Preview:

Robert T. Sheets, Jr. et ux. v. The Brethren Mutual Insurance Co. -No. 47, 1995 Term INSURANCE - Duty to Defend -- Tort suit allegation of causation was adequate to trigger duty to defend. Negligent misrepresentation is an accident covered by the liability insurance policy.

IN THE COURT OF APPEALS OF MARYLAND No. 47 September Term, 1995 ___________________________________

ROBERT T. SHEETS, JR. et ux. v. THE BRETHREN MUTUAL INSURANCE COMPANY

___________________________________

Murphy, C.J. Eldridge Rodowsky Chasanow Karwacki Bell Raker JJ. ___________________________________ Opinion by Chasanow, J. Murphy, C.J., and Karwacki, J. dissent ___________________________________

-3Filed: July 26, 1996

We are called upon in the instant case to determine whether the trial court was correct in granting an insurer's motion for summary judgment on the basis that it had no duty to defend or indemnify its insured against a claim of negligent

misrepresentation in the sale of property.

We hold that because

the insurer did owe a duty to defend its insured, the trial court erroneously granted the insurer's motion for summary judgment. We

therefore reverse and remand the case to the trial judge to enter summary judgment in favor of the insured.

I. We are asked to review a declaratory judgment action to determine whether The Brethren Mutual Insurance Company (Brethren) owed a duty to defend or indemnify its insured in a tort suit brought against the insured. by Frits M. Christensen The underlying lawsuit was instituted and Helene S. Christensen (the

Christensens) in the Circuit Court for Frederick County against Appellants, Robert T. Sheets, Jr. and his wife, Joyce A. Sheets (the Sheetses). and The suit alleged that the Sheetses the both septic

intentionally1

negligently

misrepresented

that

system at their farmhouse was in "good working condition" before selling the property to the Christensens. The suit alleged that,

as a result of the misrepresentation, the Christensens purchased The Sheetses do not contend that Brethren had a duty to defend them against a claim of intentional misrepresentation, as the terms of the policy clearly indicate that there is no duty to defend or indemnify against intentional torts.
1

-2the farm several weeks later, and moved in with their nine

children.

Approximately three weeks after the Christensens took

possession of the property, the septic system began leaking and effluent flooded the walk area. Department condemned the septic The Frederick County Health system, and therefore, the

Christensens had to replace the system at a cost in excess of $12,000. In essence, the Christensens' complaint alleged that the failure of the septic system was attributed to the Sheetses' misrepresentations that it was in "good working condition" because, had it not been for those misrepresentations, the Christensens, whose family was too large for the system to operate properly, would not have moved into the house. The Sheetses notified

Brethren, their insurance carrier, of the lawsuit and requested that Brethren defend and indemnify them pursuant to the terms of a farm owner's general liability policy that the Sheetses purchased from Brethren. Brethren refused to do so, claiming that the

Sheetses' policy did not cover misrepresentation torts. The Sheetses then sought a declaratory judgment against

Brethren in the Circuit Court for Frederick County asking the court to compel Brethren to defend and indemnify them in the lawsuit against the Christensens. Both parties filed cross-motions for

summary judgment asserting that no genuine dispute existed as to any material fact. The court granted Brethren's motion for summary The Sheetses appealed to

judgment and denied the Sheetses' motion.

-3the Court of Special Appeals. Before our intermediate appellate

court considered the case, we issued a writ of certiorari on our own motion. While the appeal was pending, the Christensens'

lawsuit against the Sheetses settled.

II. Preliminarily, we note that since there is no information in the record concerning the settlement of the Christensens' suit against the Sheetses, we have no indication of how damages were calculated or whether the suit was settled on grounds of

intentional or negligent misrepresentation.

Hence, we can not

determine whether Brethren would have a duty to indemnify the Sheetses. Consequently, we will discuss only Brethren's duty to

defend and not its duty to indemnify.

III. In granting a motion for summary judgment, the trial court does not resolve factual disputes, but is instead limited to ruling as a matter of law. Heat & Power v. Air Products, 320 Md. 584, The standard for appellate review

591, 578 A.2d 1202, 1205 (1990).

of a trial court's grant or denial of a summary judgment motion is whether the trial court was legally correct. at 592, 578 A.2d at 1206. Heat & Power, 320 Md.

Hence, we must assume that the facts in

the Christensens' complaint are true and examine whether the trial

-4court was legally correct in holding that Brethren did not have a duty to defend the Sheetses against the Christensens' claim for negligent misrepresentation. In Brohawn v. Transamerica Ins. Co., 276 Md. 396, 407-08, 347 A.2d 842, 850 (1975), this Court held that if plaintiffs in a tort suit allege a claim against an insured that is potentially covered by the insurance policy, the insurer is obligated to defend the insured. In a recent decision reviewing the scope of a liability

insurer's duty to defend an insured, we had occasion to reaffirm this common law rule. 859, 861 (1995). Aetna v. Cochran, 337 Md. 98, 102, 651 A.2d

We then stated in Cochran:

"To ascertain when an insurer is under a duty to defend an insured in accordance with Brohawn, this Court, in St. Paul Fire & Mar. Ins. [] v. Pryseski, 292 Md. 187, 438 A.2d 282 (1981), articulated the following two-part inquiry: `In determining whether a liability insurer has a duty to provide its insured with a defense in a tort suit, two types of 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? The first question focuses upon the language and requirements of the policy, and the second question focuses upon the allegations of the tort suit.' 292 Md. at 193, 438 A.2d at 285. To answer

-5these two inquiries as they pertain to the facts of the instant case, we must ascertain the scope and limitations of coverage under the ... insurance policies and then determine whether the allegations in the [underlying tort] action would potentially be covered under those policies." 337 Md. 103-04, 651 A.2d at 862.2 In applying the Pryseski two-step analysis to the instant case, we first turn to the language of the Brethren insurance policy to determine the scope and limitations of the coverage. Cochran, 337 Md. at 104, 651 A.2d at 862. See

In analyzing the policy,

we utilize our rules of construction regarding insurance contracts. As we recently stated in Sullins v. Allstate Ins. Co., 340 Md. 503, 667 A.2d 617 (1995): "In Maryland, insurance policies, like other contracts, are construed 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.'" (Citations omitted). 340 Md. at 508, 667 A.2d at 619.

