Rubins Contractors, Inc. v. Lumbermens Mut. Ins. Co., s. 86-5273

• Decision Date: 16 June 1987
• Docket Number: 86-5286,Nos. 86-5273,s. 86-5273
• Citation: 821 F.2d 671
• Parties: RUBINS CONTRACTORS, INC., a Maryland Corporation v. LUMBERMENS MUTUAL INSURANCE COMPANY, General Accident Insurance Company of America, Appellants. (Two Cases)
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 671

821 F.2d 671

261 U.S.App.D.C. 183

RUBINS CONTRACTORS, INC., a Maryland Corporation v. LUMBERMENS MUTUAL INSURANCE COMPANY, General Accident

Insurance Company of America, Appellants. (Two Cases)

Nos. 86-5273, 86-5286.

United States Court of Appeals, District of Columbia Circuit.

Argued Feb. 10, 1987.

Decided June 16, 1987.

As Amended June 16, 1987.

Walter J. Smith, Jr., Washington, D.C., with whom Katherine A. Day was on the brief for appellant, Lumbermens Mut. Ins. Co.

Austin F. Canfield, Jr., Washington, D.C., for appellant, Gen. Acc. Ins. Co. of America.

Gary Bonnett, Silver Spring, Md., with whom Louis James Morse was on the brief, for appellee.

Before MIKVA, EDWARDS and WILLIAMS, Circuit Judges.

Opinion for the Court filed by Circuit Judge WILLIAMS.

Concurring statement filed by Circuit Judge HARRY T. EDWARDS.

WILLIAMS, Circuit Judge:

This case requires us to determine whether, under Maryland law, ¹ an automobile insurance policy and a general business liability policy provide coverage for liability arising out of the negligent entrustment of an automobile. Each policy contains language that appears to apply broadly to automobile accidents: the automobile policy in expressing the coverage that is provided, the general business liability policy in expressing an exception from coverage. We conclude that Maryland would find the language applicable to negligent entrustment liability in both cases. Thus the automobile policy provides coverage and the general business liability policy does not.

I. BACKGROUND

To guard against vandalism, Rubins Contractors, Inc. arranged to park one of its trucks at the home of Wilbur Jackson, a Rubins employee. Jackson was to drive the truck to and from work but not to use it for personal purposes. On July 9, 1983 Jackson drove the truck to a wedding and was involved in an accident severely injuring Cassandra Gray. Gray sued Rubins on theories of respondeat superior and negligent entrustment, ultimately prevailing on both.

Shortly after the accident Rubins informed its automobile insurer, General Accident Insurance Company of America, of its predicament. General Accident agreed to provide Rubins a complete defense but reserved the right not to indemnity Rubins for damages awarded on the negligent entrustment claim. Rubins then turned to its business liability insurer, Lumbermens Mutual Insurance Company, but Lumbermens refused either to defend or indemnify Rubins, citing its policy's exclusion of all damage caused by the operation of automobiles.

Caught between the finger-pointing of the two insurers, Rubins sought a declaratory judgment as to the obligations of each. ² The District Court found that under Maryland law references to auto liability would be construed liberally when used to express coverage and strictly when used to create an exception from coverage. Accordingly, the District Court ruled that both policies afforded Rubins coverage. General Accident and Lumbermens appeal. ³

II. CASE OR CONTROVERSY

Before addressing the merits of this dispute we must find jurisdiction to do so. See, e.g., Bors v. Preston, 111 U.S. 252, 4 S.Ct. 407, 28 L.Ed. 419 (1884). Lumbermens originally argued that the issue of coverage for negligent entrustment was not ripe for resolution when presented to the District Court, because a verdict had yet to be rendered on that claim and because General Accident had assumed the defense in the case. ⁴ Although Lumbermens sought to waive the issue at oral argument, we have an independent obligation to determine whether jurisdiction was proper. See, e.g., Mitchell v. Maurer, 293 U.S. 237, 244, 55 S.Ct. 162, 165, 79 L.Ed. 338 (1934).

Whether a matter is ripe for resolution "turns on 'the fitness of the issues for judicial decision' and 'the hardship to the parties of withholding court consideration.' " Pacific Gas & Elec. Co. v. State Energy Resources Conservation & Dev. Comm'n, 461 U.S. 190, 201, 103 S.Ct. 1713, 1720, 75 L.Ed.2d 752 (1983) (quoting Abbott Laboratories v. Gardner, 387 U.S. 136, 149, 87 S.Ct. 1507, 1515, 18 L.Ed.2d 681 (1967)). The two policies' coverage of negligent entrustment of an automobile is a purely legal issue of contract interpretation that will not benefit from further factual development. Thus, the issue was clearly fit for judicial review when presented to the District Court. See Thomas v. Union Carbide Agricultural Products Co., 473 U.S. 568, 581, 105 S.Ct. 3325, 3333, 87 L.Ed.2d 409 (1985).

