CX Reinsurance Co. v. Johnson

• Citation: 259 A.3d 174,252 Md.App. 393
• Decision Date: 07 September 2021
• Docket Number: No. 691, Sept. Term, 2020,691, Sept. Term, 2020
• Parties: CX REINSURANCE COMPANY LIMITED, et al. v. Devon JOHNSON, et al.
• Court: Court of Special Appeals of Maryland

252 Md.App. 393

259 A.3d 174

CX REINSURANCE COMPANY LIMITED, et al.

v.Devon JOHNSON, et al.

No. 691, Sept. Term, 2020

Court of Special Appeals of Maryland.

September 7, 2021

Argued by: Robert L. Hoegle, (Mary S. Diemer, Nelson, Mullins, Riley & Scarborough LLP, Washington, DC) (Stuart M. G. Seraina, Baldwin Law, LLC, Baltimore, MD), all on the brief, for Appellant.

Argued by: Paul S. Caiola (David G. Sommer, Sam Cowin, Gallagher, Evelius & Jones LLP, Baltimore, MD), for Appellee.

Panel: Beachley, Ripken, Charles E. Moylan, Jr. (Senior Judge, Specially Assigned), JJ.

Beachley, J.

In this case, we are asked to determine whether the Circuit Court for Baltimore City erred when it granted, pursuant to a motion for summary judgment, a declaratory judgment in favor of appellees and against appellants. Appellants consist of insurance companies CX Reinsurance Limited Company ("CX") and Liberty Mutual Mid-Atlantic Insurance Company, formerly Merchants and Business Men's Mutual Insurance Company ("Liberty Mutual") (collectively, the "Insurers") that provided liability coverage to certain landlords through insurance policies (the "Policies"). Appellees consist of a group of tort claimants ("Plaintiffs") who either have proven in court or allege to be the victims of lead poisoning

while living at properties owned by the landlords in the 1990s and 2000s when the landlords were insured by the Insurers’ Policies.¹

In 2015, CX filed contract rescission actions against the landlords, alleging that the landlords made fraudulent misrepresentations in their insurance applications. Ultimately, CX reached settlement agreements (the "Rescission Settlement Agreements") with the landlords that either eliminated or greatly reduced the insurance coverage that would be available to compensate Plaintiffs for their alleged lead injuries. Subsequently, the Plaintiffs filed a complaint for declaratory judgment against the Insurers, seeking a declaration that they are third-party beneficiaries of the Policies with vested rights to enforce those Polices, and that the Rescission Settlement Agreements do not affect those rights.

After a hearing on July 29, 2020, where the court considered the parties’ competing motions for summary judgment, the circuit court granted Plaintiffs’ request for a declaratory judgment. The court declared:

1) that Plaintiffs are third-party beneficiaries of the Policies; 2) that Plaintiffs have vested rights in the Policies as they existed before being rescinded by agreement or modified pursuant to the Rescission Settlement Agreements between [CX] and the Landlord Defendants; and 3) that the Rescission Settlement Agreements do not affect Plaintiffs’ vested rights in the Policies, and the Rescission Settlement Agreements are ineffective as to Plaintiffs[.]

The Insurers timely appealed and present the following issues for our review, which we have consolidated and rephrased as follows:

1. Did the circuit court err in concluding that Plaintiffs are intended third-party beneficiaries of the Policies?

2. Did the circuit court err in concluding that Plaintiffs’ rights in the Policies vested prior to the execution of the Rescission Settlement Agreements, and that the Rescission Settlement Agreements were ineffective as to Plaintiffs’ vested rights?

We hold that the Plaintiffs are intended third-party beneficiaries of the Policies, that their rights to enforce the Policies vested when they suffered their injuries, and that the Rescission Settlement Agreements did not modify or affect those vested rights. Accordingly, we shall affirm.

FACTS AND PROCEEDINGS

In 1997, certain landlords applied for commercial general liability coverage with CX for their rental properties in Baltimore. As part of the applications, landlords were required to indicate if "the [landlord] ever had any lead paint violations in the building(s)?" Apparently, every landlord answered this question in the negative.² CX then proceeded to issue these landlords general liability policies which, relevant here, provided coverage for bodily injuries resulting from lead paint exposure at the specified properties.³ The Policies also contained a "changes" provision which stated that CX and the first named insured could amend or waive the terms of the Policy at any time and without obtaining any other insured's consent, as well as a "cancellation" provision, which stated that the first named insured could cancel the Policy. Thereafter, CX renewed the landlords’ coverage, and starting in 1999, CX issued subsequent renewal policies through what would later become Liberty Mutual. All Plaintiffs resided in properties covered by these Policies during the late 1990s or early 2000s, and have alleged that they suffered lead exposure during their respective tenancies.

