Nationwide Mutual Insurance v. Regional Electric Contractors, Inc.

WENNER, Judge. The issues before us in this appeal principally involve the construction of a commercial liability insurance policy. Appellant, Nationwide Mutual Insurance Company (“Nationwide”), noted an appeal from the entry of a judgment in favor of appellee, Regional Electrical Contractors Inc. (“Regional”) following a non-jury trial in the Circuit Court for Prince George’s County. On appeal, appellant has presented us with three (3) questions which, for clarity, we have rephrased and reordered: ⁸³ (1) Does the insurance policy require Nationwide to cover property damages to a third party before Regional has been found to be liable for the claimed damages?

(2) May Regional file a complaint seeking damages on behalf of a third party whose property was damaged? (3) Was there sufficient evidence to support a finding that the “your work” exclusion in the policy did not apply? For reasons explained below, we shall affirm the judgment of the circuit court. Facts Regional purchased a commercial liability insurance policy from Nationwide providing that Nationwide “will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.” (Emphasis added).

The policy further provides that “[t]his insurance applies to ... property damage only if (1) the ... property damage is caused by an occurrence (“an accident”) that takes place in the coverage territory.” The policy defines “coverage territory” as “electrical work "within buildings.” The agreement did not, of course, provide protection from all risks. Excluded was property damage to [t]hat particular part of real property on which [appellee] or any contractors or subcontractors working directly or indirectly on [Regional’s] behalf are performing operations, if the “property damage” arises out of those operations; or [t]hat particular part of any property that must be restored, repaired or replaced because “your work” was incorrectly performed on it. (Emphasis added.) On 19 March 1993, a switchboard 1 exploded while Regional’s employee, Ronald Marceron, was “phasing” or “wringing out” certain pairs of wires leading from the switchboard to a “reheat” unit in another room. This was to ensure that the ⁸⁴ proper wires were connected to the proper equipment.

Only Marceron witnessed the explosion. Although injured, Marceron remained conscious throughout the incident. Marceron avers that he has no recollection of the explosion, or of having done anything that would have caused it. 2 Nonetheless, Regional’s Vice President/Treasurer, Tony Allen Calloway, initially believed Marceron had “inadvertently touched the wire that he was using to wring them out, the grounded wire, to the hot side of the circuit breaker,” causing the explosion. Nationwide’s initial investigation led it to the same conclusion.

On the day after the accident, Calloway notified Nationwide’s agent, Keith D. Ludka, of the accident. Ludka told him that “[Nationwide] would take care of it.” In fact, Ludka admitted telling Calloway, “that’s why you have insurance.” Although Regional repaired the damages and submitted an invoice to Nationwide for reimbursement, Nationwide denied the claim on grounds that it was subject to the “your work” exclusion, despite having covered the damages to a “chiller unit.” Predictably, Regional filed a complaint charging Nationwide with breach of contract. At trial, the presiding judge orally converted Regional’s complaint into one seeking declaratory relief. After considering the evidence and argument of counsel, she declared the loss to be covered by the policy and not subject to the “your work” exclusion.

In addition, the presiding judge also declared that Regional was entitled to prejudgment interest. This appeal followed. Discussion I. Nationwide first contends that the trial judge’s findings of fact are clearly erroneous, and that it denied coverage because “it had not been demonstrated [Regional had] caused the ⁸⁵ occurrence.” Thus, Nationwide believes Regional had “no legal obligation ... to pay for damages, which is a requirement under the policy.” Even had Regional been legally obligated to pay the damages, “the occurrence was excluded from coverage because of the ‘your work’ exclusion.” 3 As we begin, we point out that “[wjhere there is a tort suit against the insured, the damages 4 which the insured is ‘legally obligated to pay,’ within the meaning of the coverage language, are those determined by the judgment in or settlement of the tort action.” Allstate Ins. Co. v. Atwood, 319 Md. 247, 261 , 572 A.2d 154 (1990) (footnote added).

In other words, “a liability insurer is bound by the finding in a tort action against its insured that the insured was liable due to negligence,” Atwood, 319 Md. at 260 , 572 A.2d 154 (citations omitted). Accordingly, Nationwide “would normally be bound by a judgment in a tort case.” Id. at 261 , 572 A.2d 154 . In any event, Regional purportedly repaired the damaged switchboard at Ludka’s suggestion, a point discussed more fully infra. The owner of the damaged property neither sued, nor settled with, Regional.

Indeed, when the trial judge said, “Well, maybe we ought to just stop this case and wait for the property owner to sue the contractor (Regional) and see if they can prove negligence,” counsel for Nationwide responded, ⁸⁶ “well, work has already been done and the damage has already been paid for.” As we see it, that colloquy reveals that Nationwide believed Regional’s repairs had satisfied potential third-party claims. Hence, it was unknown whether Regional was “legally obligated to pay” for the damages, a condition precedent to Nationwide’s liability under the policy. That is, Nationwide’s coverage was not available until it had been determined that Regional was legally obligated to pay. Nonetheless, our inquiry does not end here.

