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Federal Insurance Co. v. Firemen's Insurance Company of Washington, Dc

United States District Court, D. Maryland

April 21, 2014



DEBORAH K. CHASANOW, District Judge.

There is one issue remaining for resolution in this insurance dispute in connection with a motion for summary judgment filed by Federal Insurance Company ("Federal"), which Judge Alexander Williams granted in part. ( See ECF Nos. 46 & 47).[1] This case concerns a dispute among three insurers regarding their obligation to provide insurance coverage in connection with an arbitration initiated by William Hammerash and his wife against Case Design/Remodeling, Inc. ("Case Design") and its subsidiary Case Handyman Services ("Case Handyman") for deficient performance on a home remodeling contract ("the Hammerash Arbitration"). In orders dated February 9, 2011 (ECF No. 47) and July 11, 2011 (ECF No. 55), Judge Williams requested that Defendants Firemen's Insurance Company ("Firemen's") and Netherlands Insurance Company ("Netherlands") submit supplemental briefing regarding the extent to which contribution was owed to Federal and the amounts in contribution. The issues have been fully briefed, and the court now rules, no hearing being deemed necessary. Local Rule 105.6. For the following reasons, Netherlands will be ordered to contribute to Federal in the amount of $103, 228.61.

I. Background

The factual and procedural background of this action was documented in previous opinions, thus only a brief summary of the underlying issues in the case is necessary. ( See ECF Nos. 46, 54, 67). Federal, Netherlands, and Firemen's are insurance companies. Case Design, operating under the service mark, "Case Handyman, " provides home remodeling services. Case Design is Case Handyman's parent company. Case Handyman entered into a franchise agreement on October 15, 2003 with Shaun Arnold, principal of Professional Home Repair ("PHR"), which allowed PHR to conduct business as Case Handyman's franchisee. ( See ECF No. 29-7).[2] The agreement also gave PHR a license to use the Case Handyman service mark and logo. Netherlands insures Case Handyman, as an additional insured under a policy issued to PHR. ( See ECF No. 29-6). A condition of the franchise agreement between PHR and Case Handyman required PHR to name Case Handyman as an additional insured in Netherlands' insurance policy pursuant to the Commercial General Liability Extension Endorsement, and Case Handyman was so named.

Mr. Hammerash and his wife entered into several contracts with PHR for home remodeling. As a result of alleged performance deficiencies, the Hammerashes brought a complaint in arbitration against Case Design/Remodeling, Inc. on October 5, 2007. ( See ECF Nos. 29-9, 29-10, 29-13). The Hammerashes thereafter filed an amended complaint in the arbitration proceeding on March 25, 2009, naming Case Handyman as an additional respondent.[3] Case Design and Case Handyman moved for summary judgment on March 13, 2009, arguing, inter alia, that the arbitrator should dismiss the Hammerashes' claims because they failed to demonstrate that "the Case franchisee [PHR] who allegedly wronged them was the actual or apparent agent of the Case franchisor." (ECF No. 29-16, at 2). For reasons discussed infra, the arbitrator granted the motion in part on June 24, 2009.

Case Design submitted the arbitration for coverage to Federal, its insurance carrier.[4] Case Design also had policies with other insurance carriers, specifically Firemen's (ECF No. 29-5). Case Handyman sought coverage pursuant to the endorsement clause of a general liability insurance policy issued to PHR by Netherlands. (ECF No. 29-6). Federal argued that pursuant to the insurance policies entered into by Case Design with Defendants in this case, both Netherlands and Firemen's were obligated to provide coverage for, or contribute to, the defense of the Hammerash Arbitration.[5] Both Defendants denied coverage to either respondent in the Hammerash Arbitration.

Consequently, Federal filed a complaint against Firemen's, Netherlands, and Case Design/Remodeling, Inc. on September 9, 2009 (ECF No. 1), and later amended the complaint on April 28, 2010 (ECF No. 32).[6] Federal sought a declaration that Firemen's and Netherlands were obligated to provide insurance coverage for the Hammerash Arbitration (counts I & II) and also asserted a claim for subrogation/contribution to reimburse Federal for the defense costs Federal incurred on behalf of Case Design (and to the extent applicable, Case Handyman) (count III). ( Id. ).

