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Insurance coverage action in Maryland dismissed based on abstention

In Evanston Insurance Company v. Dan Ryan Builders, Inc., No. 11-02366 (D. Md. Feb. 13, 2012), the Court granted the insureds' motion to dismiss an insurer's declaratory judgment action, finding in favor of abstention based on parallel litigation pending in state court.

The defendants were Maryland contractors who were sued in West Virginia concerning construction defects in a home they had built in Martinsburg, West Virginia.  The West Virginia suit raised claims of negligence, breach of contract, and fraud or fraudulent concealment, based on allegations that the defendants had failed to disclose that the  home was subject to flooding during major storm events, and that its septic system had failed.

The insurer filed a declaratory judgment action in the U.S. District Court for the District of Maryland, to establish that it has no duty to defend or indemnify.  Three days after service of the federal suit, the West Virginia suit was amended, adding the insurer as a defendant, and adding an additional count for a declaratory judgment establishing coverage for the claims raised in the suit.  Subsequently, the defendant insureds filed a motion to dismiss the federal declaratory judgment action, arguing that the same coverage issues will be decided in the West Virginia litigation, and that the federal court should abstain.  (Such a procedure was authorized by the West Virginia Supreme Court of Appeals in 1989.  See Christian v. Sizemore, 383 S.E.2d 810 (W. Va. 1989).

The rule in the Fourth Circuit is that when an insurer files a declaratory judgment action on coverage issues in a District Court while the underlying litigation against its insured is pending in the state courts, considerations of federalism, efficiency, and comity give the District Court the discretion to refuse to entertain the action, even when the declaratory relief sought would serve a useful purpose.  The District Court is required to weigh four factors when considering whether to abstain from exercising jurisdiction over a declaratory judgment action during the pendency of a parallel state proceeding:  (1) the strength of the state's interest in having the issues raised in the federal declaratory action decided in state court; (2) whether the issues can be more efficiently resolved in the court where the state claims are pending; (3) whether there are common factual and legal issues in the federal and state actions which would cause the federal action to be unnecessarily entangled with the state court action; and (4) whether the declaratory judgment action is being used merely as a device for procedural fencing, i.e., the provide another forum in a race for res judicata or to achieve a federal hearing in a case otherwise not removable. See Nautilus Ins. Co. v. Winchester Homes, Inc., 15 F.3d 371, 376 (4th Cir. 1994), abrogated on other grounds by Centennial Life Ins. Co. v. Poston, 88 F.3d 255, 257-78 (4th Cir. 1996).

Analyzing these factors, the District Court decided in favor of abstention.  West Virginia had the stronger interest in resolving coverage issues concerning conduct in West Virginia that allegedly caused damage to property in West Virginia.  Second, the West Virginia action could resolve all issues, which was more efficient.   Third, resolution of the duty to indemnify in federal court would depend on resolution of the same factual and legal issues pending in state court.  Finally, the Court rejected the insurer's argument that the addition of the coverage issues to the West Virginia action was procedural fencing, which should not be countenanced.  The District Court accepted the insured's argument that they had not initiated either the West Virginia action or the federal declaratory action, and that the conduct of the plaintiffs in the West Virginia action was of no import.



Posted by David B. Stratton on 04/29/2012 at 10:15 PM
InsuranceMarylandPermalink


Partner John Tremain May selected for inclusion to 2012 DC Super Lawyers List

Congratulations to Partner John Tremain May on his selection for inclusion to the 2012 DC Super Lawyers  List.   The Super Lawyers Magazine conducts an annual rating process that includes independent research, peer nominations and peer evaluations.  This selection demonstrates that John has achieved a high degree of peer recognition and professional achievement



Posted by David B. Stratton on 04/27/2012 at 01:55 PM
Jordan Coyne LLP newsPermalink


Virginia rejects attempt to limit pollution exclusions to “traditional” environmental pollution

In PBM Nutritionals, LLC v. Lexington Ins. Co., No. 110669 (Va. Apr. 20, 2012), the Virginia Supreme Court affirmed the Circuit Court's judgment that pollution exclusions barred coverage for a multi-million dollar loss resulting from a manufacturing incident that contaminated a number of lots of infant formula, which all had to be destroyed as a result.  In so doing, the Court rejected the arguments that the pollution exclusions are ambiguous because they are overly broad and could exclude nearly any loss, and that the Circuit Court erred in failing to limit the scope of the pollution exclusion endorsements to traditional environmental losses in order to avoid the problem of illusory coverage. 

