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REPORTED IN THE COURT OF SPECIAL APPEALS OF MARYLAND No. 1418 September Term, 1995

WOODFIN EQUITIES CORP., ET AL.

v.

HARFORD MUTUAL INSURANCE COMPANY

Wilner, C.J., Wenner, Davis, JJ.

Opinion by Davis, J.

Filed: June 27, 1996

This is an appeal from an August 28, 1995 order of the Circuit Court for Montgomery County granting an insurer's motion for

judgment in a declaratory relief action filed by an injured third party. The principle questions presented on this appeal are

restated as follows: I. II. Should this Court deny the insurer's motion to dismiss this appeal? Do the injured third parties have standing to file a declaratory judgment action directly against the insurer?

III. Did the circuit court correctly determine that the insurer was not obligated to provide liability coverage under the terms of the CGL policy? IV. Did the circuit court correctly determine that the insurer was not prejudiced by the insured's failure to notify the insurer of the claim of the injured third parties?

To the first, second, and fourth questions, we respond in the affirmative. To the third question, we respond partially in the As a result of the

affirmative and partially in the negative.

disposition of these questions, we affirm in part and reverse in part the judgment of the circuit court.1 Accordingly, the case

shall be remanded to the circuit court for further proceedings.

FACTS

This Court originally filed its opinion in this appeal on May 8, 1996. On May 23, 1996, however, appellee filed a motion for reconsideration with this Court. Upon examination of the issues and arguments raised in appellee's motion, we determined that our May 8, 1996 opinion should be revised in certain respects. This opinion reflects those revisions.

1

- 2 This appeal involves a declaratory judgment action filed by injured third parties against an insurer for the purpose of

determining the extent of the insurer's obligations under a CGL policy. Before we present the factual backdrop, we shall introduce

the key players involved to aid in comprehending the interrelation of the parties in this case. Woodfin Equities Beginning with the principal actors, (Woodfin), Samuel A. Hardage

Corporation

(Hardage), and Hardage Construction Company (HCC) are the injured parties and appellants. Appellants constructed a hotel in

Rockville, Maryland, known as the Woodfin Suites Hotel (hotel). HCC was the general contractor for the project. Insurance Company is the insurer and appellee. comprehensive general liability (CGL) policy Harford Mutual

Appellee issued a to its insured,

Deerfield Engineering, Incorporated, (Deerfield Engineering or insured) -- a mechanical subcontractor hired by appellants to provide all labor and materials and to do all things necessary for the installation and completion of the hotel's heating,

ventilation, and air conditioning (HVAC) system. owner is Donald Paulgaard.

The insured's

At different points in time, the

insured had offices in Austin and Marble Falls, Texas, and in Rockville, Maryland. Along with the insured, the Trane Company and Climatemaster were involved in the construction of the hotel. According to

appellants, Trane was the manufacturer of the HVAC systems that the insured installed, and Climatemaster participated in the

- 3 manufacturing of the HVAC units and component parts. The remaining

entity is Deerfield, Incorporated -- not to be confused with the insured. The role of Deerfield, Incorporated is pivotal, although Deerfield, Incorporated, is an

its involvement is peripheral.

electrical contracting company located in Kingsville, Maryland. According to Martin W. Lotz, Jr., its President and CEO, Deerfield, Incorporated, is not and never has been insured by appellee. Furthermore, according to Lotz, Deerfield, Incorporated, was not involved in any way with the construction of the hotel. In January 1990, appellants, by a six-count complaint, sued Trane, Climatemaster, and Deerfield, Incorporated, in the Circuit Court for Montgomery County, for breach of contract, negligence, breach of express warranty, breach of implied warranty, breach of implied warranty of fitness for particular purpose, and strict liability. (The Trane litigation or Trane suit.) In the caption

of the Trane complaint, Deerfield, Incorporated, is designated as an Austin, Texas corporation, and Martin W. Lotz, Jr. is designated as the person to be served with the complaint at his Kingsville address. According to the Trane complaint, the hotel opened its doors to the public on February 23, 1988. Appellants alleged that, in

March, 1988, the hotel began to experience problems with the HVAC system, and that, by June 1989, 130 HVAC units failed at least once, and continue to fail. Appellants claimed that Trane,

Climatemaster, and Deerfield, Incorporated, were responsible for

- 4 the failures in the HVAC system. In particular, appellants

asserted that Deerfield, Incorporated, failed to install, service, and inspect properly the HVAC systems in the hotel. For example,

according to appellants, Deerfield, Incorporated, failed to install a "suction screen diffuser" and improperly positioned the

"thermostat sensor bulb" on the units.

