Litz v. State Farm Fire and Casualty Co.6/27/1997
nstruction of insurance contracts in Maryland is governed by a few well-established principles. An insurance contract, like any other contract, is measured by its terms unless a statute, a regulation, or public policy is violated thereby. To determine the intention of the parties to the insurance contract, which is the point of the whole analysis, we construe the instrument as a whole. Maryland courts should examine the character of the contract, its purpose, and the facts and circumstances of the parties at the time of the execution.
Pacific Indem. v. Interstate Fire & Cas. 302 Md. 383, 388, 488 A.2d 486, 488 (1985) (citations omitted).
IV.
The duty to defend is broader than the duty to indemnify. Hartford Accident v. Sherwood, 111 Md. App. 94, 106, 680 A.2d 554, 560, cert. granted, 344 Md. 116, 685 A.2d 450 (1996); 7C J. APPLEMAN, INSURANCE LAW AND PRACTICE ยง 4684, at 83 (1979, 1996-97 Supp.). The insurer's duty to defend is a contractual duty arising out of the terms of a liability insurance policy. Judge Eldridge, writing for this Court in Brohawn v. Transamerica Ins. Co., 276 Md. 396, 409-10, 347 A.2d 842, 851 (1975), said:
The promise to defend the insured, as well as the promise to indemnify, is the consideration received by the insured for payment of the policy premiums. Although the type of policy here considered is most often referred to as liability insurance, it is "litigation insurance" as well, protecting the insured from the expense of defending suits brought against him.
The duty to defend exists "even though 'the claim asserted against the insured cannot possibly succeed because either in law or in fact there is no basis for a plaintiff's judgment.'" Id. at 408-09, 347 A.2d at 850 (quoting Burd v. Sussex Mutual Ins. Co., 56 N.J. 383, 267 A.2d 7, 10 (N.J. 1970)).
This Court has also held that an insurer has a duty to defend when there exists a " potentiality that the claim could be covered by the policy." Id. at 408, 347 A.2d at 850 (emphasis in original). Under the potentiality rule, the insurer will be obligated to defend more cases than it will be required to indemnify because the mere possibility that the insurer will have to indemnify triggers the duty to defend. Hartford Accident, 111 Md. App. at 106, 680 A.2d at 560. One commentator has noted:
Brohawn and its progeny make clear that any potentiality of coverage, no matter how slight, gives rise to a duty to defend. The potentiality rule, in this regard, is perhaps better labeled the "possibility rule," and courts have characterized it as such. The defense obligation extends even to those claims filed in bad faith for the sole purpose of raising a potentiality of coverage.
Andrew Janquitto, Insurer's Duty to Defend in Maryland, 18 U. BALT. L. REV. 1, 13-14 (1988) (footnotes omitted).
A potentiality of coverage is typically established by the allegations in the tort plaintiff's complaint. Brohawn, 276 Md. at 407, 347 A.2d at 850. Sometimes, however, extrinsic evidence may also be used to establish a potentiality of coverage. Aetna v. Cochran, 337 Md. 98, 109, 651 A.2d 859, 865 (1995). When extrinsic evidence, but not the allegations of the complaint, establish a potentiality of coverage, the insured may rely on evidence outside of the complaint. Id., 651 A.2d at 865. Judge Chasanow, writing for the Court in Cochran, explained that the insurer should not be allowed to refuse to defend based solely on allegations in the complaint because the insured is completely at the mercy of the tort plaintiff's pleadings to establish a potentiality of coverage. Id. at 111, 651 A.2d at 866.
V.
We turn now to
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