Cincinnati Specialty Underwriters Insurance Company v. Code 3 Security & Protection Services, Inc.

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

Civil Case No. 15-2028 (RJL)
CODE 3 SECURITY & PROTECTION
SERVICES, INC.

)
CINCINNATI SPECIALTY )
UNDERWRITERS INSURANCE ) F I L E D
CoMPANY, ) AUG -9 2017
)
. . ’ Cl€fk, U.S. Dl ll &
Plamtlff § Courts for the s[Jls‘lrtict gfal])ll)r|:lligla
v. )
)
)
)
)

V

Defendant.
MEMORANI&§PINION

(August 12017) [# 50]

Plaintiff, the Cincinnati Specialty Undcrwriters Insurance Company (“CSU” or

“plaintiff”), brings this action seeking declaratory relief against Code 3 Security &
Protection Services, lnc. (“Code 3” or “defendant”), MM Property, LLC (“MM”),
Monique Nichols (“Nichols”), and E&G Property Services, Inc. (“E&G”). Specifically,
CSU seeks an order from this Court declaring that CSU owes no duty to defend or
indemnify Code 3 for the claims asserted against it in a tort suit that is being adjudicated
in D.C. Superior Court. This matter is now before this Court on plaintifi` s Motion for
Summary Judgment [Dkt. # 50]. Upon consideration of the parties’ submissions,
plaintiffs motion is GRANTED and defendant’s counterclaims are DISMISSED.
Accordingly, it is DECLARED that CSU owes no duty under the primary and excess
policies issued to Code 3 to indemnify, or to defend, Code 3 in the D.C. Superior Court

lawsuit.

BACKGROUND

This declaratory judgment action arises from a tort lawsuit (“underlying lawsuit”)
filed in D.C. Superior Court. Am. Compl. at 1[ ll. In that underlying lawsuit, which is
still pending, Nichols alleges that, on October 3, 2014, there was a gunfight at the
Mayfair Mansions Apartment Complex (“Mayfair Complex”) between two unidentified
parties. Pl.’s Mem. in Support of Its Mot. for Summ. J. (“Pl.’s Mem.”), Ex. 3 at 1111 25-26.
The Mayfair Complex includes Mayfair Mansions I_which is owned by Mayfair
Mansions Limited Partnership (“MMLP”) and managed by Edgewood Management
Cornpany (“Edgewood”)_and Mayfair Mansions III_which is owned by MM and
managed by E&G. Id. at W 4-5, 6, 8. Together, these properties include common areas,
Such as a playground and seven vehicular gates used to access the Mayfair Complex. Id.
at 1111 12-13. Nichols alleges that on the night of the shooting, an unidentified male, who
was not a tenant, drove or walked through an unmanned security gate, and a gunfight
broke out shortly thereafter. Id. at 1[ 26. Nichols’s nine-year-old son, J.S., was playing
on a playground at the Mayfair Complex when the gunflght broke out, and he was struck
by a stray bullet and sustained injuries. Ia’. at 11 26.

Prior to the gunfight, Code 3 had entered into a security services agreement
(“Security Contract”) with MM that, among other things, required Code 3 to provide
certain protection services at Mayfair Mansions III. Pl.’s Mem., Ex. 5. As part of the
Security contract, Code 3 was obligated to defend and indemnify MM and E&G for
claims falling within the scope of the indemnity provision. la'. at 4, Art. VI. The contract

also required Code 3 to obtain general liability insurance, and to name MM as an

2

additional insured under the insurance contract. Ia’. at 4-5, Art. VII. Code 3 did not enter
into such an agreement with MMLP or Edgewood to provide services at Mayfair
Mansions I.

In the wake of her son’s shooting, Nichols filed the underlying lawsuit_Civil
Action No. XX-XXXXXXX_in D.C. Superior Court against Code 3, MM, MMLP, and
Edgewood on April 14, 2015. See Pl.’s Mem., Ex. l. The following month, Nichols
amended her complaint to add E&G as an additional defendant. See Pl.’s Mem., Ex. 2.
In that Superior Court action, Nichols asserts a single claim for negligence against all
defendants, alleging that they “had a duty to the tenants, guests, and licensees, including
J.S., to take reasonable precautions and Security measures as were reasonably necessary
to protect their tenants, guests, and licensees from the foreseeable criminal acts of third
parties.” See Pl.’s Mem., Ex. 3 at jj 28. Nichols alleges that the defendants breached this
duty by, among other things, failing to provide adequate security, failing to have
competent security guards, failing to properly train security personnel, failing to have an
adequate number of Security guards at the Mayfair Complex, failing to secure the
perimeter at the Mayfair Complex, and failing to remove trespassers from the Mayfair
Complex. Id. at W 28-40. Nichols seeks damages against the defendants in the amount
of $50 million. Ia'. at 111 41-42.

