LUPPINO INS. CO. v. Vigilant Insurance Co.

WILNER, Chief Judge. The ultimate issue in this appeal is one of insurance coverage; the particular issue is whether appellant Rocco Luppino’s suit against Vigilant Insurance Company is barred by limitar tions. The Circuit Court for Prince George’s County held that ³⁷⁴ it was and granted the- insurer’s motion for summary judgment. We shall reverse that judgment.

Luppino once owned a home in Prince George’s County protected by a Quality Protection Homeowner’s policy issued by Vigilant. On June 24, 1986, he sold the home to Stephen Gray and Mary Soraci and, upon that sale, cancelled the policy. 1 In April, 1989, Mr. Gray and Ms. Soraci sued appellant in the Circuit Court for Prince George’s County for fraud, intentional concealment, and negligent misrepresentation in connection with the sale. The suit was apparently based on the buyers’ discovery of extensive termite damage, rotting wood, and other deficiencies. Luppino was served with process on November 1, 1989, and he promptly forwarded the complaint, along with an answer he had filed through his personal attorney, to Vigilant, requesting that it provide a defense.

On January 19, 1990, Vigilant responded that it had accepted the defense of the case under a “full Reservation of Rights.” Pointing to various provisions of the policy, the company explained that there was no coverage for damage to the property prior to the transfer of ownership on June 24, 1986, that there was no coverage for damage sustained after cancellation of the policy, and there was no coverage for property damage arising out of any act intended to cause such damage. There was apparently some question at the time as to when the policy was actually cancelled. The insurer stated that it would provide a defense but that, should a judgment be obtained that fell "within the noted exclusions or outside the policy period, satisfaction of the judgment would be Luppino’s responsibility, not that of Vigilant. On October 19, 1990, Vigilant notified Luppino that it had changed its position.

The company concluded that the policy had been cancelled effective June 24, 1986 and that, as a result, there was no coverage. Citing the various policy ³⁷⁵ provisions and defenses noted in its earlier letter, Vigilant ended with the statement that “[t]herefore, due to the fact the allegations fall outside of the policy period and within the above referenced exclusions, we must advise you we are specifically denying coverage, indemnity and defense for this lawsuit.... ” The company said that it would continue the defense through the firm it had designated for 30 days to give Luppino time to choose another lawyer and that it reserved the right to amend the letter if new information developed showing that any policy provision had been violated or, in the alternative, if the underlying complaint was amended to bring the matter within the policy coverage. In December, 1991, the plaintiffs amended their complaint to add additional counts of intentional omission, breach of contract, and tortious breach of contract, but there was no change in Vigilant’s position. Luppino employed new counsel, and the case proceeded to trial.

On May 4, 1992, a jury returned a verdict for the plaintiffs based on intentional misrepresentation, intentional concealment, negligent misrepresentation, and intentional omission, in the amount of $97,787 compensatory damages and $82,000 punitive damages. Luppino appealed. In August, 1993, in an unreported opinion, we affirmed the judgment, and, on September 13, 1994, the Court of Appeals also affirmed. Luppino v. Gray, 336 Md. 194 , 647 A.2d 429 (1994).

On May 31, 1994, Luppino filed this action against Vigilant for damages arising from its refusal to provide a defense to the Gray/Soraci action. In December, 1994, he amended his complaint to add a count for breach of the duty to pay the judgment rendered in that case. Prior to the amendment, Vigilant had filed a motion for summary judgment based on limitations, which the court had denied. In January, 1995, following the amendment, Vigilant asked the court to reconsider its ruling, arguing that limitations had run on both actions—that based on the duty to defend and that based on the duty to indemnify.

The court granted the motion to reconsider and, ultimately, the motion for summary judgment. Rely ³⁷⁶ ing on American Home Assurance v. Osbourn, 47 Md.App. 73 , 422 A.2d 8 (1980), the court held that both causes of action arose on October 19, 1990, when Vigilant informed Luppino that it was denying coverage, and that the action first filed in May, 1994 was too late. DISCUSSION Both parties cite Federal and out-of-State cases in support of their respective positions. In our view, this case can be decided under prevailing Maryland case law.

We need to distinguish, however, between an action for breach of the duty to defend and one for breach of the duty to pay. We shall begin with the latter. (1) Duty to Pay Md.Code Cts. & Jud. Proc. art., § 5-101 provides generally that a civil action at law shall be filed within three years from the date it accrues.

