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Harleysville Preferred Insurance Co. v. Rams Head Savage Mill, LLC

Court of Special Appeals of Maryland

June 28, 2018

HARLEYSVILLE PREFERRED INSURANCE COMPANY, et al.
v.
RAMS HEAD SAVAGE MILL, LLC, et al.

          Circuit Court for Howard County 104273 Case No. 13-C-15-104273

          Friedman, Fader, Rodowsky, Lawrence F. (Senior Judge, Specially Assigned), JJ. [*]

          OPINION

          FADER, J.

         Appellants Harleysville Preferred Insurance Company and Nationwide Mutual Insurance Company (collectively, "Harleysville") ask us to decide that they had no obligation to provide a defense for two lawsuits filed against their insured, Rams Head at Savage Mill, LLC ("Rams Head"), and Rams Head's general manager and majority owner, Kyle Muehlhauser. The underlying lawsuits sought damages arising from Mr. Muehlhauser's surreptitious videotaping of women who were using a restroom at a restaurant and tavern owned by Rams Head.

         We conclude that Harleysville had a duty to defend Rams Head. Harleysville issued insurance policies that provide coverage for damages Rams Head becomes legally obligated to pay because of, among other offenses, the "invasion of the right of private occupancy of a room . . . that a person occupies, committed by or on behalf of its owner . . . ." Under the plain language of the coverage grant, we conclude that the underlying tort suits alleged that Rams Head and Mr. Muehlhauser invaded the plaintiffs' right of private occupancy of the restroom when Mr. Muehlhauser conducted his unauthorized video surveillance. We also conclude that an exclusion for "Recording and Distribution of Material or Information in Violation of Law" does not preclude coverage.

         Harleysville did not, however, have a duty to defend Mr. Muehlhauser because coverage for him is excluded by the policies' Criminal Acts exclusion. There is no version of facts alleged in the complaints under which Mr. Muehlhauser's alleged conduct is not criminal. We therefore affirm in part and reverse in part.

         BACKGROUND

         Rams Head is a Maryland limited liability company that owns and operates the Rams Head Tavern. Rams Head's operating agreement designates Mr. Muehlhauser as general manager and majority owner of the company and gives him "full, exclusive, and complete discretion, power, and authority . . . to manage, control, administer, and operate the business and affairs" of Rams Head.

         Rams Head leases the property on which it operates the Rams Head Tavern from Savage Mill Limited Partnership under a long-term lease that was originally entered in 1998. During the term of that lease, provided Rams Head pays its rent and abides by the other terms of the lease, Rams Head "shall peaceably and quietly hold and enjoy the Leased Premises . . . without hindrance or interruption by Landlord or any other person or persons . . . ." Rams Head is permitted to make improvements, and is responsible for making repairs, renovations, and renewals to the leased property, subject to approval by Savage Mill. Savage Mill is permitted to make changes to the leased property only with the approval of Rams Head. The circuit court found that Rams Head exercised "exclusive control" over the restaurant.

         The Underlying Incident

         In May 2014, a Rams Head Tavern patron was using its single-occupancy women's restroom when a portable camera fell onto the floor from underneath the sink, close to the toilet. She reported the incident to the police, who identified Mr. Muehlhauser as the culprit. In July 2015, Mr. Muehlhauser pleaded guilty to two counts of conducting video surveillance with prurient intent in violation of § 3-902 of the Criminal Law Article (2012 Repl.; 2017 Supp.).[1]

         Two different sets of plaintiffs filed class action complaints in the Circuit Court for Howard County against Rams Head and Mr. Muehlhauser. In Michelle Castle, et al. v. Kyle C. Muehlhauser, et al. (Case No. 13-C-15-102598), the plaintiffs alleged that from March 2, 2012 to May 9, 2014, Mr. Muehlhauser mounted a camera in the women's restroom at Rams Head Tavern to "conduct visual surveillance of the female patrons and employees using the toilets . . . solely for prurient intent" in "an attempt to satiate his sexual perversions at the expense of the privacy of the female patrons and employees." The complaint further alleged that Mr. Muehlhauser was "at all times . . . acting in the scope of his employment and/or authority as a principal and employee of" Rams Head and that Rams Head "adopted and ratified" his conduct.

          The Castle complaint brought claims against Rams Head and Mr. Muehlhauser for (1) violation of § 3-902 of the Criminal Law Article, which criminalizes certain visual surveillance with prurient intent and also creates a private cause of action for individuals subjected to unlawful surveillance, and (2) the tort of unreasonable intrusion upon seclusion. The complaint alleged that Ms. Castle and the other putative plaintiffs incurred damages including "expenses, mental pain and suffering, fright, nervousness, indignity, humiliation, embarrassment and insult."