At the time of J.S.’s shooting, Code 3 was insured by CSU, under a policy
(“Primary Policy”) running from May 18, 2014 through May 18, 2015. See Pl.’s Mem. at
6. The Primary Policy-number CSU()046569_provides coverage for bodily injury and

property damage, but contains an exclusion for assault or battery. See Pl.’s Mem., Exs.

3

7-8. CSU also issued an excess policy (“Excess Policy”) to Code 3 for the period
running from May 18, 2014 through May 18, 2015. Pl.’s Mem., Ex. ll. The Excess
Policy_number CSU0046573_provides that coverage is subject to the same exclusions
and limitations contained in the Primary Policy, unless otherwise stated. Pl.’s Mem., Ex.
l l. The Assault or Battery Exclusion states, in relevant part:

This insurance does not apply to “bodily injury,” property damage” or
“personal and advertising injury” arising out of:

l. An actual or threatened assault or battery whether caused by or at the
instigation or direction of any insured, their employees, patrons or any
other person;

2. The failure of any insured or anyone else for whom any insured is
legally responsible to prevent or suppress assault or battery; or

3. The failure to provide an environment safe from assault or battery,
including but not limited to the failure to provide adequate security, or
failure to warn of the dangers of the environment that could contribute
to assault or battery; or

4. The failure to render or secure medical treatment or care necessitated by
any assault or battery; or

5. The negligent

a. Employment;

b. Investigation or reporting or failure to report any assault or battery

to proper authorities;

c. Supervision;

d. Training;

e. Retention
Of a person for whom any insured is or ever was legally responsible and
whose conduct would be excluded by the Assault & Battery exclusion
above.

Pl.’s Mem., Ex. 8, Policy Form CSIA405 (08/09)-B.

On May 18, 2015, MM’s insurer sought defense and indemnification on behalf of
MM and E&G from Code 3, pursuant to the indemnification provision in their security
contract. Pl.’s Mem., Ex. 14. That same day, MM’s insurer sought defense and
indemnity coverage for MM from CSU, pursuant to the security contract, as an additional
insured under the coverage CSU issued to Code 3. ld. On July 16, 2015, CSU agreed to
defend Code 3 in the underlying lawsuit pursuant to a full reservation of its rights. See
Pl.’s Mem., Ex. 15, at 7. Four months later, CSU rejected MM’s request for defense and
indemnity coverage as an additional insured under the security contract. Pl.’s Mem., Ex.
16. On November 19, 2015, CSU filed this action seeking a declaratory judgment that it
had no obligation to defend and indemnify Code 3 and MM for the claims and allegations
asserted in the underlying lawsuit.l See Compl., Docket No. l. Code 3 filed two
counterclaims, alleging that CSU breached its insurance contract and violated Maryland’s
First Party Bad Faith Statute, Md. Code Ann. Cts. & Jud. Proc. § 3-1701. See Def. Code
3 Sec. & Protection Servs., Inc.’s Answer & Counterclaims in Resp. to Pl.’s Am. Compl.

for Declaratory J. (“Def.’s Answer”) at 9-11.2

l Although CSU initially named as defendants Code 3, MM, Nichols, and E&G, Am. Compl. at 1[1] 7-10,
plaintiff moved for default judgment against MM, Nichols, and E&G on the ground that these defendants
had not filed responsive pleadings, and the deadline for doing so had passed. See Pl.’s Mot. for Entry of
Default J, Docket No. 46. By order dated March 20, 2017, this Court granted CSU’s request that a
default judgment be entered against MM Property. Mem. Order, Docket No. 57. The Court accordingly
ordered that “CSU Insurance Co. owes no duty under the Primary and Excess policies issued to Code

3 . . . to indemnify or to defend MM Property in the underlying lawsuit.” Ia'. at 3. The Court further
declared that MM Property, Nichols, and E&G “have waived their right to defend against a declaratory
judgment as to Code 3 in this lawsuit. Whatever interest those defendants may have in the coverage that
CSU Insurance Co. owes to Code 3 will not be grounds to later challenge the scope of that coverage” Id.
Accordingly, the only remaining defendant in this case is Code 3.

