Nationwide Prop. & Cas. v. Selective Way

Nationwide Property & Casualty Insurance Company, et al. v. Selective Way Insurance Company, No. 1, September Term, 2020. Opinion by Getty, J. CIVIL PROCEDURE – PREJUDGMENT INTEREST – DEFENSE COSTS – Court of Appeals held that a plaintiff is not entitled to prejudgment interest, as a matter of right, on the damages in the form of defense costs resulting from a liability insurer’s breach of its duty to defend. Such a claim is unliquidated, not fixed by agreement, and not ascertainable at the time of breach. Therefore, an award of prejudgment interest on amounts paid for defense costs falls within the discretion of the finder of fact.

Circuit Court for Baltimore County Case No. 03-C-08-006273 Argued: October 2, 2020 IN THE COURT OF APPEALS OF MARYLAND No. 1 September Term, 2020 NATIONWIDE PROPERTY & CASUALTY INSURANCE COMPANY, ET AL. V. SELECTIVE WAY INSURANCE COMPANY Barbera, C.J., McDonald Watts Hotten Getty Booth Biran JJ. Opinion by Getty, J. Filed: April 1, 2021 Pursuant to Maryland Uniform Electronic Legal Materials Act (§§ 10-1601 et seq. of the State Government Article) this document is authentic. 2021-10-27 16:19-04:00 Suzanne C. Johnson, Clerk In awarding prejudgment interest, Maryland courts have traditionally operated under a “modified discretionary approach”—that is, an approach which generally places the award of prejudgment interest within the discretion of the trier of fact, but also recognizes distinct exceptions in which a plaintiff is entitled to prejudgment interest as a matter of right. See Developments in Maryland Law (1990-91), 51 Md. L. Rev. 507 , 514 (1992).

This case presents a question of whether prejudgment interest on defense costs where a party breaches its duty to defend properly falls within the exception and should therefore be awarded as a matter of right. As we explain below, we hold that it does not fall within the exception, and we affirm the Court of Special Appeals’ conclusion that the award of prejudgment interest is within the discretion of the factfinder. BACKGROUND A. The Highpointe Apartments Construction Project. The Highpointe Business Trust undertook a large construction project in 2001 to build a new high-end apartment complex, the Highpointe Apartments, in Hunt Valley, Maryland.

They hired Questar Builders, Inc. (“Questar”) as the general contractor for the project. In turn, Questar hired numerous subcontractors and each subcontract required the subcontractor to maintain commercial general liability insurance with both “primary and noncontributory” coverage and to name Questar as an “additional insured” on the policy. Relevant to this case, four of Questar’s subcontractors purchased commercial general liability insurance from respondent Selective Way Insurance Company (“Selective Way”). These four subcontractors provided land development work, waterproofing work, and rough carpentry work.

Specifically, their responsibilities were as follows: (1) SEH Excavating Contractors, Inc. was hired to complete earthwork, excavation, disposal of debris found buried on site, grading, sediment and erosion control, construction of retaining walls, installation of water lines, meters and storm drain lines, partial installation of rain collection system, and the installation of concrete curbs and gutters in the parking lots; (2) Streett’s Waterproofing, Inc. was hired to provide all labor, tools, and equipment necessary to complete waterproofing of select foundation walls, elevator pits, and jump walls; (3) Justice Waterproofing, Inc. was hired to install tennis court waterproofing and a green and red tennis court color coat system over the existing concrete surface; and (4) King Carpentry Contractors, Inc. was hired to complete wood framing, install exterior wall and roof sheathing, install all subflooring and exterior decks, install common area doors and frames, and install exterior wood trim. Each of the four general liability insurance policies procured from Selective Way contained provisions promising to indemnify and defend the named insureds, that is, the subcontractors themselves, against damages arising out of claims covered by the policies. Other provisions in the policies extended this coverage to an additional party if a named insured entered into a written contract promising to provide insurance for that additional party. Here, the named insureds each entered into a contract with Questar promising to name Questar as an additional insured.

