The Fourth Circuit recently held that an insurance company was obligated to cover millions in legal fees incurred in defending an employment suit against the owners of DARCARS, a DC-area based car dealership. The court ruled that the relevant policy exclusion was ambiguous and, as a result, construed the exclusion narrowly against the insurer and in favor of coverage.

The insurance coverage dispute arose from a lawsuit by a former employee against DARCARS’ owners asserting, among other claims, claims for tortious interference with economic relationships and tortious interference with contract. The owners requested that the company’s insurer, Universal Underwriters, provide a defense. Universal refused, citing an exclusion that barred coverage for “any act committed by or at the direction of the INSURED with intent to cause harm,” subject to a carve out stating that the exclusion “does not apply if INJURY arises solely from the intentional use of reasonable force for the purposes of protecting persons or property.” The owners sued Universal in Maryland federal court, arguing that the insurer had breached its duty to defend and seeking to recoup the expenses incurred in defending against the lawsuit.

Universal argued that the “harm” in the exclusion applied to any harm, while the owners argued that the term, when read in context, referred only to physical harm. The district court agreed with the owners, granting summary judgment on their duty-to-defend claim. After the court’s liability ruling, a jury awarded the owners nearly $4.3 million in damages. Universal appealed, alleging that the exclusion precludes coverage and that the district court erred in its determination that Universal breached the duty to defend.

The Fourth Circuit affirmed the district court’s ruling in favor of the policyholder. The court first set forth Maryland’s two-part test in evaluating an insurer’s duty to defend, which requires identifying the scope of coverage afforded under the policy and then determining whether the allegations in the underlying lawsuit “potentially” bring the claims within the policy’s coverage.

Applying these principles, the court next examined the text of the exclusion, specifically the meaning of “harm” as used in the policy. The court agreed with the owners that the exclusion was ambiguous because it “could suggest more than one meaning to a reasonably prudent layperson.” Even if the insurer’s view that “harm” referred to all types of harm was reasonable, the owners’ view that “harm”—when viewed in conjunction with the exception for use of force in defense of persons or property—could be interpreted as referring only to harm of a physical nature was also reasonable.

Faced with this ambiguity, the court was required to adopt the “narrower formulation” of the exclusion favoring coverage and construe the term “harm” against the insurer, as the drafter of the policy. Having adopted the narrower interpretation of the exclusion, the court determined that the exclusion did not apply to the economic torts at issue in the underlying litigation and affirmed the lower court’s decision that Universal could not invoke this exclusion to extinguish its duty to defend.

The decision highlights the broad scope of coverage afforded for policyholders in Maryland (and elsewhere) seeking defense of tort claims like those at issue in the DARCARS litigation. The threshold for coverage requires only that claims “potentially” fall within the policy. Moreover, the Fourth Circuit ruling underscores the high burden that insurers face in drafting policies and relying on exclusions to avoid a duty to defend—they may do so only if the exclusion clearly and unambiguously applies to the claims at issue and there is not even the potential for coverage. If the exclusion is unclear, as was the case in the DARCARS policy, courts will adopt the “narrower formulations” of exclusions and construe the provision against the insurer. The policyholders in this case successfully disputed the insurer’s wrongful denial of coverage and, as a result, recovered more than $4 million in defense costs due under the policy. The full case name is Mariam, Inc., et al. v. Universal Underwriters Ins. Co., No. 19-1736, 2020 WL 2510385 (4th Cir. May 15, 2020).

Co-Authored by Matt Revis