JAM Associates of Baltimore v. Western World Ins. Co.

WILNER, Chief Judge. Appellants, a group of related partnerships or joint ventures, own a considerable amount of property in and around Baltimore City. They relied on Insurance, Inc. and its principal, John Heller, to obtain insurance on those properties. For the year September 26, 1983 through September 25, 1984, Insurance, Inc. procured that insurance from Western World Insurance Company (Western World), a surplus lines carrier, through Western World’s general agent, All Risks Ltd. (All Risks).

The 1983-84 policy covered over 1,000 properties, including 72 owned by Capitol Development Limited Partnership, one of the appellants. The policy had a general coverage limit of $300,000 per occurrence with a $500 per occurrence deductible. With respect to lead paint claims, however, it had a $5,000 per occurrence deductible. There was no other coverage limit; nor was there any exclusion for, or other limitation on, lead paint claims.

Insurance, Inc. obtained for appellants, from Western World through All Risks, a renewal policy for 1984-85. There were three relevant changes in that renewal policy, however, which led to this lawsuit. First, the renewal policy did not initially include the 72 properties owned by Capitol Development; second, it not only continued the ⁶⁹⁸ $300,000 per occurrence limit but contained as well an aggregate $300,000 limit of liability; third, and most significant, it contained an endorsement excluding “all losses arising out of lead paint poisoning.” Appellants contend that these changes were not brought to their attention and that they did not discover them until 1988, when several lead paint claims were made against them and Western World, relying on the exclusion, denied coverage. Appellants then filed this action in the Circuit Court for Baltimore County against Insurance, Inc., Heller, Western World, and All Risks, seeking reformation of the policy and damages.

The reformation they sought was to add the 72 properties of Capitol Development, delete the aggregate $300,000 limit, and remove the lead paint exclusion. The damage claims were based on breach of contract, negligence, negligent misrepresentation, and promissory estoppel. After a non-jury trial, the court entered an order reforming the policy to include the 72 additional properties and to remove the $300,000 aggregate limit. 1 It denied all other significant relief, however, including damages and removal of the lead paint exclusion. When the court then denied appellants’ post-judgment request for attorneys’ fees, this appeal ensued.

Appellants contend that the court erred (1) in refusing to reform the policy to delete the lead paint exclusion, and (2) in denying its request for attorneys’ fees. No complaint is made about the disposition of the assorted damage claims. We shall affirm. The Lead Paint Exclusion As we observed, there was no exclusion for lead paint claims in the 1983-84 policy, although there was a considerably higher deductible for those claims.

On July 20, 1984, ⁶⁹⁹ Insurance, Inc. wrote to All Risks requesting a renewal of the policy at the same rates, but with the deletion of 102 properties not at issue here. All Risks did not have the authority, on its own, to renew the policy, and so it forwarded the request to Western World. Western World evaluated the request and approved a renewal provided that (1) the premium was increased substantially — from $21,000 to over $46,000, (2) the per occurrence deductible was increased from $500 to $1,000, and (3) lead paint claims were excluded. On September 11, 1984, Western World informed Deanna Deardorff, an employee of All Risks, of these conditions.

Ms. Deardorff stated, with some equivocation, that she called Mr. Heller and informed him of the “renewal quote.” 2 That same day, she sent a Policy Renewal Notice to Mr. Heller’s attention at Insurance, Inc. The Notice showed the new premium, indicated that there would be a $1,000 deductible per claim, and stated “Lead Poisoning Warranty attached applies to renewal.” Attached to the Notice was a proposed endorsement captioned “LEAD POISONING WARRANTY,” and stating “This policy excludes claims arising out of the failure, on the part of the insured, to cover all lead based paints on premises insured hereunder.” Ms. Deardorff testified that she enclosed that particular endorsement because she believed that it was the form currently used by Western World. In fact, the insurer, some months earlier, had changed its form from a warranty requiring the covering of lead paint to a flat exclusion for lead paint claims, whether the paint was covered or not. Insurance, Inc. received this material the next day, but it appears that, while Mr. Heller was aware of the increase in the premium and the deductible, he either overlooked the lead paint endorsement or did not believe it to be signifi ⁷⁰⁰ cant. Heller stated that he did not see the renewal notice itself.

On September 26, following a conversation with appellants’ office manager, Leslie Ash, Heller wrote to appellants’ principal, Max Berg, enclosing an invoice for the renewal at the quoted rate. He called specific attention to the $1,000 deductible but said nothing about the lead paint endorsement. In apparent reference to the much higher premium and deductible, he informed Mr. Berg that “[w]e have thoroughly marketed your renewal and found that most of the insurance carriers would not even provide a premium quotation because of the loss history.” 3 Appellants accepted the offer of renewal, which Insurance, Inc. communicated to All Risks on September 26, 1984. That same day, appellants sent Insurance, Inc. a check for the premium.

All Risks then prepared a renewal policy and sent it to Insurance, Inc. on October 4. That policy, as we noted earlier, excluded the 72 properties of Capitol Development, contained an aggregate limit of $300,-000, and included, as Endorsement # 1 on a separate page attached to the back of the policy, a lead paint exclusion. That exclusion, captioned “LEAD POISONING EXCLUSION,” was different than the “warranty” that had been included with the September 11 renewal notice; it excluded from coverage “any and all losses arising out of Lead Paint Poisoning.” This policy was received by Insurance, Inc. on October 5. For reasons not entirely clear to us, instead of simply forwarding this policy, which took effect as of September ⁷⁰¹ 26, 1984 — the date the old policy expired — to appellants, Insurance, Inc. issued a binder to appellants on October 8, 1984.