Taken together, these subcontracts and insurance policies required Selective Way to indemnify and defend Questar as an additional insured for claims arising out of the work performed on the Highpointe Apartments by the four subcontractors. 2 Construction on the Highpointe Apartments was completed in early 2004. Prior to closing, water damage incidents were brought to the attention of Questar, and, in response, Questar provided cosmetic repairs such as drywall replacement and carpet replacement. At the time of closing, Questar acknowledged the water entry into several units, but represented that the source of water entry was corrected. However, within two and one- half years, extensive construction defects became evident as water entry repeatedly occurred through exterior walls, interior walls, the roof, and windows.

These defects caused mold infestation, deterioration of interior finishes, and damages to the structural integrity of the buildings. Overall, the extensive construction defects resulted in unsafe living conditions throughout the apartment complex. In at least one incident, water penetrated the exterior walls, intermingled with the electrical system, and freely flowed through electrical outlets. Repeated water entry into units and common areas resulted in emergency repairs, relocation of tenants to alternate living spaces, and replacement of damaged personal items belonging to the tenants.

B. Construction Defect Lawsuit Against Questar. On July 13, 2006, Highpointe Business Trust sued Questar and others alleging defective construction of the apartment complex and seeking to recover $4.5 million for resulting property damage.1 Questar’s own liability insurers, petitioners Nationwide 1 Hunt Valley, L.L.C. was a plaintiff in the original complaint, but was later removed in an amended complaint. While Highpointe Business Trust maintained continuous ownership of the apartment complex, Highpointe Associates, L.L.C. sold its sole beneficial interest in Highpointe Business Trust to Hunt Valley, L.L.C. on March 10, 2004. 3 Property and Casualty Insurance Company and Nationwide Mutual Insurance Company (collectively, “Nationwide”) appointed and paid for separate defense counsel for Questar. Questar both denied liability and filed a third-party complaint seeking indemnity or contribution from twenty-six subcontractors that performed work on the apartment complex.

Each of the four subcontractors insured by Selective Way was named as a third- party defendant. In April 2008, Questar’s attorney wrote Selective Way seeking defense and indemnification under the policies issued to the four subcontractors. In May 2008, Selective Way sent formal denial letters in response to requests regarding two of the subcontractors, citing lack of “proof” or “evidence” as to the cause of the alleged damages. Selective Way did not respond to requests regarding the other two subcontractors.

C. Nationwide’s Declaratory Judgment Action. Several months later on June 10, 2008, Nationwide filed a declaratory judgment action in the Circuit Court for Baltimore County seeking, among other things, a declaration that Selective Way was obligated to defend Questar in the construction defect lawsuit by virtue of Questar’s status as an additional insured under the Selective Way policies. Nationwide argued that Selective Way’s coverage of Questar was primary, and its own coverage of Questar was secondary. Thus, Nationwide sought reimbursement from Selective Way for all defense costs incurred in representing Questar in the construction defect lawsuit.

Selective Way denied any duty to defend Questar in the construction defect lawsuit, asserted lack of adequate notice, and demanded a jury trial on all issues. Shortly thereafter, 4 the underlying construction defect lawsuit was settled, and the court granted Nationwide’s motion to bifurcate the remaining issues under the declaratory judgment action. The court would first determine if Selective Way and others had the duty to defend Questar and thereby the obligation to reimburse Nationwide. If applicable, the court would then calculate the amount of damages Nationwide was entitled to recover.

