Woodfin Equities Corp. v. Harford Mut. Ins. Co., 1418

• Decision Date: 01 September 1995
• Docket Number: No. 1418,1418
• Citation: 678 A.2d 116,110 Md.App. 616
• Parties: WOODFIN EQUITIES CORP., et al. v. HARFORD MUTUAL INSURANCE COMPANY. ,
• Court: Court of Special Appeals of Maryland

Page 616

110 Md.App. 616

678 A.2d 116

WOODFIN EQUITIES CORP., et al. v. HARFORD MUTUAL INSURANCE COMPANY.

No. 1418, Sept. Term, 1995.

Court of Special Appeals of Maryland.

June 27, 1996.

Susan M. Kayser (Robert D. Sokolove and Sokolove & Associates, on the brief), Bethesda, for Appellants.

Albert J. Mezzanotte, Jr. (Edward M. Buxbaum and Whiteford, Taylor & Preston, on the brief), Towson, for Appellee.

Before WILNER, C.J., and WENNER and DAVIS, JJ.

DAVIS, Judge.

This is an appeal from an August 28, 1995 order of the Circuit Court for Montgomery County granting an insurer's motion for judgment in a declaratory relief action filed by an injured third party. The principle questions presented on this appeal are restated as follows:

I. Should this Court deny the insurer's motion to dismiss this appeal?

II. Do the injured third parties have standing to file a declaratory judgment action directly against the insurer?

III. Did the circuit court correctly determine that the insurer was not obligated to provide liability coverage under the terms of the CGL policy?

IV. Did the circuit court correctly determine that the insurer was not prejudiced by the insured's failure to notify the insurer of the claim of the injured third parties?

To the first, second, and fourth questions, we respond in the affirmative. To the third question, we respond partially in the affirmative and partially in the negative. As a result of the disposition of these questions, we affirm in part and reverse in part the judgment of the circuit court. ¹ Accordingly, the case shall be remanded to the circuit court for further proceedings.

FACTS

This appeal involves a declaratory judgment action filed by injured third parties against an insurer for the purpose of determining the extent of the insurer's obligations under a CGL policy. Before we present the factual backdrop, we shall introduce the key players involved to aid in comprehending the interrelation of the parties in this case. Beginning with the principal actors, Woodfin Equities Corporation (Woodfin), Samuel A. Hardage (Hardage), and Hardage Construction Company (HCC) are the injured parties and appellants. Appellants constructed a hotel in Rockville, Maryland, known as the Woodfin Suites Hotel (hotel). HCC was the general contractor for the project. Harford Mutual Insurance Company is the insurer and appellee. Appellee issued a comprehensive general liability (CGL) policy to its insured, Deerfield Engineering, Incorporated, (Deerfield Engineering or insured)--a mechanical subcontractor hired by appellants to provide all labor and materials and to do all things necessary for the installation and completion of the hotel's heating, ventilation, and air conditioning (HVAC) system. The insured's owner is Donald Paulgaard. At different points in time, the insured had offices in Austin and Marble Falls, Texas, and in Rockville, Maryland.

Along with the insured, the Trane Company and Climatemaster were involved in the construction of the hotel. According to appellants, Trane was the manufacturer of the HVAC systems that the insured installed, and Climatemaster participated in the manufacturing of the HVAC units and component parts. The remaining entity is Deerfield, Incorporated--not to be confused with the insured. The role of Deerfield, Incorporated is pivotal, although its involvement is peripheral. Deerfield, Incorporated, is an electrical contracting company located in Kingsville, Maryland. According to Martin W. Lotz, Jr., its President and CEO, Deerfield, Incorporated, is not and never has been insured by appellee. Furthermore, according to Lotz, Deerfield, Incorporated, was not involved in any way with the construction of the hotel.

In January 1990, appellants, by a six-count complaint, sued Trane, Climatemaster, and Deerfield, Incorporated, in the Circuit Court for Montgomery County, for breach of contract, negligence, breach of express warranty, breach of implied warranty, breach of implied warranty of fitness for particular purpose, and strict liability. (The Trane litigation or Trane suit.) In the caption of the Trane complaint, Deerfield, Incorporated, is designated as an Austin, Texas corporation, and Martin W. Lotz, Jr. is designated as the person to be served with the complaint at his Kingsville address.

