Cornerstone Title & Escrow, Inc. v. Evanston Insurance Company , 555 F. App'x 230 ( 2014 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 13-1318
CORNERSTONE TITLE & ESCROW, INC.; SEAN ADETULA,
Plaintiffs – Appellants,
v.
EVANSTON INSURANCE COMPANY,
Defendant – Appellee.
Appeal from the United States District Court for the District of
Maryland, at Baltimore. William M. Nickerson, Senior District
Judge. (1:12-cv-00746-WMN)
Argued: January 29, 2014 Decided: February 19, 2014
Before AGEE, FLOYD, and THACKER, Circuit Judges.
Reversed and remanded by unpublished opinion. Judge Agee wrote
the opinion, in which Judge Floyd and Judge Thacker joined.
Stephan Young Brennan, ILIFF, MEREDITH, WILDBERGER & BRENNAN,
P.C., Pasadena, Maryland, for Appellants. Paul Newman
Farquharson, SEMMES, BOWEN & SEMMES, Baltimore, Maryland, for
Appellee.
Unpublished opinions are not binding precedent in this circuit.
AGEE, Circuit Judge:
The Maryland Attorney General sued Cornerstone Title &
Escrow, Inc., alleging that Cornerstone and others engaged in a
scheme to defraud homeowners on the brink of foreclosure. In
response, Cornerstone sought coverage from its professional
liability insurer, Evanston Insurance Company, but Evanston
denied any duty to defend under the policy. Cornerstone and its
owner then filed a breach-of-contract action against Evanston in
the District of Maryland. That court entered summary judgment
in Evanston’s favor, finding that at least two policy exclusions
barred coverage for the underlying action. Cornerstone
appealed.
For the reasons explained below, we reverse and remand the
judgment of the district court. Not all the claims found in the
underlying complaint fall within the two exclusions that the
district court identified, so those two exclusions do not defeat
Evanston’s duty to defend and, by extension, duty to indemnify.
I.
A.
Evanston issued a “Service and Technical Professional
Liability Insurance” policy to Cornerstone, which provides that
Evanston will pay “the amount of Damages and Claims Expenses . .
. because of any (a) act, error or omission in Professional
2
Services rendered . . . or (b) Personal Injury committed . . .
by [Cornerstone].” (J.A. 67–68.) The policy also says that
Evanston will “investigate, defend and settle any Claim to which
coverage under this policy applies.” (J.A. 68.) Taken
together, these provisions require Evanston to defend and
indemnify Cornerstone for covered claims.
This case implicates four of the policy’s exclusions:
• Exclusion (a): applying to claims “based upon or arising
out of any dishonest, deliberately fraudulent, malicious,
willful or knowingly wrongful act or omissions committed by
or at the direction of [Cornerstone].” (J.A. 70.).
• Exclusion (n): applying to claims “based upon or arising
out of [Cornerstone] gaining any profit or advantage to
which [Cornerstone] is not legally entitled.” (J.A. 70.)
• Exclusion (x): applying to claims “based upon or arising
out of the actual or alleged theft, conversion,
misappropriation, disappearance, or any actual or alleged
insufficiency in the amount of, any escrow funds, monies,
monetary proceeds, or any other assets, securities,
negotiable instruments, . . . irrespective of which
individual, party, or entity actually or allegedly
committed or caused in whole or part the [excluded act].”
(J.A. 65.)
• Exclusion (cc): applying to claims “based upon or arising
out of the Real Estate Settlement Procedures Act (RESPA) or
any similar state or local legislation.” (J.A. 66.)
If a “[c]laim” falls within one of these exclusions, then the
policy “[d]oes [n]ot [a]pply.” (J.A. 69.)
B.
In 2008, the Maryland Attorney General sued Cornerstone and
ten co-defendants, alleging that the defendants collectively
3
violated two Maryland statutes: the Protection of Homeowners in
Foreclosure Act and the Consumer Protection Act. According to
the complaint, the defendants violated these statutes by
scheming to “take title to homeowners’ residences and . . .
strip the equity that the homeowners ha[d] built up in their
homes.” (J.A. 109.) The complaint identified thirteen specific
property transactions in which the defendants, including
Cornerstone, acted wrongfully; it asked the court for a variety
of relief, including restitution.
