Moscarillo v. Professional Risk Management Services, Inc.

⁵³² GREENE, J. This appeal arises out of an action filed in the Circuit Court for Montgomery County by Petitioner, Dr. Frank Moscarillo (“Dr. Moscarillo”), against Respondents, Professional Risk Management Services, Inc. (“PRMS”), Property and Casualty Insurance Guaranty Corporation (“PCIGC”), and Legion Insurance Company (“Legion.”) Dr. Moscarillo brought a declaratory judgement action that included allegations of breach of contract. Additionally, Dr. Moscarillo sought damages as a result of Legion’s refusal to pay or reimburse the losses that he incurred in defending a lawsuit which had been filed against him. The Circuit Court denied Dr. Moscarillo’s motion for partial summary judgment and granted Respondents’ cross-motions for summary judgment, finding no duty to defend existed under Legion’s policy (the “Policy”) because the allegations against Dr. Moscarillo were related to intentional misconduct and not negligent conduct. On appeal, the Court of Special Appeals held that the Policy did not provide coverage for fraud.

Additionally, that court held that the complaint and extrinsic evidence only supported a cause of action for fraud. The issue we must decide in this case is whether Legion had a duty to defend Dr. Moscarillo in a lawsuit brought against him by William M. Mercer, Inc', and Marsh & McLennan Co., Inc. (collectively, “Mercer”). We hold that there was no duty to defend Dr. Moscarillo because there was no potentiality of coverage under the Policy. Accordingly, we shall affirm the judgment of the Court of Special Appeals.

I. We adopt the facts as stated by Judge Peter B. Krauser, writing for the Court of Special Appeals in this case: On November 4, 1998, [Dr. Moscarillo] purchased a “claims-made” professional liability insurance policy from ⁵³³ Legion, which was retroactive to May 1, 1996. It provided that Legion would “pay on behalf of an Insured all sums which the Insured shall become legally obligated to pay as Damages arising out of a Medical Incident, to which this policy applies.” It further provided that Legion had a “duty to defend any Claim or Suit against an Insured for Damages which are payable under the terms of this policy, even if any of the allegations of such actions or proceedings are groundless, false, or fraudulent.” In the Legion policy, a “Claim” meant “a written demand received by an Insured for money including the service of Suit, demand for arbitration or the institution of any other similar legal proceeding to which this policy applies”; “Damages” included “any compensatory amount which an Insured is legally obligated to pay for any Claim to which this insurance applies”; and a “Medical Incident” encompassed “any negligent act or omission in the furnishing of Psychiatric Services by a Named Insured or any person for whose acts or omissions the Named Insured is legally responsible.” The Legion policy contained several exclusions, but only one is at issue here. That exclusion provided: “This policy does not apply to: ... [a]ny Claim arising out of or in connection with any dishonest, fraudulent, criminal, maliciously or deliberately wrongful acts or omissions, or violations of law committed by an Insured.” The Mercer Litigation On February 24, 1999, Mercer and Marsh & McLennan, Mercer’s parent company, filed suit in federal district court against [Dr. Moscarillo] and his patient, Evelyn Toni Mulder, alleging fraud and conspiracy to defraud in connection with Mulder’s application for and receipt of disability benefits. The complaint stated that Mercer hired Mulder as an actuary in 1992.

On February 27, 1997, the head of Mulder’s practice group, Henry Essert, met with Mulder to advise her that, as part of Mercer’s restructuring plan, her office was to be closed. Two months later, he sent Mulder a ⁵³⁴ letter offering her a severance package and notifying her that her employment would end on May 31,1997. Two weeks after that letter was sent, on May 22, 1997, Mulder sought treatment from [Dr. Moscarillo,] a psychiatrist. She continued to see [Dr. Moscarillo] during the spring and summer of that year.

During that time, [Dr. Moscarillo] prescribed Prozac and other antidepressants for her. By June, [Dr. Moscarillo] had concluded that Mulder was suffering from major depression. That diagnosis enabled Mulder to apply for and receive disability benefits under the Marsh & McLennan benefit plan. According to the Mercer complaint, three weeks later, on June 23, 1997, Mulder told [Dr. Moscarillo] about the employment dispute she was having with Mercer.

At that time, [Dr. Moscarillo] and Mulder “completed” Mulder’s application for short-term disability benefits. The application stated that Mulder had major depression and had been unable to work since May 14, 1997. In July and August of 1997, [Dr. Moscarillo] purportedly told a disability coordinator and a health care consultant for Marsh & McLennan that Mulder had not yet recovered from that depression. The Mercer complaint further alleged that on October 23, 1997, a senior Mercer human resources representative told Mulder that, consistent with Mercer’s original decision, there was no longer any position for her at Mercer; her disability benefits were terminated effective November 1, 1997.