Instead, the Court agreed with the insurers and the Circuit Court that the plain text of the endorsements should be applied.  After citing to City of Chesapeake v. States Self-Insurers Risk Retention Group, 271 Va. 574, 628 S.E.2d 539 (2006), the Court reasoned that none of the pollution exclusions referenced any terms such as "environment", environmental", "industrial," or any other limiting language suggesting that the exclusions are limited to "traditional" rather than "indoor" pollution.  There was no language suggesting that the discharges or dispersals of pollutants or contaminants must be into the environment or atmosphere.    The Court concluded that according to their plain language, the pollution exclusions are not restricted to traditional environmental pollution, and held that the Circuit Court did not err in refusing to limit the insurers' pollution exclusion endorsements to traditional environmental contamination losses.

In PBM Nutritionals, the contamination occurred when superheated water caused water filters to disintegrate into their constituent components of cellulose, melamine, and other materials, which infiltrated the water from which the lots of infant formula were manufactured.  Quality control testing discovered the contamination, and all batches manufactured during that period had to be destroyed.

This decision confirms that Virginia will not follow other jurisdictions which have limited pollution exclusions to traditional, environmental pollution.
 



Posted by David B. Stratton on 04/23/2012 at 02:59 PM
InsuranceVirginiaPermalink


Pollution exclusion bars coverage for claims of injury from noxious odors from pig-raising facility

In Travelers Property Casualty Co. v. Chubb Custom Ins. Co., No. 11-565 (E.D. Pa. March 30, 2012), the Court awarded summary judgment to two insurers on the grounds that coverage for the underlying lawsuit concerning odors from a "pig-raising operation" were barred by the pollution exclusions in the policies.

The pig-raising operation in question was the Sky View Sow Unit, a 2,800-sow production facility at which female pigs give birth to and raise baby pigs.  At the facility, the pigs' excrement is collected in a large, cement pit directly beneath the structure where the pigs are housed.  The pig wastes are periodically removed and deposited on nearby fields as fertilizer.

The neighbors of Sky View brought suit in federal court in Indiana, alleging that the sow facility produces "harmful and ill-smelling odors, hazardous substances and contaminated wastewater" that escape onto their properties causing personal injury and property damage.  The plaintiffs alleged that the sow facility, together with the land application fields where the defendants dispose of millions of gallons of hog waste every hear, the contaminated runoff, and the facility's method of disposal of dead hogs, produces offensive and noxious odors which impair plaintiffs' use and quiet enjoyment of their properties and causes plaintiffs to experience sudden onset physical manifestations including nausea, vomiting, headaches, breathing difficulties, burning and irritated eyes, noses, and throats, and aggravation of other medical conditions.

The insurance policies both included pollution exclusions, which excluded coverage for harm arising from the insured's release or discharge of a pollutant.  Both included the standard definition of "pollutant" as "any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, fumes, acids, alkalis, chemicals and waste.  Waste includes materials to be recycled, reconditioned or reclaimed."  Both policies included an Indiana-specific endorsement that amended the definition of pollutant to include "any such irritant or contaminant whether or not it has or had any function in your business, operations, premises, site or location . . . ."

Applying Pennsylvania law, the Court found it was undisputed that the complaint alleges bodily injury and property damage.  The insureds, however, argued that the noxious odors were not a pollutant as that term is defined in the policies.  The issue thus became whether the policies' definition of "pollutant" applies unambiguously to the noxious odors identified in the complaint.

Based on the policies' definitions and the common meaning of key terms as defined in dictionaries, the Court found that noxious odors produced by pig excrement (or waste) that cause bodily injury and property damage appear to fit squarely within the definition of pollutant under the policies.  The Court found that the fact that the pig waste is spread over fields as fertilizer is of no moment, as "waste" includes materials left over from a production operation, and the policies' definition of pollutant expressly includes waste that is to be reused.  The Court noted that several Pennsylvania cases have held allegedly noxious fumes constitute a pollutant triggering the pollution exclusion, e.g., fumes from a cement curing agent, carbon monoxide fumes emitted from a gas-powered saw, fumes from house-cleaning compounds, and fumes and runoff from a landfill.

The plaintiffs argued that simple odors cannot be pollutants, and that the allegation of foul odors is too ambiguous to be construed as a pollutant barring coverage.  Further, they argued that in a rural setting, simple farm odors cannot be pollutants because such odors are commonplace.  The Court rejected these arguments, on the grounds that the odors described in the complaint were not merely unpleasant, but were alleged to cause bodily injury and property damage.  In addition, the Court fond that that "a pollutant does not cease being a pollutant simply because it is common to an area."  Further, the Court identified numerous precedents from other jurisdictions which applied nearly identical definitions of "pollutant" to noxious odors.  The Court also recognized that large livestock feeding operations are regulated through the Clean Water Act, because of the amount of animal excrement they produce.

Accordingly, the Court found that the pollution exclusions in the two policies unambiguously applied to the claims in the complaint, and that the insurers had no duty to defend or indemnify.



