Lerner Corp. v. Assurance Co. of America

KENNEY, Judge. On June 8, 1995, appellants, Lerner Corporation (Lerner) and White Flint Limited Partnership (White Flint) (collectively, the “Insureds”), filed a two count complaint against appel-lees, Continental Insurance Company, Assurance Company of America, Hartford Accident and Indemnity Company, Maryland Casualty Company, and Northern Insurance Company of New York (collectively, the “Insurers”). Count I alleged that the Insurers violated their respective contracts of commercial general liability insurance (the “Policies”) with the Insureds. In Count II, the Insureds sought a declaratory judgment that the Insurers were obligated to provide indemnity to the Insureds for the costs incurred by the Insureds in repairing the facade to a building that had been sold by White Flint to the General Services Administration of the United States of America (“GSA”). ' An amended complaint containing essentially the same allegations was filed on or about December 18, 1995.

In response, the Insurers filed motions for summary judgment stating that Comprehensive General Liability (“CGL”) policies do not provide coverage for the Insureds’ economic losses ⁵²⁷ arising out of breach of contract and, in addition, that any alleged damages were specifically excluded under the provisions of the policy. On January 8, 1997, a motion hearing was held in the Circuit Court for Baltimore County. The circuit court granted the motions for summary judgment filed by the Insurers and entered final judgment on the ground that the damages alleged by the Insureds arose out of a breach of contract and were, consequently, not covered by a CGL policy. On January 16, 1997, the court issued a written declaration, holding that the Insurers were not liable for the Insureds’ alleged damages under the terms of the CGL policies.

This timely appeal was subsequently filed. The Insureds raise two questions on appeal: I. Did the circuit court err by granting summary judgment on the ground that a comprehensive general liability policy never provides coverage for property damages arising out of a breach of contract?

II

Did the circuit court err when it ruled that the damages of the Insureds did not arise in tort, and thereafter granted summary judgment solely on the ground that a comprehensive general liability policy never provides coverage for property damages arising from breach of contract? We have condensed and rephrased these questions to the following single question: I. Were the appellants entitled to indemnity for the costs associated with the contractually obligated repair of a latent construction defect under the comprehensive general liability polices issued to the appellants? Factual Summary In 1984, White Flint began development of a parcel of land located in Rockville, Maryland, on which was constructed an office building to be known as the One White Flint North Building (the “Building”). Lerner provided construction management services to White Flint, but neither Lerner nor White Flint performed any of the actual construction work on ⁵²⁸ the project.

Salus Corporation (“Salus”) acted as the general contractor and all construction work on the Building was performed by subcontractors. The exterior facade of the Building consists of marble and stone veneers that are attached to precast concrete panels. Beginning in 1984, marble stones were shipped to the job site by Vermont Marble Company (Vermont) and granite stones were shipped by Cold Spring Granite Company. Once the stones arrived at the site, TecFab of Maryland, Inc. (TecFab), the precast subcontractor, inserted metal anchors into holes in the backs of the stones and then poured concrete into forms over the backs of the stones to create the stone-clad panels.

In approximately November 1985, it was discovered that certain stones attached to the precast panel had become loose. Over the next several months Salus, TecFab, and Vermont worked together to devise a method to repair the Building’s facade. The repair activities were implemented in the spring of 1986, and continued through late Fall 1986. In Fall 1986, the facade of the Building was inspected by Law Engineering and determined to be structurally sound.

While the facade was being repaired, White Flint entered into a contract to sell the Building to the United States of America, acting through GSA. Although GSA acknowledged that the exterior of the facade was substantially complete, the contract of sale contained a provision which provided that the “acceptance by the United States of the work to be performed hereunder shall be final and conclusive except as regards latent defects, fraud, or such gross mistakes as may amount to fraud, or as regards any warranty or guaranty hereunder.” In early 1991, GSA discovered that the facade panels were deteriorating. On or about April 15,1993, GSA notified White Flint by letter that “the facade deficiencies identified are the apparent result of latent defects in the attachment of the marble to the precast panel, a condition which existed at the time of acceptance, but which was not discoverable by reasonable inspection.” On or about August 10, 1993, GSA formally rescinded acceptance of the facade of the Building in accor ⁵²⁹ dance with the latent defect provision of the April 8, 1986, contract for sale, and demanded that White Flint repair the deficiencies. Alternatively, GSA indicated that it would accept bids on the project and hold White Flint responsible for the costs incurred.

Thereafter, the Insureds retained the engineering firm of Raths, Raths and Johnson (“Raths”) to determine the scope and extent of the facade deficiencies and to recommend repair methods. Raths’s investigation revealed that a number of deficiencies in the attachment of the stones to the precast panels prevented the facade from withstanding the effects of time and the elements. Under the guidance of Raths, the Insureds then undertook the action necessary to repair the facade. GSA, consequently, took no legal action against the Insureds.