The alleged scheme worked by preying on homeowners close to
losing their homes in foreclosure. 1 The “Lewis Defendants”
marketed foreclosure-consulting services for a fee and, with the
help of a colluding mortgage broker (Thomas), would convince
their consulting clients to enter sale-leaseback agreements.
Under such an agreement, a homeowner would sell her home to the
Lewis Defendants and rent it back. The Lewis Defendants pitched
the arrangement as a way to resolve the homeowner’s delinquency
while allowing the homeowner to rebuild her credit and keep her
home. The reality was much different. Once a sale was
consummated, the Lewis Defendants would tell a homeowner that
unspecified closing fees and charges had consumed any equity
1
As explained below, we assume that the allegations of the
underlying complaint are true for purposes of determining
whether Evanston owes Cornerstone a duty to defend.
4
proceeds and convince the homeowner to sign her check for the
settlement proceeds back to the Lewis Defendants. Then, the
Lewis Defendants would charge the homeowner monthly rent
payments that were much higher than the original mortgage
payments -- driving the homeowner out of her home and ending any
chance for her to repurchase it in the future.
Cornerstone “provide[d] settlement services for the sale-
leaseback transactions,” and the Attorney General alleged that
Cornerstone failed to “deliver to homeowners the checks for
proceeds due to them at settlement or afterwards.” (J.A. 116.)
Cornerstone instead “deliver[ed] the homeowners’ [unendorsed]
checks to the Lewis Defendants or to Defendant Thomas, who
deliver[ed] the checks to the Lewis Defendants.” (J.A. 116.)
The complaint alleged that Cornerstone never “disclose[d] [to
the homeowners] the fact that it provide[d] homeowners’ checks
to other parties” (J.A. 116), and alleged that this failure to
disclose amounted to “a failure to state material facts” in
violation of the Maryland Consumer Protection Act. (J.A. 129.)
In addition, by acting as the settlement agent, “Cornerstone
participated in and provided substantial assistance to the . . .
[equity-stripping] scheme.” (J.A. 129.)
The Attorney General sought to hold Cornerstone responsible
not just for its own alleged failure to disclose, but also for
its co-defendants’ acts. The Attorney General pled that it was
5
the defendants’ “concerted action that [made] the enterprise
possible” (J.A. 109), so each defendant was “jointly and
severally liable” for the acts of every other co-defendant (J.A.
124, 130). Applying this theory, the Attorney General asserted
that Cornerstone was liable for a laundry list of statutory
violations committed by its co-defendants, including:
• Failing to provide a written foreclosure consulting
contract or written sale-leaseback agreement;
• Requiring homeowners to pay a membership fee before
receiving foreclosure consulting services;
• Obtaining an interest in a person’s home while offering
that same person foreclosure consulting services;
• Representing that the services were offered to save a
homeowner from foreclosure;
• Failing to disclose the nature of the foreclosure services
provided, the material terms of the sale-leaseback
agreement, the terms of the rental agreement that followed,
and the terms of any subsequent repurchase;
• Failing to disclosure specific terms of the sale-leaseback
agreements that statutes require to be disclosed;
• Failing to provide several statutorily required forms and
notices in connection with the foreclosure counseling and
the sale-leaseback agreements;
• Failing to determine whether the borrower has the
reasonable ability to make lease payments and repurchase
her home;
• Misleading consumers about whether they are entitled to
proceeds of settlement and whether those proceeds would be
placed in escrow accounts;
• Taking consumers’ settlement checks; and
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• Recording land deeds and encumbering properties before the
homeowners’ rescission period expired.
Cornerstone sought coverage under the policy from Evanston,
requesting that Evanston defend Cornerstone against the
complaint and indemnify it for any liability. Evanston denied
coverage. Although Cornerstone denied the Attorney General’s
allegations, it eventually agreed to a settlement in which it
agreed to pay $100,100 in restitution.
C.
