Lead Opinion
We are called upon in the instant case to determine whether the trial court was correct in granting an insurer’s motion for summary judgment on the basis that it had no duty to defend or indemnify its insured against a claim of negligent misrepre
I.
We are asked to review a declaratory judgment action to determine whether The Brethren Mutual Insurance Company (Brethren) owed a duty to defend or indemnify its insured in a tort suit brought against the insured. The underlying lawsuit was instituted by Frits M. Christensen and Helene S. Christensen (the Christensens) in the Circuit Court for Frederick County against Appellants, Robert T. Sheets, Jr. and his wife, Joyce A. Sheets (the Sheetses). The suit alleged that the Sheetses both intentionally
In essence, the Christensens’ complaint alleged that the failure of the septic system was attributed to the Sheetses’ misrepresentations that it was in “good working condition” because, had it not been for those misrepresentations, the Christensens, whose family was too large for the system to operate properly, would not have moved into the house. The Sheetses notified Brethren, their insurance carrier, of the
The Sheetses then sought a declaratory judgment against Brethren in the Circuit Court for Frederick County asking the court to compel Brethren to defend and indemnify them in the lawsuit against the Christensens. Both parties filed cross-motions for summary judgment asserting that no genuine dispute existed as to any material fact. The court granted Brethren’s motion for summary judgment and denied the Sheetses’ motion. The Sheetses appealed to the Court of Special Appeals. Before our intermediate appellate court considered the case, we issued a writ of certiorari on our own motion. While the appeal was pending, the Christensens’ .lawsuit against the Sheetses settled.
II.
Preliminarily, we note that since there is no information in the record concerning the settlement of the Christensens’ suit against the Sheetses, we have no indication of how damages were calculated or whether the suit was settled on grounds of intentional or negligent misrepresentation. Hence, we can not determine whether Brethren would have a duty to indemnify the Sheetses. Consequently, we will discuss only Brethren’s duty to defend and not its duty to indemnify.
III.
In granting a motion for summary judgment, the trial court does not resolve factual disputes, but is instead limited to ruling as a matter of law. Heat & Power v. Air Products,
In Brohawn v. Transamerica Ins. Co.,
“To ascertain when an insurer is under a duty to defend an insured in accordance with Brohawn, this Court, in St. Paul Fire & Mar. Ins. [] v. Pryseski,292 Md. 187 ,438 A.2d 282 (1981), articulated the following two-part inquiry:
‘In determining whether a liability insurer has a duty to provide its insured with a defense in a tort suit, two types of questions ordinarily must be answered: (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 upon the allegations of the tort suit.’
292 Md. at 193 ,438 A.2d at 285 . To answer these two inquiries as they pertain to the facts of the instant case, we must ascertain the scope and limitations of coverage under the ... insurance policies and then determine whether the allegations in the [underlying tort] action would potentially be covered under those policies.”
In applying the Pryseski two-step analysis to the instant case, we first turn to the language of the Brethren insurance policy to determine the scope and limitations of the coverage. See Cochran,
“In Maryland, insurance policies, like other contracts, are construed as a whole to determine the parties’ intentions. Words are given their ‘customary, ordinary, and accepted meaning,’ unless there is an indication that the parties intended to use the words in a technical sense. ‘A word’s ordinary signification is tested by what meaning a reasonably prudent layperson would attach to the term.’ ” (Citations omitted).
The farm owner’s general liability insurance policy (the policy) issued by Brethren provides coverage for bodily injury and property damage liability. Under the policy, Brethren 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.” Brethren also has “the right and duty to defend any ‘suit’ seeking those damages.”
The policy states that “the insurance applies to ... ‘property damage’ only if ... caused by an ‘occurrence,’ and the ...
“Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the ‘occurrence’ that caused it.”
The policy defines an “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions,” but does not define “accident.”
In sum, the policy covers property damage caused by an occurrence. Hence, the Sheetses must demonstrate that the Christensens’ complaint at least alleged three independent elements in order to compel Brethren to provide a defense in the tort suit: (1) that there was “property damage” as defined in the policy; (2) that the property damage was “caused” by the negligent misrepresentation; and (3) that negligent misrepresentation
Pursuant to the second part of the Pryseski inquiry, this Court must look to the Christensens’ complaint and any extrinsic evidence adduced to determine if the lawsuit alleges action that is potentially covered under the Sheetses’ insurance policy with Brethren. See Sullins,
IV.