Federal moved for summary judgment, and Firemen's and Netherlands filed cross-motions. ( See ECF Nos. 29, 38, & 39). Federal argued that its insurance policy with Case Design contained an "other insurance" clause, which obligated Netherlands and Firemen's to provide primary insurance coverage, and required Federal to provide "excess" coverage in instances where all of the insurance providers covered the "same claim." Federal maintained that because Netherlands and Firemen's were required to provide primary coverage for the Hammerash Arbitration, Federal had no duty to provide coverage for the Hammerash Arbitration, as its coverage was excess to claims over $1 million. Judge Williams rejected this argument, but granted in part Federal's motion, holding that although Netherlands was not required to indemnify Federal, it had to contribute to the defense costs of the Hammerash Arbitration. ( See ECF No. 47 ¶ 2).[7] In the February 9, 2011 memorandum opinion and order, Judge Williams granted Firemen's cross-motion, holding that Firemen's had no duty to defend the Hammerash Arbitration because its policy was excess to Netherlands' policy. ( Id. ¶ 3).[8] Thus, Judge Williams dismissed Firemen's from the case in the February 9, 2011 order. He ordered Federal and Netherlands to brief further the issue of the specific amount that should be awarded to Federal from Netherlands for the defense of the Hammerash Arbitration. (ECF No. 46, at 24).

Netherlands and Federal then moved for partial reconsideration. Judge Williams denied Netherlands' motion, but granted in part Federal's motion, finding persuasive Federal's argument that "after supplemental briefings are filed regarding the amount of contribution that the Netherlands owes to Federal, the Court could potentially conclude that the Netherlands' duty to defend ended when the [arbitrator in the] Hammerash Arbitration issued its decision on summary judgment on June 24, 2009." (ECF No. 54, at 8-9).[9] Consequently, Judge Williams ordered that Firemen's be reinstated as a party in the case "pending further briefings from the parties on the contribution amounts that the Netherlands owes Federal." ( Id. at 9).[10] Netherlands, Federal, and Firemen's submitted supplemental briefs on the contribution issue, the only remaining issue in the case. ( See ECF Nos. 61-65).

II. Analysis

Federal asserts that it is entitled to reimbursement for fifty (50) percent of all of the costs it has paid to date in connection with the Hammerash Arbitration, either from Netherlands only or from Netherlands and Firemen's. Federal informs that it has paid a total of $206, 457.22 in defense costs in connection with the Hammerash Arbitration.[11] Netherlands maintains that it should only provide coverage up until the point when the arbitrator issued his decision on summary judgment on June 24, 2009. Specifically, Netherlands believes that it is liable to Federal for contribution in the amount of $49, 249.00, representing half of the defense costs before the June 24, 2009 decision. (ECF No. 61, at 2).

The Additional Insured Endorsement in Netherlands' insurance policy with PHR states:

WHO IS AN INSURED is amended to include as an insured any person or organization when [PHR] and such person or organization have agreed in writing in a contract, agreement, or permit that such person or organization be added as an additional insured on your policy to provide insurance such as is afforded under this Coverage Part. Such person or organization is an additional insured only with respect to liability arising out of:
a. [PHR's] ongoing operations performed for that person or organization.

(ECF No. 29-6, at 78) (emphasis added). The franchise agreement that Shaun Arnold executed with Case Handyman - which later substituted PHR as the franchisee instead of Mr. Arnold - required Shaun Arnold to name Case Handyman as an additional insured. Case Handyman thus became an additional insured under Netherlands' insurance policy pursuant to the above endorsement clause. The above endorsement clause limited Netherlands' coverage of Case Handyman to liability arising out of PHR's ongoing operations performed for Case Handyman. In that regard, Netherlands finds controlling a June 24, 2009 decision from the American Arbitration Association on a motion for summary judgment filed by Case Design and Case Handyman. ( See ECF No. 29-16). The arbitrator considered Case Design's arguments supporting dismissal of the Hammerashes' action against them on the ground that "[the Hammerashes] have not demonstrated that the Case franchisee [PHR] who allegedly wronged them was the actual or apparent agent of the Case franchisor[, Case Handyman.]" (ECF No. 29-16, at 2). The arbitrator granted summary judgment in favor of Case Design and Case Handyman on the issue of actual authority. The arbitrator reasoned that:

