CX Reinsurance Co. v. Johnson

• Decision Date: 29 August 2022
• Docket Number: 47, Sept. Term, 2021
• Parties: CX REINSURANCE COMPANY LIMITED and Liberty Mutual Mid-Atlantic Insurance Company v. Devon S. JOHNSON, et al.
• Court: Court of Special Appeals of Maryland

481 Md. 472

282 A.3d 126

CX REINSURANCE COMPANY LIMITED and Liberty Mutual Mid-Atlantic Insurance Company

v.Devon S. JOHNSON, et al.

No. 47, Sept. Term, 2021

Court of Appeals of Maryland.

August 29, 2022

Argued by Robert L. Hoegle (Mary S. Diemer, Nelson Mullins Riley & Scarborough LLC, Washington, DC; Stuart M.G. Seraina, Baldwin Seraina, LLC, Baltimore, MD), on brief, for Petitioners

Argued by Paul S. Caiola (David G. Sommer and Sam Cowin, Gallagher Evelius & Jones LLP, Baltimore, MD), on brief, for Respondents

Amicus Curiae Complex Insurance Claims Litigation Association: Adam J. Singer, Esquire, Laura A. Foggan, Esquire, Crowell & Moring LLP, 1001 Pennsylvania Avenue, NW, Washington, DC 20004

Argued before:^* Getty, C.J., Watts, Hotten, Booth, Biran, Glenn T. Harrell, Jr. (Senior Judge, Specially Assigned), Robert N. McDonald (Senior Judge, Specially Assigned), JJ.

Biran, J.

For many years, CX Reinsurance Company Limited and its predecessor entity ("CX"), in combination with Liberty Mutual Mid-Atlantic Insurance Company and its predecessor entity ("Liberty Mutual"), issued commercial general liability policies (the "Policies") to several Baltimore residential landlords (the "Landlords") that included coverage for bodily injuries resulting from lead paint exposure at the Landlords’ rental properties. After allegedly discovering material misrepresentations in the Landlords’ initial policy applications, CX filed contract rescission actions against the Landlords in 2015. Eventually, CX and the Landlords settled the rescission cases. Under the terms of the settlements, the coverage for lead paint-related losses was substantially reduced or, in some instances, completely eliminated.

CX and Liberty Mutual (collectively, the "Insurers") are the Petitioners in this case. The Respondents are 15 tort claimants (the "Claimants") who allege that they suffered bodily injuries as a result of their exposure to lead paint while residing in the Landlords’ rental properties. The majority of the Claimants had not obtained final judgments against, or entered into settlements with, the Landlords before CX and the Landlords settled the rescission cases.

In the Circuit Court for Baltimore City, the Claimants filed suit against the Insurers and the Landlords, seeking a declaration that: (1) the Claimants are "intended third-party beneficiaries" of the Policies; and (2) the settlements between CX and the Landlords do not modify or affect the insurance proceeds available under the Policies to indemnify the Landlords with respect to judgments obtained by the Claimants against the Landlords. The circuit court ruled that the Claimants are intended beneficiaries of the Policies and granted summary judgment in the Claimants’ favor. The Court of Special Appeals affirmed.

As discussed below, the relevant provisions of the Policies make clear that those Claimants who do not hold final judgments against the Landlords (and who have not entered into approved settlement agreements with the Landlords) are not the primary parties in interest under the Policies. No Maryland statute, regulation, or public policy recognizes tort claimants who do not hold judgments against insureds as intended beneficiaries of general liability insurance policies. That being the case, the language of the Policies controls here. To the extent the Claimants do not hold judgments against, and have not entered into approved settlement agreements with, the Landlords, they are not intended beneficiaries of the Policies. Therefore, assuming that they eventually do obtain judgments against, or enter into settlements with, their Landlords, those Claimants will not have the right to enforce the terms of Policies as they existed prior to the rescission case settlements, provided that those settlements were the product of good-faith, non-collusive negotiations. Those Claimants who obtained final judgments against their Landlords prior to the settlements of the applicable rescission cases may enforce the pre-settlement terms of the Policies.

IBackground

As stated above, the circuit court granted the Claimants’ motion for summary judgment. In the light most favorable to the Insurers,¹ the record reflects the following:

A. The Policies

Beginning in 1997, the Landlords submitted applications to CX to obtain commercial general liability insurance policies.

