POTOMAC RES. CLUB v. WESTERN WORLD INS.

• Decision Date: 08 January 1998
• Docket Number: No. 95-CV-1268,No. 95-CV-1266,95-CV-1266,95-CV-1268
• Citation: 711 A.2d 1228
• Parties: POTOMAC RESIDENCE CLUB and Woodley Housing Corporation, Appellants, v. WESTERN WORLD INSURANCE COMPANY, Appellee. WESTERN WORLD INSURANCE COMPANY, Appellant, v. POTOMAC RESIDENCE CLUB and Woodley Housing Corporation, Appellees.
• Court: D.C. Court of Appeals

711 A.2d 1228

POTOMAC RESIDENCE CLUB and Woodley Housing Corporation, Appellants, v.WESTERN WORLD INSURANCE COMPANY, Appellee.WESTERN WORLD INSURANCE COMPANY, Appellant, v. POTOMAC RESIDENCE CLUB andWoodley Housing Corporation, Appellees.

Nos. 95-CV-1266, 95-CV-1268.

District of Columbia Court of Appeals.

Argued January 23, 1997.

Decided December 4, 1997.

Amended January 8, 1998.

APPEAL FROM THE DISTRICT COURT, STEPHEN G. MILLIKEN, J.

John L. Moore, Jr., with whom Stephen R. Mysliwiec and James P. Rathvon, Washington, DC, were on the brief, for appellants in No. 95-CV-1266 and appellees in No. 95-CV-1268.

David F. Grimaldi, Washington, DC, for appellee in No. 95-CV-1266 and appellant in No. 95-CV-1268.

Before SCHWELB, KING, and RUIZ, Associate Judges.

SCHWELB, Associate Judge:

The principal question presented in this appeal is whether an insured is entitled to recover its counsel fees in a successful action for a declaratory judgment in which the insured has established that its liability insurer wrongfully refused to defend it in a tort action brought against the insured by third parties. The question is one of first impression in this jurisdiction. We answer it in the affirmative.

I. THE FACTS

A. The insurance policy.

Potomac Residence Club operates several mental health programs in the District of Columbia. Woodley Housing Corporation, a subsidiary or "sister corporation" of Potomac Residence Club, owns "Woodley House," a psychiatric halfway house. In this opinion, we shall refer to Potomac Residence Club and Woodley Housing Corporation collectively as "Potomac Residence."

In the fall of 1990, Western World Insurance Company issued a comprehensive general liability policy to Potomac Residence. The policy provided three types of coverage: (i) Owners', Landlords' and Tenants' Liability Insurance; (ii) Personal Injury Liability Insurance; and (iii) Professional Liability Insurance.

Under the terms of the policy, Western World agreed to indemnify Potomac Residence for "all sums which [Potomac Residence] shall become legally obligated to pay as damages because of . . . bodily injury," subject to certain exclusions. Western World also agreed to pay

all sums which [Potomac Residence] shall become legally obligated to pay as damages because of liability arising out of any negligent act, error or omission in rendering or failing to render professional services of the type described in the description of hazard shown above, whether committed by the insured or any person employed by the insured. . . .

The policy defined "professional services" as "mental health rehabilitation counseling and housing." According to the terms of the policy, Western World was obliged to defend any action instituted against Potomac Residence, "even if any of allegations of the suit are groundless, false or fraudulent. . . ."

The policy contained a "sexual action exclusion" which was added as an endorsement to the policy. The exclusion provided as follows:

It is agreed that no coverage exists for claims or suits brought against any insured for damages arising from sexual action. Sexual action includes, but is not limited to, any behavior with sexual connotation or purpose — whether performed for sexual gratification, discrimination, intimidation, coercion or other reason.

It is further agreed that this exclusion applies even if an alleged cause of the damages was the insured's negligent hiring, placement, training, supervision, act, error or omission.

(Emphasis added.)

The "sexual action" exclusion modified the Owners', Landlords' and Tenants' Liability and the Professional Liability Insurance coverages, but it did not apply to Western World's obligations if Potomac Residence was sued for allegedly causing personal injury. The Personal Injury Liability coverage, which was set forth in a separate schedule attached to the policy, obligated Western World to

pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of injury (herein called "personal injury") sustained by any person or organization and arising outof one or more of the following offenses committed in the conduct of the named insured's business:

Group A __________ false arrest, detention or imprisonment

. . . .

Group C __________ wrongful entry or eviction, or other invasion of the right of private occupancy[.]

