Harford Mutual Insurance v. Woodfin Equities Corp.

ELDRIDGE, Judge. The principal questions presented in this case concern important coverage issues under a standard general liability insurance policy. Nevertheless, for reasons hereafter discussed, we shall not at this time be able to reach the merits of those insurance coverage issues. I. This litigation arises out of the construction of a hotel in Rockville, Maryland, known as the Woodfin Suites Hotel.

The plaintiffs Woodfin Equities Corporation and Samuel A Hard-age own and operate the hotel. The plaintiff Hardage Construction Company was the general contractor which constructed the hotel. Deerfield Engineering, Inc., owned by Donald Paulgaard, was the subcontractor which furnished and installed the hotel’s heating, ventilation, and air conditioning system (“HVAC” system). Components of the HVAC system ⁴⁰³ were allegedly manufactured by The Trane Company and by Climatemaster.

The construction of the hotel was completed in 1988, and the hotel suites were opened for occupancy at different times during that year. The plaintiffs alleged that the HVAC units installed in the hotel suites began to malfunction and fail in March 1988, and that 130 of the 226 HVAC units had to be replaced as of June 1989. According to the plaintiffs, thereafter the HVAC units continued to fail at a rate of two per week. In January 1990, the plaintiffs filed in the Circuit Court for Montgomery County a multi-count complaint for damages against The Trane Company, Climatemaster, and an entity designated as “Deerfield, Incorporated.” “Deerfield, Incorporated” was alleged to be the subcontractor which installed the HVAC system.

The different counts in the complaint were based upon theories of breach of contract, negligence, breach of express warranty, breach of implied warranties, and strict tort liability for defective products. The money damages sought were for replacement or repair of components of the defective HVAC units, consultant fees expended to discover the causes of the failures in the HVAC units, repair of damage to the hotel suites caused by replacement or repair of, or water leaking from, the faulty HVAC units, loss of revenue from suites (allegedly averaging 14 per month) which were not useable as a result of the defective units, management time spent in customer relations and in attempting to correct the problems, and loss of goodwill. The plaintiffs also requested attorneys’ fees and punitive damages. The complaint in the 1990 action was served upon an existing corporation named “Deerfield, Incorporated.” This corporation, however, was not the same corporation as “Deer-field Engineering, Inc.,” which was the subcontractor that had installed the HVAC system in the hotel.

In fact, there was no connection whatsoever between “Deerfield, Incorporated” and the HVAC subcontractor Deerfield Engineering. An order of default was entered against “Deerfield, Incorporated” in May 1992, and later a default judgment for $168,102.84 was entered ⁴⁰⁴ against “Deerfield, Incorporated.” This default judgment became final on February 21, 1995, upon the dismissal of the action against Trane and Climatemaster. See Maryland Rule 2-602(a); Quartertime Video v. Hanna, 321 Md. 59 , 580 A.2d 1073 (1990). Sometime after the filing of the 1990 action, the plaintiffs apparently realized that the wrong “Deerfield” had been served.

Consequently, in March 1991, the subcontractor Deerfield Engineering and its owner, Donald Paulgaard, were served with the pleadings in the 1990 lawsuit. It appears that Deerfield Engineering was then insolvent, and neither Deer-field Engineering nor Mr. Paulgaard filed an answer or any other pleading in the action. Nevertheless, the testimony in the present case disclosed that Mr. Paulgaard attended some of the trial court proceedings and cooperated with the plaintiffs. The plaintiffs in May 1994 discovered that a general liability insurance policy had been issued by Harford Mutual Insurance Company to Deerfield Engineering covering the period during which the hotel had been constructed and the HVAC system installed.

The “insured” is identified in the policy as follows: “Deerfield Engineering Donald Marvin Paulgaard 15 Dairyfield Court Rockville, Md. 20852.” The plaintiffs’ counsel, in June 1994, wrote to Harford, enclosed copies of the pleadings and orders in the 1990 lawsuit, offered to have the default judgment (which was not then final) vacated, and made a claim against the policy. An officer in Harford’s claims department replied on June 30, 1994, stating that “there will be no coverage available to Deerfield Engineering for this occurrence. There are a number of coverage issues which contributed to this decision.” After some further correspondence between the plaintiffs’ counsel and Harford, the plaintiffs on January 13, 1995, commenced the present action by filing in the Circuit Court for ⁴⁰⁵ Montgomery County a complaint for a declaratory judgment against Harford. The plaintiffs sought a judgment declaring that insurance policy coverage should be afforded Deerfield Engineering for the damages incurred by the plaintiffs arising from Deerfield’s installation of the HVAC system in the hotel and declaring that Harford has a duty to defend Deerfield Engineering in the action instituted in 1990.