         The plaintiffs in Felicia Barlow Clar, et al. v. Kyle C. Muehlhauser, et al. (Case No. 13-C-15-102863), similarly alleged that Mr. Muehlhauser, "both individually and in his capacity as President, General Manager, and Owner of the Rams Head . . . did plant video recording equipment in the ladies['] restroom for the purpose of videotaping women patrons and employees in the restroom without their permission." The Clar plaintiffs, women who used the restroom at the Rams Head Tavern between January and May of 2014, alleged that "[a]t all relevant times, Defendant Muehlhauser did violate Md. Code Ann., Crim. Law § 3-902 . . . ."

         The Clar complaint brought seven causes of action: negligent hiring, retention, supervision, selection and qualification (Count I); intrusion upon seclusion (Count II); breach of contract and of the implied duty of good faith and fair dealing (Count III); violation of § 3-902 of the Criminal Law Article (Count IV); negligent violation of § 3-902 of the Criminal Law Article (Count V); negligent entrustment (Count VI); and intentional infliction of emotional distress (Count VII). Counts II, III, IV, V, and VII were brought against Rams Head and Mr. Muehlhauser. Mr. Muehlhauser was not named as a defendant in Counts I and VI. The plaintiffs alleged that, as a result of the conduct of Mr. Muehlhauser and Rams Head, they "suffered severe humiliation, violation, anxiety, loss of dignity, emotional distress, mental anguish, and loss of valuable consideration." In Count VII, they further alleged that they "sustained severe emotional distress resulting in physical manifestations, emotional anguish, fear, anxiety, humiliation, embarrassment and other physical and emotional injuries . . . ."

         The Harleysville Policies

         During the period covered by the allegations in the complaints-from March 2012 through May 2014 for the Castle complaint and from January 2014 through May 2014 for the Clar complaint-Harleysville insured Rams Head under three one-year commercial lines insurance policies. For policies running from December 1, 2011 through December 1, 2012 and December 31, 2012 through December 31, 2013, respectively, [2] policy provisions relevant to this dispute were supplied on Harleysville's Commercial General Liability Coverage Form CG 00 0112 04 (the "04 Policy Form"). From December 31, 2013 through December 31, 2014, relevant policy provisions were supplied on Form CG 00 0112 07 (the "07 Policy Form"). Rams Head was listed as a named insured under each policy, and each included within the definition of "an insured" the members and managers of the named insureds, but only to the extent of their respective roles. Because the policy provisions were essentially identical each year, with one notable exception identified below, we discuss them collectively.

         The policies each provided grants of coverage for bodily injury and property damage liability (Coverage A) and personal and advertising liability (Coverage B). Under Coverage A, Harleysville 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." Coverage A excludes property damage or bodily injury that is "expected or intended from the standpoint of the insured." In addition to this duty to indemnify, the parties agreed that Harleysville would also have "the right and duty to defend the insured against any 'suit' seeking those damages," but only if such damages would be covered by the policies.

         Under Coverage B, Harleysville agreed to "pay those sums that the insured becomes legally obligated to pay as damages because of 'personal and advertising injury' to which this insurance applies," including any such injury "caused by an offense arising out of your business" during the policy period. "'Personal and advertising injury' means injury, including consequential 'bodily injury,' arising out of" seven enumerated categories of offenses. Most relevant here is "[t]he wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling or premises that a person occupies, committed by or on behalf of its owner, landlord or lessor." As with Coverage A, in Coverage B Harleysville also undertook "the right and duty to defend the insured against any 'suit' seeking [] damages" for personal and advertising injury covered by the policy.

         Harleysville invokes three coverage exclusions contained in the policies. First, only with respect to the policy in place from December 31, 2013 through December 31, 2014 (the "2014 Policy"), the "Recording and Distribution of Material or Information in Violation of Law" exclusion (the "Recording and Distribution exclusion") precludes coverage under both Coverage A and Coverage B for injuries "arising directly or indirectly out of any action or omission that violates or is alleged to violate" three specific statutes- the Telephone Consumer Protection Act ("TCPA"), the CAN-SPAM Act of 2003, and the Fair Credit Reporting Act ("FCRA")-or

[a]ny federal, state, or local statute, ordinance or regulation, other than the TCPA, CAN-SPAM Act of 2003 or FCRA and their amendments and additions, that addresses, prohibits, or limits the printing, dissemination, disposal, collecting, recording, sending, transmitting, communicating or distribution of material or information. [3]

         Second, the "Criminal Acts" exclusion exempts from Coverage B injuries "arising out of a criminal act committed by or at the direction of the insured." Third, the "Knowing Violation of Rights of Another" exclusion (the "Knowing Violation exclusion") precludes coverage under Coverage B for injuries "caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict 'personal and advertising injury'."