Posted by David B. Stratton on 04/18/2012 at 01:38 PM
InsurancePermalink


Lawyers Professional Liability - Unreported administrative error results in disclaimer of coverage

In Minnesota Lawyers Mut. Ins. Co. v. Baylor & Jackson, PLLC, No. 10-2701 (D. Md. Apr. 3, 2012), the District Court granted summary judgment to the insurer, holding that the insurer is not liable to defend or indemnify the defendant law firm under an LPL policy.  The Court awarded summary judgment based on the finding that any reasonable lawyer would have been worried about a malpractice claim after summary judgment had been awarded in the underlying action based on the insured law firm's administrative error in submitting an unexecuted affidavit in opposition to a motion for summary judgment.

This matter arose out of the insured law firm's representation of a client who was involved in a dispute concerning various agreements as to the funding of litigation against the United States and the allocation of any proceeds from that litigation.  That dispute resulted in a lawsuit in the Circuit Court for Baltimore City, before Judge Kaplan, in which the insured law firm represented the defendant. Judge Kaplan awarded summary judgment to the plaintiff in that action, in part because the defendants never contested the validity of the underlying agreement.  One of the defendants tried to contest the validity in his opposition to the plaintiff's motion for summary judgment, but he failed to submit either an affidavit or a sworn statement to support his contention, and Judge Kaplan disregarded his argument. In the subsequent coverage action, the District Court noted that the record indicated that an unexecuted affidavit had been attached to the opposition memorandum in error, and at the ensuing hearing in August, 2006, Judge Kaplan refused either to allow the defendant to execute the affidavit or to testify to the contents of the affidavit despite his presence at the hearing.  The total damages awarded to the plaintiff in that action was about $2.6 million, and the judgment was affirmed on appeal in 2009.  The appellate court also observed that the defendants opposition to summary judgment was not supported by any sworn evidence as required by Md. Rule 2-501.  The appellate court noted that the failure to properly place facts in dispute affected the arguments on all the counts.

The insured law firm had placed Minnesota Mutual on notice as soon as it they had received the appellate court's opinion on July 9, 2009.  The former client filed a malpractice suit in August, 2009.  Although Minnesota Mutual initially defended, presumably under a reservation of rights, it eventually withdrew from the defense and disclaimed coverage.  This was because the insurer had concluded that the insured law firm should have reported the potential claim during the policy period of August 1, 2006 to August 1, 2007, because it was during that time that the firm "first became aware of facts which could have reasonably supported the claim asserted against it . . . ."  Minnesota Mutual filed a declaratory judgment action to establish its lack of liability for the defense and indemnification of the insured law firm in the legal malpractice action.

The Minnesota Mutual policy was a claims made and reported policy.  It stated, among other things, that a claim is deemed made when "an act, error or omission by any INSURED occurs which has not resulted in a demand for DAMAGES but which an INSURED knows or reasonably should know, would support such a demand." The Policy definition of "CLAIM(S)" also provided, in part, that it means "An act, error or omission by any INSURED which has not resulted in a demand for DAMAGES but which an INSURED knows or reasonably should know, would support such a demand."

The District Court, in awarding summary judgment to Minnesota Mutual, found that "the act, error, or omission giving rise to the Underlying Defendants' malpractice claim occurred on August 11, 2006, when [the insured law firm] . . . filed the opposition to summary judgment without supporting evidence."  Maryland employs an objective standard for evaluating the reasonableness of an insured's actions in relation to the obligation to notify an insurance company of a potential claim.  An insured's notice obligation accrues when the circumstances known to the insured at that time would have suggested to a reasonable person the possibility of a claim.  The District Court found that:

Thus, any reasonable lawyer faced with a motion for summary judgment could simply have read Maryland Rule 2-501 and known that an unexecuted affidavit does not satisfy the Maryland standard for summary-judgment practice. [The insured law firm] . . .  reasonably could have become aware, probably acutely aware, of that during the motions hearing when Judge Kaplan refused to let [the client] . . .  either execute the affidavit or provide testimony at the hearing. . . . It certainly should have become aware of its shortcoming when Judge Kaplan rendered his opinion on August 22, 2006, specifically pointing out the absence of admissible evidence from the opposition that could possibly establish a genuine dispute of material fact. Any reasonable lawyer would have read Judge Kaplan's opinion with alarm as to what it meant to him or her personally. Any reasonable lawyer would have been worried it could lead to a malpractice claim. At that point, a claim was deemed made under the 2006 Policy. And at that point, [the insured law firm] . . .  had to report the claim during the 2006 Policy term in order for it to be a covered claim. Consequently, [the insured law firm's] . . .  failure to report it during the 2006 Policy term precluded coverage.

The Court rejected the insured law firm's argument that it had no reason to give notice to Minnesota Mutual in 2006 because Judge Kaplan's grant of summary judgment was based upon multiple alternative grounds, only one of which was the lack of an affidavit.  The Court reasoned that any reasonable lawyer would have been aware that Maryland appellate courts may affirm a summary judgment on any one of several alternative grounds, and thus, the insured law firm risked appellate affirmance solely on the basis of the firm's malpractice.