Harford defended on various alternative grounds, including the arguments that the defendant in the 1990 action was “Deerfield, Incorporated,” whereas Harford’s insured was “Deerfield Engineering,” that the plaintiffs may not bring a direct action against the liability insurer of the defendant in the 1990 action because of the “plaintiffs’ failure to present evidence of any attempt to execute upon the underlying [default] judgment,” that Harford failed to receive timely notice of the plaintiffs’ claim thereby justifying a denial of coverage, and that “the conduct and loss alleged in the underlying litigation is not covered under the Harford Mutual policy at issue.” With respect to the last argument, Harford, after pointing out that the policy covers “property damage” caused by an “occurrence,” contended that the injury or damages asserted in the underlying 1990 action were not “encompassed within the policy definition of ‘property damage,’ ” that even if there were ‘property damage’ as defined in the policy, it was not “caused by an ‘occurrence’ ” as that term is defined in the policy, and that, assuming arguendo the existence of property damage caused by an occurrence, “the conduct and damage at issue in the underlying case” fell within certain policy exclusions. Following a denial of Harford’s motion for summary judgment, the declaratory judgment action was tried nonjury in June 1995. After the testimony of the plaintiffs’ witnesses and the introduction of documentary evidence, Harford moved for judgment. At the conclusion of arguments by counsel, the circuit judge orally ruled from the bench that Harford had timely notice of the claim.

The judge did not expressly mention Harford’s arguments that the plaintiffs were not entitled to bring a declaratory judgment action against the ⁴⁰⁶ insurer because they had sued the wrong “Deerfield” in 1990 and because they had allegedly not attempted to execute on the default judgment. The judge, however, implicitly rejected these arguments, taking the position that the policy coverage issues were determinative. The circuit judge then stated that a “careful perusal of both [the policy and the complaint in the 1990 action] persuades the Court that the coverage under the terms of the [insurance] contract would not afford the plaintiffs in this matter the coverage to which they have maintained they are entitled.” The judge requested that counsel prepare and submit “an order.” Counsel for Harford initially submitted a six-page proposed memorandum order which would have constituted a declaratory judgment if the trial judge had signed it. The plaintiffs’ counsel, however, objected to portions of the proposed memorandum order, and the trial judge declined to sign the proposed order.

Subsequently, the trial judge simply signed a one-sentence order stating that Harford’s “Motion for Judgment pursuant to Maryland Rule 2-519 ... is GRANTED.” The plaintiffs appealed, and the Court of Special Appeals affirmed in part, reversed in part, and remanded the case for further proceedings. Woodfin v. Harford Mutual, 110 Md. App. 616 , 678 A.2d 116 (1996). With regard to Harford’s argument that the plaintiffs lacked standing to bring this declaratory judgment action against the insurer because the plaintiffs’ default judgment was against “Deerfield, Incorporated—‘a completely unrelated entity’ ... [which] is not the ‘named insured’ under the CGL policy,” the Court of Special Appeals stated that the “default judgment, although in the name of Deerfield, Incorporated, is a valid judgment against the insured.” Woodfin v. Harford Mutual, supra, 110 Md.App. at 635 , 678 A.2d at 125 . After reviewing the facts, and specifically pointing out that the insured Deerfield Engineering and its owner Donald Paulgaard were served in 1991 with the pleadings in the underlying suit and had notice, the Court of Special Appeals concluded that this “is a case involving a mere ‘misnomer’ ” and that, ⁴⁰⁷ therefore, the insured and the insurer “could not legally avoid the default judgment on the technical ground that the judgment is in the incorrect name.” 110 Md.App. at 637 , 678 A.2d at 126 .