This binder, which stated that it would stand “can-celled when replaced by a policy,” contained a limit of $300,000 per occurrence and said nothing about either an aggregate $300,000 limit or the lead paint exclusion. Although the binder showed Western World as the insurer, it is undisputed that Insurance, Inc. had no authority on its own to issue binders for Western World. Insurance, Inc. sent the original policy to appellants on October 19, along with a covering letter that made no mention of the lead paint exclusion. The evidence indicates that Ms. Ash read through at least part of the policy, for on November 29, 1984, she wrote to Mr. Heller, informing him that some of the partnership names were incorrect.

In June, 1985, certain properties were deleted from the policy; a month later, other properties (those of Capital Development) were added. It is evident that the policy had been physically handled by appellants’ employees on a number of occasions; it had been unstapled and restapled several times, certain parts had been “whited-out,” and the premium figure had been altered by interlineation. Nonetheless, appellants assert that they were unaware of the lead paint endorsement until they submitted some lead paint claims to Western World in 1988 and had them rejected based on the exclusion. Except as noted in our discussion of their request for attorneys’ fees, appellants have confined their complaint in this appeal to the trial court’s unwillingness to delete the lead paint exclusion from the policy.

They have abandoned their quest for damages from any of the defendants. Our discussion, therefore, will be similarly limited. In its memorandum opinion, the circuit court, citing Higgins v. Barnes, 310 Md. 532 , 530 A.2d 724 (1987), noted that reformation of a written contract constitutes extraordinary relief and that, to justify such relief, a heavy burden was placed on the plaintiffs to establish not only fraud, duress, or mutual mistake with respect to the existing contract but ⁷⁰² also the precise form that the parties intended the contract to take. It concluded from the evidence, which was largely undisputed in this regard, that appellants had failed to show any of those circumstances, and it was on that basis that the relief was denied.

The court quickly dismissed any suggestion of fraud or duress, for there was no evidence at all of that; it then concluded that there was no mutual mistake because it was clear that Western World never intended to issue a renewal policy without a lead paint exclusion. The mistake, it held, was in appellants and their chosen agents, Insurance, Inc. and Heller, not reading the policy or the renewal notice, for had they done so they would have known that the new policy was very different from the old. Appellants do not suggest that there was any fraud on the part of Western World, or any duress on their part. Their argument in this appeal is a dual one.

First, and foremost, they rely on the principle that “ ‘where an insurer agrees to renew a policy, the insured should have a right to expect that the new protection will be in substance the same as that afforded by the former contract and upon the same conditions.’ ” See Government Employees Ins. v. Ropka, 74 Md.App. 249, 267, 536 A.2d 1214 (1988), quoting from Couch on Insurance 2d, § 68.61. Ropka involved a standard automobile insurance policy issued directly by GEICO to one Michael Chilcoat. The policy was first issued in 1970 and was renewed annually thereafter. When the policy was renewed in 1979, there was added to it a “household” exclusion, excluding coverage for bodily injury suffered by any member of Chilcoat’s immediate family residing in his household.

That exclusion also appeared in the body of the 1980 renewal policy. There was no adjustment in premiums by reason of this exclusion and no separate notice was given of its addition to the policy. In 1982, Mr. Chilcoat, his wife, and his two children were killed in a collision with a truck. Their estates sued the owner of the truck, who filed a third party claim against Chilcoat’s estate, claiming that Chilcoat, the driver of his ⁷⁰³ car, was negligent.

GEICO refused to defend on the ground of the household exclusion. The estates urged that the exclusion was void because Chilcoat had not been given proper notice of it. In considering that issue, we noted, 74 Md.App. at 267 , 536 A.2d 1214 , that “[m]ost jurisdictions impose an affirmative duty on the insurer to make the insured aware of changes inserted into a renewal policy; absent notice of the change, the insured is entitled to coverage as the original policy stated.” The rationale for this rule was stated in Bauman v. Royal Indemnity Co., 36 N.J. 12, 25 , 174 A.2d 585, 591-92 (1961): “When an insured purchases an original policy of insurance he may be expected to read it and the law may fairly impose upon him such restrictions, conditions and limitations as the average insured would ascertain from such reading. However, where the stated period of coverage in the original policy is about to expire and the insurance company simply sends a renewal policy for the new period of coverage, the insured, in all likelihood, will not read it over again and may not fairly be expected to do so.

Absent notification that there have been changes in the restrictions, conditions or limitations of the policy, the insured is justly entitled to assume that they remain the same and that his coverage has not in anywise been lessened.” In examining then the question of what sort of notice is sufficient, we surveyed a number of cases throughout the country, all of which involved the direct purchase of insurance by the insured from the insurer and most of which stressed the difficulty ordinary consumers had in spotting changes made in policy provisions absent some clear notice of them. We quoted in that regard from Canadian Universal Insurance Co. v. Fire Watch, Inc., 258 N.W.2d 570, 575 (Minn.1977): “ ‘We deem that fairness requires that when an insurer makes basic coverage changes in insurance afforded a long-time insured, it has an obligation to inform the ⁷⁰⁴ insured, by cover-letter or a conspicuous heading to the amendatory endorsement, or some similar means, that the endorsement contains significant changes in coverage, and offer to explain and discuss the significance of the changes to the insured upon request.’ ” Appleman states a somewhat looser rule, more in keeping with the language from