In March 2012, Cornerstone sued Evanston, alleging that the
insurer breached both its duty to defend and its duty to
indemnify under the policy. Cornerstone moved for summary
judgment on the duty-to-defend issue and Evanston responded by
filing its own cross-motion for partial summary judgment. Among
other things, Evanston argued that the Attorney General’s suit
fell within policy exclusions (a), (n), (x), and (cc) and thus
no duty to defend, or indemnify, arose.
The district court granted Evanston’s motion for partial
summary judgment, denied Cornerstone’s cross-motion, and sua
sponte entered judgment on Cornerstone’s duty-to-indemnify
claim. Of relevance here, the court concluded -- based on the
“gravamen” of the complaint -- that the Attorney General’s
complaint “only alleged conduct that meets exclusions of the
7
policy—(n) and (x), at minimum[.]” Cornerstone Title & Escrow,
Inc. v. Evanston Ins. Co., No. WMN-12-746, 2013 WL 393286, at
*3, *7 (D. Md. Jan. 30, 2013). The court stated that
misappropriation and illegal gains were “precisely” what the
Attorney General alleged in his complaint against Cornerstone.
Id. at *7. Therefore, the district court concluded that
Evanston had no duty to defend and, consequently, no duty to
indemnify, but did not address exclusions (a) or (cc).
Cornerstone filed this timely appeal, over which we have
jurisdiction under 28 U.S.C. § 1291.
II.
The district court decided this case on summary judgment,
and we review that decision de novo. See Turner v. United
States, 736 F.3d 274, 280 (4th Cir. 2013). In doing so, we
apply “the same legal standards as the district court and view[]
all the facts and reasonable inferences therefrom in the light
most favorable to the non moving party,” Cornerstone. Id.
“Summary judgment is appropriate if the movant shows that there
is no genuine dispute as to any material fact and the movant is
entitled to judgment as a matter of law.” Id. (internal
quotation marks and citation omitted).
8
III.
As the parties agree, Maryland law applies to this
diversity case. The district court focused on the law
concerning the duty to defend, correctly reasoning that Evanston
would have no duty to indemnify if it had no duty to defend,
because the duty to defend is broader. See Cowan Sys., Inc. v.
Harleysville Mut. Ins. Co., 457 F.3d 368, 372 (4th Cir. 2006).
In Maryland, the duty to defend “should be construed
liberally in favor of the policyholder,” Pac. Emp’rs Ins. Co. v.
Eig, 864 A.2d 240, 248 (Md. Ct. Spec. App. 2004), and it
attaches “when there exists a potentiality that the claim could
be covered by the policy,” id. (emphasis in original; internal
quotation marks omitted). Even a slim possibility can
constitute a “potentiality.” Compare Walk v. Hartford Cas. Ins.
Co., 852 A.2d 98, 106 (Md. 2004) (defining a potentiality as “a
reasonable potential that the issue triggering coverage will be
generated at trial” (quotation marks omitted)), with Litz v.
State Farm Fire & Cas. Co., 695 A.2d 566, 572 (Md. 1997) (“If
there is a possibility, even a remote one, that the plaintiffs’
claims could be covered by the policy, there is a duty to
defend.”). And “any doubts about the potentiality of coverage
must be resolved in favor of the insured.” Cowan Sys., 457 F.3d
at 372.
9
To determine whether the insurer must defend, Maryland
courts ask two questions: “(1) what is the coverage and what are
the defenses under the terms and requirements of the insurance
policy? [and] (2) do the allegations in the [underlying] tort
action potentially bring the tort claim within the policy’s
coverage?” Id. (alterations in original). “The first question
focuses upon the language and requirements of the policy, and
the second question focuses upon the allegations of the tort
suit.” St. Paul Fire & Marine Ins. Co. v. Pryseski, 438 A.2d
282, 285 (Md. 1981).
A.
In answering the first question noted above, “[i]nsurance
contracts are treated as any other contract, and [Maryland
courts] measure such an agreement by its terms.” United Servs.
