaluation of relevant contacts such as place of contracting, location of the subject matter, and the place of incorporation and place of business of the parties. It also references § 6 of the Restatement, which identifies other, general considerations for the choice-of-law analysis, including: the relevant policies of the forum; the relevant policies of other interested states in the determination of the particular issue; the protection of justified expectations; and the basic policies underlying the particular field of law. With respect to casualty insurance contracts, the Restatement sets forth a more specific rule: The validity of a contract of fire, surety or casualty insurance and the rights created thereby are 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 § 193.

Some insurance policies, like the CGL policy in the instant case, cover risks located in several states. In these multiple-risk situations, the authorities adopting the Restatement approach have treated such policies, with respect to the risks in a particular state, as if a separate policy had been issued to cover only the risks in that state. See Baybutt Constr. Corp. v. Commercial Union Ins.

Co., 455 A.2d 914, 918-19 (Me.1983); Crown Center Redev. Corp., 716 S.W.2d at 358-59 ; Ellis v. Royal Ins. Cos., 129 N.H. 326, 329-30 , 530 A.2d 303, 306-07 (1987); Bell v. Merchants & Businessmen’s Mut. Ins.

Co., 241 N.J.Super. 557, 564 , 575 A.2d 878, 881-82 , cert. denied, 122 N.J. 395 , 585 A.2d 395 (1990). But see Detroit Edison Co. v. Pacific Ins. Co., 742 F.Supp. 287 , 289 ⁴⁵⁷ (M.D.N.C.1990) (parties could not have expected that the contract would be subject to varying interpretations dependent only upon location of an occurrence that gave rise to a claim), aff'd, 944 F.2d 901 (4th Cir.1991). “The rationale for such a holding is based on the fact that the location of the insurance risk in a particular state pinpoints the jurisdiction that has the greatest interests in the contract and any issues arising therefrom.” Baybutt Constr. Corp., 455 A.2d at 919 .

It appears, then, that if Maryland were to adopt the approach advocated in § 193 Maryland law would govern in the instant case because the five plaintiffs in the underlying lawsuits alleged exposure to asbestos while they worked at the Bethlehem Steel Plant in Sparrows Point, Maryland, apparently one of the insured locations under the CGL policy. Nevertheless, §§ 188 and 193 have not been adopted in Maryland. Indeed, no Maryland appellate court has even referred to those sections. The Court of Appeals followed, and apparently adopted, Restatement § 187 in Kronovet v. Lipchin, 288 Md. 30 , 415 A.2d 1096 (1980).

That section, which applies to situations where the contract contains a choice-of-law clause chosen by the parties, requires that the chosen state have a substantial relationship to the parties or the transaction. But the situation for which § 187 is intended — where the parties have selected a particular state’s law to govern their rights and duties under the contract — is not the situation present in the case sub judice. In the absence of a contractual choice-of-law provision, as is the case here, § 188 (or § 193 when a fire, surety, or casualty insurance contract is involved) would be the applicable rule in a jurisdiction that has adopted the Restatement. The Court of Appeals may very well view the instant case as presenting an appropriate opportunity to reconsider Maryland’s adherence to the plaee-of-contracting rule and adopt the Second Restatement’s flexible approach.

And the Court may determine that under such an approach Maryland law should govern this insurance coverage dispute. Until that time, however, we are bound to follow the law as it currently exists; changing the law in Maryland is the province of the Court of ⁴⁵⁸ Appeals and the General Assembly. Lex loci contractus is old but not yet outdated, and remains the controlling law in this state. Notice of Occurrence In view of our conclusion that the substantive law of New York governs the resolution of this appeal, we elect to address next whether the trial court correctly determined that Porter Hayden gave Commercial Union timely notice of occurrence as required under the policies.

Commercial Union moved for summary judgment on this issue, claiming that Porter Hayden knew as early as the mid-1960's