Plaintiff Pennsylvania National Mutual Casualty Insurance Company ("Penn National") sought a declaration that, under the terms of its insurance contract, it did not owe a duty to defend or indemnify defendant City Homes, Inc. ("CHI") in a pending lawsuit against CHI. CHI then filed a Cross-Claim requesting a declaration that Penn National did owe such a duty, after which both sides moved for summary judgment.

The underlying lead paint case involves two siblings filing suit against CHI for alleged lead exposure they suffered as children at one of CHI's properties. The siblings alleged CHI was negligent and negligently misrepresented the presence of lead in the property. A jury found against CHI in 2009, but a new trial was ordered for January 2011 due to jury misconduct in the first trial.

The property at issue participated in the "Lead-Based Paint Abatement and Repair & Maintenance Study" ("R & M Study"), an effort to increase lead-free affordable housing in Baltimore. After the property tested positive for lead, it underwent the lead-abatement intervention R & M offered, including treatment of paint, friction surfaces, and ensuring that subsequent dust samples were below Maryland's lead thresholds. The property successfully met all the post abatement clearance standards, and the plaintiffs in the underlying lawsuit moved into the residence in 1993. In the underlying suit, CHI claims it had no knowledge of paint chipping, flaking, or deteriorating at the property during the time of plaintiffs' residence.

In the instant case, Judge Blake determined that Penn National's insurance contract with CHI required Penn National defend and indemnify CHI. At issue in the contract was whether an "occurrence," as defined in the insurance contract, caused the alleged lead paint injuries. The contract states that Penn National only has a duty to defend and indemnify its insured if bodily injury arises from an "occurrence," which is defined as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." Yet, the contract also states Penn National does not owe a duty if bodily injury is "expected or intended from the standpoint of the insured."

Judge Blake relied on the two-part test that the Maryland Court of Appeals articulated in Sheets v. Brethren Mut. Ins. Co., 679 A.2d 540, 542 (1996). The Sheets test for determining whether an insurer has a duty to defend requires: 1) looking to the contract language giving rise to the duty and any defenses under the terms of the policy; and 2) considering whether the tort claims potentially fall within the policy's coverage. Sheets also held that an "accident" includes a negligent act so long as the resulting damage occurs without the insured's foresight or expectation. Id. at 548. Such an inquiry subjectively considers what the insured actually foresaw and expected, not what the insured should have foreseen or expected.

Penn National concedes that harm resulting from lead paint exposure meets the definition of "occurrence" in the contract. The Court then ruled that CHI did not foresee and expect the bodily injury resulting from the exposure such that it would alleviate Penn National of its duty to defend. Furthermore, the exposure meets the definition of an accident as defined in the contract since the lead paint was a continual harmful condition. The Court found CHI did not foresee the exposure and resulting harm because it went to great lengths to abate the hazards of lead on the property. CHI abated the lead, tested the property for lead, informed the plaintiffs of the risks of lead poisoning, and showed them a video on how to keep the property lead-safe. CHI was never notified of any chipping paint or lead exposure on the property during the plaintiffs' stay. Thus, it was unreasonable to infer CHI foresaw or expected the plaintiffs' injuries when no evidence suggests CHI knew of any lead hazards at the property after taking numerous precautionary measures to prevent lead exposure.

Therefore, the Court held that Penn National had a duty to defend CHI since the alleged bodily injuries were accidental, arising from an "occurrence" as stated in the contract. The Court further held that if CHI is found negligent at the future trial, such liability would require Penn National to fulfill its duty to indemnify CHI accordingly.