The Insureds, subsequently, filed a claim with the Insurers, asserting that the costs associated with repairing the damaged facade were covered under its commercial general liability (“CGL”) policies. The Insurers denied coverage, stating that the alleged damages arose out of the Insured’s breach of á sale contract with GSA and were not covered under the applicable CGL policy. DISCUSSION I. SUMMARY JUDGMENT The trial court, in granting a motion for summary judgment, does not resolve factual disputes, but is instead limited to ruling as to matters of law. Sheets v. Brethren Mut.

Insur. Co., 342 Md. 634, 638 , 679 A.2d 540 (1996). The standard for appellate review of a trial court’s grant of summary judgment is whether the trial court was legally correct. Id.

Thus, in the present case, we must examine whether the trial court was legally correct in holding that the Insurers did not have a duty to indemnify the Insureds for the costs expended to repair the Building’s facade. ⁵³⁰ In granting the Insurers’ motions for summary judgment, the circuit court, referring specifically to this Court’s holdings in Century I Joint Venture v. United States Fidelity & Guaranty Co., 63 Md.App. 545 , 493 A.2d 370 (1985), and Woodfin Equities Corp. v. Harford Mutual Insurance Co., 110 Md.App. 616 , 678 A.2d 116 (1996), rev’d, 344 Md. 399 , 687 A.2d 652 (1997), held: Now, it seems to me that if I were to deny these motions based upon some theory that perhaps breach of contract liability is covered by comprehensive general liability policies, I would be inclined in the teeth of the two cases that were specifically mentioned, that is, both the Century I case and the much more recent case of Woodfin, which quote with favor a Nebraska Law Review article, and as far as I can tell, essentially adopt that view as Maryland law to the extent that it hasn’t been adopted before. Contractual liability policy coverage compensates for physical damage to the property, of course, and not for the insured’s contractual liability because the property or completed work completely insured is not that for which the damaged third-party bargained; in this case, meaning the Government. Now, it seems to me there could be no clearer statement of policy that could be made, than that. And if I were to rule otherwise, it seems to me that I would be committing reversible error.

In Century I, this Court held that an insurer was not required to indemnify and/or defend a condominium developer against claims of defective workmanship made by the individual condominium owners. In Woodfin, we held that a subcontractor was not entitled to coverage under a CGL policy when the damages asserted related to the insureds’ own work product and not damage to the property of others. In both cases, we recognized, in determining whether coverage is provided under a CGL insurance policy, that [t]he risk intended to be insured is the possibility that the goods, products or work of the insured, once relinquished or completed, will cause bodily injury or damage to property other than to the product or completed work itself, and for ⁵³¹ which the insured may be found liable.... The coverage is for tort liability for physical damages to others and not for contractual liability of the insured for economic loss because the product or completed work is not that for which the damaged person bargained.

Century I, 63 Md.App. at 553-54 , 493 A.2d 370 (quoting Roger C.Henderson, Insurance Protection For Products Liability And Completed Operations — What Every Lawyer Should Know, 50 Neb. L. Rev. 415 , 441 (1970) (citation omitted)); See also Woodfin, 110 Md.App. at 642 , 678 A.2d 116 . We believe the circuit court’s order of summary judgment was legally correct, and, for the reasons set forth below, we hold that the damages claimed, regardless of the form of the cause of action that GSA might have maintained against the Insureds to repair the faulty construction of the facade, were not covered by the CGL policies issued to the Insureds and that the Insurers were not obligated to indemnify the Insureds for the costs incurred related to the repair of the Building’s damaged facade. This case does not require that we address the broader question of whether or under what circumstances damages flowing from a breach of contract claim can ever be recovered under a CGL policy.

Our review necessarily begins with an examination of the relevant insurance policies. The record indicates that, between 1985 and 1995, the Insureds purchased ten separate CGL policies from the Insurers, each of the which modeled the standard CGL policies issued by the Insurance Services Office (ISO). The policies issued for 1985-86 and 1986-87 were 1973 Standard Form Policies, and all other applicable policies were 1986 Standard Form Policies. The insuring agreement of the 1973 ISO policy reads, in pertinent part, [The Insurer] will pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages because of A. bodily injury B. property damage ⁵³² to which this insurance applies, caused by an occurrence, and [the Insurer] shall have the right to defend any suit against the Insured seeking damages on account of any such bodily injury or property damage, ..., and may make such investigation and settlement of any claim or suit as it deems expedient____ The 1986 ISO policies provide, in pertinent part, that [the Insurer] will pay those on behalf of the Insured “all sums which the Insured shall become legally obligated to pay as damages because of ‘bodily injury1 or ‘property damage’ to which this insurance applies.” Both the 1973 and 1986 policies limit coverage to “property damage” and “bodily injury” caused by an “occurrence.” “Occurrence” is defined by the 1973 policy as “an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected or intended from the standpoint of the Insured.” The 1986 ISO policy defines “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The Insureds assert that the cracking and loosening of the stone veneer to the Building’s facade constituted “property damage.” Because the deterioration of the facade resulted from the continuous and repeated exposure to harmful conditions (i.e. the effects