According to the Trane complaint, the hotel opened its doors to the public on February 23, 1988. Appellants alleged that, in March, 1988, the hotel began to experience problems with the HVAC system, and that, by June 1989, 130 HVAC units failed at least once, and continue to fail. Appellants claimed that Trane, Climatemaster, and Deerfield, Incorporated, were responsible for the failures in the HVAC system. In particular, appellants asserted that Deerfield, Incorporated, failed to install, service, and inspect properly the HVAC systems in the hotel. For example, according to appellants, Deerfield, Incorporated, failed to install a "suction screen diffuser" and improperly positioned the "thermostat sensor bulb" on the units. The complaint asserts that, as a result of the conduct of Trane, Climatemaster, and Deerfield, Incorporated, appellants incurred considerable losses and expenses, including the loss of income from the unavailability of guest rooms, costs associated with the repair and replacement of pumps in the HVAC system, consultant fees for conducting tests and providing opinions as to the reasons for the HVAC failures, management time expended with respect to customer relations and correcting the problems in the HVAC system, increased energy costs, loss of goodwill, and attorney's fees and costs related to the Trane litigation.

Appellants served Lotz with a summons and complaint for the Trane litigation. According to Lotz, since Deerfield, Incorporated, had nothing to do with the construction of the hotel, Lotz contacted appellants' attorneys to advise that they had sued and served the wrong company. Nonetheless, Lotz continued to receive various pleadings and related legal documents for some period of time. Eventually, these papers stopped arriving at Lotz's address, as a result of which Lotz was led to believe that appellants' counsel had corrected their mistake. In addition to service upon Lotz, the record indicates that appellants apparently realized their error and had Paulgaard served. A September 24, 1991 Affidavit of Service of Process (on appellants' counsel's letterhead) states that Paulgaard was served with the Trane litigation papers on March 23, 1991. In depositions, however, Paulgaard claimed that he did not learn of the Trane suit until 1994. At trial, appellants strenuously objected to the September 24, 1991 Affidavit of Service of Process, and took the position that Paulgaard did not know about the Trane suit until 1994. As shall become more clear below, it benefited appellants in a significant way if Paulgaard did not actually learn of the Trane suit until 1994, because appellee did not learn of the suit until June 1994 (from appellants' counsel), and claimed--as a basis for denial of coverage--that Paulgaard breached his duty to notify appellee of the suit since Paulgaard knew about the suit in 1991 but never informed appellee of it at that time or at any time.

In any event, neither the insured, nor Deerfield, Incorporated (as would be expected), answered the Trane complaint. On March 9, 1992, over two years after the Trane suit was filed, the Clerk of the circuit court issued a Notice of Default Order to "Deerfield Incorporated," stating "that an Order of Default has been entered against you in the above entitled case on 3/2/92." On May 8, 1992, the circuit court conducted an ex parte hearing for the purpose of determining damages against Deerfield, Incorporated. At the conclusion of that hearing, the circuit court entered a default judgment against "Deerfield, Incorporated" for $168,102.84.

Two years later, in May 1994, appellants allegedly "discovered" a Certificate of Insurance (certificate), indicating that appellee had previously issued a CGL policy to the insured. The insured is identified on the certificate as follows:

Deerfield Engineering

Donald Marvin Paulgaard

15 Dairyfield Court

Rockville, Md 20852

HCC is designated as the certificate holder. In addition, the certificate explicitly states:

THIS CERTIFICATE IS ISSUED AS A MATTER OF INFORMATION ONLY AND CONFERS NO RIGHTS UPON THE CERTIFICATE HOLDER. THIS CERTIFICATE DOES NOT AMEND, EXTEND OR ALTER THE COVERAGE AFFORDED BY THE POLICIES BELOW.

Following the "discovery" of the certificate, appellants' counsel wrote a letter to appellee dated June 14, 1994, wherein appellants informed appellee of the discovery of the certificate and its claim against the insured. By that letter, appellants invited appellee to engage in settlement discussions and offered to open its files to appellee. Furthermore, the letter stated that, if appellee declined to settle the matter, appellants would vacate the default judgment for the purpose of attempting to assess a new damages amount in light of the fact that appellants allegedly have continued to suffer losses from the HVAC failures--a course of action that would purportedly "expose [appellee] to potential damages of Two Million Dollars." In response, appellee informed appellants' counsel, by letter dated June 30, 1994, that "there will be no coverage available to Deerfield Engineering for this occurrence. There are a number of coverage issues which contributed to this decision."

Subsequent to that exchange, appellants filed the instant declaratory judgment action in the Circuit Court for Montgomery County directly against appellee. The declaratory judgment action was filed on January 13, 1995--over two and one-half years after the date of the default judgment against "Deerfield, Incorporated," over five years after the filing of the Trane suit, and over six and one-half years after the insured's alleged failures. Appellants did not...