Cowan Systems v. Harleysville Mut. Ins. Co.

Decision Date08 August 2006
Docket NumberNo. 05-2253.,05-2253.
PartiesCOWAN SYSTEMS, INCORPORATED, Plaintiff-Appellee, v. HARLEYSVILLE MUTUAL INSURANCE COMPANY, Defendant-Appellant.
CourtU.S. Court of Appeals — Fourth Circuit

ARGUED: William Carlos Parler, Jr., Parler & Wobber, Towson, Maryland, for Appellant. David A. Skomba, Franklin & Prokopik, Baltimore, Maryland, for Appellee. ON BRIEF: Denise E. Mobley, Parler & Wobber, Towson, Maryland, for Appellant. Shannon O. Colvin, Franklin & Prokopik, Baltimore, Maryland, for Appellee.

Before WILKINSON and NIEMEYER, Circuit Judges, and FLOYD, United States District Judge for the District of South Carolina, sitting by designation.

Affirmed by published opinion. Judge NIEMEYER wrote the opinion, in which Judge WILKINSON and Judge FLOYD joined.

NIEMEYER, Circuit Judge.

In this insurance coverage case, we hold that Harleysville Mutual Insurance Company had a contractual duty to provide Cowan Systems, Inc. with a defense in an action commenced against Cowan by Linens N Things, Inc., who, facing a claim for premises liability, sought indemnity from Cowan based on an indemnification provision in a commercial contract between them.

George Shaffer, a tractor-trailer driver for Cowan, was injured while he was delivering an empty Linens N Things trailer to a mud lot leased by Linens N Things. After disconnecting the empty trailer, Shaffer slipped and fell on ice in the mud lot, injuring his knee. Shaffer filed a personal injury action against Linens N Things alleging that Linens N Things had negligently failed to remove ice and snow from the mud lot.

Relying on an indemnity provision in its transportation contract with Cowan, Linens N Things filed a third-party complaint against Cowan to have Cowan indemnify Linens N Things for its premises liability.

When Cowan presented the suit papers to its insurer, Harleysville, Harleysville denied coverage, claiming that it had no duty to defend because of the limited scope of contractual coverage and various exclusions in its policy. Cowan commenced this action for declaratory judgment. In granting Cowan summary judgment, the district court concluded that Linens N Things' claims against Cowan fell within the policy's scope of coverage and that the exclusions relied on by Harleysville were inapplicable. The court ordered Harleysville to reimburse Cowan for its attorneys fees, costs, and expenses. Cowan Sys., Inc. v. Harleysville Mut. Ins. Co., 2005 WL 2863672 (D.Md.2005), 2005 U.S. Dist. LEXIS 22197, at *35.

For the reasons that follow, we affirm.

I

Cowan, a transportation company based in Baltimore, Maryland, entered into a "Truckload Transportation Agreement" with Linens N Things' Clifton, New Jersey, office to provide transportation services for Linens N Things. George Shaffer worked for Cowan as a shuttle driver, transporting Linens N Things trailers from its depot to a mud lot in Gloucester County, New Jersey, which Linens N Things leased from Erdner Brothers, Inc. for storing its trailers.

On January 9, 2001, after "dropping" a trailer at the mud lot, Shaffer slipped and fell on ice, injuring his knee. Shaffer commenced a personal injury action in the Superior Court of New Jersey in Gloucester County against Linens N Things and Erdner Brothers, alleging that either or both were negligent in failing "to provide for snow and ice removal" at the mud lot. In the same action, Linens N Things filed a third-party complaint against Cowan, alleging that under the "Truckload Transportation Agreement," Cowan had agreed to indemnify Linens N Things

from and against all claims, actions, losses, damages, expenses, judgments, and costs (including attorney's fees and costs) resulting from or arising out of damage or injury to persons (including employees, agents, or subcontractors of Shipper) or property, caused in whole or in part by [Cowan's] performance or nonperformance, including, but not limited to loading, handling, transportation, and unloading for delivery of any shipment hereunder by [Cowan] or any of [Cowan's] directors, officers, employees, agents or subcontractors in the performance of this Agreement.

Cowan forwarded the suit papers to Harleysville, who had issued Cowan a Commercial General Liability ("CGL") insurance policy, and requested that Harleysville provide Cowan with a defense against Linens N Things' third-party complaint. Harleysville refused to provide Cowan with a defense, citing to limitations of coverage and to multiple policy exclusions relating to contract liability, bodily injury suffered by the insured's employee, and bodily injury arising from the use of any auto owned by the insured. Harleysville concluded, "[w]e will not be able to provide for your defense or indemnification for the Third-Party Complaint filed in this matter." Cowan defended itself in the underlying action at its own expense and obtained a summary judgment in its favor.

