Walk v. Hartford Casualty Insurance

RAKER, Judge. This appeal arises out of an action filed in the Circuit Court for Howard County by Richard Walk against Hartford Casualty Insurance Company (“Hartford”) alleging breach of contract and seeking damages as a result of Hartford’s refusal to defend Walk in a lawsuit which had been filed against him. The Circuit Court granted summary judgment in favor of the insurer, finding no duty to defend because neither the allegations in the underlying action against Walk, nor the extrinsic evidence submitted by Walk, were sufficient to generate a potentiality of coverage under Hartford’s policy (the “Policy”). The issue we must decide in this case is whether Hartford had a duty to defend Walk in a lawsuit brought against him by Victor 0.

Schinnerer & Company, Inc. (“Schinnerer”). We shall hold that there was no duty to defend Walk because there was no potentiality of coverage under the Policy. Accordingly, we affirm the judgment of the Circuit Court. ⁶ I. Appellant Richard Walk filed suit against Hartford alleging that Hartford breached the provisions of the Policy by refusing to defend Walk against the Schinnerer suit. In Count I, Walk sought damages for Hartford’s failure to defend; in Count II, Walk sought damages for Hartford’s failure to indemnify for the amounts resulting from an “advertising injury” that were the consequence of an underlying suit which Walk had settled.

Walk was insured under a policy issued by Hartford purchased by his employer IBSC East, LLC (IBSC East). IBSC East purchased a uniform Hartford Spectrum Business Insurance Policy for the period of April 26, 1999 through April 26, 2000. The Policy provided coverage for, among other things, business personal property, business liability, and employment practices, and included the Business Liability Coverage Form. Under the business liability coverage of the Policy, Hartford agreed to “pay those sums that the insured becomes legally obligated to pay as damages because of ... ‘advertising injury’ to which this insurance applies” and “defend any ‘suit’ seeking those damages.” An “advertising injury,” as defined by the Policy, includes the copying in an advertisement of an advertising idea or style.

Walk was employed from October 1971 to May 31, 1999 by Schinnerer. In May, 1999, Walk left Schinnerer and went to work for IBSC East as CEO and President. Schinnerer underwrites professional liability insurance and risk management programs for real estate agents and other professionals. IBSC East is the east coast marketing arm and new business development coordinator for IBSC, Inc., a California-based corporation which, like Schinnerer, underwrites liability insurance for professionals.

While employed with Schinnerer, Walk’s primary focus was on marketing errors and omissions insurance, specifically structured for real estate agents. From 1989 to 1999, he was Senior Vice-President and Division Manager for Combined Programs, a large strategic business ⁷ unit, and also headed the real estate errors and omissions division of that unit. As a senior executive of Schinnerer, Walk participated in stock plans which entitled him to receive option grants for shares of the company’s common stock. As a condition precedent to the exercise of stock options, Walk was required to sign a non-solicitation agreement in which he promised to safeguard at all times the company’s trade secrets and other confidential and proprietary information and refrain from soliciting clients of the company for a period of two years from the date of termination of employment.

The non-solicitation agreement provided that, in case of any breach, monetary damages may include, but not be limited to, the gain realized on exercise of the option. Walk signed non-solicitation agreements in September and October of 1997, prior to exercising options to acquire 17,925 shares of stock in Schinnerer’s parent company, Marsh & McLennan Companies, Inc. (MMC). 1 In May 1999, Walk executed four additional non-solicitation agreements and exercised stock options to acquire 5,550 shares of stock. As a result of exercising these stock options, Walk realized a gain of $628,579.66. Walk terminated his employment with Schinnerer on May 31, 1999 and signed a severance agreement on June 2, 1999, which included $294,330.77 as enhanced severance pay.

The severance agreement provided that Walk would not use or disclose confidential or proprietary information at any time or for any purpose and that for a period of fifteen months after termination of his employment Walk would not solicit the company’s clients. On June 19, 2000, Schinnerer and two of its parent companies, the plaintiffs in the underlying action, filed suit against Walk in the Circuit Court for Howard County, Civil Action ⁸ No. 13-C-00-045331 (the underlying action), alleging that Walk, in his employment with IBSC East, solicited Schinnerer’s clients for IB SC’s real estate errors and omissions liability insurance program and used Schinnerer’s confidential and proprietary information, including its business and marketing plans. The complaint contained five counts. Counts I and II alleged that Walk breached the non-solicitation and severance agreements by soliciting Schinnerer’s clients and using proprietary and confidential information for his benefit and that of his new employer.

