Maryland Appeals Court Says Insurer Has Duty To Defend in Hidden Camera Case

By | July 6, 2018

The Maryland Court of Special Appeals has concluded that Harleysville Preferred Insurance Company has a duty to defend the limited liability company that owns and operates Rams Head Tavern in underlying litigation regarding a hidden video camera in its women’s restroom.

The court concluded, however, that the insurer does not have a duty to defend general manager and majority owner, Kyle Muehlhauser, who was found responsible for hiding the video camera.

Rams Head at Savage Mill LLC is a Maryland limited liability company that owns and operates the Rams Head Tavern. Its operating agreement designates Kyle Muehlhauser as general manager and majority owner of the company. Rams Head leases the property on which it operates the Rams Head Tavern from Savage Mill Limited Partnership under a long-term lease entered in 1998.

Under the lease, Rams Head is permitted to make improvements and is responsible for making repairs, renovations and renewals to the leased property, subject to approval by Savage Mill. Savage Mill is permitted to make changes to the leased property only with the approval of Rams Head. The Circuit Court for Howard County, Md., previously found that Rams Head exercised exclusive control over the restaurant.

Case Background

This case, Harleysville Preferred Insurance Company, et al. v. Rams Head Savage Mill, LLC, et al., comes after a Rams Head Tavern patron was using its single-occupancy women’s restroom in May 2014 when a portable camera fell onto the floor from under the sink near the toilet.

She reported the incident to the police, who identified Muehlhauser as responsible. In July 2015, Muehlhauser pleaded guilty to two counts of conducting video surveillance with prurient intent in violation of Maryland criminal law.

Two different sets of plaintiffs filed class action complaints in the Circuit Court for Howard County against Rams Head and Muehlhauser.

In Michelle Castle, et al. v. Kyle C. Muehlhauser, et al., the plaintiffs alleged that from March 2, 2012, to May 9, 2014, Muehlhauser mounted a camera in the women’s restroom at Rams Head Tavern to “conduct visual surveillance of the female patrons and employees using the toilets…solely for prurient intent” in “an attempt to satiate his sexual perversions at the expense of the privacy of the female patrons and employees.”

The Castle complaint brought claims against Rams Head and Muehlhauser for violation of section 3-902 of Maryland’s Criminal Law Article, which criminalizes certain visual surveillance with prurient intent and creates a private cause of action for individuals subjected to unlawful surveillance and the tort of unreasonable intrusion upon seclusion, according to the appeals court document.

The complaint contended that Castle and the other alleged plaintiffs incurred damages including expenses, mental pain and suffering, fright, nervousness, indignity, humiliation, embarrassment and insult.

The plaintiffs in Felicia Barlow Clar, et al. v. Kyle C. Muehlhauser, et al. made similar allegations against Muehlhauser.

The Clar complaint brought seven causes of action: negligent hiring, retention, supervision, selection and qualification (Count I), intrusion upon seclusion (Count II), breach of contract and of the implied duty of good faith and fair dealing (Count III), violation of section 3-902 of the Criminal Law Article (Count IV), negligent violation of section 3-902 of the Criminal Law Article (Count V), negligent entrustment (Count VI) and intentional infliction of emotional distress (Count VII).

Counts II, III, IV, V and VII were brought against Rams Head and Muehlhauser. Muehlhauser was not named as a defendant in Counts I and VI.

Insurance Coverage

During the period covered by the allegations in both complaints – from March 2012 through May 2014 for the Castle complaint, and from January 2014 through May 2014 for the Clar complaint—Harleysville insured Rams Head under three one-year commercial lines insurance policies.

Rams Head was listed as a named insured under each policy, and each included within the definition of “an insured” the members and managers of the named insureds, but only to the extent of their respective roles.

The policies each provided grants of coverage for bodily injury and property damage liability (Coverage A) and personal and advertising liability (Coverage B).

Under Coverage A, Harleysville agreed to pay sums the insured would become legally obligated to pay as damages because of bodily injury or property damage. This excluded property damage or bodily injury expected or intended by the insured, however. In addition, the parties agreed that Harleysville would have the duty to defend the insured against any suit seeking those damages, but only if the damages would be covered by the policies.

Under Coverage B, Harleysville agreed to pay sums the insured would become legally obligated to pay as damages because of personal and advertising injury. Personal and advertising injury means injury, including consequential bodily injury, due to seven different categories of offenses. The category that is most relevant to this case is “[t]he wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling or premises that a person occupies, committed by or on behalf of its owner, landlord or lessor,” according to the appeals court document.

