Ohio Casualty Insurance v. Lee

ROBERT M. BELL, Judge. This is an appeal from a judgment declaring the rights of the appellee, Lee, under the terms of an insurance policy issued to Auto Clean, Inc., a company of which Lee, during the relevant time period, was the president and major stockholder. Having determined the provisions of the policy to be ambiguous, the Circuit Court for Montgomery County issued an order declaring that appellant, Ohio Casualty, was obligated to provide a defense for Lee, as a ¹⁷⁹ third-party defendant, in an action for personal injuries brought by an employee of Auto Clean, Inc., that Lee should be permitted to choose his own counsel in that case, and that Ohio Casualty was responsible for all reasonable counsel fees incurred in the defense of the third-party action and the prosecution of this declaratory judgment action. Ohio Casualty poses two questions for our resolution: 1.

Was Bobby T. Lee an employee of Auto Clean, Inc. and therefore excluded as an insured under the “cross-employee” clause contained in the insurance policy issued by the appellant? 2. Did the trial court err in construing the “cross-employee” exclusion of the insurance policy issued to Auto Clean, Inc.? The facts underlying this controversy are largely not in dispute. In 1979, Lee caused a pressurized tank 1 to be installed on the premises of Auto Clean, Inc. The contract for the purchase of the tank and its installation was with L.F. Easterday, Inc. On May 25,1980, an employee of Auto Clean, while engaged in his employment, was injured when the pressurized tank exploded.

That employee, Gregory S. Popores, filed a personal injury suit against, among others, 2 L.F. Easterday, Inc., the Noland Company, Auto Clean, Inc., and Bobby T. Lee, individually. Easterday and Noland filed third-party claims against Auto Clean and Lee, alleging that they negligently bypassed the safety controls built into the system. In 1979, as in 1980, Lee was the president of Auto Clean, one of six directors, 3 and, with his wife, the owner of seventy-five percent of its stock. The board of directors ¹⁸⁰ and stockholders of the company met annually.

As president of Auto Clean, appellee had overall management responsibilities for the corporation, for which he received a salary, and from which was withheld social security, state and federal taxes. The contract with Easterday was signed by Lee in his capacity as president. Upon being notified of the Popores litigation, Ohio Casualty provided counsel for both Auto Clean and Lee and pleas and a motion to dismiss were filed on their behalf. The motion to dismiss alleged that Lee, the majority stockholder of Auto Clean, was Popores’ employer. 4 The Motion was granted as to Auto Clean, but, because there was a possibility that Lee was acting as a co-employee when he installed the pressurized tank, it was denied as to him.

As a result, counsel supplied by Ohio Casualty withdrew from the case, advising Lee that: The reason I cannot protect you under policy AG8B2639 is that the court has determined in this lawsuit you may be sued as a co-employee. Lee then retained other counsel, who brought this declaratory judgment action against Ohio Casualty. Counsel also filed a motion for summary judgment in the third-party action. 5 At all times relevant to these proceedings, Auto Clean was insured by Ohio Casualty under a garage liability policy, under which the “insured” was to be paid such sums as the “insured” was legally obligated to pay as a result of ¹⁸¹ bodily injury or property damage to which the policy applied. With respect to who is an “insured”, the policy provided, in pertinent part: IV.

PERSONS INSURED Each of the following is an insured under this insurance to the extent set forth below: (a) Under the garage, bodily injury and property damage liability coverages: (1) The named insured; (2) With respect to the garage operations other than automobile hazard: (a) any employee, director or stockholder of the named insured while acting within the scope of his duties as such, None of the following is an insured: (i) any person while engaged in the business of his employer with respect to bodily injury to any fellow employee of such person injured in the course of his employment; ... (emphasis in the original) At trial, Ohio Casualty stipulated to all of the plaintiff’s case except Lee’s testimony. 6 Lee then testified that he made the decision to purchase and install the pressurized tank, the largest single purchase made by the company, without consultation with either the board of directors or the other stockholders; whenever he disagreed with the decision of the board of directors he could vote his stock at ¹⁸² the next stockholders’ meeting and overrule that decision; on one occasion there was a conflict on the board with regard to his recommendation that the number of directors be reduced from six to three 7 ; and on that occasion, he used his stock to remove the dissenting director and to implement the proposed reduction. 8 On cross-examination, Lee acknowledged that he was elected by the directors and that his salary was approved by the directors. At the close of the evidence and after arguments of counsel, the trial judge concluded that the policy provisions at issue had “at least a potentiality of ambiguity” and ruled: In my view, the exclusion clause must be read as follows, “None of the following is an insured: (1) any person while engaged in the business of its employer with respect to bodily injury to any fellow employee of such person injured in the course of his employment, but only when and while such person is acting solely as an employee and not as an officer, director or stockholder performing a non delegable duty of the business. “Under this interpretation, the defendant, Ohio Casualty Company, is required to furnish coverage to the plaintiff, Bobby T. Lee, who the testimony discloses was acting as president of the company and also performing a non-delegable duty of the business in entering into a contract on behalf of the corporation.” Ohio Casualty concedes that the third-party action alleges claims which would fall within Auto Clean’s policy. It only disputes that Lee is an “insured” with respect to that policy.