2 Code 3 also asserted third party claims of negligence against CSU Producer Resources, Inc._the
insurance broker on Code 3’s Primary and Excess policies with CSU-and Bay Area Insurance Group,
LLC_the insurance agent who obtained the policies from CSU on Code 3’s behalf. Def. Code 3 Security

5

STANDARD OF REVIEW

Under Rule 56(c) of the Federal Rules of Civil Procedure, “[s]ummary judgment
is appropriate when the pleadings and the record demonstrate that there is no genuine
issue as to any material fact and that the moving party is entitled to judgment as a matter
oflaw.” Santos v. DEA, 357 F. Supp. 2d 33, 35-36 (D.D.C. 2004). The moving party
bears the initial burden of identifying evidence that demonstrates that there is no genuine
issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Once the
movant makes that showing, the burden shifts to the nonmoving party to “go beyond the
pleadings and by [its] own affidavits, or by the depositions, answers to interrogatories,
and admissions on file, designate specific facts showing that there is a genuine issue for
trial.” Id. at 324 (internal quotation marks omitted). This Court reviews the evidence “in
the light most favorable to the party opposing summary judgment.” Anderson v. Liberly
Lobby, Inc., 477 U.S. 242, 261 (1986). Here, unless defendant can demonstrate a genuine
issue of material fact_which requires Code 3 to “cast more than metaphysical doubt” on
the evidence CSU has presented_CSU is entitled to judgment as a matter of law. Doe v.

Gates, 981 F.2d 1316, 1323 (D.C. Cir. 1993).

& Protection Servs., Inc.’s Third Party Compl. Against Insurance Broker & Producer/Agent at 1111 1-3. On
June l3, 2016, these third party defendants moved to stay the third-party action pending the resolution of
the underlying declaratory judgment action on the ground that “[l]itigating the third-party action at this
time will require fact-intensive discovery and will unnecessarily complicate resolution of the Declaratory
Judgment Action_which can likely be resolved as a matter of law based on interpretation of the relevant
insurance policies.” Mot. by Third-Party Defs. CSU Producer Resources, Inc. & Bay Area Insurance
Grp., LLC to Stay Third-Party Action, Docket No. 31 at 11 5. By minute order dated November 8, 2016, I
granted the motion to stay pending resolution of the declaratory judgment dispute. See Minute Order,
November 8, 2016,

ANALYSIS
I. Choice of Law

Before reaching the merits of this dispute, 1 must first decide which jurisdiction’s
law 1 must apply: the District of Columbia or Maryland. The first step in a choice of law
analysis is “to determine whether a true conflict exists-that is, whether more than one
jurisdiction has a potential interest in having its law applied and, if so, whether the law of
the competing jurisdictions is different.” GEICO v. Fetiso/f 958 F.2d 1137, 1141 (D.C.
Cir. 1992) (internal quotation marks omitted). Here, the potentially interested
jurisdictions are Maryland and the District of Columbia. But our Circuit has noted that,
when it comes to insurance coverage disputes, there is no conflict between the two
jurisdictions “The law in each of these jurisdictions is the same with respect to the
interpretation of insurance contracts~in all three, the plain meaning of the policy
language controls, and any ambiguities are resolved in favor of the insured.” Ia'.
(determining that there is no conflict among Virginia, Maryland, and D.C. law regarding
the interpretation of insurance contracts).

And the same is true regarding Maryland’s and D.C.’s law on the duty to defend.
Both jurisdictions determine an insurer’s duty to defend based solely on the allegations
asserted in the underlying complaint and the terms of the insurance contract, and both
jurisdictions hold that, if there is no duty to defend, there is no duty to indemnify as a
matter of law. Compare Perm-Am. Ins. Co. v. Lewz`s, 539 F. Supp. 2d 250, 253 (D. Md.
2005), and Fz'rst Fl`nancial Ins. C0 v. GLM, Inc., 88 F. Supp. 2d 425, 430 (D. Md. 2000),

with Leve]le, Inc. v. Scottsa'ale Ins. Co., 539 F. Supp. 2d 373, 377 (D.D.C. 2008), and

7

L.J. G., Inc. v. Penn-Am. Ins. Co., 803 A.2d 430, 433 n.l (D.C. 2002). Thus, there is no
true conflict, and I apply the law of the District of Columbia by default. See Fowler v.
A&A Co., 262 A.2d 344, 348 (D.C. 1970).

