Comstock Insurance v. Thomas A. Hanson & Associates, Inc.

WILNER, Judge. There are three parties in interest to this dispute over an exclusion clause in an insurance contract. Carl and Edward Julio, together, are developers; Thomas A. Hanson & Associates, Inc. is an engineering firm that provided certain architectural and engineering services to the Julios; Com-stock Insurance Company is an insurance company that issued a professional liability insurance policy to Hanson. The Julios recovered a $287,500 judgment against Hanson for breach of contract and professional negligence.

They and Hanson are seeking to have Comstock pay that judgment, which Comstock has so far refused to do. Upon Comstock’s complaint for declaratory judgment, the Circuit Court for Baltimore County, applying Illinois law, construed the exclusion clause relied upon by Comstock and declared that Comstock was nonetheless liable. Hence this appeal, in which Comstock complains that the trial court misconstrued the clause. We shall affirm. ⁴³³ (1) The Factual Setting In 1983, the Julios became interested in purchasing a warehouse from Levitz Furniture Company and renovating it into an office building and motel complex.

They consulted Hanson with respect to the motel phase, seeking, essentially, a determination of whether the project would be economically feasible. The Julios had concluded that, to be economically feasible-, the motel would have to be constructed within and utilize part of the existing warehouse structure; to demolish the structure and engage in new construction would be too costly. The Julios stressed upon Hanson the feasibility consideration and the need to have the motel built within the existing warehouse. Eventually, Hanson prepared and delivered to the Julios preliminary drawings and a handwritten projection of costs, showing that the motel they envisioned could be built within the warehouse structure at a cost of $12,500 per unit.

Based on Hanson’s drawings and estimate, the Julios concluded that the overall project was economically feasible, and so, effective February 21, 1984, they entered into an agreement with Levitz to buy the property for $4,200,000. The contract called for a $200,000 deposit, which was made. It gave the Julios the option to terminate the agreement and receive back the deposit if, within 20 days, they notified the seller that the property was “unsatisfactory.” In the event such notice was not given and the Julios thereafter decided not to proceed, they could cancel the contract upon payment of liquidated damages of $287,500—the $200,000 deposit already made plus an additional $87,500. In the belief that the motel could be built as Hanson indicated, the Julios did not exercise their right to terminate the contract within the 20-day period and so became bound to it.

Thereafter, however, they discovered that the motel could not be built as designed by Hanson and that, to build it within the existing structure would cost over $24,000 per unit; new construction would cost well over $19,000 per unit. That, in their view, made the project unfeasible, and ⁴³⁴ so, to contain their loss, they defaulted on the contract and forfeited the $287,500 in liquidated damages. The initial lawsuit was filed in the Circuit Court for Baltimore County by Hanson, who charged the Julios with breach of the AIA contract they had entered into in March, 1984. The Julios responded, in part, with a counterclaim charging Hanson with breach of contract and negligent misrepresentation.

The gravamen of both counts of the counterclaim was the averment that: “[Hanson] represented to the [Julios] that the motel portion of the complex could be built at a cost of $12,500 per unit, or a total cost, including a restaurant, but excluding demolition, of $2,750,000. [Hanson] also represented to the [Julios] that the entire four-story motel portion of the complex could be built within the existing warehouse structure for the aforementioned amount. In connection with these representations, [Hanson] supplied the [Julios] with certain design documents, which indicated that the motel portion of the complex could be built within the existing warehouse structure.” These representations, the Julios continued, were false, were justifiably relied upon, and caused damage when it turned out that the Julios could not proceed and had to forfeit the $287,500. The Hanson v. Julio action was tried non-jury before Judge Fader. In a memorandum opinion and judgment filed in May, 1986, Judge Fader dismissed the action by Hanson on the dual grounds that (1) it was a foreign corporation that regularly did business in Maryland but had failed to register to do business in this State and, (2) although the basis of its contract with the Julios was the provision of architectural services, neither Hanson nor its employees were licensed architects.

These deficiencies, Judge Fader found, precluded Hanson from bringing and maintaining an action in a Maryland court. With respect to the counterclaim, Judge Fader credited the evidence produced by the Julios and concluded that Hanson had erred both in its design for building the motel within the existing ⁴³⁵ warehouse ¡structure and in its estimate of the probable cost of construction. The error in the cost estimate, Judge Fader found, was attributable in part to the error in design and in part to mistakes in some of the component cost figures and assumptions. As to the first aspect, Judge Fader noted that: “Problems with the Hanson design started to develop immediately.