Recognizing that there are two conditions precedent to its duty to defend under the policy, the first relating to the claim with respect to which coverage is sought and the second, to the status of the person against whom a claim is ¹⁸³ brought, i.e., whether that person is an insured under the contract: It contends that Lee qualifies only under the first. Thus, as Ohio Casualty views the issue, the only appropriate inquiry is whether Lee is an employee of Auto Clean. Ohio Casualty argues that, as president of Auto Clean, Lee meets the five common law criteria for determining the existence of an employer-employee relationship, citing Mackall v. Zayre Corp., 293 Md. 221, 230 , 443 A.2d 98, 103 (1982), and falls within the definition of “employee” under the Workmen’s Compensation Act, Md.Code Ann., Art. 101 (1979 replacement volume), citing Riviera Beach. Vol.

F. Co., Inc. v. Fidelity & Cas. Co. of N.Y., 388 F.Supp. 1114 (D.Md.1975), and cases arising under Louisiana law. 9 Relying also upon the rationale for the co-employee exclusion, as set out in Bevans v. Liberty Mutual Insurance Company, 356 F.2d 577 (4th Cir.1966), Ohio Casualty reasons that Lee, an employee under the policy, is not an insured and, therefore, properly was denied representation. Ohio Casualty next argues that the “Persons Insured” section, and specifically “the cross-employee exception” clause is not ambiguous. Maintaining that the language in an insurance contract should be given its customary and common meaning, and be interpreted from the standpoint of reasonably prudent non-lawyers and, since the “cross-employee exception” clause contains no technical or overly sophisticated language, it contends that the plain language of that clause is unambiguous.

Ohio Casualty thus asserts: “As Lee’s decision to install the pressurized tank was made in his capacity as president and was within the scope of Auto Clean’s business, and since Popores was an employee of Auto Clean injured as a result of the alleged negligence of Lee’s decision, the situation is clearly one within the ambit of the exclusion.” ¹⁸⁴ To say that Lee takes issue with these arguments is to understate the obvious. As to the first, relying primarily on Brohawn v. Trans America Insurance Company, 276 Md. 396 , 347 A.2d 842 (1975) and St. Paul Fire and Marine Insurance Company v. Pryseski, 292 Md. 187 , 438 A.2d 282 (1981), he argues that Ohio Casualty misinterprets and misconceives the real issue: Do the allegations in the third-party action “potentially” bring the claims within the policy’s coverage? But Lee also denies that he acted only as an employee of Auto Clean when he authorized the installation of the tank. He reasons that his unique position with Auto Clean renders him at worst an employee performing the non-delegable duties of the corporation, and at best, its alter-ego, not a “mere” employee. 10 Finally Lee relies upon his expectations regarding the kind of coverage he thought he purchased when this policy was obtained.

Thus, he argues that Ohio Casualty’s failure to provide coverage violated the intent and purpose of the insurance contract. Lee next argues that the factual circumstances render the policy ambiguous. The ambiguity is that the contract does not resolve the question of coverage when a defendant in a tort suit is operating in more than one covered capacity, only one of which is excluded by the policy. Because we find, for reasons set forth below, that Ohio Casualty had the duty to defend Lee in the third-party actions, we will affirm the judgment of the trial court.

We ¹⁸⁵ will not address the issue whether the contract is ambiguous since our answer to the first question is fully dispositive of the appeal. 11 We agree that “[t]he duty to defend is a contractually assumed obligation ...” which requires the examination of the precise language of the contract in question in order to determine the full scope of the obligations undertaken. Riviera Beach Vol. F. Co. v. Fidelity & Cas. Co. of N.Y., supra.

There are two conditions precedent to Ohio Casualty’s duty to defend this third-party action: (1) the claim must fall within the coverage of the policy and, (2) the person against whom the claim is asserted must be an “insured”. In this case, there is no dispute that the third-party actions allege claims within the coverage of the policy. Therefore, we agree that the essential dispute is whether Lee is an “insured”. We do not agree, however, that the extent of our inquiry is limited to a determination of whether Lee, during the applicable period, was an employee of Auto Clean. 12 We begin our analysis with Brohawn v. Trans America Insurance Co., supra.

There, the insured, having entered a guilty plea to the charge of assault, was sued civilly for both assault and negligence. She sought coverage under her homeowners’ insurance policy, which excluded intentional torts from actions to which a defense would be supplied. While the underlying tort action was pending, the insurance carrier refused coverage and sought a declaratory judgment as to the correctness of its position. The Court of Appeals held that the trial court did not abuse its discretion ¹⁸⁶ when it dismissed the Bill for Declaratory Judgment, noting: If the issue upon which coverage is denied were not the ultimate issue to be determined in a pending suit by a third party, a declaratory judgment would be appropriate.

But where, as here, the question to be resolved in the declaratory judgment action will be decided in pending actions, it is inappropriate to grant a declaratory judgment. (citations omitted) Id., 276 Md. at 406 , 347 A.2d 842 . The court also set forth the obligation of an insurer with respect to the defense of its insured, that is, to defend an insured if the tort action alleges a claim covered by the policy. The Court said: Even if a tort plaintiff does not allege facts which clearly bring the claim within or without the