II. The Merits

CSU argues that, because the allegations contained in the underlying lawsuit, and
the terms of the Assault or Battery Exclusion, are both clear and unambiguous, the plain
language of the policy bars coverage. Pl.’s Mem. at 16. I agree. “District of Columbia
courts follow the so-called ‘eight-comers rule’ with respect to insurance coverage
disputes.” Levelle, 539 F. Supp. 2d at 377. Under that approach, “an insurer’s duty to
defend is determined by comparing the complaint . . . with the policy. If the facts alleged
in the complaint . . . would give rise to liability under the policy if proven, the insurer
must defend the insured.” Stevens v. Um'ted General Title Ins. Co., 801 A.2d 61, 66 n.4
(D.C. 2002). Unfortunately for defendant, the allegations contained in Nichols’s
complaint in the underlying lawsuit, and the terms of the Assault or Battery Exclusion,
are both clear and unambiguous.

The crux of Nichols’ allegations in Superior Court is that J.S. was shot in the head
during an unexpected gunfight at the Mayfair Complex. Pl.’s Mem., Ex. 3 at 11 26.
Specifically, she alleges that “[d]espite the extensive history of criminal activity on the
grounds of Mayfair Mansions, the Defendants failed to take proper measures to provide
for appropriate and reasonable security and management on the premises.” Ia’. at 11 31.
And she further charges that Code 3 breached its duty “by failing to warn, protect, guard,

and secure the safety of Plaintiff"s son J.S.” Id. at 11 37. The Assault or Battery

8

Exclusion provides, inter alia, that there is no coverage for any bodily injury arising from
“[t]he failure to provide an environment safe from assault or battery, including but not
limited to the failure to provide adequate security, or failure to warn of the dangers of the
environment that could contribute to assault or battery.” Pl.’s Mem., Ex. 8. Comparing
the plain language of the exclusion to the allegations set forth in the underlying
complaint, it is clear that the claims Nichols asserts fall squarely within the terms of the
policy’s exclusion. Indeed, the weight of authority supports enforcement of the plain
language of assault or battery exclusions to bar coverage under similar circumstances
See, e.g., Essex Ins. Co. v. Night & Day Mgmt., LLC, 536 F. Supp. 2d 53, 57-58 (D.D.C.
2008) (assault and battery exclusion in general liability policy barred coverage where
nightclub patron was assaulted by insured’s employee); Stiglich v. Tracks, D.C., Inc., 721
F. Supp. 1386, 1388 (D.D.C. 1989) (policy’s assault and battery exclusion precluded
coverage of claim where dance club was sued for negligent failure to prevent or stop
assault by a patron of the club). As such, plaintiff has no duty to defend or indemnify
defendant in the underlying lawsuit.

Defendant attempts to salvage its case by contending that, even if the plain
language of the Assault or Battery Exclusion would apply to bar coverage, the Security
Agency Errors or Omissions Endorsement (“E&O Endorsement”) set forth in the Primary
Policy contradicts the Assault or Battery Exclusion and renders the E&O Endorsement
illusory. 1 disagree. The E&O Endorsement reads, in relevant part: “We will pay on
behalf of the insured those sums which the insured shall become legally obligated to pay

as damages because of ‘bodily injury’ or ‘ property damage’ resulting from the negligent

9

acts, errors or omissions of the insured and arising out of the security operations of the
insured to which this insurance applies, committed in the ‘coverage territory’ during the
policy period.” Pl.’s Mem., Ex. 9, Policy Form CSIA405 (08/09)-A. Simply put, these
two provisions of the policy do not conflict.

