Sting Sec., Inc. v. First Mercury Syndicate, Inc., Civ. No. JFM-91-1140.

• Decision Date: 14 January 1992
• Docket Number: Civ. No. JFM-91-1140.
• Citation: 791 F. Supp. 555
• Parties: STING SECURITY, INC., et al. v. FIRST MERCURY SYNDICATE, INC.
• Court: U.S. District Court — District of Maryland

791 F. Supp. 555

STING SECURITY, INC., et al. v. FIRST MERCURY SYNDICATE, INC.

Civ. No. JFM-91-1140.

United States District Court, D. Maryland.

January 14, 1992.

Kenneth R. West, Levitan, Ezrin, West & Kerxton, Bethesda, Md., for plaintiff.

Morris Kletzkin, Washington, D.C., for defendant.

MEMORANDUM

MOTZ, District Judge.

Sting Security, Inc. ("Sting"), Patrol Command Systems, a division of Sting and Robert D. Arscott, Jr., president of Sting (collectively "Sting") have brought this action seeking a declaration that their insurer, First Mercury Syndicate, Inc. ("First Mercury"), has a duty both to defend and indemnify them in connection with a lawsuit currently pending in the Circuit Court for Prince George's County. First Mercury has filed a counterclaim for a declaratory judgment that it is under neither duty. The parties have filed cross-motions for summary judgment.

I.

A.

Sting, a Maryland corporation, is engaged in various aspects of the security business. Apparently, Sting's original business was providing alarm monitoring services to commercial customers. Since 1988 at the latest, Sting has also marketed a product known as "Patrol Command" to other security firms. Patrol Command is a computer system consisting of both hardware and software that purportedly allows security agencies to schedule guard assignments with greater efficiency.

From 1988 to 1990, First Mercury, a Michigan insurer, insured Sting under two standard-form comprehensive general liability ("CGL") policies. The first policy covered the period December 20, 1988 to December 20, 1989. The policy was renewed in 1989 and covered the period November 1, 1989 to November 1, 1990. The second policy continued the terms and provisions of the first. Consistent with Sting's business at that time, the policies described the operations for which Sting was insured as "Detective or Patrol Agencies. Including Completed Operations. Including Alarm Monitoring." The policies further stated that "Products" were not covered.¹

Under the CGL provisions, First Mercury agreed to indemnify Sting for "all sums which the insured shall become legally obligated to pay as damages because of ... bodily injury ... or ... property damage to which this insurance applies, caused by an occurrence." (Emphasis added). Additionally, First Mercury assumed the "right and duty to defend any suit against Sting seeking damages on account of such bodily injury or property damage, even if any of the allegations of the suit are groundless, false or fraudulent." The policies contain the following relevant definitions:

"occurrence" means an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured;

* * * * * *

"property damage" means (1) physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom, or (2) loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period.

(Emphasis added). As is typical of CGL policies, the basic declaration of coverage was subject to numerous exclusions and limitations.

During 1990, First Mercury and Sting amended the second policy, apparently in order to reflect Sting's new line of business, the sale of Patrol Command. Pursuant to Endorsement 8, the parties added "Patrol Command Systems, A Division of Sting Security, Inc." as a named insured and "Manufacturing & Sales of Patrol Command Systems Software" to the description of insured operations. The endorsement also stated that "all other terms and conditions remain unchanged." Endorsement 9 amended the policy to provide coverage for "products." By their express terms, both endorsements became effective on July 30, 1990.

B.

On September 7, 1990, Security Administration Services, Inc. ("Security") filed a civil complaint against Sting, Patrol Command Systems and Arscott in the Circuit Court for Baltimore City. In December 1990, Security obtained a dismissal of the suit and refiled the identical complaint in the Circuit Court for Prince George's County. According to the complaint, from August, 1988 through April, 1989, Sting, doing business as Patrol Command Systems, attempted to sell Patrol Command to Security. On April 17, 1989, Security purchased Patrol Command hardware and was licensed as an "end user" of the component software.

