Mesmer v. MAIF

• Citation: 725 A.2d 1053,353 Md. 241
• Decision Date: 11 March 1999
• Docket Number: No. 50,50
• Parties: Denise MESMER et al. v. The MARYLAND AUTOMOBILE INSURANCE FUND.
• Court: Court of Appeals of Maryland

725 A.2d 1053
353 Md. 241

Denise MESMER et al.
v.
The MARYLAND AUTOMOBILE INSURANCE FUND

No. 50, September Term, 1996.

Court of Appeals of Maryland.

March 11, 1999.

725 A.2d 1055

Martin H. Freeman (Robert K. Jenner, Freeman & Jenner, Bethesda; David M. Kopstein, Dross, Levinstein, Perilman & Kopstein, Washington) on brief for petitioners

Mark D. McCurdy, Asst. Atty. Gen., Annapolis, Andrew H. Baida, Asst. Atty. Gen. (J. Joseph Curran, Jr., Atty. Gen., Baltimore; Stanley L. Lipshultz, Victor I. Weiner, Silver Spring) on brief for respondent.

Argued before BELL, C.J., and ELDRIDGE, RODOWSKY, CHASANOW, KARWACKI¹, RAKER and WILNER, JJ.

725 A.2d 1054

ELDRIDGE, Judge

This is an action against a liability insurer based upon the insurer's allegedly erroneous denial of coverage. The issues are whether the action sounds in contract, in tort, or both, and what is the appropriate measure of damages.

I.

In January 1989 the Maryland Automobile Insurance Fund ("MAIF"), a state agency, issued an automobile liability policy on a 1981 Buick Skylark to Gladys Mesmer with personal injury liability coverage limits of $20,000.00 per person and $40,000.00 per accident. Krist Leo Salmi of Wheaton, Maryland, was the insurance agent or broker who produced the policy. The application and declaration page of the policy listed Gladys as the owner and operator of the vehicle. Gladys's daughter, Denise Mesmer, was also listed as an operator of the Buick. The application stated that both Gladys and Denise held valid Maryland driver's licenses, resided in Silver Spring, Maryland, and that Gladys had been refused automobile liability coverage by two private insurance companies.²

On or about July 19, 1989, Gladys contacted Salmi and informed him that "[w]e've changed vehicles." Both Gladys and Salmi stated that the matter primarily discussed was that Denise would be the primary driver of the newly acquired vehicle and that neither of them raised the issue of who was the owner of the newly acquired vehicle. Salmi secured from MAIF a new insurance policy

725 A.2d 1056

that removed the Buick and added a 1989 Chevrolet Spectrum, without any change in coverage limits. The declaration page listed Gladys as the named insured and listed both Gladys and Denise as operators of the Chevrolet. The declaration page also included Item 8, stating that "[u]nless otherwise stated herein: (a) [t]he automobile(s) described in item 3 is (are) solely owned by the named insured...." The Chevrolet, however, was not titled in either Denise's or Gladys's name. The titled owner was Robert Arthur Hyman, Gladys's future husband, with whom she and Denise lived. According to the complaint in the instant case, the Chevrolet had been purchased in the name of Mr. Hyman "[i]n order to secure financing."

On February 22, 1990, Denise, while in the District of Columbia, negligently operated the Chevrolet and caused an accident. Peggy Lyons was seriously injured in the accident. The accident was reported to MAIF, which investigated the matter for approximately two months. On April 20, 1990, MAIF notified Gladys that it was denying coverage on the ground that she did not have an insurable interest in the Chevrolet at the time the policy was issued and that, therefore, the policy was being voided as of January 31, 1990, and premium payments would be refunded. Three days later MAIF informed Hyman that the Chevrolet did not qualify as an insured vehicle under the terms of the policy and that the policy was being voided ab initio.

In September 1990 and again in July 1991, the attorneys representing McKeeba Lyons, mother of Peggy Lyons, contacted MAIF by letter. The first letter requested that MAIF "post its policy" to enable the injured party to "proceed against other available insurance." The second letter offered to "settle this matter as against Denise Mesmer for MAIF's policy limit of $20,000." MAIF responded to both letters but declined to enter into any negotiations concerning Peggy's claim, stating that the Chevrolet did not qualify as an insured vehicle and that there was no coverage. Neither the Mesmers, nor Lyons, nor Hyman brought a declaratory judgment action to challenge MAIF's position that there was no coverage.

Peggy filed suit in the Superior Court for the District of Columbia against Denise. MAIF was not named as a party to and did not receive notice of the action filed in the District of Columbia. On April 14, 1992, following a jury trial, a judgment for Peggy against Denise, in the amount of $19,563,203.00, was entered.