The District Court also found that an alternative ground for finding no coverage was that the insured law firm in 2007 failed to report on its application for renewal of its Minnesota Mutual policy, "any INCIDENT which could reasonably result in a claim being made against the firm or a member of the firm". The Court found that the failure to report this incident until July 9, 2009 could have been reasonably regarded by Minnesota Mutual as a material misrepresentation, and the insurer was entitled to decline coverage under the 2009 policy on the ground of material misrepresentation.  

Finally, the District Court rejected the insured law firm's argument that Minnesota Mutual could not show actual prejudice due to late notice, under Md. Ins. Code sec. 19-110.  The District Court concluded that under the language of the Minnesota Mutual policy, the time for reporting was no mere "notice provision", but was incorporated into the definition of coverage and therefore became a condition precedent to coverage.  Consequently, the insured law firm's failure to report the claim within the policy term or extended reporting period amounted to a failure to perform a condition precedent to coverage.  The 2006 policy expired by the time the claim was reported to the insurer, and so coverage was never triggered for this incident.  Thus no breach of the 2006 policy occurred and the insurer is not required to show actual prejudice in order to disclaim coverage under Section 19-110.  Even if the insurer were required to show prejudice, the Court found that it could have easily done so by showing it had been excluded from the post-summary judgment and appellate proceedings which were the only opportunities in which the insurer could have had to fashion a request for relief.



Posted by David B. Stratton on 04/16/2012 at 01:34 PM
InsuranceLegal MalpracticeMarylandPermalink


Claims for Negligent Title Search by Title Company are Limited to Breach of Contract in Maryland

In Columbia Town Center Title Co., et al., v. 100 Inv. Ltd. P’ship, et al., No., 0915 Sept. Term 2009 (Feb. 2, 2012), the Maryland Court of Special Appeals reversed the judgment of the Circuit Court for Howard County.  The Court held that in cases where a title company performs a title examination merely in order to issue title insurance, Maryland law limits the liability of the title company to breach of contract and does not extend tort liability for negligence.

Factual Background

Mr. and Mrs. Miller conveyed the same 1.145-acre parcel (the "Parcel") to two different purchasers; first in 1982 to Ashan Khan, M.D., then in 1986 to Appellee, 100 Investment Limited Partnership (the "Partnership") as part of a larger parcel (the “Miller Tract”). 

In conjunction with the Partnership conveyance, Cambridge Title Company ("Cambridge"), and later, Columbia Town Center Title Company ("Columbia") were engaged to issue title insurance for the property that include the Parcel, as agents for a title insurance company.  However, neither Cambridge nor Columbia discovered the prior conveyance of the Parcel to Dr. Kahn. 

In 1994, the Partnership subdivided the Miller Tract, including the Parcel, for residential development, conveying part of the Parcel to a developer for townhouse lots and conveying the remainder to another developer, thereby eliminating the Partnership’s interests in the Parcel.

The Partnership first learned of the conveyance to Dr. Kahn in July 2001, when developers buying the Parcel from Dr. Kahn commissioned a survey which discovered townhouses located on Dr. Kahn’s portion of the Parcel. 

To cure any title defect in its prior conveyances, the Partnership agreed to purchase the Parcel from the developer involved in the Kahn purchase, paying $175,348.56 for the Parcel and $16,162.32 in associated expenses. 

Nevertheless, Dr. Kahn sued the Partnership for trespass in the District Court for Howard County.  Even though judgment was entered against the Partnership, Dr. Kahn was only awarded one dollar ($1.00) in nominal damages.

As a result of the Kahn litigation, Chicago Title filed a suit for declaratory judgment against the Partnership in the U.S. District Court for the District of Maryland, to determine Chicago Title’s responsibilities under the 1986 title insurance policy.  The federal court granted summary judgment in the Partnership’s favor and awarded $201,744.37 in damages for the 2001 re-purchase of the Parcel and expenses defending the Kahn litigation.  On appeal the Fourth Circuit found that Chicago Title was only obligated to pay for the costs associated with the Kahn Litigation under the policy and was under no obligation to compensate the Partnership for the cost of re-purchasing the Parcel.  The Court reasoned that the instruments of conveyance by the Partnership contained, at most, a special warranty “promising only that the Partnership had not itself created any defect in title”, and that Chicago Title’s duty to defend was limited to claims made against the Partnership for loss or damage occurring prior to the time it conveyed its interest in the Parcel.

Dissatisfied with the Fourth Circuit’s ruling, the Partnership filed a complaint in the Circuit Court for Howard County, Maryland, alleging negligence, against the Title Companies for failing to discover the Kahn deed, and vicarious liability, against Chicago Title for the Title Companies’ negligence.  After a bench trial, the Circuit Court determined that the Partnership’s “economic injury was proximately caused by the title companies breach of the duty of care they owed to the Partnership,” and that “Chicago Title was vicariously liable for the negligence of the Title Companies” because the Title Companies its agents, awarding the Partnership $191,510.88.  The Title Companies and Chicago Title appealed.

