Utica Mutual Insurance v. Miller

ADKINS, Judge. We must decide in this appeal whether Utica Mutual Insurance Company, appellant, has a duty to defend William Ray Miller II, appellee, in a tort action. Appellant denied coverage, contending that under the terms of an errors and omissions insurance policy issued to appellee’s employer, it has no duty to defend appellee because the underlying case against appellee asserts claims that are expressly barred from coverage. Appellee subsequently filed a suit for declaratory relief in the Circuit Court for Baltimore County seeking, inter alia, a declaration that appellant has a duty to defend him in the tort action.

On August 31, 1998, the circuit court held a ³⁷⁸ hearing on cross-motions for summary judgment and held that appellant was required to defend appellee. This appeal followed. Appellant contends that the trial court erred in determining that it is required to defend appellee because: 1) the “money received” exclusion in the policy bars coverage; and 2) the policy only provides coverage for errors or omissions “in the rendering or failure to render professional services” and that the claims asserted in the underlying tort action do not arise out of professional services. Secondarily, appellant contends that even if it was not entitled to a finding that it had no duty to defend appellee, the trial court erred by not permitting it to conduct discovery before the court ruled on appellee’s summary judgment motion.

FACTS AND LEGAL PROCEEDINGS Appellee was an employee of J.L. Hickman and Company, Inc., d/b/a IFA Insurance Services (“JLH”) from early 1993 until March 1997. As an employee of JLH, appellee served various insurance companies that had entered agency relationships with JLH. His responsibilities included selling and writing insurance policies on behalf of insurance companies, and collecting premiums from and forwarding premiums on behalf of JLH customers who had purchased insurance from insurance companies through JLH. JLH was covered under an insurance contract for errors and omissions purchased from appellant, covering the period from May 13, 1996, through May 13, 1997.

JLH originally applied for liability insurance from appellant for the policy year 1993-1994. On the original application, appellee was listed as an employee of JLH. Additionally, appellee was listed as an employee in the renewal applications for the policy years 1994-1995, 1995-1996, and 1996-1997. After the expiration of the insurance contract, the successor in interest to JLH, North American Risk Management, Inc., (“NARM”), entered into a contract with appellant for an optional extended reporting period for the two-year interval between July 12, 1997, to ³⁷⁹ July 12, 1999.

This policy provided that a claim which is “first made against an insured during the [extended period] for negligent acts, errors, or omissions which take place after the retroactive date ... but before the end of the policy period” would be covered. JLH was the named insured on the policy. The policy also provided coverage to “[a]ny partner, executive officer, director, or employee of [JLH], while acting within the scope of his or her duties on behalf of [JLH]” and “any person who was formerly an insured ... but only with respect to negligent acts, errors, or omissions committed prior to the termination of such relationship.” On July 23, 1997, Insurance Company of North America (“CIGNA”) filed suit against appellee in the Circuit Court for Baltimore County claiming: 1) appellee owed CIGNA an accounting for $326,480.12 that appellee should have collected as premiums on CIGNA’s behalf; 2) conversion; 3) breach of fiduciary duty; 4) unjust enrichment; and 5) negligence. The primary thrust of CIGNA’s complaint against appellee was that appellee converted $326,480.12 received as premiums on CIGNA’s behalf for his own use.

Additionally, CIGNA claimed, inter alia, that appellee acted negligently because: [Appellee] had a duty to exercise ordinary care in the handling and timely remittance of funds to the CIGNA Companies, and he had a duty to monitor business operations to detect and prevent the diversion and misapplication of funds that occurred here. As a direct and proximate result of the negligence of [appellee], the CIGNA Companies have suffered damages.... Appellee denied the allegations of wrongdoing alleged in the CIGNA complaint. By letter dated August 6, 1997, NARM submitted a copy of the CIGNA complaint to appellant.