As to Harford’s alternative standing argument, the Court of Special Appeals said ( 110 Md.App. at 632 , 678 A.2d at 123 ): “We agree with appellee that, before an injured party may sue an insurer directly, the injured party must first obtain a judgment against the insured and that judgment must be returned unsatisfied, or the insured must refuse to pay it.” The Court of Special Appeals relied on some of its prior cases, as well as on Maryland Code (1957, 1994 Repl.Vol.), Art. 48A, § 481. 1 Although agreeing with the legal principle put forward by the appellee Harford, the intermediate appellate court “rejeet[ed] appellee’s argument that appellants lacked standing because they allegedly failed to enforce the judgment.” 110 Md.App. at 638 , 678 A.2d at 126 . The appellate court reviewed the evidence presented at trial disclosing that the plaintiffs employed an investigator to search for the insured’s assets but that no assets were found, that the insured’s owner testified that all of the insured’s assets had been disposed of, and that the insured was insolvent. The Court of Special Appeals concluded (ibid.): “This evidence of total insolvency, in our view, is sufficient to satisfy the requirement that the judgment against the ⁴⁰⁸ insured must be returned unsatisfied, or that the insured must refuse to pay it, before the injured party may directly sue the insurer.” The Court of Special Appeals also rejected Harford’s contention that the insurer was prejudiced by lack of timely notice, stating ( 110 Md.App. at 655 , 678 A.2d at 135 ): “Upon our review of the record, we hold that the circuit court was not clearly erroneous in determining that appellee was not prejudiced by the insured’s failure to notify the insurer of appellants’ claim or by its alleged failure to cooperate with appellee with respect to the claim.” 2 In addition, the Court of Special Appeals disagreed with the plaintiffs’ argument that the circuit court based its decision of no coverage solely upon the complaint in the 1990 lawsuit and the provisions of the insurance policy, and that the court ignored the evidence adduced at trial. After reviewing the trial transcript, the intermediate appellate court held that it was “satisfied that the circuit court considered the evidence produced at trial in granting appellee’s motion for judgment.” 110 Md.App. at 647 , 678 A.2d at 130-131 . 3 Turning to the merits of the coverage issues, the Court of Special Appeals expressed agreement with the plaintiffs’ argument that the damaged and defective HVAC system constitut ⁴⁰⁹ ed “property damage” as defined in the general liability policy issued to Deerfield Engineering. 110 Md.App. at 648 , 678 A.2d at 131 .

Nevertheless, the intermediate appellate court held that this property damage was not caused by an “occurrence” within the meaning of the policy, stating (ibid.): “Courts uniformly hold that when property damage arising out of the insured’s defective workmanship is confined to the insured’s own work product, the damage is not caused by an ‘occurrence’ within the meaning of the CGL policy. % sH % sjs Hs “In light of the contract between appellants and the insured, there can be no doubt that the HVAC system, whether considered as a whole or in terms of its various component parts, is the work product of the insured.” Alternatively, the appellate court held that even if the damage to the HVAC system were within the policy’s coverage provisions, such damage would fall within an exclusion for “ ‘property damage to the named insured’s products’ ” which include “ ‘goods or products manufactured, sold, handled or distributed by the named insured.’ ” 110 Md.App. at 650 , 678 A.2d at 132 . Consequently, the Court of Special Appeals held that the plaintiffs are not entitled to recover under the policy for the costs of replacing or repairing components of the HVAC system, “for costs associated with tearing out walls, molding, and carpeting in order to repair and remove the HVAC units,” and “for the economic costs of paying consultants, or the economic costs associated with loss of management time.” 110 Md.App. at 649 , 678 A.2d at 131-132 . On the other hand, the Court of Special Appeals held that the “loss of use of the guest suites ... is ‘property damage’ caused by an ‘occurrence’ under the CGL policy,” that such loss is not within any of the policy exclusions, and that Harford “is obligated to cover the ‘damages’ associated with the loss of use of the guest suites.” 110 Md.App. at 652 , 678 A.2d at 133 . Harford filed in this Court a petition for a writ of certiorari, presenting the same standing, notice, and coverage issues ⁴¹⁰ which it had raised in the two courts below.

While agreeing