B. The Zeender litigation.

On December 19, 1991, Cathy and Ramon Zeender filed a ten-count complaint against Potomac Residence in the Superior Court. The complaint was based on the alleged exploitation of Cathy Zeender by Karen Prieto, a Potomac Residence counselor, at a time when Mrs. Zeender, who was suffering from a Multiple Personality Disorder, was a resident of Potomac Residence's half-way house. The Zeenders alleged that Ms. Prieto engaged in a sexual relationship with Cathy Zeender from December 19, 1990 through January 6, 1991 and that she drank alcohol with Mrs. Zeender, even though Ms. Prieto knew that these activities were improper and potentially harmful to the patient. The complaint also alleged that Ms. Prieto caused Mrs. Zeender to dissociate,¹ contrary to the treatment plan prescribed for Mrs. Zeender by her psychiatrist.

According to the complaint, Edith Maeda, the executive director of Potomac Residence, learned of Ms. Prieto's improper conduct with Cathy Zeender. The Zeenders alleged that, contrary to the directions of Mrs. Zeender's psychiatrist, Ms. Maeda permitted Ms. Prieto not only to continue her employment with Potomac Residence, but also to maintain her relationship with Cathy Zeender. The Zeenders claimed that the defendants' conduct constituted, inter alia, breach of fiduciary duty, assault and battery, false imprisonment, intentional infliction of emotional distress, gross negligence, negligent supervision, and breach of contract. They prayed for an award of compensatory and punitive damages totalling one hundred million dollars.

C. The declaratory judgment action.

On December 27, 1991, Potomac Residence forwarded the Zeenders' complaint to Western World and inquired as to coverage. On January 24, 1992, Western World responded that it had no obligation to defend or indemnify Potomac Residence with respect to the Zeender complaint. Western World relied solely on the policy's sexual action exclusion.

According to its brief, Potomac Residence could not afford to pay for legal representation in the Zeender matter. The law firms of Piper & Marbury L.L.P. and Kator, Scott & Heller agreed to represent Potomac Residence without fee, but only if the defense costs were not covered by insurance.

In September 1992, pro bono counsel for Potomac Residence informed Western World that the Zeenders' attorneys had offered to settle the Zeender litigation within the policy limits, and requested that Western World respond to the offer. Western World again disclaimed any obligation to defend or indemnify Potomac Residence. In January 1993, counsel for Potomac Residence informed Western World that if Western World refused to participate in a scheduled mediation conference in the Zeender litigation, Potomac Residence would file suit to vindicate its rights under the policy. Western World refused, and on February 12, 1993, Potomac Residence instituted this action against Western World in the Superior Court.

In its complaint, Potomac Residence prayed for a declaratory judgment that Western World owed a duty to defend Potomac Residence in the Zeender case, and that Western World had breached this duty. Potomac Residence asked the court to award it the expenses and counsel fees that it had incurred to date in defending the Zeender litigation, as well as the costs and fees that it would incur in prosecuting its declaratory judgment action. Potomac Residence also asked the court to declare that Western World was obligated to indemnify Potomac Residence for any amounts that might bepaid to the Zeenders pursuant to an adverse judgment or negotiated settlement. Finally, Potomac Residence included in its complaint a count alleging that Western World had acted in bad faith in denying coverage.

Potomac Residence filed a motion for summary judgment in which it reiterated the position taken in its complaint. Western World opposed the motion, again relying on the sexual action exclusion of the policy. Western World acknowledged in its memorandum in opposition to Potomac Residence's motion that Ms. Prieto's alleged actions "included but [were] not limited to behavior with sexual connotation or purpose." (Emphasis added.) In addition to opposing Potomac Residence's motion, Western World cross-moved for summary judgment on all counts of the complaint.

On July 6, 1994, Judge Patricia A. Wynn issued a Memorandum Opinion and Order in which she held that Western World had breached its duty to defend Potomac Residence against the Zeender complaint and was therefore liable for damages arising out of that breach. Judge Wynn concluded, inter alia, that the allegations in the Zeender complaint concerning Ms. Prieto's unauthorized trips with Mrs. Zeender to restaurants and bars were not necessarily sexual in connotation and purpose, and that there was therefore potential coverage under the Professional Liability portion of the policy. The judge also held that the claim for negligent hiring and supervision was not barred by the policy's sexual exclusion. The judge concluded, however, that there was no evidence of bad faith on Western World's part, and she granted summary judgment in favor of Western World as to the bad faith count.

On August 1, 1994, following receipt of Judge Wynn's order, counsel for Potomac Residence submitted to Western World invoices for the costs and fees incurred in the defense of the Zeender suit and in prosecuting the instant declaratory judgment action through June 1994. Western World refused to pay these invoices, claiming that they were excessive.

On September 23, 1994,...