1t is clear from the language of the policy that the E&O Endorsement applies
broadly to provide coverage for damages arising out of negligence. Critically, however,
the E&O Endorsement is subject to the same exclusions_including the Assault and
Battery Exclusion-as the rest of the policy. Putting it another way, the Assault or
Battery Exclusion limits the scope of the E&O coverage to the extent that the injury or
damage was caused by assault or battery. And this is the same reading courts have given
to virtually identical contractual provisions in similar circumstances See Capz'tol Indem.,
Inc. v. Brown, 581 S.E.2d 339, 343 (Ga. Ct. App. 2003) (“[T]he assault or battery
exclusion does not render the E&O endorsement worthless or effectively preclude all
coverage for nearly any conceivable event. . . . The exclusion relates to a finite class of
claims involving assault or battery. . . . [T]he range of professional liability claims that
might be brought against a security firm certainly extends beyond this class.”); see also
Fl`rst Mercury Ins. Co. v. Suda’erth, 620 Fed. App’x 826, 830 (1 lth Cir. 2015). As such,
there is no ambiguity created by giving full application and effect to both contractual
provisions. Defendant’s assertion that the Assault or Battery Exclusion nullifies_or
otherwise renders illusory_the E&O Endorsement accordingly is of no avail.

Finally, Code 3 argues that, even if the plain language of the policy demonstrates

that CSU has no duty to defend or indemnify it, Code 3 had a reasonable expectation of

10

coverage for claims arising out of an assault or battery because of its status as a “security
agency operations intended to prevent assault or battery.” Def. Code 3 Security &
Protection Servs., Inc.’s Mem. of P&A in Opp. to Pl. Cincinnati Specialty Underwriters
Insurance Co.’s Mot. for Summ. J. (“Def.’s Opp.”) at 8-14. But the law is clear that “the
reasonable expectations doctrine is not a mandate for courts to rewrite insurance policies
and reallocate their assignment of risks between insurer and insured.” Chase v. State
Farm Fz`re & Cas. Co., 780 A.2d 1123, 1132 (D.C. 2001). The policy at issue in this
case is clear and unambiguous, and this Court will not disturb that plain language simply
because defendant entertained a mistaken belief about the policy’s scope of coverage.
III. Defendant’s Counterclaims

Finally, defendant asserts counterclaims for one count of breach of contract and one
count of bad faith pursuant to Md. Code Ann., Cts. & Jud. Proc. § 3-1701. See Def.’s
Answer at 1111 16-28. Because 1 have concluded that CSU has no duty to defend or
indemnify Code 3 under the Assault or Battery Exclusion, both of defendant’s
counterclaims fail as a matter of law.

First, an insured cannot establish a case for bad faith_or lack of good faith_where
the policy at issue does not afford coverage. “Section 3_1701(d)(1)(i) provides that the
statutory claim for failure to act in good faith applies to civil actions in which the insured
seeks a determination of whether coverage actually exists under an insurance policy, and
§ 3-1701(e) requires a finding iri favor of the insured on that coverage question.” St.
Paul Mercury Ins. Co. v. Am Bank Holdings, Inc., 819 F.3d 728, 739 (4th Cir. 2016); see

also All Constr., LLC v. Mut. Benefit Ins. Co., 3 F. Supp. 3d 409, 416-17, 423 (D. Md.

ll

2014). Here, 1 have already concluded that the plain language of the polices bars
coverage for Code 3 for the claims asserted in the underlying lawsuit. Thus, Code 3’s
claim for bad faith fails as a matter of law.

Second, Code 3 cannot demonstrate that CSU breached any alleged duties under the
policies. Although Code 3 asserts in its summary judgment papers that CSU has
disclaimed coverage and its duty to defend, see, e.g., Def.’s 0pp. at 16, this allegation is
contradicted by the record. 1n fact, Code 3 admits elsewhere in its filings that CSU is, in
fact, defending the underlying lawsuit pursuant to a reservation of rights. See Def.’s
Opp., Ex. 2 at 11 22. And CSU’s July 16, 2015 letter explicitly states that CSU “agrees to
defend Code 3 against the claims and allegations asserted in the above-referenced lawsuit
pursuant to a full and complete reservation of rights under the above-referenced policy.”
Pl.’s Mem., Ex. 15. As such, Code 3’s argument on this point is meritless.

CONCLUSION
For the foregoing reasons, plaintiff’s Motion for Summary Judgment is
GRANTED. 1t is DECLARED that CSU owes no duty under the Primary and Excess
policies issued to Code 3 to indemnify or to defend Code 3 in the underlying lawsuit. It
is further ORDERED that defendant’s counterclaims are DISMISSED with prejudice. A

separate Order consistent with this decision accompanies this Memorandum Opinion.

12