The general thrust of the Security complaint is that in the course of sales negotiations, Sting and Arscott misrepresented the capabilities of Patrol Command as a management system for security services and that Security relied on these misrepresentations to its detriment. Specifically, Security alleges that Sting and Arscott misrepresented that Patrol Command "would permit Security to schedule, monitor, create time cards for, and a permanent record of, the activities of its watchmen." As described by Sting, Patrol Command would gather the information necessary to perform these functions by means of bar-code readers installed at sites monitored by Security which would read bar-code badges carried by Security's watchmen; the data would then be transmitted by telephone modem to a central computer for processing. Security also alleges that Arscott personally assured Security that Patrol Command was a "tried and tested computer hardware and software package" used by Sting in its own business, that the bar-code readers and communications equipment would function outdoors and that Sting would replace any malfunctioning equipment within 24 hours.

According to Security's complaint, Patrol Command "never substantially performed the functions described" by Sting. Allegedly, Patrol Command's crucial defect was the failure of the on-site communications equipment to function in cold weather. Contrary to Arscott's assurances, Sting allegedly let the defective components go for weeks without repair or replacement. Security also alleges that Arscott's statements concerning Sting's extensive experience with Patrol Command were false and that Security was the victim of bait-and-switch tactics: the system delivered to Security was, in fact, a wholly different system from that which Arscott had demonstrated to Security at Sting's offices.

Security alleges that as a consequence of Sting's misrepresentations and Patrol Command's defects, it suffered extensive injuries. The complaint asserts claims of fraud, negligent misrepresentation and breach of warranty against Sting and Arscott. Security seeks $300,00 in compensation for (1) the difference in value between the system promised and the negative value of Patrol Command; (2) lost profits; (3) damage to Security's business reputation; (4) additional personnel costs; and (5) costs associated with thefts directly attributable to the failure of Patrol Command. Security also requests punitive damages in the amount of $1,000,000.

Shortly after Security filed its complaint, Sting and Arscott put First Mercury on notice of the suit. First Mercury denied coverage based on the allegations in the underlying complaint. Consequently, Sting filed the present action in the Circuit Court for Prince George's County. First Mercury timely removed the action to this court.

II.

The first issue presented is that of the choice of law. Maryland law governs the selection of the applicable law in this diversity action. E.g., Klaxon v. Stentor Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). Under Maryland conflicts rules, an insurance contract is construed "according to the laws of the state where the last act is performed which makes the agreement a binding contract." Travelers Indem. Co. v. Allied-Signal, Inc., 718 F.Supp. 1252, 1253 (D.Md.1989); Grain Dealers Mut. Ins. Co. v. Van Buskirk, 215 A.2d 467, 241 Md. 58 (1965). Typically, this is where the policy is delivered and the premiums are paid. E.g., Aetna Cas. & Sur. Co. v. Souras, 78 Md.App. 71, 552 A.2d 908, 911 (1989). While it is not clear where Sting paid its premiums, both policies were issued to Sting at its address in Arlington, Virginia. Additionally, the policies contain provisions specifically relevant to Virginia insurance regulation. Therefore, it appears that the law of Virginia governs this dispute.²

Under Virginia law, an insurer's "obligation to defend arises whenever the complaint against the insured alleges facts and circumstances, some of which, if proved, would fall within the risk covered by the policy." Brenner v. Lawyers Title Ins. Corp., 240 Va. 185, 189, 397 S.E.2d 100, 102 (1990). However, the insurer has no duty to defend if the allegations preclude the possibility of a judgment for which the insurer would be liable under the policy.

Here, First Mercury advances three arguments why the policies which it issued to Sting would not provide coverage for any judgment obtained by Security against Sting: (1) there was no "occurrence" within the relevant policy periods; (2) none of the damages which Security claims in its suit constitute "property damage" as defined by the First Mercury policy; and (3) Security's allegations do not describe an "accident, neither expected nor intended from the standpoint of Sting." The first two of these arguments are meritorious; I therefore need not consider the third.³

A. The "Occurrence" Issue

All of Security's claims against Sting are predicated on the sale of Patrol Command. The parties agree that "products" were not among the hazards insured until Endorsements 8 and 9 became effective on July 30, 1990. Thus, as a "product," Patrol Command was not covered until that date. Sting contends, however, that Patrol Command was also covered as a "completed operation" once Security had purchased the software system on April 17, 1989. Sting thus argues for overlapping periods of coverage with respect to Patrol...