Count III alleged that Walk violated the Maryland Uniform Trade Secrets Act by misappropriating Schinnerer’s trade secrets and using them for the benefit of IBSC. Count IV alleged that Walk breached his fiduciary duty to Schinnerer by disclosing confidential and proprietary information and by soliciting Schinnerer’s clients for the benefit of IBSC. Count V alleged fraud related to the exercise of options. The plaintiffs sought to recover in damages the full amount of gain realized by Walk upon his acquisition of the stock that were the subject of the non-solicitation agreements, the amount of the severance pay paid to Walk, lost profits, and exemplary damages and attorney’s fees.

The complaint did not allege or infer that Walk copied any advertising idea belonging to Schinnerer into a publication that is given widespread public distribution. Walk relies on evidence extrinsic to the complaint to support his argument that Hartford is required to defend him in the underlying action. He argues that the extrinsic evidence supports his argument that there is at least a potentiality of coverage. During his deposition in the underlying suit, Walk answered questions about some of his activities while employed at IBSC East, including the transmission of communications to insurance brokers regarding real estate errors and omissions insurance being offered by IBSC.

Walk stated that his secretary sent several hundred “blast faxes” 2 to brokers in six to eight states announcing the availability of IBSC’s real estate errors ⁹ and omissions program outside of California. He also stated that he rewrote a press release for IBSC which announced the same thing and was sent to several insurance publications. Walk stated that he gave his secretary the names and addresses of between 100 to 200 brokers with whom he had dealt while employed by Schinnerer, and that the secretary sent the blast faxes to these individuals, among others. Each blast fax was one side of one page and consisted of a headline, “Real Estate E & O Coverage For The New Millennium from IBSC Insurance Services & Associates Insurance Company,” underneath of which were two columns of short bullet points describing the insurance.

The bullet points included such information as limits of liability available and deductibles. The bottom of the page listed contact information for representatives of IBSC. Another blast fax was substantially the same but also listed contact information for Richard Walk at IBSC East. See apps. at 1-2.

The press release was one side of one page and consisted of seven short paragraphs describing IB SC’s origins, its new partnership with American Equity Insurance to provide a real estate errors and omissions insurance program nationwide, and the existence of IBSC East, headed by Walk. See app. at 3. Walk notified Hartford of the claim and requested that Hartford defend him in the action. 3 Hartford declined, explaining that there was no coverage under the Policy for the claim. Walk continued to demand that Hartford undertake his defense.

In correspondence with Hartford, Walk insisted that the plaintiffs’ allegations that he had used their confidential and proprietary information to solicit their customers created the possibility that he could be found liable for causing “advertising injury” to the plaintiffs, thus triggering Hart ¹⁰ ford’s duty to defend. As discovery in the underlying lawsuit progressed, Walk supplied Hartford with a copy of the deposition transcript and renewed his demand that Hartford provide him with a defense. Hartford maintained that it had no duty to defend Walk. In February 2001, the plaintiffs offered to settle the underlying action.

Walk again wrote to Hartford, referring Hartford to portions of the settlement offer letter about Walk’s marketing efforts — the “blast faxes,” “other advertising material,” and “marketing brochures.” Walk argued that the plaintiffs’ claims implicated the “advertising injury” coverage of Hartford’s policy. Hartford once more declared that the plaintiffs had not asserted a cause of action that would trigger Hartford’s duty to defend. In May 2001, Walk settled the claims and paid the plaintiffs an amount stated in their confidential settlement agreement. Before the Circuit Court for Howard County, Walk and Hartford filed cross-motions for summary judgment.

The Circuit Court granted summary judgment in favor of Hartford, concluding that there was no potential that the plaintiffs in the underlying action had alleged an “advertising injury.” 4 ¹¹ The court concluded that the complaint did not allege that Walk used Schinnerer’s ideas or proprietary information in an advertisement nor did the complaint claim that Walk or his new employer used advertisements in its business solicitations. In a Memorandum and Order, the Circuit Court stated as follows: “[Tjhere is nothing in the Complaint that complains about any advertising by Walk or his new employer or by the use of confidential and proprietary information in advertisements prepared by them. The crux of the Complaint is the violations of the severance and non-solicitation agreements by Walk. There is nothing in the Complaint which asserts that Walk or his new employer used any of the Plaintiffs’ materials or confidential information in advertisements.” ¹² The court properly recognized that in Maryland, an insurer’s duty to defend is not determined solely by the eight corner rule (reviewing the complaint and policy) but rather includes consideration of extrinsic evidence.

