Md. High Court: No Coverage Owed for Lead Paint Exposure After Policies Rescinded

Insurers that rescinded general liability policies issued to landlords who misrepresented their exposure to lead paint claims owe no coverage to 12 plaintiffs who had not yet obtained final court judgments, Maryland’s high court ruled.

The Court of Appeals on Monday overturned decisions by the Baltimore City Circuit Court and Court of Special Appeals that held the claimants were third-party beneficiaries who had vested rights in the insurance polices as they existed before the rescission.

The unanimous opinion says “…we hold that injured tort claimants who have yet to obtain a judgment against, or enter into an approved settlement with, an insured are not intended beneficiaries of general liability insurance policies, absent public policy modifications or contractual language to the contrary.”

On the other hand, the high court found that three claimants who had obtained judgments or settled lawsuits against their landlords before the policies were rescinded were beneficiaries of the insurance policies.

The case stems from commercial general liability policies that CX Reinsurance Co. Ltd., in combination with Liberty Mutual Mid-Atlantic Insurance Co., issued in 1997 to several businesses that rented residential properties in Baltimore. Each of the landlords had checked boxes on their insurance applications or otherwise indicated they had no “prior lead paint violations” at their properties.

The policies were renewed continuously until 2015, when CX and Liberty filed suit against the landlords to rescind them. The insurers alleged the landlords had lied; the Baltimore Department of Health had cited the insureds for lead paint violations at many of the insureds’ buildings.

In the meantime, 15 claimants who had lived in the landlords’ buildings as children filed lawsuits alleging they were injured by exposure to lead paint. Those lawsuits received a boost in 2011, when the Maryland Court of Appeals ruled that a state law that imposed a $17,000 cap on damages for lead paint claims violated the state constitution.

The landlords and CX reached settlement agreements that rescinded or reduced the coverage provided by the liability policies. Devon S. Johnson, one of the former tenants who alleged lead pain exposure, responded by filing a lawsuit seeking a court declaration that he was a beneficiary of his former landlord’s insurance policy. Other claimants joined the lawsuit. The third amended complaint that proceeded in Baltimore City Circuit Court named 15 plaintiffs.

Three of the plaintiffs, Devon Johnson, Chauncey Liles and Shyliyah Streeter, obtained judgments against the landlords for lead-paint injuries before the insurance policies were rescinded in 2015. The remaining 12 plaintiffs continued to litigate their cases.

The Baltimore court ruled that all 15 plaintiffs had vested rights as third-party beneficiaries of the insurance policies as they existed before rescission.The Court of Special Appeals affirmed the decision. The Court of Appeals accepted the insurer’s petition to hear the case.

According to the opinion, the trial and intermediate appeals court had based their holdings on Maryland’s direct action statute, which allows tort claims to be filed directly against the tortfeasor’s insurer. The lower courts reasoned that this created a legal obligation for the insurers at the time the injury occurred — long before the policies were rescinded.

The Court of Appeals, however, said under the plain language of the policies, tort claimants do not become beneficiaries until they hold final judgments.

“Thus, tort claimants without final judgments or settlements are not additional parties in interest under the plain language of the policies,” the opinion says. “In other words, they are incidental beneficiaries to the policies.”

The court rejected the plaintiff’s argument that direct action statute creates a public policy that insurance policies are generally issued for the benefit of third parties.

“If the General Assembly had intended to provide enforcement rights to tort claimants who have not obtained judgments or entered into approved settlements, it presumably would have drafted Maryland’s direct action statute differently,” the opinion says.