On October 31st, the day before her benefits were to end, Mulder sent a letter to Mercer appealing the termination of her benefits. In reply, Mercer suggested that Mulder submit to an independent medical examination. That suggestion, according to the complaint, prompted [Dr. Moscarillo] to write a note to Mercer’s medical consultant stating that Mulder would be able to return to work on December 1,1997.[ 1 ] ⁵³⁵ When the Mercer litigation commenced, [Dr. Mosearillo] invoked Legion’s duty to defend him under the terms of his insurance policy. That request was denied.

On April 26, 1999, [Dr. Mosearillo] filed an answer, and discovery commenced. Nine months later, on January 29, 2001, Mercer and Marsh & McLennan filed a stipulation under seal stating that, “following extensive discovery and intense discussions between counsel ... plaintiffs’ counsel has advised his clients of his opinion that the allegations that Dr. Mosearillo himself engaged in fraud or conspiracy to defraud with respect to his diagnosis and treatment of defendant Mulder or with respect to Mulder’s application for disability benefits would likely be rejected by a finder of fact.” On January 30, 2001, Mercer and Marsh & McLennan agreed to dismiss with prejudice their claims against [Dr. Mosearillo]. Thereafter, [Dr. Mosearillo] demanded payment from [Legion] of the costs he had incurred during the Mercer litigation. On June 29, 2000, and October 15, 2001, PRMS, PCIGC,[ 2 ] and Legion denied coverage of [Dr. Moscarillo’s] claim.

Two years later, on July 28, 2003, Legion was declared insolvent by the Commonwealth of Pennsylvania. On January 28, 2004, [Dr. Mosearillo] filed suit against [Respondents] PRMS, PCIGC, and Legion, seeking a declaratory judgment and damages for breach of contract arising out of Legion’s refusal to reimburse him for the costs of the Mercer litigation. Eight months later, [Dr. Mosearillo] filed a motion for partial summary judgment seeking a judicial declaration that [Respondents] had a duty to defend him and that Legion, by failing to pay or reimburse [Dr. Mosearillo] for his defense costs, had an unpaid obligation to him at the time it was declared insolvent. In response, [Respondents] moved for summary judgment on ⁵³⁶ the grounds that they had no duty to defend [Dr. Moscarillo] in the Mercer litigation.

Following a hearing on the cross-motions, the circuit court granted [Respondents’] motion for summary judgement____ Moscarillo v. Professional Risk Mgmt. Services, Inc., 169 Md.App. 137, 141-44 , 899 A.2d 956, 959-60 (2006). Dr. Moscarillo appealed the judgment of the Circuit Court to the Court of Special Appeals. On June 2, 2006, the Court of Special Appeals filed its reported opinion, Moscarillo, 169 Md.App. 137 , 899 A.2d 956 (2006), holding that Legion did not have a duty to defend Dr. Moscarillo in the Mercer litigation.

Dr. Moscarillo filed a petition for writ of certiorari 3 in this Court, which we granted. Moscarillo v. Prof'l Risk Mgmt. Services, Inc., 394 Md. 479 , 906 A.2d 942 (2006). For the reasons stated in this opinion, we affirm the judgment of the Court of Special Appeals.

II

A. We turn first to Dr. Moscarillo’s assertion that Legion had a duty to defend him in the Mercer litigation, despite the fact that the allegations in that case were for fraud and conspiracy to defraud. Dr. Moscarillo argues that the duty to defend is not necessarily triggered by the mere titling or styling of a cause of action, but instead “the duty to defend is measured ⁵³⁷ first by gleaning the substance of the underlying tort action from the complaint and/or extrinsic evidence, and then evaluating whether there might be any potential for coverage under the terms of the insurance policy.” Dr. Moscarillo further contends that “the Policy’s coverage grant ... extends to negligent conduct” and that “Mercer aggressively sought to develop a record of negligent conduct against Dr. Moscarillo [and thus] the duty to defend was triggered.” Legion argues, to the contrary, that the terms of the policy establish that Legion had no duty to defend Dr. Moscarillo in the Mercer litigation and that similarly, Dr. Moscarillo has failed to demonstrate that an issue triggering coverage would be generated at trial. This Court has, on numerous occasions, discussed the duty of an insurer to provide a defense for an insured. The principles for determining whether an insurer has a duty to defend an insured were first set out in Brohawn v. Transamerica Ins.

Co., 276 Md. 396 , 347 A.2d 842 (1975). In Brohawn the issue before the Court was whether an insurer had a duty to defend an insured in a tort suit, brought by injured third parties, that alleged negligence and assault, when the policy excluded from coverage acts that were committed with the intent to injure. Brohawn, 276 Md. at 398 , 347 A.2d at 844 . In that case, the insured, Mary Brohawn, her son, and her sister, were involved in a physical altercation outside of a nursing home that resulted in Mrs. Brohawn and her sister pleading guilty to criminal assault charges.