Of much concern and the subject of much discussion were the following issues: (1) whether the outside wall panels could be coordinated with inside room formats and window locations; (2) whether four full floors of rooms could be placed within the existing structure; (3) whether the existing slab would support the new structure and allow utility installation to the rooms; and (4) how and where the bearing walls and columns were and could be placed.” Judge Fader recounted the evidence bearing on some of these design problems, noting in particular the testimony of a structural engineer testifying for the Julios that “Hanson did not properly take into account the existing building’s columns and necessary coordination with the room and window location.” Though raising doubt as to some aspects of the opinions from the Julios’ experts, Judge Fader believed “the overall content of these opinions ... to be correct and against the Hanson position.” His conclusion, then, as to this aspect of the problem, was that: “There was on Hanson’s part a great misconception of the Levitz building structure and the ability to use that structure with its existing columns, panels, slab floor and possibly the roof structure to accommodate the four-story motel to be placed thereon at the cost Hanson proposed. The costs of accommodation were far in excess of the Hanson estimate____” Additionally, Judge Fader concluded that, in applying a published square foot estimate of cost, Hanson had erroneously neglected to add on a 15% overhead and profit figure and that it further erred in using a single, general square ⁴³⁶ foot cost figure without taking into account more specific cost estimates that were available.. As to this, Judge Fader stated: “Hanson made another mistake in using the Means publication. Increased construction costs are evident in the Means square foot costs for a hotel, 4-7 story, as compared with a motel, 2-3 story, from that same publication.

Testimony on this point was not exhaustive but it was sufficient to satisfy the Court of the correctness of the Julio position; namely, that the four-story Julio project falls somewhere between the building and structure requirements evidenced by these separate estimates. Hanson’s reliance on a publication using a single cost figure under the label of ‘Motels’ was error and not accepted in the trade.” Upon these findings, the court entered judgment on the counterclaim in favor of the Julios for $287,500. Aggrieved by that result, Hanson appealed. In a per curiam Opinion filed March 27, 1987, however, this Court affirmed.

After reciting the procedural history of the case, we stated: “We have carefully examined the record in this case and find ample evidentiary support for all of Judge Fader’s factual findings. We perceive no error in his application of the law to those findings. For the reasons stated in the opinion of the trial court, which we hereby adopt as our own, the judgment is affirmed.” Hanson v. Julio, unreported, Sept. Term, 1986, No. 897, Op. filed March 27, 1987. Hanson, supported by its erstwhile foes, the Julios, then turned to Comstock for payment of the judgment.

Com-stock, as we observed, had issued an Architects and Engineers Professional Liability Insurance Policy to Hanson. In that policy, Comstock agreed to pay on behalf of Hanson “all sums which the Insured shall become legally obligated to pay as damages as a result of claims first made against the Insured ... in the performance or failure to perform ⁴³⁷ professional services.... ” In the “Exclusions” section, however, the policy stated: “This policy does not apply to ... (F) express warranties or guarantees, estimates of probable construction or cost estimates being exceeded....” Believing that the judgment against Hanson was based on an estimate “of probable construction or cost estimates being exceeded” and thus fell squarely within Exclusion (F), Comstock denied liability and filed this declaratory judgment action in the Circuit Court for Baltimore County seeking a construction of the policy favorable to its point of view. Hanson, of course, was the initial defendant, but the Julios were permitted to intervene.

Presented with cross motions for summary judgment, the court, through Judge Sfekas, concluded that (1) Illinois law—the lex locus con tractus—applied, (2) under Illinois law, “where a policy expressly insures against loss covered by one risk but excludes loss caused by another risk, coverage is extended to a loss caused by the insured risk even though the excluded risk is a contributory cause,” (3) based on Judge Fader’s findings, while in part the loss arose from an overage in the cost estimate, “Hanson’s professional negligence was a contributory cause, if not in fact that proximate cause of Julio’s injuries,” and (4) the loss therefore did not fall within Exclusion (F). Accordingly, the court entered judgment against Comstock for $287,500, and this appeal was taken. Comstock makes three arguments. First, it urges that Judge Sfekas erred in finding that the loss to the Julios was not solely the product of Hanson’s negligent estimate of probable construction costs.

The evidence before Judge Fader, and Judge Fader’s factual findings, it says, compels the conclusion that the loss stemmed entirely from an erroneous cost estimate, which would put the loss squarely within Exclusion (F). Second, picking up on one brief remark in Judge Sfekas’s memorandum opinion, Comstock contends that he added an element to the exclusion that is not in the contract and thus misconstrued the exclusionary ⁴³⁸ clause. And finally, it argues that Judge Sfekas misconstrued the applicable Illinois law—that this was not a situation in which one risk was covered and one was not, but rather a case in which one area of a single risk was excluded. (2) The Legal Setting As a preface, we observe that all parties agree that the policy is to be construed in accordance with Illinois law.