The question, then, is when Luppino’s action for breach of the duty to pay accrued. That, in turn, requires us to examine the nature of the duty. The coverage in question is provided in Section II, Coverage E of the policy. That coverage obligates Vigilant “to pay on behalf of the .insured, up to our limit of liability, the ultimate net loss which the insured becomes legally obligated to pay because of personal injury or property damage.” The term “ultimate net loss” is defined in the policy as “all damages which an insured becomes legally obligated to pay because of personal injury or property damage.” Luppino argues that he did not become legally obligated to pay damages to Gray and Soraci until the Court of Appeals affirmed the judgment against him in September, 1994.

Vigilant, on the other hand, though seemingly acknowledging that Luppino might be correct if Vigilant had actually defended the action through to judgment, contends that, because it disclaimed the duty to defend as well, both causes of action accrued on the day it informed Luppino that there was no coverage. Relying, as did the court, on American Home ³⁷⁷ Assurance v. Osbourn, supra, 47 Md.App. 73 , 422 A.2d 8 , and two Federal cases (Cardin v. Pacific Employers Ins. Co., 745 F.Supp. 330 (D.Md.1990) and an unpublished Opinion of the Fourth Circuit Court of Appeals in Millham v. Globe Am. Cas.

Co., No. 89-2846, 1990 WL 122068 , Opinion filed August 24, (1990)), Vigilant urges that the limitations period commenced at that point because Luppino knew then that he would have to defend the case and pay any judgment himself. Although there are some out-of-State cases supporting the proposition, we do not agree with Luppino that the action accrued only when the Court of Appeals affirmed the judgment, and we most assuredly do not agree with Vigilant that the action for breach of the duty to pay accrued when it first denied coverage. We conclude that Luppino’s obligation became legally fixed, and thus the duty to pay arose, when the judgment was entered against him by the circuit court in May, 1992. That judgment, of course, was subject to being upset on appeal, but it was valid, final, and, unless stayed through the posting of acceptable security, was subject to execution at that point.

Because Vigilant places so much emphasis on American Home Assurance v. Osbourn and Cardin , we shall begin with a discussion of those cases. Osbourn operated a car-towing service. He was sued for trespass and conversion by the owners of cars that he towed from a prohibited parking zone at the Capital Center, under contract with the Center and upon direction from the police. On September 11, 1974, his insurer declined coverage on the ground that the action was based on intentional acts, for which no coverage was afforded by his policy.

Osbourn defended the actions, which, in December, 1977, ultimately settled. On September 25, 1978, he sued both his insurer and the agent from whom he procured the insurance. The action against the agent was based on negligence and breach of warranty for not procuring complete coverage. The court granted summary judgment for the agent based on limitations.

The action against the insurer was tried to ³⁷⁸ verdict, which was favorable to Osbourn. The insurer appealed the judgment against it, and Osbourn appealed the judgment in favor of the agent. Limitations was not raised as a defense to the action against the insurer, and that issue was therefore not addressed by us. We reversed the judgment against the insurer because we concluded that there was no “occurrence,” which was- a prerequisite to coverage.

We did discuss the limitations question with respect to the agent, however. The critical question, we said, was the date “when Osbourn knew or should have known that his insurance broker sold him an insurance policy which was inadequate because it afforded incomplete coverage.” 47 Md.App. at 86 , 422 A.2d 8 . Osbourn argued that the limitations period did not commence until his damages were ascertained, which was when he settled the underlying cases in December, 1977. We rejected that approach and concluded instead that the action accrued when the insurer denied coverage.

It was then that Osbourn knew, or should have known, of the deficiency in the policy and of the fact that he would have to defend the actions himself and thereby incur expense. That aspect of American Home Assurance is completely inapposite to this case. The alleged duty of the agent was to procure complete insurance, and the breach of that duty, along with the assurance of damage, became clear when the insurer declined coverage. Vigilant’s duty here is quite different; it is to pay any “ultimate net loss” that Luppino becomes “legally obligated to pay because of personal injury or property damage.” Vigilant’s declaration of no coverage did not establish, or even trigger, any ultimate net loss that Luppino would be obligated to pay.

Cardin is likewise inapplicable with respect to the obligation to pay. That case involved the duty to provide a defense, in particular whether a malpractice carrier was obliged to pay the expenses of the insured’s