Following the parties’ cross-motions for summary judgment in the declaratory action, a hearing was held before the Honorable Mary Ann Stepler. At the hearing, Brethren argued that the claims made against the Sheetses were not covered under the insurance policy because: (1) “there is no causal nexus or direct causation between the misrepresentation and the property damage;” (2) “the claims for misrepresentation in the complaint are claims only for economic losses [—t]hey are not claims for property damage;” and (3) “the Sheetses’ misrepresentations to the Christensens are not an occurrence.”
In response, the Sheetses argued that the Christensens’ complaint sufficiently alleged a direct causal connection because the Christensens’ claim was that the negligent misrepresentation caused a family that was too large for the system to move into the house and use the system, in turn causing the system to break down. The Sheetses further asserted that, since the failure of the system constituted a loss of use caused by the misrepresentation, the lawsuit was potentially covered under Brethren’s policy, and therefore Brethren was obligated to defend against the Christensens’ claim.
The trial judge agreed with Brethren and granted summary judgment in its favor. The parties reasserted their positions both in brief and in oral argument to this Court. We must determine whether Brethren owed the Sheetses a legal duty to defend. To do so, we must discuss seriatim whether the Christensens’ complaint alleged that (1) there was property damage (2) caused by (3) an occurrence. For the reasons
V.
(A) CAUSAL NEXUS
The trial judge based her ruling primarily on lack of causation, finding “there to be no causal nexus between the negligent misrepresentation and the actual damages incurred by the owners.” The Christensens’ complaint alleged that the negligent misrepresentation caused a family too large for the septic system to move in to the house and use the system, in turn causing the system to break down. The Sheetses argue that even if the Christensens’ claim may have been a frivolous and inadequate basis for proving causation, their complaint alleged a cause of action that was at least potentially covered by the policy. Brethren, on the other hand, asserts that the Christensens’ claim that they would not have moved in and thus would not have used the system absent the misrepresentation “defies logic” and is simply too attenuated.
In order for an insurer to be obligated to defend an insured, the underlying tort suit need only allege action that is potentially covered by the policy, no matter how attenuated, frivolous, or illogical that allegation may be. See 7C John Alan Appleman, Insurance Law and Practice § 4686, at 172 (Berdal ed. 1979) (“In general, the insurer is not permitted to contradict the allegations contained in a complaint since that will be a matter of proof to be determined during the trial of the underlying negligence action.”). Brethren should have defended the suit filed against its policy holder even if that suit on its face was frivolous in the allegation of a causal connection between the Sheetses’ negligence and the Christen-sens’ property damage. Rather than filing a motion for summary judgment against the Sheetses, Brethren should have filed a motion on behalf of the Sheetses against the Christensens on the ground of lack of causal nexus.
There is an important difference between the duty to defend a lawsuit that affirmatively makes a claim that falls outside of the coverage of the policy, and the duty to defend a lawsuit that fails to allege the elements of a cause of action that if properly alleged and proven would be within the coverage of the policy. Any motion for summary judgment on the basis that a tort suit fails to allege an adequate claim of causation should be made by the insurer against the tort claimant, not against the insured. The fact that the allegation of causation is groundless does not relieve the insurance carrier from defending its insured as long as some causal nexusds at least alleged.
In Brohawn, we explained:
“The obligation [to defend] is contractual and exists because of the agreement made by Transamerica with Mrs. Brohawn. Transamerica has expressly promised to ‘defend any suit against the Insured alleging such bodily injury ... and seeking damages which are payable under the terms of this [policy], even if the allegations of the suit are groundless, false, or fraudulent.’ (Emphasis supplied.) Interpreting the same provision, Chief Judge Learned Hand said in Lee v. Aetna Casualty & Surety Co.,178 F.2d 750 , 751-52 (2d Cir.1949):
‘This language means that the insurer will defend the suit, if the injured party states a claim, which, qua claim, is for an injury “covered” by the policy; it is the claim which determines the insurer’s duty to defend; and it is irrelevant that the insurer may get information from the*645 insured, or from any one else, which indicates, or even demonstrates, that the injury is not in fact “covered.” The insurer has promised to relieve the insured of the burden of satisfying the tribunal where the suit is tried, that the claim as pleaded is “groundless.” ’
The plain meaning of this covenant is that the insurer will defend any suit stating a claim within the policy even though ‘the claim asserted against the insured cannot possibly succeed because either in law or in fact there is no basis for a plaintiffs judgment.’ ” (Citation omitted).