The court found that “[ejven considering the extrinsic evidence in a light most favorable to Walk, the Court does not believe that it potentially converted this action into one for ‘advertising injury’ that Hartford was obligated to provide a defense or coverage for under the policy in question.” The court reasoned as follows: “Walk’s mere rewriting of a press release prepared by IBSC announcing its new line was not activity that, even under the greatest stretch of language or logic, could invoke the Policy. The conduct complained of was alleged to violate his non-compete agreement. There is no suggestion that the press release could in any way be an ‘advertisement’ as defined by the Policy, and there is no indication that the press release itself contained any ‘advertising idea’ of the Plaintiffs or caused ‘advertising injury’ to the Plaintiffs as defined by the Policy. The ‘injury’ it could have arguably caused to the Plaintiffs arises from Walk’s alleged competitive activities on behalf of IBSC in violation of his contractual obligations.

There is no suggestion that the content of the press release copied any ‘advertising idea’ or style of advertisement of Plaintiffs. * *K * [Tjhe Court discerns no allegations that the Plaintiffs in the underlying action were contending that their ‘advertising ideas’ or ‘style of advertisement’ were used in the faxes ... Thus, there is no ‘advertising injury’ that potentially results from the faxes, even assuming that they can be construed to be ‘advertisements.’ Again, the problem with the faxes from the underlying Plaintiffs’ point of view was that Walk engaged in the effort to send them out at all and used names and addresses he acquired in his former employment, actions which they allege violated their non-compete agreements. ¹³ Walk also makes references in his affidavit and memoranda to statements in discovery and the settlement letter and references to ‘marketing materials’ and ‘advertising material.’ See, e.g., ¶ 19 of Walk Affidavit. Pulling stray phrases out of the letters and discovery relating generally to advertising does not, in this Court’s view, convert the claims filed against Walk into ones for ‘advertising injury.’ ” (Footnote omitted.) Walk noted an appeal to the Court of Special Appeals. Prior to consideration by that court, this Court issued a writ of certiorari on our own initiative.

Walk v. Hartford Casualty, 379 Md. 224 , 841 A.2d 339 (2004).

II

To determine whether Hartford had a duty to defend its insured, we must decide whether the allegations in the underlying action potentially could fall within the scope and limitations of coverage for “advertising injury” under Hartford’s policy. Walk argues that Schinnerer’s claim potentially was covered by the Policy because Schinnerer’s allegations that he violated the non-competition agreements stem from advertising activity on his part. He maintains that Schinnerer alleged that he used its client lists, copied its marketing plans and ideas, and used that information in a nationwide sales effort involving a press release, blast faxes, magazine advertisements, and other means of public communications. Hartford claims that the Circuit Court correctly determined that the complaint and extrinsic evidence established neither a potentiality of advertising injury, nor a reasonable potential that allegations of advertising injury would have been raised at trial.

Hartford argues that there is no allegation in the underlying action that Walk copied, in an advertisement, an idea for an advertisement or the style of an advertisement. Hartford points out that the alleged use of business and marketing plans is not the same as copying an advertising idea into an advertisement. Hartford contends that blast faxes and ¹⁴ a press release do not meet the Policy definition of “advertisement.” Even if they are advertisements, Hartford argues that Schinnerer never alleged anything with respect to the content of such advertisements and mentioned Walk’s marketing efforts merely to prove that Walk breached contracts prohibiting him from soliciting Schinnerer’s clients. Finally, Hartford asserts that Walk was not entitled to a defense because the Policy excludes any claim arising out of any breach of contract, except an implied contract to use another’s “advertising idea” in your “advertisement,” and Schinnerer’s claims arose out of Walk’s breach of the non-competition contracts.

III

As indicated previously, this matter was resolved in the Circuit Court on summary judgment. The standard of review is de novo. See Jurgensen v. New Phoenix, 380 Md. 106 , 843 A.2d 865 (2004). The standard of review of a grant of summary judgment is whether the trial court was legally correct.

See Pelican Nat’l Bank v. Provident Bank of Maryland, 381 Md. 327 , 849 A.2d 475 (2004). Whether summary judgment was granted properly is a question of law. Id. We reiterate that in reviewing a grant of summary judgment under Maryland Rule 2-501 (e), we independently review the record to determine whether there exists any genuine issue of material fact and whether the moving party is entitled to judgment as a matter of law.

Jurgensen, 380 Md. at 114 , 843 A.2d at 869 . We review the record in the light most favorable to the non-moving party and construe any reasonable inferences which may be drawn from the facts against the movant. Id. Because a policy of insurance is a contract, we construe it according to contract principles.

