Selective Way Ins. Co. v. Nationwide Prop. & Cas. Ins. Co.

• Decision Date: 30 October 2019
• Docket Number: No. 755,755
• Parties: SELECTIVE WAY INSURANCE COMPANY v. NATIONWIDE PROPERTY AND CASUALTY INSURANCE COMPANY, ET AL.
• Court: Court of Special Appeals of Maryland

SELECTIVE WAY INSURANCE COMPANY
v.
NATIONWIDE PROPERTY AND CASUALTY INSURANCE COMPANY, ET AL.

No. 755

COURT OF SPECIAL APPEALS OF MARYLAND

September Term, 2018
October 30, 2019

LIABILITY INSURANCE—DAMAGES FOR BREACH OF DUTY TO DEFEND

A liability insurer for a subcontractor has a duty to defend a suit against a general contractor where: the policy makes the general contractor an additional insured with respect to claims arising out of or caused by the subcontractor's work for the general contractor; and the allegations in the lawsuit demonstrate a potential that the damages resulted from the general contractor's supervision of the subcontractor's work.

In those circumstances, the insurer must provide a defense of all claims raised against the additional insured, notwithstanding alternative allegations for which there is no potentiality of coverage. An insurer that breaches this duty is liable for the reasonable costs of defending the entire suit against the additional insured.

EQUITABLE SUBROGATION—PRIMARY AND EXCESS INSURANCE

Where an excess insurer pays for the defense that another insurer was primarily obligated to provide, the primary insurer must reimburse the excess insurer for the costs of defense, as well as the cost of litigation to establish the primary insurer's duty to defend. In deciding whether one insurer is primary over another, the rights and liabilities of the insurers depend, as far as possible, upon the specific language of their policies.

VERDICT SHEETS—PRESERVATION OF OBJECTION

Under Md. Rule 2-522, if the court fails to submit any issue to the jury, all parties waive the right to a jury trial of the issue unless a party demands its submission to the jury before the jury retires. No party may assign as error the refusal to submit a requested issue to the jury unless the party objects on the record before the jury retires, stating distinctly the matter to which the party objects and the grounds of the objection.

In this case, an insurer waived its contention that the court erred by omitting from the verdict sheet an issue regarding contractual notice, by failing to object to the omission.

PREJUDGMENT INTEREST—ATTORNEYS' FEES AND RELATED EXPENSES

A plaintiff is not entitled to prejudgment interest, as a matter of right, on the damages resulting from a liability insurer's breach of contract, in the form of reasonable and necessary attorneys' fees and other expenses incurred in defending a lawsuit against the insured. Such a claim is unliquidated, because the amount is not fixed by agreement and

Page 2

cannot be exactly determined by rules of arithmetic or law. Therefore, a plaintiff's entitlement to prejudgment interest on the claim rests in the discretion of the fact-finder.

The court is not authorized to add prejudgment interest to damages awarded by the jury where the allowance of prejudgment interest is discretionary for the jury, but where the issue is not presented to the jury and the plaintiff does not request that the court submit the issue to the jury.

ATTORNEYS' FEES AND RELATED EXPENSES—RIGHT TO JURY TRIAL

The damages resulting from a liability insurer's breach of a contractual duty to defend include the attorneys' fees and expenses incurred in a declaratory judgment action to establish the insurer's duty to defend. A breaching insurer can be held liable for the amount that would have put the insured in as good a position as it would have occupied had the insurer performed the contractual obligation from the beginning.

A breaching insurer is entitled to have the amount of those fees and expenses proven with certainty and under standards ordinarily applicable for proof of contractual damages. Because those amounts are recoverable as part of the damages for breach of contract, the breaching insurer is entitled to demand that a jury determine the amount of damages. The plaintiff bears the burden of proving, by a preponderance of the evidence, the amount of reasonable and necessary fees and expenses incurred by the plaintiff as a result of the insurer's breach.

Page 3

Circuit Court for Baltimore County
Case No. 03-C-08-006273

REPORTED

Arthur, Shaw Geter, Eyler, Deborah S. (Senior Judge, Specially Assigned), JJ.^*

Opinion by Arthur, J.

^*Judge Kathryn G. Graeff did not participate in the Court's decision to designate this opinion for publication pursuant to Md. Rule 8-605.1.