(B) PROPERTY DAMAGE
Next, we must determine whether the trial judge was legally correct in holding that the damages to the septic system were not covered as “property damage” under the policy. The Sheetses concede that the money spent to fix the system was economic loss and thus not covered under the policy as property damage.
Also included within the policy’s definition of property damage, however, is “[l]oss of use of tangible property that is not physically injured.” The Sheetses argue that the trial judge failed to look beyond the allegation of economic loss to see that the complaint alleged property damage in terms of a loss of use of the septic system to the Christensen family. We agree. The Christensens claim they were deprived of the use of their septic system. This alleged “loss of use” was property damage as defined in and covered by the Brethren policy.
(C) OCCURRENCE
Lastly, we must determine whether negligent misrepresentation, as alleged in the Christensens’ complaint, constitutes an “occurrence” under the policy. The policy defines “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions,” but does not define “accident.” The policy also excludes from coverage property damage “expected or intended from the standpoint of the ‘insured.’ ” Consequently, the question before us is whether the Sheetses’ alleged negligent misrepresentation concerning the working condition of the septic system was an “accident.”
1.
Negligent misrepresentation is a form of negligence. Before we discuss whether negligent misrepresentation is an accident, we must discuss whether any form of negligence can be considered an accident under a liability insurance policy. This question is not easily resolved. Courts that have considered the issue have produced several distinct lines of authority:
“There is a definite split of authority ... as to what acts of negligence result in liability covered by the terms of ... a policy [insuring against liability caused by accident]. Some courts have held that such policies do not cover liability for the natural and probable consequences of the negligence of the insured or his agent.
* * * * * *
[O]ther courts have held that such policies include liability for negligence-caused injury or damage, provided that the injury or damage was not in fact intentional.” (Footnote omitted).
J.P. Ludington, Annotation, Liability Insurance: “Accident” or “Accidental” as Including Loss Resulting from Ordinary
The leading cases holding that liability insurance policies covering damages caused by “accident” do not cover damages which are the natural and probable consequences of negligent acts were decided by the United States Court of Appeals for the Tenth Circuit. See, e.g., City of Aurora, Colorado v. Trinity Universal Insurance Co.,
“The natural and ordinary consequences of a negligent act do not constitute an accident. If one negligently erects a roof by the use of weak or inadequate rafters, the roof is liable to collapse but its fall is not an accident because such is the ordinary result of such construction. * * * When the means used and intended to be used produce results which are their natural and probable consequences, there has been no accident although such results may not have been intended or anticipated.”
The troublesome aspect of these cases is that their interpretation of the term “accident” severely limits the applicability of general liability policies:
“[E]ven ... those courts which follow [this interpretation recognize] ... that it so greatly restricts the insurer’s liability as to render the policy valueless or even meaning*648 less, and denies coverage for what is the predicate of any likely liability against the insured. As one court has pointed out, the insured himself is not liable where damage or injury is the unforeseeable result of his negligence; and where the damage or injury is foreseeable, so that the insured is liable, his insurer is not liable.... ” (Footnotes omitted).
7 A.L.R.3d § 2, at 1264-65. This problem was recognized by the Tenth Circuit in Hutchinson Water Co., where the court acknowledged:
“Apparently we did not contemplate whither this logic would lead us. For, if the policy did not cover the loss because the natural and probable consequences of the negligent act did not constitute an accident, then by the same logic, there would be no liability where the damage was the unexpected, hence unforeseen result of the negligent act. In the first instance, the damage would be foreseeable and therefore not accidental; in the latter instance, the damage would not be foreseeable and hence [there would be] no liability upon the insured for his negligent acts. In either instance, the insurer would be free of coverage and the policy would be rendered meaningless.”