With regard to the claims of actual authority, it must be noted that there have been no facts presented or suggested in argument or in the exhibits attached to the submissions of the parties (including the depositions of various individuals) which would tend to support the claim that the Case franchisee [PHR] with whom [the Hammerashes] contracted was operating under a grant of actual authority from [Case Handyman] or that [Case Handyman] had sufficient control over the activities of Mr. Arnold to subject them to liability for those actions.

( Id. ). The arbitrator further remarked that "[n]o document has been presented to suggest anything other than a franchisorfranchisee relationship." The arbitrator did not find that Case Handyman exercised the requisite level of control over PHR's execution of the home remodeling contract with the Hammerashes to support a direct agency relationship. Accordingly, summary judgment was granted in favor of Case Design and Case Handyman on the issue of actual authority.

Although Netherlands characterizes the arbitrator's decision as holding "as a matter of law that the claims against Case Handyman in the Hammerash Arbitration did not arise from work being performed by PHR on behalf of Case Handyman, " this is not quite the case. (ECF No. 61, at 5). As Federal and Firemen's both point out, the arbitrator held that there was no evidence to support the claim that PHR was operating under a grant of actual authority from Case Handyman. ( See ECF No. 63, at 4). What Netherlands fails to address, however, is the second part of the arbitrator's June 24, 2009 decision, in which he explained that "[t]he claims of agency based upon the apparent authority of the franchisee to act on behalf of and bind the franchisor requires a different analysis and result. " (ECF No. 29-16, at 2) (emphasis added). The arbitrator rejected Case Design's and Case Handyman's argument that the Hammerashes' claims of agency based upon apparent authority should also be dismissed as a matter of law. In so concluding, the arbitrator observed that the contract that the Hammerashes signed for remodeling and repair work on their premises was signed by Case Handyman Services and was on "Case Handyman Services" letterhead. (See ECF Nos. 29-9, 29-10, & 29-16, at 3). The arbitrator also found convincing testimony that "the persons with whom [the Hammerashes] dealt gave them business cards with the Case logo and legend on them and spoke of the long history of the Company and the assurance that [the Hammerashes] and their project would be taken care of no matter what happened." (ECF No. 29-16, at 3). He further stated:

Although [the Hammerashes] reviewed the web site pages upon which [Case respondents] rely, [the Hammerashes] testified that they did not understand the web site notation independently owned and operated' to mean that the entity with which they were dealing [PHR] was separate from the larger Case enterprise and that they did enter into their contract relying upon what they had been told about Case and its history and practices by the representatives of the franchisee [PHR].

( Id. ). Accordingly, the arbitrator denied summary judgment on the issue of whether PHR operated under a grant of apparent authority from Case Handyman.

Netherlands argues that "any duty on [its] part [sic] to defend [] Case Handyman (and thus per the Court's prior ruling, Case Design) was triggered solely by the possibility that Case Handyman could be found liable for PHR's operations performed on its behalf ( i.e., as Case Handyman's agent) and could thus potentially be an additional insured under The Netherlands Policy." (ECF No. 61, at 8). Consequently, Netherlands concludes that:

once summary judgment was granted to Case Handyman and Case Design as to the actual agency claims, there was no longer the potentiality that they can be found liable for PHR's operations on their behalf, and thus they were no longer additional insureds and no longer entitled to a defense under The Netherlands' Policy.