Auto. Ass’n v. Riley, 899 A.2d 819, 833 (Md. 2006). We must
construe the policy as a whole, and a word should be accorded
“its usual, ordinary and accepted meaning unless there is
evidence that the parties intended to employ it in a special or
technical sense.” Clendenin Bros., Inc. v. U.S. Fire Ins. Co.,
889 A.2d 387, 393 (Md. 2006) (quotation marks omitted). “In
addition, [Maryland courts] examine the character of the
contract, its purpose, and the facts and circumstances of the
parties at the time of execution.” Cole v. State Farm Mut. Ins.
10
Co., 753 A.2d 533, 537 (Md. 2000) (quotation marks omitted).
“[I]f no ambiguity in the terms of the insurance contract
exists, a court will enforce those terms.” Nat’l Union Fire
Ins. Co. of Pittsburgh v. David A. Bramble, Inc., 879 A.2d 101,
109 (Md. 2005). But “if an insurance policy is ambiguous, it
will be construed liberally in favor of the insured and against
the insurer as drafter of the instrument,” Dutta v. State Farm
Ins. Co., 769 A.2d 948, 957 (Md. 2001) (quotation marks omitted;
emphasis in original), at least if extrinsic evidence cannot
resolve the ambiguity, Clendenin Bros., 889 A.2d at 394. We
must find policy language ambiguous if it “suggests more than
one meaning to a reasonably prudent layperson.” State Farm Mut.
Auto. Ins. Co. v. DeHaan, 900 A.2d 208, 226 (Md. 2006).
In interpreting the insurance contract, we should take
special care to interpret exclusion provisions narrowly. See
Megonnell v. United Servs. Auto. Ass’n, 796 A.2d 758, 772 (Md.
2002). “[S]ince exclusions are designed to limit or avoid
liability, they will be construed more strictly than coverage
clauses and must be construed in favor of a finding of
coverage.” Id. (quotation marks omitted). And, in all cases,
the insurer bears the burden of showing that an exclusion
applies. See Prop. & Cas. Ins. Guar. Corp. v. Beebe-Lee, 66
A.3d 615, 624 (Md. 2013); see also Trice, Geary & Myers, LLC v.
11
Camico Mut. Ins. Co., 459 F. App’x 266, 274 (4th Cir. 2011)
(unpublished) (applying Maryland law).
B.
In answering the second question, courts evaluate the
“causes of action actually alleged by the plaintiff in [the
underlying] lawsuit.” Reames v. State Farm Fire & Cas. Ins.,
683 A.2d 179, 186 (Md. Ct. Spec. App. 1996); see also Sheets v.
Brethren Mut. Ins. Co., 679 A.2d 540, 542 (Md. 1996) (“[W]e must
assume that the facts in the [underlying] complaint are true.”).
We do not consider the merits of the underlying suit at the
duty-to-defend stage; “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.”
Sheets, 679 A.2d at 544 (emphasis in original). The
policyholder -- but not the insurer -- may also introduce
extrinsic evidence at this step to establish a potentiality of
coverage. Aetna Cas. & Sur. Co. v. Cochran, 651 A.2d 859, 866
(Md. 1995).
Finally, and critically, if the complaint at issue contains
some covered claims and some non-covered claims, then the
insurer must defend the entire action. See Perdue Farms, Inc.
v. Travelers Cas. & Sur. Co. of Am., 448 F.3d 252, 258 (4th Cir.
2006) (“Under Maryland’s comprehensive duty to defend, if an
12
insurance policy potentially covers any claim in an underlying
complaint, the insurer . . . must typically defend the entire
suit, including non-covered claims.”).
With these basic principles in mind, we consider each of
the parties’ exclusion-related arguments.
IV.
A.
Evanston first argues that exclusion (n), sometimes called
the personal-profits exclusion, defeats coverage. In its view,
exclusion (n) applies whenever an underlying action suggests
that the policyholder gained an illegal benefit or superior
position. Evanston contends that the Attorney General’s
complaint alleged such an advantage because Cornerstone did not
deliver the settlement checks to the selling homeowners, thereby
taking part in an equity-stripping scheme.
Even if we were to adopt Evanston’s reading of the relevant
exclusion, we do not agree with its view of the complaint. Our
disagreement leads us to conclude that exclusion (n) does not
bar coverage to Cornerstone.