Title Insurance

On Appeal, the Court of Special Appeals noted that title insurance is now the predominant method for real estate purchasers and mortgage lenders to protect themselves against title risks.  Title insurance typically affords three "kinds" of coverage: (1) indemnity for loss or damage resulting from a title defect; (2) provide a legal defense if a third party attacks title through litigation; and (3) hire experts in title matters, if necessary. Title insurance policies are generally standardized and include the terms, dollar amount of coverage, exclusions from coverage, and any prerequisites required.

Title insurance differs from a title opinion based on a title abstract, which covers a particular period of time, reflects what appears in the public title records, and includes any conveyances or encumbrances on property discovered in a title search.  Under the abstract-and-opinion method (i.e. "title reporting") the title abstract is reviewed by an attorney who issues a title opinion explaining any defects and the overall validity (or invalidity) of title as reflected in the abstract.

The Title Companies

The Title Companies argued that the trial courts finding of negligence was in error, citing Corcoran v. Abstract & Title Co. of Md., Inc., 217 Md. 633, 143 A.2d 808 (1958), to contend that Maryland law dispositively establishes that a title examiner's duties are contractual in nature, and therefore, the Partnership cannot recover damages in tort.  The Partnership contended that a contractual obligation does not preclude the court from also imposing a duty in tort for a breach of that obligation citing Jacques v. First Nat’l Bank of Md., 307 Md.527 (1986), as a matter of public policy.

Ultimately, the Court was not persuaded by Jacques, rejected the determination that the Title Companies owed a legal duty to the Partnership, stating that an independent basis for a tort claim is required.  Specifically, in Maryland, "[t]he mere negligent breach of a contract, absent a duty or obligation imposed by law independent of that arising out of the contract itself, is not enough to sustain an action sounding in tort,"  even though, in some situations, a duty imposed by law and enforceable in tort overlaps with a contractual obligation.  In essence, the basis for liability was the breach of the agreed upon undertaking, rather than the negligent title search because absent a contract, a title company owed no duty regarding the status of title. Thus, the Court reaffirmed Corcoran which stands for the proposition that a title examiner is contractually bound to exercise "a reasonable degree of skill and diligence," but the contract establishes the bounds of the examiner's liability, whether enforced in tort or contract.

The Title Insurer

Whether a title insurance company can be vicariously liable for the actions of its agents in regard to title searches appears to be a question of first impression in Maryland.  The Court stated that if the Title Companies do not owe a tort duty to the Partnership, Chicago Title would not be vicariously liable for the Title Companies' negligence. Nevertheless, in the Court’s view, even if the Partnership's tort claims against the Title Companies were cognizable, Chicago Title would not be liable for the negligence of the Title Companies.

While there is no Maryland decision directly addressing the duty of a title insurer or its agents to conduct a full title examination, the Court of Special Appeals adopted the view in Stewart Title Guaranty Co. v. West, 110 Md. App. 114, 131, 676 A.2d 953 (1996), that a title insurance policy is a contract for indemnity and not a guarantee of marketable title.  Quoting West the Court stated:

[T]he insurer is not immediately in breach simply because title is defective on the day the policy is issued -- is more in line with both title insurance law and the standard form title insurance policy that we have before us. [A] title insurer does not guarantee the state of the title. Instead, a title insurance policy is a contract of indemnity. The view that a title insurer is in breach simply because there are defects in the title at the time the policy is issued would turn the title insurer into the guarantor of the grantee's title.

[T]he mere existence of title defects does not, in and of itself, mean that a title insurer is in breach of the insurance policy," because, "[o]nce advised of a title problem, the insurer still has the option of paying the insured's loss, clearing the defects within a reasonable time, or showing that the defects do not exist."

West, 110 Md. App. at 131-141 (emphasis added).  The Court was persuaded that holding a title insurer liable in tort for a negligent title examination by its agents conflicted with its holding in West. To create a tort remedy for a negligent title search performed for the issuance of a title insurance policy would make the title insurer a guarantor of title and deprive the insurer of its option to cure the title or to pay for covered losses as contracted for in the title insurance policy. Jurisdictions that consider a title insurance policy as an indemnity contract do not provide an independent tort remedy because, to do so, would undermine an insurer's ability to manage its risks by the terms of its policies. That title examinations performed for the issuance of title insurance are essentially an underwriting function is consistent with the West decision and the statutory authority granted to title insurers to examine and insure title. Even if an agent of a title company is authorized to examine title, independent of the title insurance policy, there would need to be some special agreement outside of the title insurance commitment and the title insurance policy.