The complaint asserts that,

as a result of the conduct of Trane, Climatemaster, and Deerfield, Incorporated, appellants incurred considerable losses and expenses, including the loss of income from the unavailability of guest rooms, costs associated with the repair and replacement of pumps in the HVAC system, consultant fees for conducting tests and providing opinions as to the reasons for the HVAC failures, management time expended with respect to customer relations and correcting the problems in the HVAC system, increased energy costs, loss of goodwill, and attorney's fees and costs related to the Trane litigation. Appellants served Lotz with a summons and complaint for the Trane litigation. According to Lotz, since Deerfield,

Incorporated, had nothing to do with the construction of the hotel, Lotz contacted appellants' attorneys to advise that they had sued and served the wrong company. Nonetheless, Lotz continued to

receive various pleadings and related legal documents for some period of time. Eventually, these papers stopped arriving at

Lotz's address, as a result of which Lotz was led to believe that appellants' counsel had corrected their mistake. In addition to

- 5 service upon Lotz, the record indicates that appellants apparently realized their error and had Paulgaard served. A September 24,

1991 Affidavit of Service of Process (on appellants' counsel's letterhead) states that Paulgaard was served with the Trane

litigation papers on March 23, 1991.

In depositions, however,

Paulgaard claimed that he did not learn of the Trane suit until 1994. At trial, appellants strenuously objected to the September

24, 1991 Affidavit of Service of Process, and took the position that Paulgaard did not know about the Trane suit until 1994. shall become more clear below, it benefited appellants in As a

significant way if Paulgaard did not actually learn of the Trane suit until 1994, because appellee did not learn of the suit until June 1994 (from appellants' counsel), and claimed -- as a basis for denial of coverage -- that Paulgaard breached his duty to notify appellee of the suit since Paulgaard knew about the suit in 1991 but never informed appellee of it at that time or at any time. In any event, neither the insured, nor Deerfield, Incorporated (as would be expected), answered the Trane complaint. On March 9,

1992, over two years after the Trane suit was filed, the Clerk of the circuit court issued a Notice of Default Order to "Deerfield Incorporated," stating "that an Order of Default has been entered against you in the above entitled case on 3/2/92." On May 8, 1992,

the circuit court conducted an ex parte hearing for the purpose of determining damages against Deerfield, Incorporated. At the

- 6 conclusion of that hearing, the circuit court entered a default judgment against "Deerfield, Incorporated" for $168,102.84. Two years later, in May 1994, appellants allegedly

"discovered" a Certificate of Insurance (certificate), indicating that appellee had previously issued a CGL policy to the insured. The insured is identified on the certificate as follows: Deerfield Engineering Donald Marvin Paulgaard 15 Dairyfield Court Rockville, Md 20852 HCC is designated as the certificate holder. certificate explicitly states: THIS CERTIFICATE IS ISSUED AS A MATTER OF INFORMATION ONLY AND CONFERS NO RIGHTS UPON THE CERTIFICATE HOLDER. THIS CERTIFICATE DOES NOT AMEND, EXTEND OR ALTER THE COVERAGE AFFORDED BY THE POLICIES BELOW. Following the "discovery" of the certificate, appellants' counsel wrote a letter to appellee dated June 14, 1994, wherein appellants informed appellee of the discovery of the certificate and its claim against the insured. By that letter, appellants In addition, the

invited appellee to engage in settlement discussions and offered to open its files to appellee. Furthermore, the letter stated that,

if appellee declined to settle the matter, appellants would vacate the default judgment for the purpose of attempting to assess a new damages amount in light of the fact that appellants allegedly have continued to suffer losses from the HVAC failures -- a course of action that would purportedly "expose [appellee] to potential damages of Two Million Dollars." In response, appellee informed

- 7 appellants' counsel, by letter dated June 30, 1994, that "there will be no coverage available to Deerfield Engineering for this occurrence. There are a number of coverage issues which

contributed to this decision." Subsequent to that exchange, appellants filed the instant declaratory judgment action in the Circuit Court for Montgomery County directly against appellee. The declaratory judgment action

was filed on January 13, 1995 -- over two and one-half years after the date of the default judgment against "Deerfield, Incorporated," over five years after the filing of the Trane suit, and over six and one-half years after the insured's alleged failures.

Appellants did not name, or attempt to join, the insured as a party to this declaratory judgment action. Indeed, the insured is

noticeably absent as a party to these proceedings. In their complaint for declaratory judgment, appellants Of

recited the foregoing facts and set forth the stated damages.

particular interest is that appellants identify the insured as "Deerfield, Incorporated," and state that they have obtained a default judgment against Deerfield, Incorporated. Finally, the

complaint requests the circuit court to grant, inter alia, the following relief: (1) "Declare that coverage be established under"

appellee's CGL policy; (2) "Declare that coverage be afforded to Deerfield under" appellee's CGL policy "for the damages arising from Deerfield's installation of the HVAC systems"; (3) "Declare [appellee's] duty to defend"; and (4) "Declare that [appellants]