The only real question is whether the impact on Rubins of the insurers' disavowal of any liability was "sufficiently direct and immediate as to render the issue appropriate" for resolution by the District Court. Abbott Laboratories v. Gardner, 387 U.S. at 152, 87 S.Ct. at 1517. We believe that it was. ⁵

If insurance provided only a right to reimbursement for final judgments entered against the insured, a finding of ripeness might be difficult on the facts of this case. ⁶ But the policies' protections are considerably broader, including a right to the insurer's provision of a defense and active participation in settlement. See, e.g., Fireman's Fund Ins. Co. v. Continental Ins. Co., 308 Md. 315, 318, 519 A.2d 202, 204 (1987) (insurer has legal duty to attempt to settle claims against insured). An insurer's disclaimer of duty to pay, or reservation of rights, undercuts both of these duties.

In assessing how much to invest in litigative effort, an insurer is bound to consider its exposure. If the insurer believes, for example, that even in the event of an adverse judgment against the insured its chance of actually having to pay is only one in three, it will surely invest less effort in defense than if coverage were certain. Of course its laxity might give rise to a claim by the insured for partial breach of the duty to defend, and fear of such a lawsuit would in itself constrain the laxity. But in the meantime the insurer's conduct has exposed the insured to uncertainty where he sought certainty. Moreover, as litigation strategy is complex and subtle, a remedy based on an after-the-fact evaluation would be dicey to say the least; this would dilute the remedy's capacity to prevent insurer laxity.

A reservation of rights on coverage may affect the insurer's pursuit of its settlement duties even more directly. ⁷ The process of defense is interwoven with the process of settlement and payment. See Fireman's Fund, 308 Md. 315, 318, 519 A.2d 202, 204. Indeed, General Accident's posture--agreeing to defend but repudiating any duty to indemnify--seems to us inherently contradictory. As the Third Circuit recently noted, the insurer's duties encompass an obligation to pay the settlement amounts agreed on. ACandS, Inc. v. Aetna Cas. & Sur. Co., 666 F.2d 819, 823 (3rd Cir.1981) (finding that both the failure to defend and the disavowal of any duty to indemnify rendered a dispute over coverage an actual controversy ripe for resolution before issues of underlying liability were decided). ⁸ See also Fireman's Fund, 308 Md. at 318, 519 A.2d at 204 (under Maryland law insurer has duty to attempt to settle claims within policy limits). It seems inescapable that uncertainty over coverage would skew the settlement process, see ACandS, 666 F.2d at 823; at oral argument counsel for Lumbermens conceded as much. ⁹

In sum, to require Rubins to proceed without knowing if the insurance policies cover the negligent entrustment claim would prolong the insured's uncertainty over coverage and distort the insured's conduct in defense and settlement--a palpable and considerable hardship to Rubins. We therefore conclude that the coverage issue is ripe for resolution.

III. MERITS

The District Court found Rubins entitled to indemnity under both policies for liability arising out of negligent entrustment of an automobile. We address the automobile and general business liability policies in turn.

A. Automobile Policy.

The General Accident policy provides that General Accident "will pay all sums the insured legally must pay as damages because of bodily injury or property damage ... caused by an accident and resulting from the ownership, maintenance or use of a covered auto." Policy No. BAP 34-68-44, Part IV(A) (emphasis deleted). General Accident essentially argues that damages awarded on the theory of negligent entrustment "result[ed] from" Rubins's negligent business decision to entrust the vehicle to Jackson and not from the "use" of the vehicle. ¹⁰ We see no basis for such a crabbed reading of the policy.

The quoted language seems naturally to encompass the liability in question. The "bodily injury" undoubtedly "result[ed] from" "use" of the truck. The use was Jackson's, of course, but the policy does not require that it be the insured's. Conceivably one might parse the sentence as providing coverage for "sums the insured legally must pay as damages ... resulting from the ownership, maintenance or use of a covered auto," i.e., attaching the "resulting from" clause to damage liability rather than to injury. Indeed, this may be a better reading, for it is hard to see how bodily injury could ever result from "ownership" of an auto. But this analysis would not help General Accident, for the damage liability can be seen to have resulted from Rubins's ownership of the truck.

In fact, General Accident offers no detailed construction of the language at all. Rather, it simply relies on cases giving an extremely narrow reading to similar language where it appears as an exception in a liability policy. In so doing, courts have clearly strained to assure coverage. For the reasons developed below, we believe Maryland would not make such a linguistic stretch even in that, more appealing, context. We are quite confident it would not do so in order to curtail coverage. Although Maryland resists the proposition that insurance contracts are to be construed "most strongly" against the insurer, it does apply to insurance cases the general maxim of...