“The fact that the claims here involved ... negligence did not remove them from the category of accident. Bundy would not be legally obligated to pay a claim arising out of an accident occurring without its negligence____ If the liability policy were construed so as to cover only accidents not involving____ negligence, then no protection would be given to the insured. The insured would not need liability insurance which did not cover the only claims for which it could be held liable. The word ‘accident’ is common in most liability policies and should not be construed in this type of case as not including claims involving negligence.... ”
Bundy,
Other courts have also found various acts of negligence to be “accidents” under liability insurance policies. See Employers Ins. Co. of Ala. v. Alabama Roofing & Sid. Co.,
2.
This Court has been called on in previous cases to consider whether negligent acts by an insured constituted “accidents” under liability insurance policies. See State Farm Mutual v. Treas,
In Harleysville, we distinguished Haynes and found no accident in a case involving smoke damage caused by the careless burning of refuse. The insured in Harleysville was a contractor hired to clear trees from a wooded tract of land.
The difficulty in applying these cases is that they are somewhat ambiguous as to the standard used to determine whether the negligent act constituted an “accident.” There is some language in the cases suggesting that the Court focused on whether the damage caused by the negligence should have been foreseen or expected by the insured, while other portions of the analyses indicate that the dispositive consideration was whether the damage was actually expected or intended by the insured. For example, we stated in Harleysville:
“It is our view that a contractor who piles trees and underbrush in 10 to 12 foot piles, adds fuel oil and rubber tires, and permits the fires to burn for 36 hours before they are extinguished should be charged with the responsibility of foreseeing that a pall of smoke and soot will result, which may damage adjacent properties. The resulting damage*652 was not ‘an event that takes place without one’s foresight or expectation____’ ” (Citation omitted).
Although our prior cases may have been less than clear in explaining the relevant inquiry, we hold today that an act of negligence constitutes an “accident” under a liability insurance policy when the resulting damage was “ ‘an event that takes place without [the insured’s] foresight or expectation.’ ” Harleysville,
We concur with the courts that have held that construing the term “accident” as including negligent acts resulting in unexpected or unforeseen damage conforms to the meaning that a “ ‘reasonably prudent layperson would attach to the term.’ ” Sullins,
If we were to adopt an objective standard and hold that the term “accident” as used in liability insurance policies excludes coverage for damage that should have been foreseen or expected by the insured, such insurance policies would be rendered all but meaningless. Under such an interpretation, the policy would provide no coverage for negligent acts resulting in objectively foreseeable or expectable damage. Only acts of negligence resulting in objectively unforeseeable or unexpectable damage would be covered. Of course, under basic principles of tort law, the insured is unlikely to be held liable for unforeseeable or unexpectable damages resulting from his negligence. Thus, interpreting “accident” as encompassing only negligent acts resulting in unforeseeable and unexpectable damages would leave the insured covered against only those damages for which he or she is not likely to be held liable. We decline to adopt such a restrictive construction of the term accident. We agree with the reasoning of the Eighth Circuit in City of Carter Lake:
“To adopt Aetna’s interpretation that an injury is not caused by accident because the injury is reasonably foreseeable would mean that only in a rare instance would the comprehensive general liability policy be of any benefit to Carter Lake. Enforcement of this policy in the manner would afford such minimal coverage as to be patently disproportionate to the premiums paid and would be inconsistent with the reasonable expectations of an insured purchasing the policy. Under Aetna’s construction of the policy language if the damage was foreseeable then the insured is liable, but there is no coverage, and if the damage is not*654 foreseeable, there is coverage, but the insured is not liable. This is not the law. The function of an insurance company is moré than that of a premium receiver.” (Citation omitted).
We recognize that our holding today may be inconsistent with language in at least one Court of Special Appeals opinion that focused on the foreseeability of damage to determine whether negligence constituted an accident. In Ed. Winkler & Son v. Ohio Cas. Ins.,
3.
