(June 2023 Alyssa Olagbegi and Jeffrey C. Sotland, Esquire)

In a recent opinion, Nationwide Prop & Casualty Insurance Co. V. The Fireline Corporation v. Chesapeake Sprinkler Company, No. 1:20-cv-00684-JRR, the United States District Court for the District of Maryland held that a fire sprinkler company’s alleged failure to drain a dry system’s low point drain fell within the scope of an Agreement between the parties, and therefore, the Plaintiff’s claims were barred. In granting Fireline’s motion for summary judgement, the court applied Maryland’s objective law of contract interpretation. The Court found that the Agreement between the parties was clear and unambiguous and that the Plaintiff’s claims were time-barred.  Further, the Court held that even if the claims were not time-barred, the Agreement’s Waiver of Subrogation was enforceable and barred Plaintiff’s claims.

The Agreement at issue was drafted by Sandra Carson and George Bogris of Murphy Sanchez’s Fire and Life Safety Practice Group on behalf of The Fireline Corporation.

Prior to 2018, Fireline, a fire protection contractor, provided services to the subject property; a community center owned and operated by the Maple Lawn Homeowners Association (“Maple Lawn”). Maple Lawn maintained property insurance through Nationwide. In January 2018, Fireline entered into an Agreement with Maple Lawn where Fireline agreed to provide various annual fire alarm, sprinkler, and portable fire extinguisher testing and inspection. The Agreement had been drafted by Sandra Carson and George Bogris. In April, July, and October 2018, Fireline generated reports regarding the inspection and testing services at Maple Lawn. In January 2019, water accumulated in a section of the sprinkler system, which led to a pipe freezing, splitting, and releasing water into the community center, causing damage to Maple Lawn. Nationwide made payments to Maple Lawn for the property damage and sued Fireline in March 2020 to recover its policy payout.

The Complaint set forth two causes of action: Negligence and Breach of Express and/or Implied Warranties. Nationwide sought to recover nearly $300,000 together with interest, costs, attorney’s fees, and any other damages the court deemed proper. Nationwide argued that Fireline was liable because Fireline’s services that resulted in the damage and were part of the regular maintenance services that Fireline had customarily provided well before the parties entered into the 2018 agreement. Nationwide argued its entitlement to recover was not limited by the Agreement between Fireline and Maple Lawn. Fireline argued that the claimed damage to Maple Lawn arose from testing and inspection services squarely within the scope of the Agreement.

The issue was whether Fireline’s alleged failure to drain one of the dry sprinkler system’s low point drains fell within the scope of the Agreement. Fireline maintained the 2018 services it provided were covered and subject to the Agreement, while Nationwide argued the opposite – that Fireline’s actions fell outside the scope of the Agreement, and therefore Nationwide’s claims are not precluded.

Maryland follows the objective law of contract interpretation, which gives effect to the clear terms of agreements, regardless of the intent of the parties at the time of contract formation. The contract must be construed in its entirety, and if reasonably possible, effect must be given to each clause so that a court will not find an interpretation which casts out or disregards a meaningful part of the language of the writing unless no other course can be sensibly and reasonably followed. A contract is considered ambiguous if, when read by a reasonably prudent person, the language is susceptible of more than one meaning. In determining whether a contract is ambiguous, Maryland courts consider the character of the contract, its purpose, and the facts and circumstances of the parties at the time of execution.

The court found that the Agreement between Fireline and Maple Lawn was clear and unambiguous. While it was undisputed that the reports of April, July, and October of 2018, and subsequent property damage, occurred during the term of the Agreement, Fireline and Maple Lawn agreed that “[t]he inspection and testing services . . . [were] designed to determine the functionality of the inspected systems at the time of the inspection/test.”  The Agreement defines “testing” as “a procedure used to determine the operation status of a component or system by physically manipulating components of the system.” As set forth in the Agreement, quarterly inspection and testing includes purging low point drains; thus, the Court found that Fireline’s alleged failure to drain one of the low point drains during its quarterly sprinkler inspection and testing, as shown on the quarterly Sprinkler System Reports of Inspection of April, July, and October 2018, and as testified to by Fireline’s corporate designee, fell squarely within the Agreement. Thus, Nationwide’s argument that Fireline’s alleged oversight was a failure of its maintenance services, as opposed to testing and inspection services, was unavailing.

Further, the Court found that Nationwide’s claims were time-barred, and even if they were not, the Waiver of Subrogation was enforceable and barred Nationwide’s claims. Nationwide countered that the Agreement’s Time Limitation provision was “an unenforceable and unreasonable limitation on the time in which Maple Lawn and its subrogor could file suit against Fireline. The Agreement’s Time Limitation provision provided that:

“All claims, actions or proceedings, legal or equitable against COMPANY must be commenced in court within one year after the cause of action has accrued or the act[,] omission or event occurred from which the claim, action or proceeding arises, whichever is earlier, without judicial extension of time or said claim action or proceeding is barred time being of the essence of this paragraph. CUSTOMER further understands that the COMPANY is relying upon this limitation in determining the cost of services provided to you.”