According to the Plaintiffs, a significant event relevant to this litigation occurred in 2011. Specifically, "the Court of Appeals invalidated Maryland's $17,000 liability cap on lead-related personal injury actions" in Jackson v. Dackman Co ., 422 Md. 357, 381-83, 30 A.3d 854 (2011). There, the Court of Appeals held that the $17,000 statutory cap then in place violated the Maryland Declaration of Rights, stating, "For a child who is found to be permanently brain damaged from ingesting lead paint, proximately caused by the landlord's negligence, the maximum amount of compensation under a qualified offer is miniscule. It is almost no compensation." Id . at 382, 30 A.3d 854. The Court held that the cap's significant limitation on the amount of possible recovery violated Article 19 of the Maryland Declaration of Rights. Id . at 383, 30 A.3d 854. Plaintiffs allege that this shift in the law created a significant problem for the Insurers in light of the "countless pending lead paint claims against its insureds." Simply put, Jackson dramatically increased the Insurers’ potential liability to injured tort claimants who successfully sued the insured landlords for lead poisoning

. Plaintiffs claim that, in light of this shift in the law, CX "devised a sinister strategy to avoid its financial obligations at the expense of [Plaintiffs] and other lead paint victims."⁴

That strategy, according to Plaintiffs, was to procure the Rescission Settlement Agreements at issue in this case. Those settlement agreements came about as follows. In 2015, CX sued the landlords in the United States District Court for the District of Maryland, seeking rescission of the Policies on the grounds that the landlords had made fraudulent misrepresentations in the insurance applications. Specifically, CX alleged that the landlords lied regarding whether there had ever been any lead paint violations in the buildings to be insured. Ultimately, CX and the landlords entered into the Rescission Settlement Agreements, which resulted in either mutual rescissions of the Policies or amendatory endorsements that reduced, but did not completely eliminate, the insurance coverage afforded by the Policies. Thus, CX's federal action against the landlords was not tried to judgment. The Plaintiffs were not parties to the Rescission Settlement Agreements.

In April 2018, a single Plaintiff who held a judgment against a landlord initiated the instant action by filing a complaint for declaratory judgment against CX and the appropriate landlord. By June 2019, the litigation had grown to add numerous Plaintiffs and landlord defendants, as well as Liberty Mutual. The Plaintiffs’ Third Amended Complaint for Declaratory Judgment stated that the Plaintiffs were former residents of properties owned by the landlord defendants and insured by the Insurers. The Plaintiffs alleged that they had been injured by lead paint at these properties, and that the Insurers were responsible for defending and indemnifying the landlords for these lead paint claims. Recognizing the existence of the Rescission Settlement Agreements between the Insurers and the landlords, the Plaintiffs sought a declaration that they were intended third-party beneficiaries of the insurance Policies, and, concomitantly, that the Rescission Settlement Agreements had no legal effect on their vested rights to enforce the Policies.

Following a motion and cross-motion for summary judgment, the circuit court issued a memorandum opinion and corresponding declaration. As noted above, the court declared that: 1) the Plaintiffs are intended third-party beneficiaries of the Policies, 2) Plaintiffs’ rights in the Policies vested before the Insurers and landlords executed the Rescission Settlement Agreements, and 3) the Rescission Settlement Agreements did not affect the Plaintiffs’ vested rights in the Policies and are ineffective as to the Plaintiffs. We shall provide additional facts as necessary.

DISCUSSION

The parties agree on the applicable standard of review where the circuit court grants summary judgment:

We review the Circuit Court's grant of summary judgment as a matter of law. Goodwich v. Sinai Hosp. of Balt., Inc. , 343 Md. 185, 204, 680 A.2d 1067, 1076 (1996) ("The standard of review for a grant of summary judgment is whether the trial court was legally correct." (citation omitted)). Before determining whether the Circuit Court was legally correct in entering judgment as a matter of law in favor of [appellees], we independently review the record to determine whether there were any genuine disputes of material fact. Hill v. Cross Country Settlements , LLC , 402 Md. 281, 294, 936 A.2d 343, 351 (2007). A genuine dispute of material fact exists when there is evidence "upon which the jury could reasonably find for the plaintiff." Beatty v. Trailmaster Prods., Inc. , 330 Md. 726, 739, 625 A.2d 1005, 1011 (1993) (citation omitted). "We review the record in the light most favorable to the nonmoving party and construe any reasonable inferences that may be drawn from the facts against the moving party." Myers v. Kayhoe , 391 Md. 188, 203, 892 A.2d 520, 529 (2006) (citation omitted).

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