(ECF No. 61, at 8). But as Firemen's points out, "Netherlands incorrectly interprets [the arbitrator's] finding [regarding actual authority] to mean that PHR was not acting on behalf of Case Handyman." (ECF No. 63, at 4). Indeed, the endorsement clause in the Netherlands Policy does not condition coverage of Case Handyman only where PHR's liability arises out of PHR's ongoing operations performed under a grant of actual authority for Case Handyman. See, e.g., Nautilus Ins. Co. v. BSA Ltd. P'ship, 602 F.Supp.2d 641, 649 (D.Md. 2009) ("[i]f the terms used are unambiguous, the meaning of the terms are determined by the court as a matter of law."). Because the endorsement clause leaves open the possibility that PHR may be found liable for ongoing operations performed under a grant of apparent authority - a possibility that the June 24, 2009 arbitration decision also left open - Netherlands' construction of the endorsement clause appears to be too narrow. See, e.g., Bakery and Confectionary Union and Industry Intern. Pension Fund v. New World Pasta Co., 309 F.Supp.2d 716, 728-29 (D.Md. 2004) ("[a] corporation is bound by the acts of its agent where those acts are performed by any express grant of power or within the agent's implied or apparent authority, unless the agent acted for his own benefit without the corporation's ratification of his action.") (emphasis added). Federal's reading of the endorsement clause, which broadly extends coverage "to any matter based on PHR's operations performed for' Case Handyman" is correct. The clause does not limit coverage of Case Handyman for claims based on PHR's status as Case Handyman's direct agent. ( See ECF No. 62, at 6).

Moreover, "[p]ursuant to Maryland law, apparent authority arises where the purported agent, [] may or may not have actual authority to act for the purported principal, but because of conduct on the purported principal's part the third person believes that the authority to act exists." Progressive Northern Ins. Co. v. Airborne Express, Inc., No. Civ. RDB 03-2987, 2005 WL 1712396, at *10 (D.Md. July 20, 2005) ( quoting Medical Mut. Liability Ins. Soc. Of Maryland v. Mutual Fire, Marine & Inland Ins. Co., 37 Md.App. 706, 720 (1977)). "The principal, either actively or passively, creates a situation that causes the third person to be misled." Medical, 37 Md.App. at 720. The arbitrator determined that there were "definite disputes as to material facts concerning the applicability of the doctrine of apparent authority to the claims by the [Hammerashes]." (ECF No. 29-6, at 3). This holding undermines Netherlands' position that after the June 24, 2009 decision, Case Handyman could no longer have been found liable for work PHR was performing on its behalf.

Further buttressing Federal's and Firemen's argument that Netherlands' duty to insure Case Handyman did not cease after the June 24, 2009 decision is the fact that the summary judgment decision did not end the case against Case Handyman and Case Design. As Firemen's points out:

If we were to accept the Netherlands' contention that Case Design's and Case Handyman's liability ceased upon a finding by the Arbitrator that PHR was not acting on behalf of Case Design/Case Handyman with actual authority, then the entire Hammerash Arbitration would have been resolved as Case Design and/or Case Handyman would have had no liability at all. However, that was not the case. The Arbitrator held that a potential claim still existed against Case Design and/or Case Handyman, not arising out of their own contract with the Hammerashes, but instead arising out of the theory that the Hammerashes believed they were contracting with Case Design/Case Handyman based on PHR's apparent authority.

(ECF No. 63, at 5) (emphasis added). In fact, Federal informs that the Hammerash Arbitration has since settled. (ECF No. 62, at 4 n.1). Had the arbitrator's decision negated the potential that Case Handyman could be found liable, there would have been no need to settle with the Hammerashes. See, e.g., Mitcheson v. Harris, 955 F.2d 235, 240 (4th Cir. 1992) (noting that under Maryland law, the "duty to defend continues, if actual or potential coverage is established, until such coverage is negated." ( citing 7416 Balt. Ave. Corp. v. Penn-America Ins. Co., 83 Md.App. 692 (1990))).

Based on the foregoing, the June 24, 2009 arbitration decision did not relieve Netherlands of the duty to defend and provide coverage in the Hammerash Arbitration.[12] Consequently, Netherlands must contribute to Federal in the amount of $103, 228.61, which is fifty (50) percent of the $206, 457.22 in costs that Federal incurred in defending the Hammerash Arbitration.[13]

III. Conclusion

For the foregoing reasons, Netherlands will be ordered to contribute to Federal in the amount of $103, 228.61. A separate order will follow.

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