Information Systems & Network Corp. v. Federal Insurance

BLOOM, J. This appeal stems from a complaint filed by appellants, Information Systems and Networks Corporation (ISN) and the Port of Oakland, California, against appellee, Federal Insurance Company (Federal), seeking, inter alia, a declaratory judgment that Federal owed a duty to defend and indemnify ISN in an action filed against it in California! On 20 September 2000, the Circuit Court for Montgomery County granted summary judgment in favor of Federal, holding that it had no duty to defend or indemnify ISN under either the Commercial General Liability (“CGL”) policy or the Commercial Excess Umbrella policy that Federal had issued to ISN. The sole issue presented on appeal is whether the circuit court erred in holding that Federal did not have a duty to defend or indemnify ISN under the subject insurance policies. FACTUAL BACKGROUND Although the underlying facts are complex and span a long period of time, only a few of those facts are relevant to our resolution of the issue presented in this appeal.

Accordingly, we shall set forth only the basic facts. On 9 November 1999, ISN and its assignee, Port of Oakland, California, filed an amended complaint against Federal, seeking a declaratory judgment that Federal was obligated, pursuant to the CGL and Commercial Excess Umbrella policies, to defend and indemnify ISN in an action filed against ISN in California. ISN also sought damages for breach of contract arising out of Federal’s failure to defend and indemnify it in the California action. The lawsuit filed against ISN in California was a qui tam action. 1 Securacom, Inc. filed the qui tam action in the ⁴⁶¹ United States District Court for the Northern District of California on behalf of itself, the United States of America, and the State of California.

Securacom alleged that ISN, ISN’s president and chief executive officer, and one of ISN’s vice presidents had knowingly submitted false claims to the Board of Port Commissioners of the city of Oakland, California (the Port) in violation of 31 U.S.C. § 3729 et seq. and Cal. Govt.Code § 12650 et seq. The alleged false claims related to work ISN was to perform at the Port’s Oakland International Airport. In October 1991, ISN was the low bidder for a contract to provide a new automated access control system (AACS) to be installed at the airport.

In the qui tam suit, Securacom alleged that ISN knowingly and fraudulently concealed material information and affirmatively misrepresented facts to the Port to induce the Port to award the contract to it. Securacom alleged, inter alia, that ISN falsely claimed that it had the knowledge, experience, qualifications, and ability to do the job it bid for; misrepresented in its bid that it had a California contractor’s license; misrepresented actual costs and entitlements to damages in a proposal for a written change order; and deceived the Port by failing to disclose problems with the security system product that ISN had experienced with two other airport projects. The damages sought in the qui tam suit included: delay damages, loss of use of the security system, the need for repair or replacement of the security system, and treble damages as authorized by 31 U.S.C. § 3729 (a) and Cal. Govt.

Code § 12651 (a) (hereinafter referred to collectively as “the false claims acts.)” The United States and the State of California declined to intervene in the qui tam suit. The Port, however, intervened, claiming that ISN knew that a key component of the AACS and application software was defective. The Port sought ⁴⁶² damages equal to the amount of the progress payments made to ISN in response to the false claims, treble damages, a civil penalty of $10,000 for each of five false claims alleged, and costs of the suit. ISN and the Port settled the Port’s claim.

Under the terms of the settlement, judgment was entered against ISN in the amount of $1,322,726 in actual damages and $75,000 in attorney’s fees. Also pursuant to the terms of the settlement, ISN assigned to the Port its rights under certain insurance policies with respect to the claim, to the extent necessary to secure payment of the judgment. ISN agreed to cooperate with the Port in a direct action against ISN’s insurer to collect the balance of the judgment. Pursuant to the terms of the settlement agreement, ISN and the Port subsequently filed a lawsuit in the Circuit Court for Montgomery County against Federal and the Chubb Corporation d/b/a The Chubb Group of Insurance Companies (Chubb).

The claims against Chubb were eventually dismissed. As noted above, ISN and the Port sought a declaratory judgment that Federal was obligated, pursuant to the CGL and Commercial Excess Umbrella policies, to defend and indemnify ISN in the qui tam action. ISN and the Port also sought damages for breach of contract arising out of Federal’s failure to defend and indemnify it in the qui tam action. The parties filed motions for summary judgment.

ISN’s motion was based on its assertion that it was entitled, as a matter of law, to a declaratory judgment that the insurance policies provide coverage for the defense and indemnity of ISN with respect to the qui tam action. Federal’s motion for summary judgment was based on the argument that the qui tam action was predicated upon the fact that ISN knowingly defrauded a government entity, and that such claims do not constitute “property damage caused by an occurrence” as required by the provisions of both the CGL and the Commercial Excess Umbrella policies. After hearing oral argument, the circuit court ruled from the bench that Federal was entitled to have summary judgment entered in its favor. The ⁴⁶³ court determined that the complaint filed in the qui tam action contained allegations that ISN had submitted false and fraudulent claims to the Port, and that it involved “fraud perpetrated upon a government entity.” The circuit court concluded that the subject insurance policies provide coverage only for “property damage caused by an occurrence,” and that none of those elements were present in the qui tam action.

In its oral ruling, the circuit court denied ISN’s motion and granted summary judgment in favor of Federal. This appeal followed. STANDARD OF REVIEW Summary judgment is appropriate when there is no dispute as to any material facts and the moving party is entitled to judgment as a matter of law. Md. Rule 2-501.

We review the same information from the record and decide the same issues of law as the trial court. Nationwide Mut. Ins. Co. v. Scherr, 101 Md.App. 690, 694-95 , 647 A.2d 1297 (1994). “Although all reasonable inferences from the facts are to be considered in the light most favorable to the non-moving party, Maryland courts narrow their focus to those facts that will ‘somehow affect the outcome of the case.’ ” Warner v. German, 100 Md.App. 512, 516 , 642 A.2d 239 (1994)(quoting King v. Bankerd, 303 Md. 98, 111 , 492 A.2d 608 (1985)).

Ordinarily, we are confined to the basis relied upon by the lower court, and we may not affirm the lower court’s decision on the basis of new or different legal theories. Warner, 100 Md.App. at 517 , 642 A.2d 239 . Therefore, in reviewing a trial court’s grant of summary judgment, we must determine whether the trial court’s ruling was legally correct. Heat & Power Corp. v. Air Products & Chemicals, Inc., 320 Md. 584, 591 , 578 A.2d 1202 (1990).

DISCUSSION In the circuit court action, each party filed a motion for summary judgment. The parties agreed that there is no genuine dispute as to any material fact. We must determine, therefore, whether Federal was entitled to judgment as a ⁴⁶⁴ matter of law. That is, we must determine whether, under the terms of the CGL and Commercial Excess Umbrella policies, Federal had a duty to defend and to indemnify ISN in the qui tam action.

In Mesmer v. Maryland Auto. Ins. Fund, 353 Md. 241 , 725 A.2d 1053 (1999), the Court of Appeals discussed the duty to defend and the duty to indemnify, stating: Under the typical liability insurance policy, the insurer has a duty to indemnify the insured, up to the limits of the policy, for the payment of a judgment based on a liability claim which is covered. The insurer also has a duty to defend the insured against a liability claim which is covered or which is potentially covered.

The source of both duties is solely the insurance contract. As stated in Brohawn v. Transamerica Ins. Co., 276 Md. 396, 409 , 347 A.2d 842, 851 (1975), “the promise to defend the insured, as well as the promise to. indemnify, is the consideration received by the insured for payment of the policy premiums.” We have repeatedly indicated that the obligation to defend and the obligation to