- 8 may seek a direct action against [appellee] for the amount of the Default Judgment and for all other damages resulting from its insured's wrongdoing." In response to appellants' complaint, appellee filed an answer on January 31, 1995, setting forth a number of defenses. One such

defense was that the terms of the CGL policy did not obligate appellee to provide insurance coverage in this case. In addition,

appellee defended on the ground that appellants allegedly lacked standing because they are not "insureds" under the CGL policy. Notably, appellee denied that it issued an insurance policy to "Deerfield, Incorporated." Furthermore, appellee defended against

the complaint on the ground that the insured failed to notify appellee of the claim pursuant to the terms of the CGL policy, and that this failure caused substantial prejudice to appellee. Meanwhile, during a February 21, 1995 hearing in the Trane litigation before Judge Mason, the circuit court dismissed

Woodfin's and HCC's actions against the remaining parties, Trane and Climatemaster, because of the forfeiture of Woodfin's corporate charter. During that hearing, the circuit court ruled that it was

unable to determine "at this time" whether Hardage's action should also be dismissed by virtue of the forfeiture of the corporate charter. Accordingly, the circuit court scheduled a motions

hearing for April 27, 1995 to consider further argument on the matter. Unfortunately, there is no evidence in the record

indicating the disposition of Hardage's claims.

The record,

- 9 however, contains representations by the parties that all of the claims of the plaintiffs in the Trane litigation were dismissed. The important thing, for purposes of this appeal, is not when final judgment disposing of all claims against all parties was actually entered in the Trane litigation, but that final judgment was entered in the Trane litigation no earlier than February 21, 1995. For the sake of convenience, we shall proceed as if final judgment was entered on that date. In the instant declaratory judgment action, following its answer, appellee filed a motion for summary judgment in April 1995. Therein, appellee argued that it was entitled to judgment on three grounds. First, appellee argued that, because Deerfield,

Incorporated is not appellee's insured, appellee owes no obligation to appellants with respect to the judgment that appellants obtained against that entity. Second, appellee argued that it was entitled

to judgment "due to the complete lack of notice given to it until nearly two years after the entry of a Default Judgment," and that this delay in notice constituted actual prejudice under Maryland case law. Finally, appellee asserted that the CGL policy does not In this

protect against the acts alleged in the Trane complaint.

latter regard, appellee argued that appellee is not obligated to provide coverage because: (1) the claim does not involve "property damage" arising out of an "occurrence," as those terms are defined in the CGL policy, and (2) certain coverage exclusions existed. On

June 1, 1995, appellee's motion for summary judgment was denied.

- 10 The matter proceeded to trial on June 28, 1995. witnesses testified for appellants, and eleven At trial, two exhibits were

introduced into evidence (six by appellants and five by appellee). Appellants' first witness was Peter Kruse, a representative from the Hardage Group -- the entity that owns HCC and Woodfin. Kruse

explained that the insured was employed to install the HVAC and plumbing system for the hotel. began to fail. Kruse testified that the HVAC units

Kruse responded in the affirmative when asked

whether the HVAC failures arose as a result of the insured's faulty installation of the units. According to Kruse, the failures

resulted from "a number of acts that were performed [by the insured], including" rupturing or fracturing capillary tubes in the units during installation and placing the temperature-sensing bulb in the wrong position. Kruse stated that as the units failed they According to Kruse,

had to be replaced throughout the hotel.

replacement caused damage to the walls and carpeting of the hotel. Kruse stated that damages also included loss of room occupancies, replacement of the HVAC units, consultants' fees, management time, and loss of goodwill. Appellants also called Robert F. Ohler, Jr. to testify. is appellee's claims manager. Ohler

Ohler acknowledged that appellee

undertook no investigation into the facts of the loss beyond reviewing appellants' Trane complaint. Indeed, Ohler agreed that,

apart from what was alleged in that complaint, he had no knowledge about the manner in which the HVAC system was installed, nor the

- 11 manner in which the HVAC goods were handled. In this regard,

Ohler stated, based on his review of that complaint, "I have determined that there wasn't coverage for any of the damages sought or the claims sought by [appellants]." Ohler acknowledged that

appellants offered to vacate the default judgment, but maintained that that would not have cured the prejudice that appellee suffered from the late notice of the claim. Ohler admitted that appellee Significantly, Ohler

equated the passage of time with prejudice.

further stated that appellee had the opportunity to interview Paulgaard regarding the claim, but chose not to do so. In

addition, Ohler testified that, even if the alleged damages could be considered property damage under the CGL policy, various

coverage exclusions in the CGL policy existed, under which appellee could properly deny coverage. At the conclusion of appellants' case, on June 28, 1995, appellee moved for judgment pursuant to MARYLAND RULE 2-519,

essentially reiterating those arguments asserted on its motion for summary judgment.2 From the bench, the circuit court ruled that

appellee was not prejudiced, believing that appellee had proper

Appellee slightly modified its argument that it was not obligated to provide coverage with respect to a judgment obtained against "Deerfield, Incorporated." Appellee argued that, apart from the fact that the judgment is not against its insured, appellants may not proceed against appellee because they have not complied with MD. ANN. CODE art. 48A,

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