On August 26, 1997, appellant denied coverage, by letter to appel-lee, claiming that Exclusion 4 of the insurance contract, the “money received” exclusion, relieved it of any duty to defend. Appellee then filed a third party complaint against appellant, ³⁸⁰ seeking a declaration that appellant had a duty to defend him in the underlying lawsuit. On August 31, 1998, Judge Levitz held a hearing on the parties’ cross motions for summary judgment. In granting appellee’s motion for summary judgment, Judge Levitz determined that “[biased on the allegations in the [CIGNA] complaint, that have been made against [appellee], I believe [appellant] is required to provide him with coverage____” The ruling was entered on September 3, 1998.

This appeal was timely filed. Additional facts will be added as necessary to supplement our discussion. DISCUSSION a. Standard of Review Summary judgment is appropriate where there is no dispute of material fact and the moving party is entitled to judgment as a matter of law.

See Md. Rule 2-501. The review of the grant of summary judgment involves the determination of whether a dispute of material fact exists, and whether the trial court was “legally correct.” Hartford Ins. Co. v. Manor Inn of Bethesda, Inc., 335 Md. 135, 144 , 642 A.2d 219 (1994). Although “summary judgment in a declaratory judgment action is ‘the exception rather than the rule,’ summary judgment may be warranted where there is no dispute as to the terms of an insurance contract but only as to their meaning.” Nationwide Mut.

Ins. Co. v. Scherr, 101 Md.App. 690, 695 , 647 A.2d 1297 (1994), cert. denied, sub nom., Scherr v. Nationwide, 337 Md. 214 , 652 A.2d 670 (1995) (quoting Loewenthal v. Security Ins. Co., 50 Md.App. 112, 117 , 436 A.2d 493 (1981)). In the instant case, the parties do not dispute the terms of the insurance contract, but disagree as to the proper interpretation of the contract.

Thus, because appellant’s duty to defend rests on the construction and interpretation of the contract, resolution by summary judgement is appropriate. ³⁸¹ b. Duty to Defend The duty to defend an insured is broader than the duty to indemnify. See Litz v. State Farm Fire and Cas. Co., 346 Md. 217, 225 , 695 A.2d 566 (1997).

Indeed, Maryland courts have recognized liability insurance policies as “litigation insurance ... protecting the insured from the expense of defending suits brought against him.” Brohawn v. Transamerica Ins. Co., 276 Md. 396, 410 , 347 A.2d 842 (1975). In St. Paul Fire & Marine Ins. Co. v. Pryseski, 292 Md. 187 , 438 A.2d 282 (1981), the Court of Appeals articulated the following test: In determining whether a liability insurer has a duty to provide its insured with a defense in a tort suit, two ... 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? Id. at 193 , 438 A.2d 282 . To answer these questions, a court “must ascertain the scope and limitations of coverage under the ... insurance policies and then determine whether the allegations in the [underlying] action would potentially be covered under those policies.” Aetna Cas. & Sur. Co. v. Cochran, 337 Md. 98, 104 , 651 A.2d 859 (1995).

In applying the first part of the Pryseski test, we turn to the language of the insurance contract to determine the scope of coverage. In analyzing an insurance contract, we shall: construe [the contract] as a whole to determine the parties’ intentions. Words are given their ‘customary, ordinary, and accepted meaning,’ unless there is an indication that the parties intended to use the words in a technical sense. ‘A word’s ordinary signification is tested by what meaning a reasonably prudent layperson would attach to the term.’ ³⁸² Sheets v. Brethren Mut. Ins.

Co., 342 Md. 634, 640 , 679 A.2d 540 (1996) (citations omitted) (quoting Sullins v. Allstate Ins. Co., 340 Md. 503, 508 , 667 A.2d 617 (1995)). The policy issued by appellant to JLH provided insurance for errors or omissions made by JLH in the scope of its business. In terms of coverage, the policy stated: [W]e will pay for loss up to the Limits of Liability, in excess of the deductible, that the insured becomes legally obligated to pay as a result of a claim---- The loss must arise out of negligent acts, errors, or omissions in the conduct of the insured’s business, wherever committed or alleged to have been committed, by the insured ... in the rendering or failure to render professional services as: a.