In September 2009, Nationwide moved for summary judgment against twelve subcontractors’ insurers, including Selective Way, seeking to establish the insurers’ duty to defend Questar as a matter of law. The twelve insurers opposed Nationwide’s motion for summary judgment and filed their own motion for summary judgment asserting that a sixteen-month delay in notice of the construction defect lawsuit relieved any duty to defend Questar and that Nationwide’s exclusive control of the defense during the delay left Nationwide with “unclean hands.” On August 26, 2014,2 the court entered an order granting Nationwide’s motion for summary judgment in part and denying it in part. The court determined as a matter of law that the subcontractors’ insurers had a duty to defend Questar in the underlying construction defect lawsuit but reserved the remaining issues for the jury. Specifically, the jury would determine whether the subcontractors’ insurers suffered prejudice as a result of the delay in notice and whether Nationwide had “unclean hands.” Before trial, Nationwide reached settlement agreements with all the subcontractors’ insurers except Selective Way. 2 In the five-year span from 2009 until 2014, the parties engaged in discovery and disputes surrounding discovery. 5 D. Jury Trial on Nationwide’s Claims Against Selective Way.

On December 15, 2016, Nationwide made a second motion for summary judgment on both remaining issues before the court and again the court granted the motion in part and denied it in part. The court rejected Selective Way’s defense of “unclean hands” and thus narrowed the scope of the jury trial to the single remaining issue of whether Selective Way suffered actual prejudice because of the delayed notice. In the event of finding no actual prejudice, the jury would then determine the amount of damages Nationwide was entitled to recover for its defense of Questar in the construction defect lawsuit. The court held a five-day jury trial on March 7, 8, 9, 10, and 13, 2017.

At trial, both Nationwide and Selective Way presented competing expert opinion testimony regarding the fairness and reasonableness of the fees charged. Nationwide did not request any jury instructions on prejudgment interest and did not propose any questions about prejudgment interest on the special verdict sheet it provided to the court. Without reference to prejudgment interest, the verdict sheet used by the court asked broadly, “[w]hat damages, if any, has Nationwide proved by a preponderance of the evidence?” Ultimately, the jury found that Selective Way had received timely notice of the construction defect lawsuit against Questar and Nationwide had proven $994,719.54 in total damages.3 In April 2017, Selective Way filed a premature appeal to the Court of Special Appeals, which was dismissed in June 2017 because the circuit court had not yet 3 The jury also answered two additional questions regarding the apportionment of the defense costs, finding that while the costs were readily apportionable between various subcontractors, Nationwide was not required to apportion the costs. 6 determined Nationwide’s entitlement to additional fees as a result of Selective Way’s breach of its duty to defend. E. Trial Court Award of Prejudgment Interest.

Once the case returned to the circuit court, Nationwide made a motion seeking a determination of Selective Way’s liability for attorneys’ fees and expenses incurred in the declaratory judgment action. Prejudgment interest was not requested in the motion. Subsequently, the circuit court held a hearing solely pertaining to attorneys’ fees and expenses. The court awarded Nationwide $810,556.72 in fees and expenses.

After Nationwide filed the motion for attorneys’ fees and expenses, but prior to the hearing on that motion, the two parties sent correspondence to the court regarding the issue of prejudgment interest. On March 20, 2018, Nationwide wrote a one-page letter directly to the circuit court with a copy to Selective Way’s counsel, seeking an award of $430,534.82 in prejudgment interest on the damages awarded to Nationwide by the jury.4 Nationwide included a detailed calculation of the prejudgment interest and electronic files containing invoices for attorneys’ fees paid by Nationwide with the letter. On April 6, 2018, Selective Way responded with a two-page letter to the circuit court judge objecting to the timing and manner in which the issue of prejudgment interest had been raised by Nationwide. Selective Way argued that the award of prejudgment interest was a matter of discretion for the factfinder to determine at trial, not for the court 4 The prejudgment interest amount proposed by Nationwide was calculated at a six percent interest rate beginning at the conclusion of the construction defect lawsuit in 2009 and ending just prior to the March 2017 hearing before the circuit court on attorneys’ fees and expenses. 7 to add after the judgment.