Later, the injured parties each filed a civil suit against Mrs. Brohawn and her sister alleging that they were assaulted and, in an amended declaration, alleged negligence. Mrs. Brohawn requested that her insurer, Transamerica, defend her in the civil suits. Brohawn, 276 Md. at 401 , 347 A.2d at 846 . The insurer, in response, filed a declaratory judgment action seeking a declaration that, because Mrs. Brohawn pled guilty in a criminal action, the acts she allegedly committed were intentional and therefore were excluded from coverage and, further, that Transamerica did not have an obligation to defend Mrs. Brohawn in the civil suits.

We explained that, “[t]he ⁵³⁸ obligation of an insurer to defend its insured under a contract provision ... is determined by the allegations in the tort actions. If the plaintiffs in the tort suits allege a claim covered by the policy, the insurer has a duty to defend.” Brohawn, 276 Md. at 407-408 , 347 A.2d at 850 (citing Journal Pub. Co. v. General Cas. Co., 210 F.2d 202, 207 (9th Cir.1954); Boyle v. Nat’l.

Cas. Co., 84 A.2d 614, 615-616 (D.C.Mun.App. 1951); Travelers Ins. Co. v. Newsom, 352 S.W.2d 888, 892 (Tex.Civ.App.1961); 7A Appleman Insurance Law and Practice § 4682; Annot., 50 A.L.R.2d 458 ). ,We noted that “[ejven if a tort plaintiff does not allege facts which clearly bring the claim within or without the policy coverage, the insurer still must defend if there is a potentiality that the claim could be covered by the policy.” Brohawn, 276 Md. at 408 , 347 A.2d at 850 (citing U.S. Fidelity & Guaranty Co. v. National Paving & Contracting Co., 228 Md. 40, 54 , 178 A.2d 872 (1962)). The Court held that Mrs. Brohawn was entitled to a defense, noting that the allegations of negligence clearly stated a claim that was within the coverage of the policy and that the evidence of a guilty plea did not “relieve Transamerica of its duty to defend its insured in suits which allege an unintentional tort covered b y the policy.” Id.

In St. Paul Fire & Marine Ins. Co. v. Pryseski, 292 Md. 187 , 438 A.2d 282 (1981), this Court further explained the rule for determining whether an insurer has a duty to defend its insured, establishing a two-part inquiry. The Court said that [i]n determining whether a liability insurer has a duty to provide its insured with a defense in a tort suit, two types of questions ordinarily must be answered: (1) what is the coverage and what are the defenses under the terms and requirements of the insurance policy? (2) do the allegations in the tort action potentially bring the tort claim within the policy’s coverage?

The first question focuses upon the language and requirements of the policy, and the second question focuses upon the allegations of the tort suit. ⁵³⁹ Pryseski, 292 Md. at 193 , 438 A.2d at 285 (holding that, as the policy was presented in the record, there existed an ambiguity, and that ambiguity should be resolved against the insurer, St. Paul, because it is the party that prepared the contract.) To determine if Legion had a duty to defend Dr. Moscarillo in the Mercer litigation, we turn to the first question of the Pryseski inquiry. Accordingly, we look to the terms of the professional liability insurance policy issued to Dr. Moscarillo to determine the scope of its coverage and any defenses. Dr. Moscarillo contends that the Policy creates a duty to defend when there is a potential for a payment arising out of negligent professional conduct, but that duty is not dependent on the plaintiff labeling the cause of action as negligence. Legion, in turn, consistent with the reasoning of the Court of Special Appeals, argues that the only “ordinary or reasonable interpretation of the coverage clause [is] that Legion is obligated to provide coverage for damages arising out of a negligent act or omission” and that because the “gravamen of the Mercer complaint” is fraud, Legion did not have a duty to defend Dr. Moscarillo.

The Policy we must interpret provides that Legion had the “duty to defend any Claim or suit against an Insured for Damages which are payable under the terms of th[e] Policy, even if any of the allegations of such actions or proceedings are groundless, false or fraudulent.” Additionally, it provided that Legion “shall pay on behalf of an Insured all sums which the Insured shall become legally obligated to pay as Damages arising out of a Medical Incident to which th[e] policy applies____” The definitions section of the Policy defines a “Medical Incident” as meaning “any negligent act or omission in the furnishing of Psychiatric Services by a Named Insured or any person for whose acts or omissions the Named Insured is legally responsible. Any act or omission together with all related acts omissions shall be considered one Medical Incident.” The Court of Special Appeals held that “it [was] clear that the policy covered negligent acts or omissions and not intentional torts.” Moscarillo, 169 Md.App. at 146 , 899 A.2d at ⁵⁴⁰ 961. We agree with the intermediate appellate court’s holding. We construe the professional liability insurance policy issued by Legion to Dr. Moscarillo according to contract principles, because a policy of insurance is a contract.