The Agency Agreement

The Court noted that the agency agreement unambiguously restricted the Title Companies’ authority to matters regarding the scope of title insurance, as an agent for Chicago Title "for the promoting and transacting of a title insurance business in the state of Maryland." Even though the Agency Agreement contained a provision indemnifying Chicago Title for acts by its agents, Chicago Title's liability to the Partnership was governed by the terms of the policy and did not turn on whether a covered defect could have been reasonably located.  The Court stated that even though it is obvious that a title insurer would want to exclude a defect clearly shown on the public record from coverage, ultimately the provision indemnifying Chicago Title for errors in abstracting and examining title affirmed that the title search was for the benefit of the Chicago Title and would reimburse them for insured losses that could have been excluded from coverage based on an accurate title search.

The Title Insurance Policy

The Court of Special Appeals stated that as a general rule, the extent and scope of liability of an insurer is determined by the insurance policy itself. An insurance company that underwrites specific coverage "should not subsequently be expected to assume liability for a risk which it expressly excluded." Any clause in an insurance contract restricting liability or coverage will be held enforceable unless contrary to "the public policy of this State, as set forth in . . . the Insurance Code" or another statute.

In this case, the policy agreed to indemnify the Partnership related to any defect in title losses, but the policy did not guarantee title was without defect, or that the exclusions listed represented all defects disclosed in the public record.  Any preliminary commitment issued by Chicago Title and the Title Companies related only to the issuance of a title insurance policy since it was not a title abstract or independent title opinion for which the title insurer would be liable outside the terms of its policy.  As a result, the Court held that both policies and any binders put the Partnership on notice that the Title Companies were agents of the insurer only for the issuance of title insurance and did not confer actual or apparent authority on the Title Companies to provide the Partnership with a separate guarantee of title for which the insurer would be responsible.  Similarly, the Court held that to permit an insured to sidestep the policy limitations through a claim of vicarious liability undermines the contractual agreement and potentially title insurance in general.

The Court went on to state that because of the essential and primary role that title insurance plays in the purchase and sale of real estate and the shift from title reporting to title insurance to protect both purchasers and lenders, a sea change would occur in allowing an action in tort against the Title Companies and the title insurers with the risk of unintended consequences would be better handled by the legislature and regulatory branches of government after appropriate study and hearings. Therefore, the Court is obligated to enforce the title insurance policy as written which does not conflict with any statute or regulation in Maryland.

Ultimately, the Court concluded that the Partnership could not hold Chicago Title vicariously liable for any negligence of the Title Companies related to the status of title to the Parcel and that the insurer's liability is limited to the terms of its policy, thereby reversing the decision of the trial court.

For advice on potential matters involving the defense of claims against title companies in Maryland, contact Deborah M. Whelihan, Esq. at 703-246-0900.



Posted by Robert D. Anderson on 04/11/2012 at 01:23 PM
InsuranceLiability of Agents and BrokersMarylandPermalink


4th Circuit affirms summary judgment based on business enterprise exclusion in LPL policy

In Minnesota Lawyers Mut. Ins. Co. v. Antonelli, Terry, Stout & Kraus, LLP, No. 10-2404 (4th Cir. March 29, 2012)(unpublished), the Court affirmed the District Court's award of summary judgment to the insurer, holding that the insurer does not have a duty to defend the insured law firm because the complaint falls entirely within the insurance policy's Business Enterprise Exclusion. 

In the underlying suit, the defendant attorneys were alleged to have advised their clients to transfer the ownership of certain patents for wireless email technology to a shell company, NTP, in which the clients held no interest, in order to protect the patents from creditors.  Later, NTP filed a patent infringement action against RIM, alleging that RIM's Blackberry system infringed on the wireless email technology patents.

RIM settled the suit for $612.5 million and received a perpetual license.   When the defendant attorneys refused to share the settlement with the plaintiffs, the plaintiffs sued for breach of fiduciary duty, breach of contract, unjust enrichment, and promissory estoppel.

The Business Enterprise Exclusion  stated that the policy did not provide coverage to:

  any CLAIM arising out of PROFESSIONAL SERVICES rendered by any
  INSURED in connection with any business enterprise:
  (a) owned in whole or part;
  (b) controlled directly or indirectly; or
  (c) managed, by any INSURED, and where the claimed DAMAGES resulted from
  conflicts of interest with the interest of any client or former client or with the
  interest of any person claiming an interest in the same or related business
  enterprise.

 
The Fourth Circuit found that each element of this exclusion was met within the four corners of the Complaint.  There was no dispute that the case arose out of professional services that the insureds provided to the plaintiffs.  Those services included counseling as to changing the ownership of certain patents in order to avoid their creditors.  The Court also found that the professional services were rendered "in connection with" a business enterprise, and that the insureds owned, controlled or managed the business enterprises that were involved.   Finally, the Court found that the asserted damages surely resulted from conflicts of interest, because the defendant attorneys allegedly obtained complete ownership and control of their clients' assets and exploited those assets for personal benefit, violating professional ethics rules governing conflicts of interest.  See Va. R. Prof. Conduct 1.8(a), (b), and (j).