Cowan commenced this action against Harleysville, seeking a declaratory judgment that Harleysville breached its duty to defend Cowan in the action commenced against it by Linens N Things. Harleysville filed a motion for summary judgment, claiming that it properly denied coverage to Cowan based on limitations in its contractual coverage and exclusions for (1) workers' compensation, (2) employer's liability, and (3) "auto" liability. Cowan filed a cross-motion for summary judgment, arguing to the contrary.

The district court entered summary judgment in favor of Cowan on November 14, 2005, holding that Cowan's indemnification agreement was an insured contract and that none of the asserted exclusions were applicable. It concluded therefore that Harleysville had a duty to defend Cowan in the underlying litigation. The court ordered Harleysville to reimburse Cowan for all of its costs and expenses, including attorneys fees, in defending the underlying litigation, as well as its attorneys fees in prosecuting this declaratory judgment action, as provided by Maryland law. From the district court's judgment, Harleysville filed this appeal.

II

Under Maryland law, which the parties agree is controlling, the insurer's duty to defend is a "contractual duty arising out of the terms of a liability insurance policy" and is "broader than the duty to indemnify." Litz v. State Farm Fire & Cas. Co., 346 Md. 217, 695 A.2d 566, 569 (1997). Whereas the insurer's duty to indemnify only attaches upon liability, "[a]n insurance company has a duty to defend its insured for all claims that are potentially covered under the policy." Walk v. Hartford Cas. Ins. Co., 382 Md. 1, 852 A.2d 98, 106 (2004) (emphasis added); Brohawn v. Transamerica Ins. Co., 276 Md. 396, 347 A.2d 842, 850 (1975) ("Even if a tort plaintiff does not allege facts which clearly bring the claim within or without the policy coverage, the insurer must still defend if there is a potentiality that the claim could be covered by the policy").

To establish whether an insurance company has a duty to defend its insured, a two-part inquiry is undertaken, asking:

(1) what is the coverage and what are the defenses under the terms and requirements of the insurance policy? [and] (2) do the allegations in the [underlying] tort action potentially bring the tort claim within the policy's coverage?

Montgomery County Bd. of Educ. v. Horace Mann Ins. Co., 383 Md. 527, 860 A.2d 909, 915 (2004) (first alteration in original) (quoting St. Paul Fire & Marine Ins. v. Pryseski, 292 Md. 187, 438 A.2d 282, 285 (1981)). Before the decision in Aetna Casualty & Surety Co. v. Cochran, 337 Md. 98, 651 A.2d 859 (1995), Maryland courts answered these two questions by applying the "eight corners" rule, under which only the underlying complaint and the insurance policy could be consulted to determine the potentiality of coverage. In Cochran, however, the Maryland Court of Appeals modified the rule to allow insureds to introduce extrinsic evidence for the purpose of demonstrating coverage. The court kept in place an asymmetrical prohibition on the use of extrinsic evidence by the insurer. Thus, in deciding whether to defend, an insurer may only rely on the language of the policy and the facts alleged in the complaint, and not on outside evidence, as that would risk deciding the question on facts not advanced in the underlying action. Id. at 866. Moreover, any doubts about the potentiality of coverage must be resolved in favor of the insured. See Walk, 852 A.2d at 106-07 ("If there is any doubt as to whether there is a duty to defend, it is resolved in favor of the insured").

The parties do not dispute that the CGL policy's affirmative insuring provisions afford coverage in specified circumstances for tort liability assumed in a contract. The policy issued by Harleysville to Cowan insures Cowan's contractual liability insofar as Cowan

assume[d] the tort liability of another party to pay for "bodily injury" or "property damage" to a third person or organization. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement.

The tort liability alleged in the underlying complaint filed by Shaffer against Linens N Things was Linens N Things' negligence in failing to remove snow and ice from the mud lot, and the contract assuming this tort liability was the Truckload Transportation Agreement between Linens N Things and Cowan, in which Cowan agreed to indemnify Linens N Things for all claims "resulting from or arising out of" injury to persons "caused in whole or in part by [Cowan's] performance of the transportation agreement."

Even though Harleysville agrees that the CGL policy provides Cowan coverage for certain tort liability that Cowan assumed by contract, it argues that the contractual coverage does not insure Cowan's indemnification of liability to an employee of Cowan. In addition, Harleysville contends that three policy exclusions apply to deny Cowan coverage in this case: (1) the workers'...

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