The Attorney General’s complaint did not allege that any
particular “profit” or “advantage” inured to Cornerstone’s
benefit, as exclusion (n) requires. To the contrary, the
complaint alleged that all the relevant benefits and funds went
13
to the Lewis Defendants and, perhaps, Thomas. It was the Lewis
Defendants, after all, who “stripped” the equity from
homeowners’ homes by contriving false fees and other reasons to
obtain the homeowners’ settlement proceeds. Evanston admits as
much. (See Evanston’s Br. 17 (“The result of this scheme
allowed the Lewis Defendants to wrongfully take the homeowners’
equity.” (emphasis added)).) Although Cornerstone collected the
settlement proceeds, the complaint does not suggest that it ever
retained them. See Perdue Farms, 448 F.3d at 256 n.3 (finding
personal-profits exclusion inapplicable where the underlying
plaintiffs “never alleged that [the defendant] gained any
advantage from its unlawful conduct”). There is no allegation
that Cornerstone should not have collected the settlement
proceeds because, as a settlement agent, the company was
required to do so. Cf. Obligation of Title Insurance Companies
to Conduct Annual Review of Settlement Agents, 85 Md. Op. Att’y
Gen. 306, 315 (2000) (“Funds are normally escrowed as a part of
a real estate settlement.”). While the homeowners’ equity and
money might be an illegal profit or advantage that went to
someone after settlement, those assets went to parties other
than “the Insured” under the terms of Cornerstone’s policy with
Evanston.
We also observe that exclusion (n) would not apply because
the underlying complaint did not allege illegal profiteering by
14
Cornerstone. Instead, the complaint alleged illegal conduct
that produced incidental gains. Put another way: the Attorney
General could have succeeded on its claims against Cornerstone
without showing that Cornerstone received a single dollar or any
other advantage, legal or illegal. In fact, many of the claims
for which Cornerstone was allegedly jointly and severally liable
did not involve money at all, but instead alleged wrongful
disclosures and misrepresentations. (See J.A. 109 (defining
Cornerstone as a “Foreclosure Rescue Defendant”); J.A. 126-30
(listing actions for which all Foreclosure Rescue Defendants
were responsible).) Cf. Fed. Ins. Co. v. Kozlowski, 792
N.Y.S.2d 397, 403 (N.Y. App. Div. 2005) (explaining that
personal-profits exclusion did not relieve insurer of duty to
pay defense costs where underlying actions also contained
allegations relating to “alleged misstatements and omissions”
that were “archetypical of claims that encompass both excluded
and covered behavior”). The underlying nondisclosure claims,
at a minimum, do not “arise out of” the illegal profit or
advantage itself, so those allegations of the complaint do not
fall within the exclusion. Perdue Farms, 448 F.3d at 256 n.3
(“[T]he alleged ERISA violations do not ‘aris[e] out of’ illegal
profiteering, because 29 U.S.C. § 1140 proscribes specified
conduct, not profit.”); see also Brown & LaCounte, LLP v.
Westport Ins. Corp., 307 F.3d 660, 664 (7th Cir. 2002)
15
(distinguishing between cases involving “allegations of breaches
of fiduciary duty where the dispute concerned the illegality of
the actions taken or profits received” and case involving an
“unequivocal[] alleg[ation] that [the defendant] reaped an
illegal profit”).
Though Evanston argues otherwise, it makes no difference
that Cornerstone received fees for the settlement services that
it provided at closing when the houses were conveyed to the
Lewis Defendants. The complaint does not allege that
Cornerstone overcharged or that it failed to provide bona fide
settlement services. Under the plain terms of exclusion (n),
Cornerstone’s receipt of legally justified funds does not defeat
policy coverage. See, e.g., St. Paul Mercury Ins. Co. v.
Foster, 268 F. Supp. 2d 1035, 1045 (C.D. Ill. 2003) (finding
personal-profits exclusion inapplicable where policyholder might
have been “legally entitled to retain” the funds in question).
More importantly, as the district court held in an unchallenged
ruling and as Evanston acknowledged at argument, the Attorney
General’s complaint did not seek damages for the “consideration
or expenses paid to [Cornerstone] for services or goods.”