We first note that “[a]n insurer, prior to trial of a tort suit against its insured [by a third party], ordinarily [can] not obtain a declaratory judgment concerning policy coverage, where the coverage issue was essentially the same as an issue to be decided in the pending tort case.” Atwood, supra, at 249 , 572 A.2d 154 (citing Brohawn v. Transamerica Ins. Co., 276 Md. 396 , 347 A.2d 842 (1975)). As we have said, however, the likelihood of a third party tort action was eliminated by Regional having repaired the damages. Relying on Benning v. Allstate, 90 Md.App. 592 , 602 A.2d 233 (1992), however, Regional contends that we have “recognized the right of an insured under a liability policy to sue her own insurance company after the insurance company wrongfully denied coverage, even before the insured’s liability to the injured party had been determined.” Regional has misread Benning .

In Benning , we permitted the appellant to proceed with an action for declaratory judgment on a discrete policy issue separate from the underlying tort cases. 5 We also pointed out in Benning , however, that, under Brohawn and its progeny, “disputes [relating to policy coverage] that are also at issue and will necessarily be decided in any underlying litigation between the claimant and the insured [as opposed to] those that are entirely independent of that litigation[,] are inappro ⁸⁷ priate for resolution in advance through declaratory judgment proceedings.” Benning, 90 Md.App. at 600 , 602 A.2d 233 . 6 We are here presented with a situation somewhat different from those in the cases we have just mentioned. Except for Benning , those cases involved pre-tort-trial declaratory judgment actions by the insurer. Here before us is a pre-tort-trial declaratory judgment action by an insured against its insurer. Nevertheless, we find the above cited cases to be helpful.

As the Court of Appeals said in Allstate , “[i]f the pre-tort-trial declaratory judgment proceeding were allowed, the insured would suffer great prejudice: not only would she have to defend against the plaintiff but also against the insurer.” Hence, the Court went on to say that “[t]he essential unfairness to ... [the plaintiffs] of allowing Transamerica to prosecute their case, and the harsh burden of forcing Ms. Brohawn to defend against a third-plaintiff far outweigh any possible advantages advanced by Transamerica in support of granting declaratory relief.” Allstate, 319 Md. at 257 , 572 A.2d 154 (quoting Brohawn, 276 Md. at 406-07 , 347 A.2d 842 ). The Court then said, “[i]nsuranee company intervention in tort trials would be tantamount to authorizing direct actions by plaintiffs against defendant liability insurers. Maryland law generally precludes such actions.” 319 Md. at 257 , 572 A.2d 154 . (citing Reese v. State Farm Mut.

Auto. Ins., 285 Md. 548, 552 , 403 A.2d 1229 (1979)). As we see it, an insured’s paying pre-tort-trial damages and then seeking a declaratory judgment as to the insurer’s obligation under the policy would cause the insurer to “suffer great prejudice.” In other words, the insured would be obligated to prove that it was “legally obligated to pay,” in order to recover from its insurer. Not only would this burden ⁸⁸ eliminate the obligation of an insurer to defend its insured, it would eviscerate the insurer’s right to defend claims brought against its insured.

Moreover, we also believe that in a situation such as this, there is manifest opportunity for fraud and collusion between the insured and a third party—something for which no insurance company bargains. 7 Allstate, 319 Md. at 263 , 572 A.2d 154 .

II

Further, as the insured essentially stands in the shoes of the injured party in a declaratory judgment proceeding, we have no difficulty in concluding that it constitutes a direct action by the tort plaintiff against the insurer. Maryland law precludes such actions. 8 Consequently, unless the insurer breaches its duty to defend the insured, leaving the latter to defend the claim on its own, until an insured’s obligation to pay has been determined in an underlying tort trial, a pre-tort-trial declaratory judgment proceeding litigating an issue that would otherwise be decided in an underlying tort action is not permitted. As Regional’s obligation to pay damages to a third party had not been determined in a tort trial, the declaratory judgment action should not have gone forward. III. ' Although in Maryland it is beyond cavil that pre-torttrial declaratory judgment proceedings are not ordinarily per ⁸⁹ mitted on issues to be decided in the underlying tort trial, we believe Regional’s prompt repairs 9 were induced by Ludka’s telling Calloway to correct the damage and that Nationwide “would take care of it.” In most jurisdictions, the doctrines of waiver and estoppel do not “bring within the coverage of an insurance policy risks not covered by its terms, or expressly excluded therefrom.” W.C. Crais III, Comment Note: Docteine of Estoppel or Waiver as Available to Bring Within Coverage or Insurance Policy Risks Not Covered by its Terms or Expressly Excluded Therefrom, 1 A.L.R.3d 1139 , 1147 (1965, 1995 supp.).

With respect -to the doctrine of waiver, Maryland follows the majority rule. Although the doctrine of waiver may deprive an insurer of a right to which it would otherwise be entitled, GEICO v. Group Hosp. Medical Serv. Inc., 322 Md. 645, 650, 589 A.2d 464 (1991), according to the Court of Appeals there is a distinction between defenses founded upon lack of basic coverage and those arising from the failure of the claimant to satisfy some ‘technical’ condition subsequent.

The former, it is apparent, may not be waived merely by the company’s failure to specify them in its initial response to the