Turning to the more specific issue before us, we must determine whether the. Christensens’ allegations of negligent misrepresentation constitute an accident under the Brethren insurance policy. Whether negligent misrepresentation can constitute- an .accident is a question that has -not yet been decided in Maryland, but has been examined by other jurisdictions. Just as courts are divided on the issue of whether
On one hand, some courts have stated that negligent misrepresentation is an accident under liability insurance policies. For example, the Supreme Court of New Jersey differentiated between negligent and intentional misrepresentation stating: “Courts generally have held that although the insurer must defend an insured who is accused of reckless, negligent, or innocent misrepresentations, no defense is required when the insured is accused of intentional misrepresentations.” SL Industries v. American Motorists,
On the other hand, some jurisdictions hold that negligent misrepresentation is not an accident or occurrence. The leading case on this side of the issue is Safeco Ins. Co. of America v. Andrews,
California cases that subsequently rely on Safeco hold that, under California law, negligent misrepresentation is associated more with fraud than with ordinary negligence and hence cannot be considered an accidental, unintended occurrence. See, e.g., American States Ins. Co. v. Canyon Creek,
Other jurisdictions that have held that negligent misrepresentation is not an accident have focused on the insured’s intent to induce reliance on the false statement. See, e.g., Tschimperle v. Aetna Cas. & Sur. Co.,
In Maryland, the prima facie elements of the tort of negligent misrepresentation are:
*657 “(1) the defendant, owing a duty of care to the plaintiff, negligently asserts a false statement;
(2) the defendant intends that his statement will be acted upon by the plaintiff;
(3) the defendant has knowledge that the plaintiff will probably rely on the statement, which, if erroneous, will cause loss or injury;
(4) the plaintiff, justifiably, takes action in reliance on the statement; and
(5) the plaintiff suffers damage proximately caused by the defendant’s negligence.”
Gross v. Sussex,
The Christensens’ complaint asserts that the failure of the septic system due to use by their eleven member family was a result of statements made by the Sheetses that they “had no problems with the septic system” and that it was in “good working condition.” Additionally, the pleadings in the declaratory judgment action state that, according to Mr. Christensen’s testimony taken at a deposition, his claim was based on the Sheetses’ “negligence and carelessness in failing to reveal certain necessary information about the subject property and in making those misrepresentations” set out in the complaint. According to these allegations, it is possible that the Sheetses did not foresee or expect the damage resulting from their alleged negligent or careless assertion that the septic system worked properly. It is conceivable that
We hold that Brethren owed the Sheetses a duty to defend against the underlying tort suit because the Christensens’ lawsuit was potentially covered by the insurance policy. For purposes of the duty to defend, the underlying complaint sufficiently alleged: (1) property damage, in the form of a loss of use of the septic system; (2) caused by; (8) an occurrence, in the form of negligent misrepresentation. Moreover, any doubt as to whether the allegations in the complaint state a potentially covered cause of action is ordinarily resolved in favor of the insured. See, e.g., Cochran,
JUDGMENT OF THE CIRCUIT COURT FOR FREDERICK COUNTY REVERSED AND REMANDED FOR FURTHER PROCEEDINGS CONSISTENT WITH THIS OPINION. COSTS TO BE PAID BY APPELLEE.
Dissenting Opinion by KARWACKI, J., in which MURPHY, C.J., joins.
Notes
. The Sheetses do not contend that Brethren had a duty to defend them against a claim of intentional misrepresentation, as the terms of the policy clearly indicate that there is no duty to defend or indemnify against intentional torts.
. We recently held that if the allegations in the underlying complaint are ambiguous as to whether there exists a potentiality of coverage under an insurance policy, the insured may rely on extrinsic evidence. Aetna v. Cochran,
. The only "occurrence” that is potentially covered by the Brethren policy is negligent misrepresentation. Any other potential causes of the septic system’s failure happened after the transfer of title in the property and are thus not covered by the Brethren policy.
. At least one other case applying Maryland law has also relied on Ed. Winkler & Son v. Ohio Cas. Ins.,
Dissenting Opinion
dissenting.
The majority of this Court has determined that this case should be reversed and remanded to the trial judge to enter summary judgment on behalf of the insureds. Because I
I.