Maryland courts have routinely found that contractual one-year limitation provisions are reasonable. In considering the totality of the circumstances, the sophistication and bargaining power of the parties, their long-standing business relationship, and the justification for the shortened time period set forth in the Agreement, the Court held that the Time Limitation provision was reasonable. Maple Lawn solicited the proposal from Fireline for services; Fireline submitted the proposal to Maple Lawn; and Maple Lawn accepted the proposal. There was no evidence in the record to suggest that Maple Lawn sought to negotiate the terms, rejected the proposed terms, or proposed new terms to Fireline. Although the Time Limitation provision applies only to Maple Lawn and its subrogor, the Court held that it applied equally to all claims brought against Fireline. Further, Nationwide did not contend it did not have sufficient time to file a claim. In any event, Nationwide filed this lawsuit on March 14, 2020, almost a year and three months after the Subject Property damage of January 24, 2019, suggesting Nationwide had sufficient time to file a claim. Under Maryland law, the general rule is that the running of limitations against a cause of action begins upon the occurrence of the alleged wrong, unless there is a legislative or judicial exception which applies. The parties did not dispute that the property damage occurred on January 24, 2019. Therefore, pursuant to the Agreement, Nationwide had until January 24, 2020, to file this action. Because Nationwide did not file until March 14, 2020, the Time Limitation provision barred Nationwide’s claims against Fireline.

Fireline also argued that Nationwide lacked standing to bring the action due to the Waiver of Subrogation in the Agreement. Nationwide contended that the Waiver of Subrogation Clause is unenforceable because it sought to “insulate Fireline from its own negligence in violation of a life safety code, which cannot be permitted.” A subrogation waiver is a risk-shifting provision premised upon the recognition that it is economically inefficient for parties to a contract to insure against the same risk. Maryland courts have consistently relied upon the Texas Court of Appeals’ public policy argument when considering waiver of subrogation clauses. See Nat’l Sur. Corp., 2018 WL 1830960, at *7; Hartford Underwriters Ins. Co. v. Phoebus, 187 Md. App. 668, 677 (2009), aff’d sub nom. John L. Mattingly Constr. Co., Inc. v. Hartford Underwriters Ins. Co., 415 Md. 313 (2010)). In United Nat’l Ins. Co. v. Peninsula Roofing Company, Inc., the court explained the distinction between waivers of subrogation and exculpatory clauses:

An exculpatory clause “relieves a party from liability for harm caused by his or her own negligence.” Subrogation waivers, by contrast, “shift[] the ultimate risk of loss resulting from [fire and other] perils to the owner to the extent damages are covered by insurance.” As other courts addressing this very argument have observed, the rule that voids exculpatory clauses exists to ensure that “a party injured by another’s gross negligence will be able to recover its losses.” With subrogation waivers, however, “there is no risk that an injured party will be left uncompensated.” Subrogation waivers, therefore, do not implicate the same policy considerations courts employ to void exculpatory clauses.

Here, the Court found that the Waiver of Subrogation clause is not an unlawful exculpatory clause. The parties agreed that Maple Lawn would obtain insurance and rely exclusively on its insurance to recover for damages. Unlike exculpatory clauses, a Waiver of Subrogation contemplates that the injured party will be able to recover for its losses. Maple Lawn was in fact compensated for its loss.  Accordingly, Nationwide’s allegations that Fireline violated code and industry requirements did not render the Waiver of Subrogation clause void for public policy or otherwise unenforceable; Because Maple Lawn waived all rights to subrogation, Nationwide lacked standing to assert any claims against Fireline on Maple Lawn’s behalf.

Fireline argued that if it is the prevailing party, it is entitled to recover reasonable attorney’s fees and cost from Nationwide. Nationwide contended that section 5-401(2) of the Courts and Judicial Proceedings Article of the Maryland Code “strictly prohibits a contractor, like Fireline, entering into an inspection and/or maintenance agreement requiring another party to pay for its defense due to claims arising from the contractor’s negligence.” Alternatively, Nationwide argued that, even if § 5-401(2) does not apply, the Attorney’s Fees provision is unenforceable.

Nationwide did not cite, and the Court was not aware of, any Maryland authority interpreting

section 5-401(2) to prohibit an attorney’s fees provision that is distinct from an indemnity provision. In analyzing 5-401(1), Maryland courts have consistently held that to impose liability upon an indemnitor for the negligence of the indemnitee the intention of the parties must be expressed in clear and unequivocal terms. In reading section 5-401(2) with section 5-401(1), the statute rendered unenforceable a fees provision within an exculpatory clause insofar as the promisee is solely negligent.

The Attorney’s Fees provision that Fireline sought to enforce, however, was distinct from the costs and expenses incurred in connection with the Exculpatory Clause. Accordingly, section 5-401(2) did not render the Attorney’s Fees provision void or otherwise unenforceable.

Alternatively, Nationwide argued that the Attorney’s Fees provision is unenforceable because it is unconscionable. “[W]hether a contract is unconscionable is a question of law.” “The prevailing view is that both procedural and substantive unconscionability must be present in order for a court to invalidate a contractual term as unconscionable.” Nationwide did not indicate whether it contended that the Attorney’s Fees provision is procedurally or substantively unconscionable. Regardless, the court discerned no basis on which to conclude that the provision is so one-sided as to be unconscionable. Further, nothing in the record suggested or demonstrated that Maple Lawn lacked a meaningful choice to enter into the Agreement. Accordingly, the Attorney’s Fees provision was held to be enforceable by the Court. The Court found that Fireline was the prevailing party and granted the motion for summary judgment, and Nationwide must pay Fireline’s reasonable attorneys’ fees.

Members of the Murphy Sanchez Fire and Life Safety Practice Group are available for consultation, contract preparation and review.