Three coverage exclusions were also contained in the Harleysville policies.

The Recording and Distribution of Material or Information in Violation of Law exclusion was issued only with respect to the policy in place from December 31, 2013, through December 31, 2014 (the 2014 policy). It precluded coverage under both Coverage A and Coverage B for injuries as a direct or indirect result of any action or omission that violates or is alleged to violate the Telephone Consumer Protection Act, the CAN-SPAM Act of 2003 and the Fair Credit Reporting Act, according to the appeals court document.

The Criminal Acts exclusion exempted from Coverage B injuries resulting from a criminal act committed by or at the direction of the insured. Finally, the Knowing Violation of Rights of Another exclusion precluded coverage under Coverage B for injuries caused by or at the direction of the insured with the knowledge that the act would violate the rights of another party and would inflict personal and advertising injury, according to the appeals court document.

Harleysville sought a declaratory judgment that it did not owe a defense to Rams Head or Muehlhauser with respect to either underlying action.

It argued that the complaints did not allege injuries covered under either Coverage A or Coverage B and, with respect to the 2014 Policy, the Recording and Distribution exclusion precluded coverage. Harleysville further argued that Muehlhauser does not qualify as an insured under the policies because the Criminal Acts and Knowing Violation exclusions precluded coverage for him.

After a hearing, the Howard County circuit court initially issued a memorandum opinion and declaration that Harleysville did in fact have a duty to defend both Rams Head and Muehlhauser against the two complaints.

Opposing Arguments

In its argument that Harleysville had a duty to defend it against the complaints, Rams Head pointed to a coverage grant requiring Harleysville to provide a defense to claims for damages based on the “wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling or premises that a person occupies, committed by or on behalf of its owner, landlord or lessor,” according to the appeals court document.

Rams Head argued that this coverage grant obligates Harleysville to defend it because the Clar and Castle complaints alleged the plaintiffs not only had a right to occupy the private restroom at the Rams Head Tavern, but Muehlhauser – acting on behalf of Rams Head – invaded that right of private occupancy by his video surveillance. Additionally, it argued Rams Head was the restroom’s owner for purposes of the coverage grant.

Muehlhauser also argued that he qualifies as an insured, because both complaints alleged that he was acting within the scope of his duties as a manager and owner of Rams Head.

Regarding Rams Head, Harleysville disagreed that the coverage grant applied to these allegations. Harleysville argued that to have a right of private occupancy in a room, someone needs to have a possessory interest in the room. Because the plaintiffs lacked any interest, Harleysville contended their claims did not fall within the coverage grant.

Harleysville also argued that Rams Head was not the owner of the restroom because it was a lessee of the premises, which were instead owned by Savage Mill. Savage Mill was not a party to the case.

Additionally, Harleysville contended that it did not have a duty to defend Muehlhauser. It alleged he is not an insured under the policy for the purposes of the underlying claims, and the Knowing Violation and Criminal Acts exclusions preclude coverage. This is because Harleysville contended that Muehlhauser’s videotaping of women in the restroom was not “with respect to the conduct of [Ram’s Head’s] business,” according to the appeals court document.

Harleysville further contended that the Criminal Acts exclusion bars coverage for Muehlhauser because the acts he is said to have committed are criminal, an argument to which the appeals court agreed.

Appeals Court Decision

“Because the Criminal Acts exclusion cannot be disregarded, it precludes coverage under the policies for the claims against Mr. Muehlhauser,” the appeals court document stated. “The complaints both allege that Mr. Muehlhauser acted with prurient intent in surreptitiously videotaping women who were using the restroom. Neither complaint includes any alternative factual allegations under which Mr. Muehlhauser’s conduct might not be criminal.”

With this in mind, the appeals court ruled that Harleysville did not have a duty to defend Muehlhauser in connection with the Castle and Clar complaints.

However, the court concluded that Harleysville did have a duty to defend Rams Head against the complaints, pointing to the coverage grant in which Harleysville issued insurance policies providing coverage for damages Rams Head would become legally obligated to pay due to the invasion of the right to privately occupy a room committed by or on behalf of the room’s owner.

As a result, it affirmed the circuit court’s order regarding Harleysville’s duty to defend Rams Head, but reversed its determination that Harleysville had a duty to defend Muehlhauser, and remanded to the circuit court for a declaratory judgement consistent with its opinion.

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