The majority opinion has done an admirable job of surveying the decisions of our sister jurisdictions, and categorizing them. Majority opinion at 654-657. As I interpret it, much of this disagreement around the country about whether negligent misrepresentation constitutes an “accident” within the meaning of a liability insurance policy may be attributed to a more fundamental dispute about the nature of the tort of negligent misrepresentation. Clearly, negligent misrepresentation is a difficult concept, whose very name breeds confusion. The name “negligent misrepresentation” is, in itself, an oxymoron because to “misrepresent” requires some measure of intentionality, while the word “negligent” seemingly contradicts the necessity of intent. The prima facie elements of the tort of negligent misrepresentation in Maryland were recently repeated in Gross v. Sussex,
“(1) the defendant, owing a duty of care to the plaintiff, negligently assents a false statement;
(2) the defendant intends that his statement will be acted upon by the plaintiff;
(3) the defendant has knowledge that the plaintiff will probably rely on the statement, which, if erroneous, will cause loss or injury;
(4) the plaintiff, justifiably, takes action in reliance on the statement; and
(5) the plaintiff suffers damage proximately caused by the defendant’s negligence.”
Id. at 259,
In Ellerin v. Fairfax Savings,
It is an insufficient analysis, however, merely to note that this Court adheres to our traditional distinction between fraud and negligent misrepresentation, or that negligent misrepresentation is insufficiently intentional to support punitive damages. The question here is whether negligent misrepresentation has a sufficiently intentional quality to distinguish it from an accident. To make that determination, a closer look at negligent misrepresentation is necessary.
I observe that the first prima facie element of the tort of negligent misrepresentation requires that the defendant “assert” the false statement. Black’s Law Dictionary (6th ed. 1990) defines the term “assert” as “[t]o state as true; declare; maintain.” None of these definitions is consistent with an accidental “blurt.” Instead, an assertion requires a degree of intentionality inconsistent with the term accident. This result is consistent with a common sense understanding that a voluntary verbal statement cannot, by definition, constitute an accident, as that term is intended by the policy.
The second element of the tort of negligent misrepresentation requires that the defendant “intends” that the plaintiff will act in reliance upon this statement. This intention, although quite distinct from the intent to deceive necessary to establish fraud, see Ellerin v. Fairfax Savings, supra, is also inconsistent with conceptions of ordinary negligence. Al
I would therefore choose to have Maryland pick our own path between those of our sister states. Although I would adhere to our traditional distinction between fraud and negligent misrepresentation, I would nonetheless hold that the limited intentionality necessary for negligent misrepresentation is of a sufficient quality to not qualify as an accident, and thus, not an “occurrence.” Because I would hold that negligent misrepresentation cannot be an occurrence, it would follow that Brethren has no duty to defend the Sheets against the Christensens’ suit, and that the trial court was entirely correct in granting summary judgment.
II.
I also wish to note my dissent from those portions of the majority opinion labelled as sections V(C) 1 and 2, where the relationship between the policy definition of an “accident” and the negligence standard in tort law is explored. This relationship was not briefed or addressed by either party, is beyond the scope of this appeal, and is superfluous to the decision. I also fear that the majority’s new definition of an “accident” may have the unintended effect of resurrecting the antiquated and artificial distinction between accidental means and accidental results, which Justice Benjamin Cardozo termed a
I consider the question foreclosed as a matter of Maryland law by virtue of our oft-repeated pronouncement that in construing insurance contracts,
“[w]ords are given their ‘customary, ordinary, and accepted meaning,’ unless there is an indication that the parties intend to use the words in a technical sense. ‘A word’s ordinary signification is tested by what meaning a reasonably prudent layperson would attach to the term.’ ”
Sullins v. Allstate Ins. Co.,
III.
For the reasons discussed, I would affirm the trial judge’s entry of summary judgment for Brethren.
Chief Judge MURPHY has authorized me to state that he concurs with the views expressed herein.
. One example of the volitional aspect of ordinary negligence would be found if A threw a rock that accidentally hit B. A intended to throw the rock; he did not intend for the rock to hit B. While A’s act would be considered negligent, it did have a volitional component.
. For the reasons stated in part II of this dissenting opinion, I disagree that there was a need to overrule the decision in Ed. Winkler, supra.