We recently held that if the allegations in the underlying complaint are ambiguous as to whether there exists a potentiality of coverage under an insurance policy, the insured may rely on extrinsic evidence. Aetna v. Cochran, 337 Md. 98, 107-12, 651 A.2d 859, 863-66 (1995). The insurer, however, may not use such evidence to contest coverage if the allegations in the underlying tort suit sufficiently establish a potentiality of coverage. Cochran, 337 Md. at 107, 651 A.2d at 863. Since the Christensens' complaint may be somewhat ambiguous, use of extrinsic evidence by the Sheetses to supplement the complaint would be warranted.

2

-6The farm owner's general liability insurance policy (the policy) issued by Brethren provides coverage for bodily injury and property damage liability. Under the policy, Brethren agreed to

"pay those sums that the `insured' becomes legally obligated to pay as damages because of `bodily injury' or `property damage' to which this insurance applies." Brethren also has "the right and duty to

defend any `suit' seeking those damages." The policy states that "the insurance applies to ... `property damage' only if ... caused by an `occurrence,' and the ...

`property damage' occurs during the policy period." damage" is defined under the policy as: "Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the `occurrence' that caused it."

"Property

The policy defines an "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions," but does not define "accident." In sum, the policy covers the property must damage caused by an the

occurrence.

Hence,

Sheetses

demonstrate

that

Christensens' complaint at least alleged three independent elements in order to compel Brethren to provide a defense in the tort suit: (1) that there was "property damage" as defined in the policy; (2)

-7that the property damage was "caused" by the negligent

misrepresentation; and (3) that negligent misrepresentation3 is an "occurrence" as that term is defined by the policy. If one of

these three elements is not alleged in the underlying tort suit, then Brethren would not be obligated to defend the Sheetses. Pursuant to the second part of the Pryseski inquiry, this Court must look to the Christensens' complaint and any extrinsic evidence adduced to determine if the lawsuit alleges action that is potentially covered under the Sheetses' insurance policy with Brethren. See Sullins, 340 Md. at 509, 667 A.2d at 619-20. The

Christensens' complaint alleged in pertinent part that the Sheetses owed them a duty to disclose all defects in the property prior to the sale of the property. The complaint further alleges that the

Sheetses negligently misrepresented that the septic system was in "good working condition when in fact [they] knew or should have known that the septic system had been repaired and that it had not been inspected by nor received the approval of the Frederick County Health Department." The complaint further states that the

Christensens "relied on said misrepresentations" and "[t]hat as a result [of] the said reliance, the Plaintiffs have suffered

damages."

The only "occurrence" that is potentially covered by the Brethren policy is negligent misrepresentation. Any other potential causes of the septic system's failure happened after the transfer of title in the property and are thus not covered by the Brethren policy.

3

-8IV. Following the parties' cross-motions for summary judgment in the declaratory action, a hearing was held before the Honorable Mary Ann Stepler. At the hearing, Brethren argued that the claims

made against the Sheetses were not covered under the insurance policy because: (1) "there is no causal nexus or direct causation between the misrepresentation and the property damage;" (2) "the claims for misrepresentation in the complaint are claims only for economic losses [-- t]hey are not claims for property damage;" and (3) "the Sheetses' misrepresentations to the Christensens are not an occurrence." In response, the Sheetses argued that the Christensens'

complaint sufficiently alleged a direct causal connection because the Christensens' claim was that the negligent misrepresentation caused a family that was too large for the system to move into the house and use the system, in turn causing the system to break down. The Sheetses further asserted that, since the failure of the system constituted a loss of use caused by the misrepresentation, the lawsuit was potentially was covered under to Brethren's defend policy, against and the

therefore

Brethren

obligated

Christensens' claim. The trial judge agreed with Brethren and granted summary judgment in its favor. The parties reasserted their positions both We must determine To do

in brief and in oral argument to this Court.

whether Brethren owed the Sheetses a legal duty to defend.

-9so, we must discuss seriatim whether the Christensens' complaint alleged that (1) there was property damage (2) caused by (3) an occurrence. For the reasons explained below, we find for the

Sheetses on all three issues and therefore hold that Brethren owed the Sheetses a duty to defend against the Christensens' complaint.

V. (A) CAUSAL NEXUS The trial judge based to her be ruling no primarily nexus on lack of the

causation,

finding

"there

causal

between

negligent misrepresentation and the actual damages incurred by the owners." The Christensens' complaint alleged that the negligent

misrepresentation caused a family too large for the septic system to move in to the house and use the system, in turn causing the system to break down. The Sheetses argue that even if the

Christensens' claim may have been a frivolous and inadequate basis for proving causation, their complaint alleged a cause of action that was at least potentially covered by the policy. Brethren, on

the other hand, asserts that the Christensens' claim that they would not have moved in and thus would not have used the system absent the misrepresentation "defies logic" and is simply too attenuated. In order for an insurer to be obligated to defend an insured, the underlying tort suit need only allege action that is

-10potentially covered by the policy, no matter how attenuated, frivolous, or illogical that allegation may be. APPLEMAN, INSURANCE LAW
AND

See 7C JOHN ALAN

PRACTICE

Download Sheets v. Brethren Mutual.pdf

Maryland Law