A General Insurance Agent; b. An Insurance Broker; c. An Insurance Agent; d. An Insurance Consultant; e.

A Managing General Agent; f. A Life Insurance Agent; or g. A Surplus Lines Broker. The contract expressly stated that appellant would provide a defense to any claim that fell under the policy.

Specifically, the policy stated: [W]e shall defend any claim first made during the policy period seeking damages to which this insurance applies even if the allegations of the claim are groundless, false, or fraudulent. We may make such investigation of any negligent act, error, or omission as we deem expedient.... The policy also provided a number of exclusions, including one stating that insurance would not be provided for a claim arising out of: 4. Any liability for money received by an insured or credited to an insured for fees, premiums, taxes, commissions, loss payments,-or escrow or brokerage monies.

This exclusion is known as the “money received exclusion.” In sum, the policy provided coverage for negligent acts, errors, or omissions for which the insured is legally liable in ³⁸³ the rendering or failure to render professional services, subject to certain exclusions. Appellee, therefore, must: (1) demonstrate that the CIGNA complaint alleges causes of action that fall under the coverage provided; and (2) that one of the express exclusions does not apply. Under the second part of the Pryseski test, we must determine whether the lawsuit alleges action that is potentially covered under JLH’s policy with appellant. See Sullins, 340 Md. at 509 , 667 A.2d 617 .

Generally, we look to the allegations made in the complaint to determine whether claims may potentially be covered. Additionally, a court may look towards extrinsic evidence to determine whether a lawsuit alleges action that is potentially covered because “[ajllowing an insured the opportunity to establish a defense to tort allegations which may provide a potentiality of coverage under an insurance policy ... is precisely what the insured bargained for under the insurance contract.” Cochran, 337 Md. at 110 , 651 A.2d 859 . Furthermore, if any claims potentially come within the policy coverage, the insurer is obligated to defend all claims, “ ‘notwithstanding alternative allegations outside the policy’s coverage, until such times ... that the claims have been limited to ones outside the policy coverage.’ ” Southern Md. Agric. Assoc., Inc. v. Bituminous Cas.

Corp., 539 F.Supp. 1295, 1299 (D.Md.1982) (quoting Steyer v. Westvaco Corp., 450 F.Supp. 384, 389 (D.Md.1978)); See John Alan Appleman, Insurance Law and, Practice, § 4684.01 (Rev. ed.1979) at 102-06 (“The fact that the pleadings state a cause of action that is not covered by the policy does not excuse insurer if another ground for recovery is stated that is covered.... Accordingly, the insurer is obligated to provide a defense against the allegations of covered as well as the noncovered claims.”). Doubts as to whether an allegation indicates the possibility of coverage should be resolved in the insured’s favor. See United States Fidelity & Guar.

Co. v. National Paving and Contracting Co., 228 Md. 40, 54 , 178 A.2d 872 (1962). ³⁸⁴ i. The Money Received Exclusion In determining whether a potentiality of coverage exists, we must compare the insurance policy to the allegations set forth in the underlying action. See Brohawn, 276 Md. at 407-08 , 347 A.2d 842 . The gravamen of the CIGNA complaint is that appellee and JLH failed to remit $326,480.12 in premiums collected on behalf of CIGNA.

Appellant asserts that it has no obligation to cover any losses or defend appellee based on the “money received exclusion.” Appellant cites K. Bell & Assoc., Inc. v. Lloyd’s Underwriters, 97 F.3d 632 (2 d Cir.1996), in support of its contention that there is no possibility of coverage based on the money received exclusion. In Lloyd’s Underwriters , an insurance broker was found liable for failure to remit premiums collected on behalf of an insurance company in violation of applicable state law. The broker’s professional liability insurer denied coverage based on an exclusion that stated that the insurer would not provide coverage for claims “ ‘arising out of the commingling of monies or accounts, or loss of monies received....’” Id. at 637 . The Second Circuit, based on this exclusion, held that the insurer had no duty to provide coverage.

