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Capital City Real Estate, LLC (“Capital City”) initiated a declaratory judgment action in the District of Maryland, seeking a declaration that Certain Underwriters at Lloyd’s London (“Underwriters”) were obligated to defend and indemnify Capital City against a negligence lawsuit filed in the Superior Court for the District of Columbia. The district court granted summary judgment in favor of the Underwriters, [enhanced version available to lexis.com subscribers], concluding that it had no duty to defend or indemnify Capital City.
On appeal, the Third Circuit Court of Appeal, in Capital City Real Estate, LLC v. Certain Underwriters at Lloyd’s London, Subscribing to Policy Number: ARTE018240, — F.3d —-, 2015 U.S. App. LEXIS 9662 (C.A.4 (Md.) 6/10/15), [enhanced version available to lexis.com subscribers], was asked to resolve the dispute. The dispute arose from a common wall shared by the structures located at 55 Bryant Street, NW, Washington, DC (“55 Bryant Street”) and 57 Bryant Street, NW, Washington, DC (“57 Bryant Street”). 55 Bryant Street was owned by Leon Yates (“Yates”) and insured by The Standard Fire Insurance Company (“Standard Fire”). Capital City, a real estate development company with its principal place of business in Washington, DC, was operating as the general contractor for the renovation of 57 Bryant Street in 2008 and 2009.
Capital City subcontracted the foundation, structural, and underpinning work for the 57 Bryant Street renovations to Marquez Brick Work, Inc. (“Marquez”), a corporation engaged in the business of concrete, bricks, blocks, and foundation work with its principal place of business located in Maryland. The subcontract between Capital City and Marquez Brick required Marquez Brick to indemnify Capital City for damages caused by its [Marquez’s] work and further required Marquez Brick to maintain certain general liability insurance naming Capital City as an additional insured. Accordingly, on November 17, 2008, the Underwriters issued an insurance policy (the “Policy”) to Marquez, effective from November 17, 2008, through November 17, 2009.
The Underwriters also issued an Endorsement (the “Endorsement”) to the Policy listing Capital City as an additional insured party on the Policy. As relevant to this case, the Endorsement amends the Policy to cover Capital City as an additional insured, but only with respect to liability for “property damage” caused in whole or in part by Marquez’s acts or omissions; or the acts or omissions of those acting on Marquez’s behalf in the performance of [Marquez’s] ongoing operations for Capital City in Washington, D.C.
On June 9, 2009, during the course of Marquez’s work on the underpinning of 57 Bryant Street, the common wall shared by 57 Bryant Street and 55 Bryant Street collapsed.
Standard Fire, as subrogee, filed suit against 57 Bryant Street, NW Limited Partnership, Bryant St., LLC, and Capital City in the Superior Court for the District of Columbia. The underlying complaint does not mention Marquez or explicitly seek any damages for any of its acts or omissions. Rather, the complaint attributes the June 9, 2009 collapse and resulting damage to 55 Bryant Street to negligence on the part of the named defendants.
Standard Fire paid for the repairs per its insurance policy with Yates, and requested $600,000 in damages, plus attorney’s fees, costs, and interest.
Capital City responded in part by filing a third party complaint against both Marquez and its owner, Feliciano Marquez. Capital City alleges that its contract with Marquez requires Marquez “to pay for defending and indemnify [Capital City] against all claims for liability that were a result of or partially resulting from Marquez’s breach of any term of the” contract, and also requires “that if [Capital City] is sued and the subject of the suit is [Marquez’s] work or the direct or indirect result of it, [Marquez] shall indemnify [Capital City] against all liabilities” and reimburse it for any damages or fees.
In determining whether an insurer has a duty to defend under an insurance policy, Maryland courts apply the following test:
(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 on the allegations of the tort suit. At times these two questions involve separate and distinct matters, and at other times they are intertwined, perhaps involving an identical issue.
Unlike the majority of other states, Maryland does not follow the rule that insurance policies are to be most strongly construed against the insurer. Empire Fire & Marine Ins. Co. v. Liberty Mut. Ins. Co., 699 A.2d 482, 494 (Md.1997), [enhanced version available to lexis.com subscribers]. Rather, Maryland law applies ordinary contract principles to insurance contracts. Nevertheless, under the general principles of contract construction, if an insurance policy is ambiguous, it will be construed liberally in favor of the insured and against the insurer as drafter of the instrument.