Cornerstone, 2013 WL 393286, at *5 (alteration in original).
Because the Attorney General’s claims did not touch upon
Cornerstone’s settlement fees, those fees could hardly have been
a “profit” or “advantage” that spurred the underlying claim.
16
See, e.g., Axis Reinsurance Co. v. Telekenex, Inc., 913 F. Supp.
2d 793, 803 (N.D. Cal. 2012) (finding personal-profits exclusion
did not bar coverage for spoliations sanction even though
spoilative act might have also provided business advantage,
where court did not premise the sanction on the act creating the
advantage); In re Donald Sheldon & Co., Inc., 186 B.R. 364, 369
(S.D.N.Y. 1995) (holding that exclusion did not apply where the
“alleged personal profits . . . were not the basis of the
liability for which recovery was sought”).
Finally, Evanston has not persuaded us that some undefined
personal benefit flowed to Cornerstone merely because the
Attorney General sought restitution as a remedy under the
complaint. To be sure, a restitution award sometimes suggests
that the defendant enjoyed some gain, as “restitution [in the
Consumer Protection Act context] aims at disgorgement of unjust
enrichment, not compensation for damages.” Consumer Prot. Div.
v. Morgan, 874 A.2d 919, 953 (Md. 2005). But in a case that
involves “concerted action” -- that is, a case like the
underlying action here -- the restitution award doesn’t
necessarily aim to disgorge benefits from particular defendants.
Instead, the award serves to disgorge the benefits going to the
scheme as a whole. A conspiring Consumer Protection Act
defendant will therefore face potential restitution anytime any
of his co-conspirators enjoyed some benefit. Id. (“As
17
tortfeasors acting in concert are responsible for the damages
each caused, so too are Consumer Protection Act violators who
act in concert responsible for the unjust enrichment each gained
at the consumers’ expense.”). A defendant who enjoyed no
personal gain could still be ordered to pay restitution if he
were part of a broader concerted action that produced benefits
to a fellow co-defendant. See, e.g., State v. Cottman
Transmissions Sys., Inc., 587 A.2d 1190, 1201 (Md. Ct. Spec.
App. 1991) (ordering defendant to pay restitution where another
party received improper fees but defendant “indirectly” assisted
other party in deception); see also J.P. Morgan Secs. Inc. v.
Vigilant Ins. Co., 992 N.E.2d 1076, 1082-83 (N.Y. 2013) (finding
that personal-profit exclusion would not apply where
disgorgement payment made by defendant “did not actually
represent the disgorgement of [the defendant’s] own profits,”
but rather “represented the improper profits acquired by third-
part[ies]”). The restitution request therefore does not serve
as any guarantee of personal gain on Cornerstone’s part.
In sum, the personal-profits exclusion –- exclusion (n) --
does not defeat Evanston’s duty to defend and the district court
erred in granting partial summary judgment to Evanston in that
regard.
18
B.
Alternatively, Evanston references the Attorney General’s
allegations that Cornerstone misdirected settlement checks and
maintains that exclusion (x) also bars coverage. This improper
delivery, it says, amounts to conversion. 2 Evanston’s argument
suffers from a fatal flaw: the improper delivery seen here did
not amount to conversion.
In Maryland, the payee of a check (here, the homeowner)
must receive the check before he or she can bring a conversion
action based on a misuse or improper delivery of it. See Md.
Code Ann., Comm. L. § 3-420(a) (“An action for conversion of an
instrument may not be brought by . . . a payee or indorsee who
did not receive delivery of the instrument either directly or
through delivery to an agent or a co-payee.”). Where the payee
has not received the check, the payee retains a cause of action
against the drawer (in this case, Cornerstone) for the liability
reflected in the check, but, at least at that point in time,
cannot bring a conversion action. See Jackson v. 2109
Brandywine, LLC, 952 A.2d 304, 321 (Md. Ct. Spec. App. 2008).
In this case, Cornerstone allegedly misdirected the settlement
checks before they ever reached the hands of the homeowners.
2
On appeal, Evanston invokes only the conversion portion of
the exclusion.