On April 30, 1993, the instant action was filed in the Circuit Court for Montgomery County by Denise and Gladys against MAIF. Denise subsequently assigned her rights against MAIF to Peggy. The original complaint was amended to add Peggy as a plaintiff and add Salmi, the producer of the policy, as a defendant.³ The plaintiffs sought to recover the amount of the District of Columbia judgment, attorney fees, and other damages from MAIF and Salmi based on alleged breach of contract and negligence.

The parties filed cross motions for summary judgment. The issues presented in the motions were as follows: (1) whether the plaintiffs' claims were actions in tort or in contract; (2) whether Peggy could sue MAIF as a third-party beneficiary of Denise's policy; (3) if the claims were in tort, whether the doctrine of sovereign immunity barred a claim against MAIF for bad faith failure to settle a claim; (4) whether or not MAIF was guilty, as a matter of law, of a bad faith failure to settle a claim; (5) whether the plaintiffs' claims were barred by the statute of limitations; and (6) whether MAIF would be liable under the doctrine of respondeat superior for any negligence by Salmi.

After oral argument, the circuit court held as follows: (1) the plaintiffs' claims were in both contract and tort; (2) Peggy had standing to maintain the instant case as a third party beneficiary; (3) MAIF is a state agency and is thus cloaked with sovereign immunity

725 A.2d 1057

in tort actions; (4) because MAIF has immunity, the issue of whether MAIF was guilty of bad faith refusal to settle the claim need not be reached, but that if it were reached, it would be a matter for the trier of fact at trial; (5) the action was not barred by the statute of limitations; and (6) since MAIF is not liable in tort because of sovereign immunity, MAIF cannot be held liable in tort under the doctrine of respondeat superior. The circuit court also held, as a matter of law, that MAIF had a contractual duty to defend Denise in the underlying tort action and that MAIF breached this duty. The Court awarded the plaintiffs the $20,000.00 policy limit and $9,673.95 in attorney fees as damages for breach of contract

Final judgment, pursuant to Maryland Rule 2-602, was entered by the circuit court with regard to all claims against MAIF. The judgment incorporated the above-summarized rulings. The circuit court stayed all claims against Salmi pending the outcome of a timely filed appeal. A timely notice of appeal was subsequently filed by the plaintiffs. MAIF did not cross-appeal.⁴

The plaintiffs filed a petition for a writ of certiorari in this Court which we granted prior to consideration of the case by the Court of Special Appeals. Mesmer v. Maryland Automobile Insurance Fund, 342 Md. 633, 679 A.2d 539 (1996).

II.

The issues before this Court arise out of MAIF's voiding or rescinding ab initio the insurance policy issued to Gladys for the Chevrolet. The rescission resulted in MAIF's denial of coverage and refusal to defend the Mesmers against Peggy's claim.

The plaintiffs argue "that Appellants' claim for the excess judgment sounds in contract rather than tort," that the claim is based on the insurer's breach of the "`duty to defend [which] is a contractual obligation,'" and that "because a claim for damages resulting from a wrongful failure to defend sounds in contract, such a claim is not even arguably barred by sovereign immunity. Sovereign immunity for contract actions has been statutorily abrogated in Maryland." (Appellants' brief at 4-5). The plaintiffs further argue that, although a tort claim based upon an insurer's wrongful failure to settle requires a "show[ing] that the carrier acted in bad faith," a contract claim based on the insurer's failure to defend simply requires a showing that the contract was breached. (Id. at 5-6). The plaintiffs go on to argue that the damages for breach of the contractual duty to defend are not confined to the policy limits and attorney fees but may properly include "the amount of an excess judgment." (Id. at 6-12).

The plaintiffs alternatively contend that, "[i]f this Court decides that bad faith is a necessary element of the claim for recovery of the excess judgment," and "if the Court further decides that the existence of that element renders this a tort claim for purposes of sovereign immunity, then" MAIF does not enjoy sovereign immunity. (Id. at 14). They argue that, under the legislation creating MAIF as an insurer, "MAIF was intended to function ... in a manner similar to a private insurance company" and "it is not endowed with sovereign attributes consistent with sovereign immunity." (Id. at 14, 21). The plaintiffs distinguish Harrison v. Motor Vehicle Admin., 302 Md. 634, 648, 490 A.2d 694, 701 (1985), where this court stated that MAIF is a "State agenc[y] which [has] inherited the sovereign attributes of the State and [is] performing a governmental function." They point out that Harrison involved MAIF's function as successor to the Unsatisfied Claim and Judgment Fund and not MAIF's function as a carrier issuing motor vehicle insurance policies.

MAIF argues that its "failure to defend Ms. Mesmer as a result of its rescission of its insurance policy gives rise to, at most, contractual damages that are confined to the limits set forth in the [insurance] policy and the costs of defending the District of Columbia litigation." (Appellee's...