See Bausch & Lomb v. Utica Mut., 330 Md. 758, 779 , 625 A.2d 1021, 1031 (1993); Litz v. State Farm Fire & Cas. Co., 346 Md. 217, 224 , 695 A.2d 566, 569 (1997), Mesmer v. M.A.I.F., 353 Md. 241 , 725 A.2d 1053 (1999). We have said: Construction of insurance contracts in Maryland is governed by a few well-established principles. An insurance contract, like any other contract, is measured by its terms unless a statute, a regulation, or public policy is violated thereby.

To determine the intention of the parties to the insurance contract, which is the point of the whole analysis, we construe the instrument as a whole. Maryland Courts should examine the character of the contract, its purpose, and the facts and circumstances of the parties at the time of the execution. Litz, 346 Md. at 224-225 , 695 A.2d at 569 (citing Pacific Indem. v. Interstate Fire & Cas., 302 Md. 383, 388 , 488 A.2d 486, 488 (1985)). In the case sub judice, we are asked to interpret the contract and decide whether the insurer, Legion, had a duty to defend the insured, Dr. Moscarillo.

As we noted in Litz , “[t]he insurer’s duty to defend is a contractual duty arising out of the terms of a liability insurance policy.” 346 Md. at 225 , 695 A.2d at 569 . The policy at issue also contained several “Exclusions,” including an exclusion that provided that the “Policy does not apply to: ... [a]ny claim arising out of or in connection with any dishonest, fraudulent, criminal, maliciously or deliberately wrongful acts or omissions, or violation of law committed by an Insured.” Our reading of the policy as a whole, in light of the principles of construction, supra, according to the ordinary meaning of the words used, makes clear that the parties did not intend to cover any claim brought against Dr. Moscarillo that is based on an alleged fraudulent act or omission. The policy cannot be construed, ⁵⁴¹ however, to exclude a claim that is based on an alleged negligent act. The definition of “Medical Incident” supports this conclusion.

The policy clearly contemplates coverage in instances in which Dr. Mosearillo’s actions are alleged to be negligent, but not where the conduct is alleged to be intentional or fraudulent. Thus, in answer to the first part of the Pryseski inquiry, we hold that the Policy before us obligated the insurer to defend the insured in an action that alleged negligence but not as here, where the pleadings in the Mercer litigation alleged only fraudulent conduct. Accordingly, “[h]aving established the scope and limitations of coverage available under the [Legion] insurance polic[y],” as the Court of Special Appeals notes, “[t]he second part of the Pryseski inquiry requires us to determine whether any of the claims in the Mercer litigation could potentially fall within the scope of the policy’s coverage.” Moscarillo, 169 Md.App. 137, 146 , 899 A.2d 956, 961 (2006) (citing Aetna Cas. & Surety Co. v. Cochran, 337 Md. 98, 105 , 651 A.2d 859, 863 (1995)). As noted supra, the insurer must defend the insured if there is a potentiality that the claim could be covered by the insurance policy.

Brohawn, 276 Md. at 408 , 347 A.2d at 850 . In Cochran , this Court held that to establish a potentiality of coverage, an insured can also refer to extrinsic evidence. In that case, we concluded that, “[o]nly if an insured demonstrates that there is a reasonable potential that the issue triggering coverage will be generated at trial can evidence to support the insured’s assertion be used to establish a potentiality of coverage under an insurance policy.” Cochran, 337 Md. at 112 , 651 A.2d at 866 (noting that the “facts sufficiently established a reasonable potential that a self-defense issue” would be generated at trial and therefore the insurer had a duty to defend the insured in the underlying tort action). We warned, however, that “an insured cannot assert a frivolous defense merely to establish a duty to defend on the part of his insurer.” Cochran, 337 Md. at 112 , 651 A.2d at 866 .

Later in Walk v. Hartford Cas. Ins. Co., 382 Md. 1 , 852 A.2d 98 (2004), we limited the usage of extrinsic evidence to estab ⁵⁴² lish the potentiality of coverage. Dr. Moscarillo contends that, in its decision, the Court of Special Appeals “misapplied” this Gourt’s decision in Walk .

We disagree. In our view, Walk is dispositive and was correctly applied by the Court of Special Appeals. Walk arose out of an action filed by Richard Walk against Hartford Casualty Insurance Company alleging breach of contract and seeking damages as a result of Hartford’s refusal to defend him in a lawsuit which had been filed against him. Walk’s employer, IBSC East, purchased a business insurance policy that provided