Selective Way further requested the opportunity to oppose any future motion made by presenting the court with appropriate authority through “formal channels.” However, on the issue of prejudgment interest, no formal motion was made for the court’s consideration nor was a hearing requested or held on the matter. On May 2, 2018, the court filed an “Order and Declaratory Judgment” establishing that Selective Way breached its duty to defend Questar in the construction defect lawsuit and was liable to Nationwide in the total amount of $1,647,659. This amount included the jury award, prejudgment interest, attorneys’ fees and costs, and a reduction based on settlement awards already received by Nationwide. Specifically, the total judgment issued by the circuit court reflected $994,719.54 in defense costs in the construction defect lawsuit; $430,534.82 in prejudgment interest on those defense costs; $810,556.72 in attorneys’ fees and costs incurred in the declaratory judgment action; and a reduction of $588,152 for settlement amounts Nationwide had received from other insurers.

Selective Way made several post-trial motions, one of which was a motion to alter or amend the judgment, asking the court to set aside the award of prejudgment interest. The circuit court denied Selective Way’s post-trial motions, including the motion to alter or amend the judgment, and Selective Way noted a timely appeal to the Court of Special Appeals. F. Appeal and Opinion of the Court of Special Appeals. On October 30, 2019, the Court of Special Appeals filed a reported opinion addressing twelve separate issues raised by Selective Way.

On appeal, Selective Way challenged the declaratory judgment that it owed a duty to defend Questar in the underlying 8 construction defect lawsuit, the determination of damages incurred by Nationwide in defending Questar in the underlying construction defect lawsuit, the award of prejudgment interest on the damages awarded by the jury, and the award of attorneys’ fees and expenses incurred by Nationwide in the declaratory judgment action. The Court of Special Appeals affirmed the circuit court’s judgment with respect to Selective Way’s duty to pay defense costs incurred by Nationwide in its representation of Questar in the construction defect lawsuit; reversed the circuit court’s judgment with respect to the award of prejudgment interest on those defense costs; and vacated and remanded the circuit court’s judgment with respect to the amount of attorneys’ fees and expenses incurred in the declaratory action. Selective Way Ins. Co. v. Nationwide Prop. & Cas.

Ins. Co., 242 Md. App. 688 (2019). On the issue of prejudgment interest, the Court of Special Appeals held that the award of prejudgment interest was a triable issue of fact for the jury to decide, not the court to determine as a matter of law. Id.

Nationwide timely petitioned this Court for Writ of Certiorari, which we granted on March 11, 2020. Nationwide Prop. & Cas. Ins. Co. v. Selective Way Ins.

Co., 467 Md. 690 (2020). Although the Court of Special Appeals’ opinion addressed numerous issues, this Court granted certiorari on the sole issue of prejudgment interest. Accordingly, before us is the single question: Did the Court of Special Appeals err in ruling that prejudgment interest is not recoverable as a matter of right on amounts paid for defense costs where a liability insurer breaches its duty to defend? For the reasons more fully stated below, we affirm the Court of Special Appeals and hold that damages in the form of defense costs resulting from a liability insurer’s breach of 9 its duty to defend are unliquidated, not fixed by agreement, and unascertainable at the time of the breach.

Therefore, such damages are not entitled to prejudgment interest as a matter of right and are instead left to the discretion of the factfinder. Here, the jury as factfinder was not presented with the issue of prejudgment interest for deliberation, and thus the circuit court was not authorized to later award additional prejudgment interest. STANDARD OF REVIEW A party’s entitlement to prejudgment interest is governed by the Maryland Rules. See Md. Rule 2-604(a).

Our interpretation of the Maryland Rules is a question of law, and therefore we review a circuit court’s decision to award prejudgment interest under a de novo standard of review to determine whether it is legally correct. See Davis v. Slater, 383 Md. 599, 604 (2004) (“Because our interpretation of the . . . Maryland Rules [is] appropriately classified as [a] question[] of law, we review the issues de novo to determine if the trial court was legally correct in its rulings on these matters.”); see also Nesbit v. Gov’t Emps. Ins.

