Sheets v. Brethren Mut. Ins. Co.

• Decision Date: 01 September 1995
• Docket Number: No. 47,47
• Citation: 679 A.2d 540,342 Md. 634
• Parties: , 58 A.L.R.5th 883 Robert T. SHEETS, Jr. et ux. v. The BRETHREN MUTUAL INSURANCE COMPANY. ,
• Court: Maryland Court of Appeals

Page 634

342 Md. 634

679 A.2d 540, 58 A.L.R.5th 883

Robert T. SHEETS, Jr. et ux. v. The BRETHREN MUTUAL INSURANCE COMPANY.

No. 47, Sept. Term, 1995.

Court of Appeals of Maryland.

July 26, 1996.

Clifford R. Bridgford, Frederick, for Appellants.

Dana Moylan (Donald E. Beachley, Miller, Oliver, Beachley & Stone, on brief), Hagerstown, for Appellee.

Argued before MURPHY, C.J., ELDRIDGE, RODOWSKY, CHASANOW, KARWACKI, BELL and RAKER, JJ.

CHASANOW, Judge.

We are called upon in the instant case to determine whether the trial court was correct in granting an insurer's motion for summary judgment on the basis that it had no duty to defend or indemnify its insured against a claim of negligent misrepresentation in the sale of property. We hold that because the insurer did owe a duty to defend its insured, the trial court erroneously granted the insurer's motion for summary judgment. We therefore reverse and remand the case to the trial judge to enter summary judgment in favor of the insured.

I.

We are asked to review a declaratory judgment action to determine whether The Brethren Mutual Insurance Company (Brethren) owed a duty to defend or indemnify its insured in a tort suit brought against the insured. The underlying lawsuit was instituted by Frits M. Christensen and Helene S. Christensen (the Christensens) in the Circuit Court for Frederick County against Appellants, Robert T. Sheets, Jr. and his wife, Joyce A. Sheets (the Sheetses). The suit alleged that the Sheetses both intentionally ¹ and negligently misrepresented that the septic system at their farmhouse was in "good working condition" before selling the property to the Christensens. The suit alleged that, as a result of the misrepresentation, the Christensens purchased the farm several weeks later, and moved in with their nine children. Approximately three weeks after the Christensens took possession of the property, the septic system began leaking and effluent flooded the walk area. The Frederick County Health Department condemned the septic system, and therefore, the Christensens had to replace the system at a cost in excess of $12,000.

In essence, the Christensens' complaint alleged that the failure of the septic system was attributed to the Sheetses' misrepresentations that it was in "good working condition" because, had it not been for those misrepresentations, the Christensens, whose family was too large for the system to operate properly, would not have moved into the house. The Sheetses notified Brethren, their insurance carrier, of the lawsuit and requested that Brethren defend and indemnify them pursuant to the terms of a farm owner's general liability policy that the Sheetses purchased from Brethren. Brethren refused to do so, claiming that the Sheetses' policy did not cover misrepresentation torts.

The Sheetses then sought a declaratory judgment against Brethren in the Circuit Court for Frederick County asking the court to compel Brethren to defend and indemnify them in the lawsuit against the Christensens. Both parties filed cross-motions for summary judgment asserting that no genuine dispute existed as to any material fact. The court granted Brethren's motion for summary judgment and denied the Sheetses' motion. The Sheetses appealed to the Court of Special Appeals. Before our intermediate appellate court considered the case, we issued a writ of certiorari on our own motion. While the appeal was pending, the Christensens' lawsuit against the Sheetses settled.

II.

Preliminarily, we note that since there is no information in the record concerning the settlement of the Christensens' suit against the Sheetses, we have no indication of how damages were calculated or whether the suit was settled on grounds of intentional or negligent misrepresentation. Hence, we can not determine whether Brethren would have a duty to indemnify the Sheetses. Consequently, we will discuss only Brethren's duty to defend and not its duty to indemnify.

III.

In granting a motion for summary judgment, the trial court does not resolve factual disputes, but is instead limited to ruling as a matter of law. Heat & Power v. Air Products, 320 Md. 584, 591, 578 A.2d 1202, 1205 (1990). The standard for appellate review of a trial court's grant or denial of a summary judgment motion is whether the trial court was legally correct. Heat & Power, 320 Md. at 592, 578 A.2d at 1206. Hence, we must assume that the facts in the Christensens' complaint are true and examine whether the trial court was legally correct in holding that Brethren did not have a duty to defend the Sheetses against the Christensens' claim for negligent misrepresentation.