See id. at 639 . Appellee attempts to distinguish Lloyd’s Underwriters on the grounds that his liability has yet to be determined, and until he is determined hable, appellant has a duty to defend. We disagree. The exclusion applies to any claim of liability for money received.

Nothing in the exclusion requires a judicial determination of liability. Appellee relies on Litz for the proposition that the “possibility that the fact-finder may conclude that [appellee] was [not] involved in the receipt of premium monies creates a potentiality of coverage and entitles him to a defense.” This reliance on Litz is misplaced. In Litz , Mr. and Mrs. Litz sought coverage under their homeowners’ insurance policy for their liability for injuries suffered by a child in the care of Mrs. Litz. In his ³⁸⁵ answer, Mr. Litz raised the defense that he was not involved in his wife’s child-care business.

The insurance company denied coverage to both Mr. and Mrs. Litz under the “business pursuits” exception contained in the policy. The Court of Appeals held that the potentiality of coverage did exist for Mr. Litz and that the circuit court erred in failing to treat Mr. and Mrs. Litz as having separate policies. See id. at 230-31 , 695 A.2d 566 . In doing so, the Court held that “the possibility that the fact finder may conclude that Mr. Litz was not involved in the babysitting creates a potentiality of coverage and entitles Mr. Litz to a defense in the underlying tort case.” Id. at 231 , 695 A.2d 566 .

The instant case differs from Litz . In Litz , the potentiality for coverage existed -because Mr. Litz claimed he was not involved in the activity that caused the exclusion to be applicable. Conversely, in the instant case, appellee does not deny being an employee of JLH or that his activities on behalf of JLH did not encompass collecting premiums on CIGNA’s behalf. Rather, he is “vigorously contesting ‘liability.’ ” His liability defense is not the key; what is key is the fact that even if appellee were found liable for failing to remit premiums collected on CIGNA’s behalf, appellant would not have to pay the resulting damages because of the monies received exclusion.

In the absence of any potential liability to pay the damages, appellant has no obligation to defend. To hold otherwise would render the exclusion meaningless in the sense that the insurer will always be required to defend whenever an insured denies liability for an activity for which there is no coverage provided. If CIGNA’s sole cause of action asserted in the complaint was based on appellee’s failure to remit premiums collected, we would hold that appellant had no duty to defend under the monies received exclusion. Nevertheless, “[i]f there is a possibility, even a remote one, that the plaintiffs claims could be covered by the policy, there is a duty to defend.” Id.

In examining the remainder of the CIGNA complaint, we find that this possibility exists. ³⁸⁶ Along with its claims for premiums due, CIGNA alleged in its complaint: 13. ... [JLH] also agreed to ‘keep complete records and accounts of all transactions pertaining to insurance written under this [agency] Agreement’ and that the CIGNA Companies would ‘have the right to examine [JLH’s] accounts and records and make copies of them.’ The Agency Agreement provided for automatic termination in the event that [JLH] misappropriated any of the CIGNA Companies’ ‘funds or property’ and that, in such event, ‘all records relating to policies [JLH] produced will belong to [CIGNA].’ 15. ... The CIGNA Companies had demanded that [ap-pellee] return its books and records relating to insurance policies. [Appellee and NARM] have failed to return the polices.... Negligence 20. The conduct of [appellee] constitutes negligence. [Ap-pellee] ... had a duty to monitor business operations to detect and prevent the diversion and misapplication of funds that occurred here.

The claims stated in paragraphs thirteen and twenty, appel-lee’s failure to turn over records and failure to monitor business operations, fall outside the scope of the money received exclusion. The exclusion, by its own terms, is limited to monies received by an insured for “fees, premiums, taxes, commissions, loss payments, or escrow or brokerage monies.” As the Second Circuit noted in Lloyd’s Underwriters