19
Thus, the necessary element of delivery for a Maryland
conversion action to the payee was absent at the time of the
allegedly wrongful transfer by Cornerstone.
Even if we could overlook this basic issue and assume that
the Cornerstone’s act of “improper delivery” fell within
exclusion (x), we would still find that other allegations in the
Attorney General’s complaint are not within the ambit of that
exclusion and therefore the duty to defend is triggered. For
instance, the underlying complaint faults Cornerstone for
failing to disclose certain facts. And, as we have now
previously described, the underlying complaint attempts to
impose liability on Cornerstone for acts of its co-defendants
that have no connection at all to misdirected checks. Among
other things, the Attorney General sought to hold Cornerstone
responsible for acts such as failing to make required statutory
disclosures, recording deeds prematurely, and making misleading
statements about the services that the defendants provided.
Those claims do not arise from theft, conversion,
misappropriation, or any of the other acts described in
exclusion (x), and consequently require coverage under the
policy.
At argument, Evanston pressed two other points that we need
only briefly address. First, Evanston evoked a notion
reminiscent of the one that the district court adopted –- that
20
the “gravamen” of the underlying complaint should decide whether
it warrants coverage. But as we have already discussed, the
well-established rule in Maryland says otherwise. Where covered
and uncovered claims arise in the same action, the insurer must
defend, regardless of what the gravamen of the action might be.
See, e.g., Cont’l Cas. Co. v. Bd. of Educ. of Charles Cnty., 489
A.2d 536, 542 (Md. 1985); Back Creek Partners, LLC v. First Am.
Title Ins. Co., 75 A.3d 394, 400 (Md. Ct. Spec. App. 2013);
Zurich Ins. Co. v. Principal Mut. Ins. Co., 761 A.2d 344, 348
(Md. Ct. Spec. App. 2000); Balt. Gas & Elec. Co. v. Commercial
Union Ins. Co., 688 A.2d 496, 512 (Md. Ct. Spec. App. 1997).
Indeed, in Utica Mutual Insurance Co. v. Miller, 746 A.2d 935,
941–42 (Md. Spec. Ct. App. 2000), the Court of Special Appeals
of Maryland found that an underlying complaint triggered the
duty to defend even though the “gravamen” of that complaint was
plainly excluded, where other claims were not. Second,
Evanston questioned whether Cornerstone faced a genuine prospect
of liability from the acts of its co-defendants. As should be
clear by now, we need not answer that question to determine
whether the insurer must defend. The insurer has a duty to
defend a covered claim even when the claim can be called
“frivolous.” Back Creek Partners, 75 A.3d at 400.
In short, exclusion (x) also does not defeat Evanston’s
duty to defend the Attorney General’s suit and the district
21
court erred in awarding Cornerstone partial summary judgment in
that regard.
C.
Evanston suggests that we affirm on alternative grounds,
particularly that exclusions (a) and (cc) exclude coverage. As
noted earlier, the district court did not address these policy
exclusions. “Although we are not precluded from addressing
[alternative grounds for affirmance], we deem it more
appropriate to allow the district court to consider them, if
necessary, in the first instance on remand.” Q Int’l Courier
Inc. v. Smoak, 441 F.3d 214, 220 n.3 (4th Cir. 2006); see also
United States ex rel. Carter v. Halliburton Co., 710 F.3d 171,
184 (4th Cir. 2013) (“The district court did not reach this
argument, having found grounds for dismissal elsewhere. We
decline to address this issue for the first time on appeal.”).
Accordingly, we will remand the case for further proceedings so
that the district court can address the parties’ arguments as to
exclusions (a) and (cc) in the first instance.
V.
For these reasons, we reverse the district court’s grant of
summary judgment to Evanston on the duty-to-defend issue.
Because the district court’s decision on the duty-to-indemnify
22
matter rested solely on its erroneous duty-to-defend decision,
we must reverse that decision as well. We direct the district
court to enter partial summary judgment in Cornerstone’s favor
on the duty-to-defend issue as to exclusions (n) and (x). We
remand for further proceedings consistent with this opinion.
REVERSED AND REMANDED
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