In Brohawn v. Transamerica Ins. Co., 276 Md. 396, 407-08, 347 A.2d 842, 850 (1975), this Court held that if plaintiffs in a tort suit allege a claim against an insured that is potentially covered by the insurance policy, the insurer is obligated to defend the insured. In a recent decision reviewing the scope of a liability insurer's duty to defend an insured, we had occasion to reaffirm this common law rule. Aetna v. Cochran, 337 Md. 98, 102, 651 A.2d 859, 861 (1995). We then stated in Cochran:

"To ascertain when an insurer is under a duty to defend an insured in accordance with Brohawn, this Court, in St. Paul Fire & Mar. Ins. [ ] v. Pryseski, 292 Md. 187, 438 A.2d 282 (1981), articulated the following two-part inquiry:

'In determining whether a liability insurer has a duty to provide its insured with a defense in a tort suit, two types of questions ordinarily must be answered: (1) what is the coverage and what are the defenses under the terms and requirements of the insurance policy? (2) do the allegations in the tort action potentially bring the tort claim within the policy's coverage? The first question focuses upon the language and requirements of the policy, and the second question focuses upon the allegations of the tort suit.'

292 Md. at 193, 438 A.2d at 285. To answer these two inquiries as they pertain to the facts of the instant case, we must ascertain the scope and limitations of coverage under the ... insurance policies and then determine whether the allegations in the [underlying tort] action would potentially be covered under those policies."

337 Md. at 103-04, 651 A.2d at 862. ²

In applying the Pryseski two-step analysis to the instant case, we first turn to the language of the Brethren insurance policy to determine the scope and limitations of the coverage. See Cochran, 337 Md. at 104, 651 A.2d at 862. In analyzing the policy, we utilize our rules of construction regarding insurance contracts. As we recently stated in Sullins v. Allstate Ins. Co., 340 Md. 503, 667 A.2d 617 (1995):

"In Maryland, insurance policies, like other contracts, are construed as a whole to determine the parties' intentions. Words are given their 'customary, ordinary, and accepted meaning,' unless there is an indication that the parties intended to use the words in a technical sense. 'A word's ordinary signification is tested by what meaning a reasonably prudent layperson would attach to the term.' " (Citations omitted).

340 Md. at 508, 667 A.2d at 619.

The farm owner's general liability insurance policy (the policy) issued by Brethren provides coverage for bodily injury and property damage liability. Under the policy, Brethren agreed to "pay those sums that the 'insured' becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies." Brethren also has "the right and duty to defend any 'suit' seeking those damages."

The policy states that "the insurance applies to ... 'property damage' only if ... caused by an 'occurrence,' and the ... 'property damage' occurs during the policy period." "Property damage" is defined under the policy as:

"Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or

Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the 'occurrence' that caused it."

The policy defines an "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions," but does not define "accident."

In sum, the policy covers property damage caused by an occurrence. Hence, the Sheetses must demonstrate that the Christensens' complaint at least alleged three independent elements in order to compel Brethren to provide a defense in the tort suit: (1) that there was "property damage" as defined in the policy; (2) that the property damage was "caused" by the negligent misrepresentation; and (3) that negligent misrepresentation ³ is an "occurrence" as that term is defined by the policy. If one of these three elements is not alleged in the underlying tort suit, then Brethren would not be obligated to defend the Sheetses.

Pursuant to the second part of the Pryseski inquiry, this Court must look to the Christensens' complaint and any extrinsic evidence adduced to determine if the lawsuit alleges action that is potentially covered under the Sheetses' insurance policy with Brethren. See Sullins, 340 Md. at 509, 667 A.2d at 619-20. The Christensens' complaint alleged in pertinent part that the Sheetses owed them a duty to disclose all defects in the property prior to the sale of the property. The complaint further alleges that the Sheetses negligently misrepresented that the septic system was in "good working condition when in fact [they] knew or should have known that the septic system had been repaired and that it had not been inspected by nor received the approval of the Frederick County Health Department." The complaint further states that the Christensens "relied on said misrepresentations" and "[t]hat as a result [of] the said reliance, the Plaintiffs have suffered damages."

IV.

Following the parties' ...