Business Entreprise Exclusions are discussed in more detail here.



Posted by David B. Stratton on 04/08/2012 at 02:41 PM
InsuranceLegal MalpracticeVirginiaPermalink


Pollution exclusion update: Fourth Circuit certifies Chinese drywall case to Virginia Supreme Court

To update a previous post dealing with the application of the pollution exclusion in a Chinese drywall case, in Travco Ins. Co. v. Ward, No. 10-1710 (4th Cir. March 1, 2012), an insured had appealed from an order granting summary judgment to his homeowner's insurer in a Chinese drywall case.  The District Court found that the insured had suffered a loss within the policy's coverage, but concluded that coverage was excluded by four provisions:  the latent defect exclusion; the faulty material exclusion; the corrosion exclusion; and the pollution exclusion. 

The Fourth Circuit in Travco recently certified the coverage issues to the Supreme Court of Virginia, including the following: for purposes of interpreting an "all risk" homeowners insurance policy, is any damage resulting from the Chinese drywall unambiguously excluded from coverage under the policy because it is loss caused by: . . . ('pollutants,', where pollutant is defined as 'any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste'?

On appeal, the insured's argument on the pollution exclusion is that it is ambiguous in the context of product liability claims, because the exclusion was intended to limit or exclude coverage for past environmental contamination.  The insured relies on Unisun Ins. Co. v Schulwolf, 53 Va. Cir. 220 (Va. Cir. 2000), in which the Circuit Court declined to apply a pollution exclusion to lead-based paint.

A very similar issue was certified in Nationwide Mut. Ins. co. v. Overlook, but the Supreme Court of Virginia declined to accept the certified question of law, .  See Builders Mut. Ins. Co. v. Parallel Design & Dev. LLC, 785 F. Supp. 2d 535, 545 n. 5 (E.D. Va. 2011). 

 


 



Posted by David B. Stratton on 04/07/2012 at 09:31 PM
InsuranceVirginiaPermalink


Private causes of action against CRESPA surety bond

 In First American Title Insurance Company v. Western Surety Company, No. 111394 (March 2, 2012), the Virginia Supreme Court addressed three questions of law certified by the United States Court of Appeals for the Fourth Circuit.  The Court held: (1) that the Virginia Consumer Real Estate Settlement Protection Act ("CRESPA") does not provide for a private cause of action against a surety and surety bond executed pursuant to CRESPA; (2) that Virginia law nonetheless permits a common law breach of contract cause of action against a CRESPA surety and surety bond; and (3) that a title insurance company has standing as subrogee of its insured to maintain a cause of action against a CRESPA surety and surety bond.

 
The case arose out of a real estate transaction involving an owner who sought to refinance his existing mortgage through SunTrust Mortgage, Inc.  First American Title Insurance Company ("FATIC") provided title insurance for the refinancing through its title agent, First Alliance Title Company ("First Alliance").  Pursuant to CRESPA requirements, First Alliance obtained a $100,000 surety bond from defendant Western Surety Company ("Western").  At settlement, funds which were designated to pay off the original mortgages on the property were diverted.  The original mortgages were not paid, and the original deeds of trust were not released. As a result, SunTrust's deeds securing the refinance indebtedness were behind the original deeds in priority. 


The property owner subsequently defaulted, and the original mortgagor foreclosed, resulting in a loss of $734,296.09 to SunTrust.  FATIC paid SunTrust the full amount of the loss pursuant to the title insurance policy, and made a formal demand upon Western for the full $100,000 of the CRESPA surety bond.  Western refused to pay, asserting that FATIC could not bring a private cause of action against a statutory CRESPA surety bond.  FATIC brought this action against Western on its own behalf, and also as a subrogee of SunTrust, asserting that it became subrogated to SunTrust's right after paying in full SunTrust's claim under the title insurance policy.

 
The parties disputed that FATIC could bring a common law claim against the CRESPA surety bond, and also that FATIC had standing to assert the cause of action.  At trial, the District Court found in favor of FATIC, and entered judgment in its favor for the full $100,000 amount of the CRESPA bond.  On appeal, the Fourth Circuit certified the three questions of law to the Supreme Court of Virginia.

 
The Court first held that CRESPA does not provide for a private cause of action.  CRESPA expressly authorizes only licensing authorities to fine or otherwise penalize a settlement agent that violates its provisions.  Accordingly, the Court found that CRESPA does not recognize a private cause of action against a surety or surety bond executed pursuant to its provisions. 
Next, the Court found that under certain circumstances, Virginia common law does allow for a cause of action to be maintained against a CRESPA surety or surety bond.  The Court noted that the express language of a statute must expressly state that the statute abrogates a common law cause of action.  CRESPA contains no such express language.  The general rule in Virginia that any bond required of a surety is at least as good as a common law voluntary contractual obligation.  Accordingly, the Court held that while CRESPA does not expressly authorize a private cause of action against surety bonds, Virginia common law does permit the assertion of a common law breach of contract claim.