The applications included Question 16, in which CX asked whether "the Insured [has] ever had any lead paint violations in the building(s)?" Each of the Landlords answered "No" to this question on the application itself or, if they left that question blank, they allegedly otherwise provided CX with a negative response to that question. Based on these negative responses, CX issued the Policies, which included coverage relating to bodily injuries resulting from exposure to lead-based paint at the Landlords’ covered properties during the policy term. Specifically, the Policies provided that

we^{[2 ]} will pay those sums that the Insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" arising out of the Ingestion, Inhalation, absorption of, or exposure to lead, lead-paint or other lead-based products of any kind, form or nature whatsoever to which the insurance provided by this endorsement applies. We will have the right and duty to defend any "suit" seeking those damages. We may at our discretion investigate any "occurrence" and settle any claim or "suit" that may result.

Included in the Policies was a "Schedule of Named Insureds," identifying the first Named Insured as well as other Named Insureds and identifying the insured properties in a "Schedule of Locations." The Policies also contained a "Changes" provision stating:

This policy contains all the agreements between you and us concerning the insurance afforded. The first Named Insured shown in the Declarations is authorized to make changes in the terms of this policy with our consent. This policy's terms can be amended or waived only by endorsement issued by us and made a part of this policy.

The Policies also included a "Cancellation" provision allowing CX or the first Named Insured to cancel the policy. Nothing in the Policies required CX or the first Named Insured to obtain the consent of any other Named Insured or any other person or entity before exercising the right of cancellation or agreeing to a change in terms.

In addition, the policies included a "Legal Action Against Us" provision, stating that:

No person or organization has a right under this Coverage Part:

a. To join us as a party or otherwise bring us into a "suit" asking for damages from an insured; or

b. To sue us on this Coverage Part, unless all of its terms have been fully complied with.

A person or organization may sue us to recover on an agreed settlement or on a final judgment against an insured obtained after an actual trial; but we will not be liable for damages that are not payable under the terms of this Coverage Part or that are in excess of the applicable limit of insurance. An agreed settlement means a settlement and release of liability signed by us, the insured and the claimant or the claimant's legal representative.

For lead paint claims, the Policies purported to cover up to $1,000,000 for any one "occurrence" and, depending on the policy, up to $1,000,000 or $2,000,000 in the aggregate. The Insurers continually renewed the Policies for more than a decade.³

B. The Change in the Legal Landscape Regarding Liability for Lead-Paint Claims

In 1994, the Maryland General Assembly enacted the Reduction of Lead Risk in Housing Act, which, among other things, effectively placed a $17,000 cap on lead-related personal injury compensation by providing immunity from suit to owners of "affected properties" who made "qualified offers" of up to $17,000 to persons "at risk" of ingesting lead at the properties. H.B. 760, 1994 Leg., 408th Sess. (Md. 1994). Based, at least in part, on this recently adopted legislation, the Insurers decided to offer their commercial general liability insurance products to the Landlords. While the Policies on paper provided for up to $1,000,000 in coverage per claim of bodily injury resulting from exposure to lead paint, the Landlords’ liability for each such claim effectively was capped at $17,000.

The landscape relating to lead-paint claims changed with this Court's 2011 decision in Jackson v. Dackman Co ., 422 Md. 357, 30 A.3d 854 (2011). In that case, we held that the immunity provisions in the Reduction of Lead Risk in Housing Act violated Article 19 of the Maryland Declaration of Rights. Id. at 382-83, 30 A.3d 854. As a result, the Insurers’ potential exposure for lead-related personal injury claims under the Polices increased substantially.

C. The Rescission Actions

In 2015, CX filed actions against the Landlords in the United States District Court for the District of Maryland, seeking rescission of the Policies. Among other theories, CX claimed that the Landlords had made material misrepresentations in their initial applications for insurance by falsely answering Question 16 concerning prior "lead paint violations in the building(s)[.]" According to CX's Complaints, prior to the Landlords submitting their applications, the Baltimore Department of Health had cited the Landlords and/or other Named Insureds for lead paint violations in numerous buildings included on the Policies’ Schedules of Locations. CX further alleged that, if the Landlords had truthfully answered Question 16, CX would not have issued the Policies.

Over the next several years, CX and the Landlords litigated the various rescission cases. Eventually, the parties entered into settlements to resolve CX's claims. Six of the settlements resulted in amendments to the Policies that reduced, but did not fully eliminate, coverage; three of the agreements resulted in mutual rescission of the underlying policies altogether.

D. This Litigation

In April 2018, one of the Claimants, Devon S. Johnson,...