Continental Cas. Co. v. Board of Educ. of Charles County
| Decision Date | 01 September 1984 |
| Docket Number | No. 7,7 |
| Citation | 489 A.2d 536,302 Md. 516 |
| Parties | , 24 Ed. Law Rep. 208 CONTINENTAL CASUALTY COMPANY v. BOARD OF EDUCATION OF CHARLES COUNTY, Maryland et al. Misc., |
| Court | Maryland Court of Appeals |
Michael C. Warlow, Baltimore (H. Emslie Parks, Brian S. Goodman and Wright & Parks, Baltimore, on the brief), for appellant.
David A. Levin, Annapolis, and Edward S. Digges, Jr., La Plata (John J. Sellinger on the brief and Digges, Wharton & Levin, Annapolis, and Edward S. Digges, Sr., La Plata, on the brief), for appellees.
Argued before MURPHY, C.J., SMITH, ELDRIDGE, COLE, RODOWSKY and COUCH, JJ., and CHARLES E. ORTH, Jr., Associate Judge of the Court of Appeals of Maryland (retired), Specially Assigned.
In this case the insurer and insured under a policy providing a form of directors' and officers' (D & O) liability insurance dispute the extent of the insurer's liability for counsel fees and expenses incurred by the insured in defense of a suit which alleged both covered and noncovered claims against the insured. The parties also dispute the liability of the insurer for the counsel fees and expenses incurred by the insured in prosecuting the instant action. We shall hold that fees and expenses which are reasonably related to the defense of a covered claim may ordinarily be allocated wholly to that covered claim. We shall also hold that the insurer is liable for the insured's fees and expenses in this case.
For a policy period of August 1, 1976, to August 1, 1979, Continental Casualty Company (CNA) issued to the Board of Education of Charles County, Maryland (the Board) a "Board of Education Liability Including School District Reimbursement Policy." The policy was issued with an optional broad form of coverage under which "Assureds" were "[a]ll persons who were, now are or shall be employed by the School District...."
In the insuring clause of the basic policy CNA agreed
(a) With the Assureds that if, during the policy period any claim or claims are made against them ... for a Wrongful Act occurring during the policy period, the Insurer will pay on behalf of ... the Assureds ... for all loss [sic] which the said Assureds or any of them shall become legally obligated to pay;
(b) With the School District that if, during the policy period, any claim or claims are made against the Assureds ... for a Wrongful Act occurring during the policy period, the Insurer will pay on behalf of ... the School District all loss for which the School District may be required or permitted by law to indemnify such Assureds.
By the "Liberalization Endorsement" the insuring clause was amended to add subparagraph (c) which reads:
"(c) With the School District that if during the policy period any claim or claims are made against it as a result of any Wrongful Act occurring during the policy period, the Insurer will pay on behalf of [sic] ... all loss which the School District shall become legally obligated to pay."
"Wrongful Act" is defined in the policy to
mean any actual or alleged errors or misstatement or misleading statement or act or omission or neglect or breach of duty by the Assureds in the discharge of their duties, individually or collectively, or any matter claimed against them solely by reason of their being or having been Assureds during this policy period.
The policy provisions relating to "Costs, Charges and Expenses," as amended by the "Liberalization Endorsement," read:
The Board's policy from CNA provides for a $1,000 retention as to "[e]ach loss" and a limit of liability of $3,000,000 which is the "[m]aximum annual aggregate."
As a result of an exclusion also added by the "Liberalization Endorsement," the policy does not cover any "Loss" resulting from breach of a construction contract. 2 Naturally the litigation which spawned the subject case arose out of a construction contract.
On or about August 10, 1976, the Board entered into a contract with Iorio Construction Co., Inc. (Iorio) under which Iorio was to build a new high school in La Plata, Maryland. By letter dated August 29, 1979, the Board, acting through the Superintendent of Schools, gave notice that it was terminating the contract. That letter "enclosed a copy of the Architect's recommendation for termination ... on the basis that [the Iorio] firm has failed to supply enough properly skilled workmen or proper materials to finish the project in a timely fashion." Iorio responded by letter of September 10, 1979, which in part reads:
Your attempt at terminating our contract is absurd when viewed in the light of the incontrovertible fact that all of our work is virtually complete. The project has been occupied for months and has been in use by faculty, supervisory personnel and students. Your refusal to formally take occupancy of the project despite the fact that it has been operational and used for many, many months is unconscionable.
Such tactics can only be explained by your expressed desire to withhold, for no cogent reason, our long overdue contract balance.
In October 1979 Iorio filed suit against the Board and others in the United States District Court for the District of Maryland. 3 Iorio's claims sounded both in contract and in tort. Among the Board's codefendants were certain governmental entities, the partnership of the project's architects two individual architects from that firm, and three Assureds under the CNA policy, M. William Runyon (Runyon), the Assistant Superintendent of Business and Supporting Services for the Board, Jesse L. Starkey (Starkey), Superintendent of Schools for the Board, and Joseph J. Lavorgna (Lavorgna), Director of School Facilities for the Board. The Board, in December 1979, asked CNA to acknowledge coverage of the claims asserted by Iorio against the Board and its employees. CNA in early 1980 denied coverage.
On March 6, 1981, the Board, Runyon, Starkey, and Lavorgna sued CNA in the United States District Court for the District of Maryland for a declaratory judgment (the Declaratory Judgment Action). The plaintiffs sought a judicial determination that CNA was obligated for their expenses, including attorneys' fees, in defending Iorio's suit against them and also in the Declaratory Judgment Action. 4
The Board settled the Iorio suit in December 1982 so that the Declaratory Judgment Action has become a suit for damages and fees. There is no suggestion in the record that CNA has ever approved, or, after CNA took the position that there was no coverage, that CNA has been asked to approve, the defense conducted to the Iorio suit, the fees incurred by the Board or the settlement. In the course of proceedings in the Declaratory Judgment Action the federal court has concluded that certain claims in the Iorio suit were within the coverage of the CNA policy while other claims were not. Based on that preliminary legal ruling the Board has argued to the federal court that CNA was obligated to pay all of the legal fees and other expenses incurred by the Board in the Iorio suit while CNA has contended that an apportionment of those costs between covered and noncovered claims was required. At that point the federal court invoked the Maryland Uniform Certification of Questions of Law Act, Md.Code (1974, 1984 Repl.Vol.), §§ 12-601 to -609 of the Courts and Judicial Proceedings Article. The federal court has certified five questions to us, four of which deal with apportionment of litigation expenses between covered and noncovered claims. We shall state the precise questions and our answers to them in the course of analyzing the contentions of insurer and insured.
Review of the Iorio complaint is essential to an understanding of the issues raised in the litigation underlying the Declaratory Judgment Action. Iorio chose to divide its complaint into seven counts. The second and each succeeding count incorporate certain introductory allegations and all of the allegations of preceding counts. Counts I through III claim only against the Board and other governmental entities, but not against any individuals.
Count I alleges breach of the express construction contract and claims the difference between the contract price as "adjusted and fixed by the defendants" and the amount paid to Iorio. The difference is alleged to be $406,793. The second count seeks $298,313, allegedly representing the reasonable value of...
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