 
Finally, the Court found that title insurance companies may have standing as subrogees of their insureds to maintain a common law cause of action against a CRESPA surety bond.    CRESPA's surety bond requirement exists to protect parties with an interest in real estate transactions.  Title insurers are not parties to real estate transactions and thus are not among the parties CRESPA surety bonds are intended to protect.  Because a title insurer is not a protected party under CRESPA, it does not have standing in its own right to maintain a cause of action.  However, the Court nonetheless concluded that a title insurer has standing, not in its own right but as a subrogee of its insured, to maintain a cause of action against a CRESPA surety bond.

 
Therefore, under its ruling in First American Title,  the Supreme Court recognized that certain entities may bring a common law cause of action for breach of contract against a CRESPA surety bond.  Additionally, the Court recognized that certain parties may have standing to bring such actions, not in their own right, but as subrogees of their insureds.



Posted by Robert D. Brant on 04/05/2012 at 04:49 PM
InsuranceVirginiaPermalink


Virginia Insurance Coverage:  Supreme Court interprets auto policy’s workers compensation exclusion

In Christy v. Mercury Casualty Company, No. 102138 (March 2, 2012), the Supreme Court of Virginia held that an exclusion in an automobile insurance policy barred the insured from receiving any payment for medical expenses where a portion of medical expenses had already been paid by workers' compensation benefits.

 
The plaintiff police officer was a passenger in a car driven by a Washington County sheriff's deputy.  The car was struck from behind, and the plaintiff sustained a number of injuries.  The parties did not dispute that the accident arose out of and occurred during the course of the plaintiff’s employment with the town.  Among other injuries, the plaintiff’s physician opined that he experienced a tear of the labrum in his left shoulder as a result of the accident, that required surgery.

 
At the time of the accident, the plaintiff was covered by three different insurance policies.  The Town of Abington obtained its workers’ compensation coverage through the Virginia Municipal League Insurance Programs ("VMLI").  The plaintiff received his primary health insurance coverage through a physician-hospital organization ("PHO").  Additionally, the plaintiff was insured under an automobile liability policy issued by Mercury Casualty Company.  The Mercury policy included coverage for medical expenses incurred as a result of injuries arising out of the use of a motor vehicle.  In relevant part, the policy provided that it did not apply "to bodily injury sustained by any person to the extent that benefits therefor[] are in whole or in part payable under any [workers'] compensation law."

 
The workers’ compensation insurance carrier, VMLI, paid a portion of the plaintiff's total medical expenses.  However, VMLI denied claims for the plaintiff’s surgery to repair his labrum, asserting that the injury was a pre-existing condition and therefore not compensable under the workers’ compensation policy.  The balance of the plaintiff's medical expenses was either paid or resolved by the plaintiff and the PHO.

  
The plaintiff subsequently submitted a claim to Mercury demanding payment under the medical expense coverage of his policy.  Mercury denied the claim, asserting that the exclusion provision barred coverage due to the fact that some of the plaintiff’s medical expenses were, in part, payable under workers’ compensation law.

 
On appeal, the plaintiff argued that the exclusion applied only “to the extent” that some portion of his medical expenses were paid by workers' compensation benefits.  The plaintiff argued that the exclusion acted only to offset any amount actually paid by the workers' compensation carrier, without regard to whether he successfully pursued a claim for all medical expenses.  In doing so, the plaintiff argued that the policy language operates to prevent a "double recovery" by not allowing the insured to receive full payment for medical expenses from both a workers' compensation provider as well as an automobile insurance provider.

 
Defendant Mercury argued its interpretation of the exclusion, asserting that it excluded all coverage if any portion of plaintiff’s medical expenses were subject to workers’ compensation.

   
The Court ultimately found in favor of defendant Mercury Casualty, holding that the policy exclusion limited the scope of coverage for medical expenses, rather than the amount of coverage in the form of a set-off against workers’ compensation benefits.  The court noted the fact that VMLI did pay a portion of plaintiff’s medical expenses pursuant to its workers' compensation policy.   The court also noted that there was no dispute over whether the accident arose out of and in the course of the plaintiff's employment.  Accordingly, the Court held that the clear and unambiguous language of the exclusion permitted defendant Mercury Casualty to deny coverage where the expenses were payable under workers’ compensation law.   Thus, the exclusion permitted Mercury Casualty to deny coverage for any expenses which would have been subject to workers' compensation coverage by VMLI without regard to whether all of those expenses were actually paid by VMLI.



Posted by Robert D. Brant on 04/05/2012 at 04:22 PM
InsuranceMotor Vehicle AccidentsVirginiaWorkers CompensationPermalink