If the policy’s language is clear and unambiguous, the Court will assume the parties meant what they said. As with any contractual dispute, the court must start with the relevant policy wording. The Endorsement in this case is the form provided by the Insurance Services Office, Inc. (“ISO”) which is the almost exclusive source of support services in this country for commercial general liability insurance. However, the language is quite clear that coverage is provided for Capital City, as the additional insured, for “property damage … caused in whole or in part by” Marquez.
The Underwriters argued that the scope of coverage is limited to Capital City’s vicarious liability for Marquez’s acts or omissions. However, there is no mention of vicarious or derivative liability in the Endorsement. If the parties had intended coverage to be limited to vicarious liability, language clearly embodying that intention was available but was not included in the ISO form. The words “derivative” and “vicarious” are conspicuously absent from the Endorsement. The language of the Endorsement plainly lacks the vicarious liability limitation that the Underwriters seek to impose.
As the Maryland Court of Appeals has stated, “to give effect to the duty to defend where the allegations, even if groundless, present claims both within and without the policy coverage the rule in Maryland is that ‘the insurer still must defend if there is a potentiality that the claim could be covered by the policy.’” Continental Cas. Co. v. Bd. Of Educ., 489 A.2d 536, 542 (Md.1985), [enhanced version available to lexis.com subscribers]. Maryland courts generally look to the pleadings in the underlying lawsuit to determine whether there is a potentiality of coverage. Aetna Cas. & Sur. Co. v. Cochran, 651 A.2d 859, 863 (Md.1995), [enhanced version available to lexis.com subscribers].
Here, the underlying complaint is silent as to the involvement of Marquez. Indeed, Marquez is not named anywhere in the complaint. However, Capital City has filed a third party complaint against Marquez and its owner, and has introduced extrinsic evidence that the collapse of the common wall between 55 Bryant Street and 57 Bryant Street was caused by Marquez.
Because the underlying complaint does not make clear that Marquez conducted the foundation, structural, and underpinning work that led to the collapse of the common wall, Capital City is entitled to rely on its extrinsic evidence to establish those facts and to thereby establish a potentiality of coverage. It was error for the district court to conclude otherwise.
By contrast, there is not such a clean delineation of which actor owes which duty in this case, in part because the underlying complaint fails to even mention Marquez. It is undisputed that Marquez did the foundation work during the course of the renovations. The appellate court, therefore found that there is a potentiality of coverage and, as a result, the Underwriters have a duty to defend Capital City in the underlying tort lawsuit.
For the foregoing reasons, the Third Circuit concluded that the scope of coverage under the Endorsement extends beyond acts or omissions of Marquez for which Capital City was vicariously liable. The plain language of the Endorsement creates a duty to defend Capital City where Capital City is being held liable for the acts or omissions of Marquez.
Additional insured endorsements cause a great deal of litigation and interpretation of the wording of the additional insured endorsement. In this case the insurer attempted to expand the meaning of the endorsement to limit the coverage to vicarious liability imposed on the additional insured by the actions of the named insured. Since the key words did not appear in the endorsement the court refused to limit the coverage as Underwriters desired. Intent, in insurance, must be in writing and if the limitation to vicarious liability is intended it must be put in writing in the contract of insurance. Underwriters failed to use that language and, instead used the broader ISO wording.
By Barry Zalma, Attorney and Consultant
Reprinted with Permission from Zalma on Insurance, (c) 2015, Barry Zalma.
Barry Zalma, Esq., CFE, is a California attorney who limits his practice to consultation regarding insurance coverage, insurance claims handling, insurance bad faith and fraud and acting as a mediator or arbitrator on insurance disputes. Mr. Zalma serves as a consultant and expert almost equally for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. He recently published the e-books, "Zalma on Rescission in California - 2013"; "Random Thoughts on Insurance" containing posts from this blog; "Zalma on Insurance;" "Murder and Insurance Don't Mix;" “Heads I Win, Tails You Lose — 2011,” “Zalma on Diminution in Value Damages,” “Arson for Profit” and “Zalma on California Claims Regulations,” and others that are available at Zalma Books.
Mr. Zalma can be contacted at or firstname.lastname@example.org, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma’s Insurance Fraud Letter.
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