         The Declaratory Judgment Action

         Harleysville sought a declaratory judgment that it did not owe a defense to Rams Head or Mr. Muehlhauser with respect to either underlying action. Harleysville argued that the complaints did not allege injuries covered under either Coverage A or Coverage B and, with respect to the 2014 Policy, that the Recording and Distribution exclusion precluded coverage. Harleysville further argued that Mr. Muehlhauser does not qualify as an insured under the policies because the Criminal Acts and Knowing Violation exclusions preclude coverage for him.

         After a hearing, the circuit court issued a memorandum opinion and declaration that Harleysville had a duty to defend Rams Head and Mr. Muehlhauser against both complaints. The court observed that the duty to defend "depends on whether the allegations" in a complaint "potentially come[] within the Policy coverage," regardless of whether the claims have a "probability of success." Thus, the court concluded, Harleysville had an obligation under Coverage A to provide a defense for Rams Head to the Clar complaint, which the court concluded "clearly set[] forth numerous 'occurrences'" of negligence by Rams Head that "enabled" Mr. Muehlhauser to conduct surveillance in the restroom, causing "bodily injury" to the plaintiffs.

         The court held that both defendants were entitled to a defense under Coverage B, specifically the policy's coverage for injuries arising from an alleged "invasion of the right of private occupancy of a room . . . that a person occupies, committed by or on behalf of its owner." Finding that coverage grant to be ambiguous, the court interpreted it in the light most favorable to the policyholder. The court further rejected Harleysville's reliance on exclusions, concluding that: (1) the Recording and Distribution exclusion is limited to the protection of "personal and financial" information; and (2) the Knowing Violation and Criminal Acts exclusions are invalid under Bailer v. Erie Ins. Exch., 344 Md. 515 (1997), because applying them would render the coverage grant illusory. Because the complaints alleged that Mr. Muehlhauser was, at all relevant times, acting on behalf of Rams Head, the court also concluded that Harleysville owed a duty to defend Mr. Muehlhauser. In light of the pendency of the underlying cases, the court declined to accept extrinsic evidence to resolve whether Mr. Muehlhauser was actually acting on behalf of Rams Head.

         Both underlying complaints have now been resolved finally in favor of Rams Head and Mr. Muehlhauser.[4] As a result, the sole remaining coverage issue is whether Harleysville had a duty to defend.

         DISCUSSION

         "When an action has been tried without a jury, the appellate court will review the case on both the law and the evidence. It will not set aside the judgment of the trial court on the evidence unless clearly erroneous . . . ." Maryland Rule 8-131(c). "To the extent this case involves questions of law, including the interpretation of a contract, we review for legal error." White Pine Ins. Co. v. Taylor, 233 Md.App. 479, 493 (2017); see Clickner v. Magothy River Ass'n, 424 Md. 253, 266-67 (2012) ("Where a case involves both issues of fact and questions of law, this Court will apply the appropriate standard to each issue.").

         Whether an insurer has a duty to defend "is determined by the allegations in the tort actions. If the plaintiffs in the tort suits allege a claim covered by the policy, the insurer has a duty to defend." Brohawn v. Transamerica Ins. Co., 276 Md. 396, 407 (1975). We employ a two-part test to make this determination. First, we determine the "coverage[s] and . . . the defenses under the terms and requirements of the insurance policy." St. Paul Fire & Marine Ins. Co. v. Pryseski, 292 Md. 187, 193 (1981). Second, we review the allegations of the underlying suit to determine whether they "potentially bring the tort claim within the policy's coverage." Id. "Even if a tort plaintiff does not allege facts which clearly bring the claim within or without the policy coverage, the insurer still must defend if there is a potentiality that the claim could be covered by the policy." Brohawn, 276 Md. at 408. The scope of the duty to defend is broad; it applies whenever a tort plaintiff brings an "action that is potentially covered by the policy, no matter how attenuated, frivolous, or illogical that allegation may be." Sheets v. Brethren Mut. Ins. Co., 342 Md. 634, 643 (1996).

         To address the first part of this test, we must construe the relevant language of the policy according to contract principles. Md. Cas. Co. v. Blackstone Int'l Ltd., 442 Md. 685, 694 (2015). "Maryland follows the law of objective contract interpretation." Sy-Lene of Wash., Inc. v. Starwood Urban Retail II, LLC, 376 Md. 157, 166 (2003). Thus, "[i]n construing insurance contracts in Maryland we give the words of the contract their ordinary and accepted meaning, looking to the intention of the parties from the instrument as a whole." Taylor, 233 Md.App. at 498 (quoting Finci v. Am. Cas. Co., 323 Md. 358, 369-70 (1991)). We must construe a contract "as a whole" and give ...


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