Page 4

This case concerns a liability insurer's duty to defend. Under its policies, the insurer was obligated to defend a general contractor from claims with respect to work performed by four subcontractors. The insurer declined to defend the general contractor against a lawsuit based on allegations that its subcontractors performed defective work.

In a subsequent declaratory judgment action, the Circuit Court for Baltimore County determined that the insurer had been obligated to defend the general contractor in the construction-defect lawsuit. The court ordered the insurer to pay the costs of defense, in an amount decided by a jury. After the jury verdict, the court ordered the insurer to pay prejudgment interest on those defense costs. The court also ordered the insurer to pay all expenses incurred in the declaratory judgment action, in an amount decided by the court rather than by a jury. The insurer appealed.

For the reasons explained in this opinion, we shall affirm the judgment with respect to the insurer's obligation to pay defense costs from the construction-defect lawsuit; reverse the judgment with respect to the award of prejudgment interest by the court; and vacate the judgment with respect to attorneys' fees and expenses incurred in the declaratory judgment action. The case shall be remanded for a jury trial solely to determine the amount of attorneys' fees and expenses incurred in the declaratory judgment action as a result of the insurer's breach of the duty to defend.

FACTUAL AND PROCEDURAL BACKGROUND

A. Selective Way Liability Insurance for Questar's Subcontractors

In 2001, the Highpointe Business Trust engaged Questar Builders, Inc., to oversee the construction of the Highpointe Apartments in Hunt Valley. Construction was

Page 5

completed in early 2004.

As the general contractor for the Highpointe project, Questar entered into contracts with dozens of subcontractors. Four of those subcontracts, executed between 2001 and 2003, are pertinent here. SEH Excavating Contractors, Inc., agreed to perform land development work for the project; Streett's Waterproofing, Inc., agreed to perform waterproofing work for certain buildings; Justice Waterproofing, Inc., agreed to perform waterproofing work for tennis courts above a parking garage; and King Carpentry Contractors, Inc., agreed to perform rough carpentry work for certain buildings.

Each subcontract required the subcontractor to indemnify Questar from claims for damages resulting from the subcontractor's work; to maintain commercial general liability insurance with "primary and noncontributory" coverage; and to name Questar as an "additional insured[]" under those policies.

For various policy periods between 2001 and 2007, those four subcontractors purchased commercial general liability insurance from appellant Selective Way Insurance Company. In the policies that it issued to the subcontractors, Selective Way promised to indemnify its insureds if they became legally obligated to pay damages based on claims covered by the policy and to defend the insureds in any lawsuit seeking those damages.

Each Selective Way policy included provisions extending this coverage to an additional party if the named insured entered into a written contract requiring it to provide insurance for that additional party. These provisions specified that any party that became an additional insured because of a contract would be treated as an insured "only with respect to" the named insured's work for that additional party. The policies further

Page 6

specified that the coverage resulting from such a contract would be "primary and not contributory" with respect to the additional insured, if the contract so required.

Through the combined effect of these policies and subcontracts, Selective Way became Questar's insurer with respect to claims against Questar arising out of the work performed at the Highpointe project by SEH Excavating Contractors, Streett's Waterproofing, Justice Waterproofing, or King Carpentry Contractors.

B. The Construction-Defect Lawsuit against Questar

In a transaction that coincided with the completion of construction, a third party purchased the Highpointe Apartments. On July 13, 2006, the purchaser filed a lawsuit based on "the defective construction of the Highpointe Apartments" by Questar. As amended, the complaint asserted four counts against Questar and two executives.

Each count against Questar rested on allegations that it had failed to properly oversee the work of its subcontractors and that defects in the construction resulted in extensive water infiltration throughout the buildings. The purchaser sought to recover $4.5 million for the property damage allegedly caused by Questar's conduct.

To undertake its defense, Questar turned to its liability insurers: Nationwide Property and Casualty Insurance Company and Nationwide Mutual Insurance Company (collectively, "Nationwide"). Nationwide agreed to defend Questar under a reservation of rights, appointing and paying for counsel to represent Questar separately from the other defendants.

Questar denied liability, but also filed a third-party complaint, seeking indemnity or contribution from 26 subcontractors that performed work at the Highpointe project. In

Page 7

the third-party complaint, Questar claimed that, if it were found liable in the construction-defect lawsuit, then the subcontractors should be liable to it for all or some of its liability to the purchaser. The third-party defendants included the four subcontractors that Selective Way insured.

On April 1, 2008, Questar's attorney made written requests for...