Co., 382 Md. 65, 72 (2004) (“When the trial court’s order involves an interpretation and application of Maryland . . . case law, our Court must determine whether the lower court’s conclusions are legally correct under a de novo standard of review.” (internal quotation marks omitted)). DISCUSSION A. Requirements for Prejudgment Interest Awards. Maryland law provides factual and procedural requirements governing the award of prejudgment interest. To begin, this Court has explained that the “purpose of awarding pre-judgment interest . . . is ‘to compensate the aggrieved party for the loss of the use of 10 the principal liquidated sum found due it and the loss of income from such funds.’” Harford County v. Saks Fifth Ave.

Distrib. Co., 399 Md. 73, 95 (2007) (quoting Buxton v. Buxton, 363 Md. 634, 652 (2001)). Put another way, prejudgment interest “compensates the judgment creditor for his or her inability to use the funds that should have been in his or her hands at some earlier time and usually does not depend on what the debtor might have done with the money.” Buxton, 363 Md. at 652 (emphasis in original omitted). Prejudgment interest falls into one of two distinct categories—that which is discretionary and that which is awarded as of right.

United Cable Television of Balt. Ltd. P’ship v. Burch, 354 Md. 658, 668 (1999). This Court has continually recognized the general rule that a party’s entitlement to prejudgment interest is an issue for the finder of fact and accordingly “left to the discretion of the jury, or the Court when sitting as a jury.” I. W. Berman Props. v. Porter Bros., Inc., 276 Md. 1, 18 (1975) (quoting Affiliated Distillers Brands Corp. v. R.W.L. Wine & Liquor Co. Inc., 213 Md. 509, 516 (1957)). However, there are well-established exceptions to this general rule.

Id. Only under certain factual circumstances that fall within an exception to the general rule will a court award prejudgment interest as a matter of right. See Harford County, 399 Md. at 94 (quoting Ver Brycke v. Ver Brycke, 379 Md. 669, 702 (2004)). Prejudgment interest is available as a matter of right when “the obligation to pay and the amount due” is “certain, definite, and liquidated by a specific date prior to judgment” such that “the effect of the debtor’s withholding payment was to deprive the creditor of the use of a fixed amount as of a known date.” Buxton, 363 Md. at 656 (quoting First Virginia Bank v. Settles, 322 Md. 555, 564 (1991)).

This exception “arises under written contracts to pay 11 money on a day certain, such as bills of exchange or promissory notes, in actions on bonds or under contracts providing for the payment of interest, in cases where the money claimed has actually been used by the other party, and in sums payable under leases as rent . . . as well [as] in conversion cases where the value of the chattel converted is readily ascertainable.” Buxton, 363 at 656. On the other hand, no prejudgment interest is allowed in “tort cases where the recovery is for bodily harm, emotional distress, or similar intangible elements of damage not easily susceptible of precise measurement.” Id. Pertinent to this case and “[b]etween these poles of allowance as of right and absolute non- allowance is a broad category of contract cases in which the allowance of pre-judgment interest is within the discretion of the trier of fact.” Id. at 657 . While this Court’s prior decisions outline factual requirements for an award of prejudgment interest, Maryland Rule 2-604(a) sets out the procedural requirements.

Maryland Rule 2-604(a) provides, “[a]ny pre-judgment interest awarded by a jury or by a court sitting without a jury shall be separately stated in the verdict or decision and included in the judgment.” The Court of Special Appeals has previously construed this rule narrowly, holding that a jury’s addition of “plus interest” following an award of compensatory damages on the verdict sheet was insufficient to satisfy the requirement that a prejudgment interest award must be “separately stated.” Fraidin v. Weitzman, 93 Md. App. 168, 219 (1992). B. Parties’ Contentions. Nationwide argues that this case is exceptional and meets the requirements for prejudgment interest as a matter of right. Nationwide contends, and both lower courts 12 agreed, that Selective Way had a unilateral duty to defend Questar in the underlying case.

Nationwide maintains that Selective Way, by declining to defend Questar, breached that duty, and is obligated to pay Nationwide $994,719.54