Reservation of Rights Does Not Create Right of Reimbursement
May 2006
In an unpublished decision by the Fourth Circuit, American Modern Home Insurance Company v. Reeds at Bayview
Mobile Home Park, LLC, applying Maryland law, the court held that insurers
were under no obligation to defend an underlying class action against its insureds
for faulty construction, but also that the insurers had no right of reimbursement
for their contribution to a settlement fund.
by Kevin
Merriman
Goldberg
Segalla LLP
Residents of the insured mobile home parks filed a class action alleging
that the insureds were responsible for faulty installation of foundations for
their mobile homes. The residents claimed that the insureds employed a company
that defectively installed the foundations, that the insureds knew of the defective
workmanship, and that the insureds required residents to use this installer.
The complaint stated causes of action under Maryland consumer protection and
real property laws, breach of contract, fraud, negligent misrepresentation,
conspiracy, unjust enrichment, negligence, and breach of warranty.
The insureds tendered the claim to their liability insurers, who denied coverage
because the complaint did not seek "property damage" caused by an "occurrence."
One of the insurer's concluded, however, that allegations of the insureds' conduct
in a third amended complaint might be covered by its policies, and agreed to
defend the insureds subject to a reservation of rights.
To facilitate settlement of the class action, the insurer agreed to contribute
to a settlement fund, but issued a letter making clear its participation in
the settlement was subject to "a complete reservation of rights to recover back
its contribution for damages that are not covered by its insurance policies
with the various insureds." The insurer then filed this action seeking a declaration
that its policy did not obligate it to defend the suit.
The court first considered whether any of the claims asserted against the
insureds in the underlying class action were covered by the policies. The court
concluded they were not. It reasoned that:
- None of the damage … can be characterized as having been caused by an
accident … because none of it occurred by chance or arose from unknown or
remote causes. The [insureds'] alleged failure to carry out contractual
and statutory obligations to assure that the foundations were properly installed
could not possibly be considered accidental. Indeed, some of the damage
alleged could arguably be characterized as having been an expected or intended
consequence of the [insured's] actions, which damage the policy explicitly
excludes from coverage.
The court acknowledged that Maryland courts have applied a broader definition
of "accident" to allegations of negligence; that negligence can be deemed accidental
if it "causes damage that is unforeseen or unexpected by the insured." In this
case, however, the court found it was not conceivable that the insureds' alleged
conduct "may have taken place without their foresight or expectation of the
damage caused. Negligent interactions with residents regarding obligations relating
to the foundations and negligent interactions with companies responsible for
installing foundations foreseeably and expectedly lead to damage to the mobile
homes sitting on the foundations." The court concluded, therefore, that the
insurers had no duty to defend the suit.
The court also considered whether the insurer was entitled to reimbursement
for its contribution to the settlement fund, and concluded it was not. The court
observed that the policy did not contain any provision for reimbursement for
settlement payments made in cases in which there was no coverage, and the insureds
never agreed to grant the insurer that right in the reservation of rights letter
issued by the insurer preceding its contribution to the settlement fund. Indeed,
the court concluded that the insurer's "repeated reservation of its asserted
right to reimbursement is entirely inconsequential ... Assiduous reservation
of a nonexistent right does not bring that right into existence."
In a separate opinion, Justice Wilkins agreed that the insurer had no right
of reimbursement for its contribution to the settlement fund, but concluded
that the insurers had a duty to defend the underlying action. The dissenting
opinion pointed out that all of the complaints requested compensation for property
damage, and that the complaints created potential liability for property damage
"caused by an 'occurrence.'" Under Maryland law, "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," which
the dissenting justice concluded was a subjective, not objective test.
The dissenting justice explained that although the complaints alleged some
intentional torts, they also alleged causes of action for negligent misrepresentation,
violation of building code, negligence, breach of warranty, and torts arising
from breach of contract. If the failure to install the homes correctly amounted
only to negligence, the insureds may not have known that the homes were being
installed incorrectly. In that event, there would be no basis for concluding
that the insureds actually expected that the installations would damage the
homes. Therefore, the damage could have been caused by an occurrence. The dissenting
justice also observed that the complaints sought to impose liability for damage
not to the foundations themselves, but to the rest of the homes, and that the
scope of the product or work for which the insureds were responsible was limited
to the installation of the homes and did not include their construction.
Though not discussed in the majority opinion, the dissent also concluded
that the business risk exclusions did not preclude the insurers' duty to defend.
Given that the purpose of exclusions is to remove any obligation of the insured
to pay for the repair or replacement of the policyholder's own defective work
or defective product, and that the exclusions permit coverage for damages to
other property or for other accidental loss caused by the defective product
or defective work, the court concluded that none of the exclusions were dispositive.
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