Mesmer v. M.A.I.F., 353 Md. 241 , 725 A.2d 1053 (1999). The obligation to defend is a contractual one. Id. at 258 , 725 A.2d at 1061 . Unless there is an indication that the parties intended to use words in the policy in a technical sense, the terms of the contract are accorded their customary, ordinary, and accepted ¹⁵ meanings.

See Lloyd E. Mitchell, Inc. v. Maryland Casualty, 324 Md. 44, 56 , 595 A.2d 469, 475 (1991); Cheney v. Bell National Life, 315 Md. 761, 766 , 556 A.2d 1135, 1138 (1989). Our task in this case is to decide whether the insurer, Hartford, had a duty to defend the insured, Walk. As Judge Chasanow pointed out, writing for the Court in Aetna Casualty & Surety Company v. Cochran, 337 Md. 98 , 651 A.2d 859 (1995), to determine whether an insurer has a duty to defend an insured in accordance with the principles set out in Brohaim v. Transamerica Insurance Company, 276 Md. 396, 408 , 347 A.2d 842, 850 (1975), we engage in a two-part inquiry, answering the following two questions: “(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 [underlying action] potentially bring the tort claim within the policy’s coverage?” Cochran, 337 Md. at 103-04 , 651 A.2d at 862 (quoting St. Paul Fire & Mar.

Ins. v. Pryseski, 292 Md. 187, 193 , 438 A.2d 282, 285 (1981)). At the outset, it is important to note that an insurer’s duty to defend is distinct conceptually from its duty to indemnify, i.e., its obligation to pay a judgment. See T.H.E. Ins. v. P.T.P. Inc., 331 Md. 406 , 628 A.2d 223 (1993); cf. BGE Home v. Owens, 377 Md. 236 , 833 A.2d 8 (2003). One major distinction is that the duty to defend depends only upon the facts as alleged, and the duty to indemnify depends upon liability.

See Litz v. State Farm, 346 Md. 217, 225 , 695 A.2d 566, 570 (1997). Moreover, the duty to defend is broader than the duty to indemnify. Id. at 225 , 695 A.2d at 569 . An insurance company has a duty to defend its insured for all claims that are potentially covered under the policy.

See Brohawn, 276 Md. at 407-08 , 347 A.2d at 850 . Judge Eldridge, writing for the Court, stated as follows: “The 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 ¹⁶ claim covered by the policy, the insurer has a duty to defend. Even 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.” Id. at 407-08 , 347 A.2d at 850 (citations omitted).

In Cochran , we pointed out that potentiality of coverage under the policy may be established by an insured through extrinsic evidence by demonstrating that “there is a reasonable potential that the issue triggering coverage will be generated at trial.” 337 Md. at 112 , 651 A.2d at 866 . An insured may rely on extrinsic evidence where the underlying complaint “neither conclusively establishes nor negates a potentiality of coverage.” Id. at 108 , 651 A.2d at 864 . If there is any doubt as to whether there is a duty to defend, it is resolved in favor of the insured. Id. at 107 , 651 A.2d at 863-864 .

Nonetheless, in permitting the use of extrinsic evidence to establish a potentiality of coverage, we made clear that an insured cannot assert a frivolous defense to establish an insurer’s duty to defend. Id. at 111-12 , 651 A.2d at 866 . “Only 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.” Id. Under the terms of the Policy, Hartford had a duty to defend Walk only if the Schinnerer complaint and the extrinsic evidence claim an “advertising injury.” We turn to the language of the Policy to determine the scope and limitations of the coverage. The relevant terms are defined in the Policy.

The Policy, Form SS 00 08 02 98, provides coverage for business liability as follows: “We will pay those sums that the insured becomes legally obligated to pay as damages because of ... ‘advertising injury’ to which this insurance applies. We will have the right and duty to defend any ‘suit’ seeking those damages.” “Advertising injury” is defined in the policy as “injury arising out of one or more of the following offenses”: ¹⁷ “e. Copying, in your ‘advertisement’, a person’s or organization’s ‘advertising idea’ or style of ‘advertisement.’ ” 5 “Advertisement” is defined in the policy as follows: “a dissemination of information or images that has the purpose of inducing the sale of goods, products or services through: a. (1) Radio; (2) Television; (3) Billboard; (4) Magazine; (5) Newspaper; or b.

Any other publication that is given widespread public distribution.” “Advertising idea” is defined as “any idea for an ‘advertisement.’ ” The Policy requires that the underlying