The policy was issued in Illinois, and, as a general rule, an insurer’s liability is determined by the law of the place where the contract was made. See Galford v. Nicholas, Adm., 224 Md. 275, 281 , 167 A.2d 783 (1961); Grain Dealers v. Van Buskirk, 241 Md. 58, 65-66 , 215 A.2d 467 (1965); Billingsley v. Lincoln Nat’l Bank, 271 Md. 683 , 685 n. 1, 320 A.2d 34 (1974). We look, then, to see what the Illinois law is in this area. Citing one line of cases applying Illinois law, Com-stock argues that, in order for coverage to exist, the covered event must be the “significant” or the “efficient and predominating” cause of the loss.

See Am. States Ins. Co. v. Byerly Aviation, Inc., 456 F.Supp. 967 (S.D.Ill.1978); General Accident Fire & Life Assurance Corp. v. Brown, 35 Ill.App.2d 43 , 181 N.E.2d 191 (1962); Bituminous Casualty Corp. v. Hartford Accident & Indemnity Co., 330 F.2d 96 (7th Cir.1964); Clark v. Travelers Indemnity Co., 313 F.2d 160 (7th Cir.1963). Here, it argues, the “signifi cant” or “efficient and predominating” cause of the loss was the excluded one, not the covered one.

Alternatively, or additionally, it cites another line of cases for the proposition that, for coverage to exist in the face of an exclusion, the loss must arise and exist without reference to an excluded event. See Louis Marsch, Inc. v. Pekin Insurance Co., 140 Ill.App.3d 1079 , 96 Ill.Dec. 386 , 491 N.E.2d 432 (1985); Allstate Insurance Co. v. Panzica, 162 Ill. App.3d 589 , 114 Ill.Dec. 28 , 515 N.E.2d 1299 (1987); State Farm & Cas. Co. v. McGlawn, 84 Ill.App.3d 107 , 39 Ill.Dec. 531 , 404 N.E.2d 1122 (1980).

Here, it contends, the loss ⁴³⁹ cannot be said to arise without reference to an excluded event—the negligent underestimate of probable cost. Hanson and the Julios, on the other hand, dismiss the Louis Marsch line of cases as involving negligent entrustment claims and therefore as inapposite and argue that Illinois has discarded the “significant” or “efficient and predominating” tests in favor of a rule that, if a proximate cause of a loss is within the included coverage, that coverage is not voided merely because an additional proximate cause falls within an exclusion. For that proposition, they cite United States Fidelity & Guaranty Co. v. State Farm Mut. Auto Ins.

Co., 152 Ill.App.3d 46 , 105 Ill.Dec. 254 , 504 N.E.2d 123 , cert. denied 115 Ill.2d 551 , 110 Ill.Dec. 466 , 511 N.E.2d 438 (1987), Davis v. Sheehan, 43 Ill.App.3d 449 , 2 Ill.Dec. 523 , 357 N.E.2d 690 (Ill.App.1976), and Mattis v. State Farm Fire & Casualty Co., 118 Ill.App.3d 612 , 73 Ill.Dec. 907 , 454 N.E.2d 1156 (1983). These various cases do say what the parties claim they say. None of them involves the precise point now before us, however, and none of them, in our view, directly controls that issue. The first group of cases cited by Comstock did indeed speak in terms of “efficient and predominating cause,” but one must look at the context in which that language was used.

In General Accident Fire and Life Assur. Corp. v. Brown, supra, 181 N.E.2d 191 , the principal issue was not the scope of an exclusionary clause but whether the loss fell within the general coverage. A general automobile liability policy covered, among other things, accidents arising from the loading or unloading of insured vehicles. The claimant was injured during a loading operation, and so a demand was made on the policy.

The court pointed out that the mere use of an insured vehicle during the loading operation did not suffice to establish coverage; there must also be “a causal connection between the use of the truck and the injury.” Thus, it said, “unless we can determine that the loading of the truck was ⁴⁴⁰ the efficient and predominant cause of [the claimant's] injury, the matter will not come within the terms of the ... policy.” 181 N.E.2d at 194 . In the particular case, the court went on, the claimant maintained that his injury resulted solely from a defect in the loading dock; there was no assertion that his carrying of merchandise “in any way contributed to his fall, [or] that any merchandise or anything connected with the loading operation or the truck itself in any way caused his injury.” Id. On those facts, the court found no coverage. Clark v. Travelers Indemnity Co., supra, 313 F.2d 160 , and Bituminous Casualty Corp. v. Hartford Accident and Indemnity Co., supra, 330 F.2d 96 , are also “loading” cases in which the Seventh Circuit Court of Appeals followed Brown .

In both instances, although the injury occurred while a loading operation was in progress, the cause of the injury was entirely unconnected with the loading operation. Am. States Ins. Co. v. Byerly Aviation, Inc., supra, 456 F.Supp. 967 , involved essentially the same principle but in the context of