Provident Bank of Maryland v.  TRAVELERS PROPERTY CASUALTY CORPORATION, formerly known as Aetna Life & Casualty…

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
 PROVIDENT BANK OF MARYLAND,
Plaintiff-Appellant,
v.
No. 00-1378  TRAVELERS PROPERTY CASUALTY
CORPORATION, formerly known as
Aetna Life & Casualty Company,
Defendant-Appellee. 
Appeal from the United States District Court
for the District of Maryland, at Baltimore.
J. Frederick Motz, Chief District Judge.
(CA-99-968-JFM)
Argued: November 1, 2000
Decided: December 28, 2000
Before WIDENER, WILKINS, and NIEMEYER, Circuit Judges.
Vacated and remanded by published opinion. Judge Niemeyer wrote
the opinion, in which Judge Widener joined. Judge Wilkins wrote a
dissenting opinion.
COUNSEL
ARGUED: Lawrence Jay Gebhardt, GEBHARDT & SMITH, L.L.P.,
Baltimore, Maryland, for Appellant. Edward C. Bacon, BACON,
THORNTON & PALMER, L.L.P., Lanham, Maryland, for Appellee.
ON BRIEF: James T. Heidelbach, Douglas S. Reinhart, GEB-
HARDT & SMITH, L.L.P., Baltimore, Maryland, for Appellant.

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OPINION
NIEMEYER, Circuit Judge:
We must determine whether a "Check Stop Payment Liability"
endorsement to a "Commercial General Liability" insurance policy
provides the insured, a bank, with a right to a legal defense of a law-
suit brought against it for its wrongful dishonor of drafts drawn on an
irrevocable letter of credit. Because we conclude that the policy
imposes a duty on the insurance company to defend the insured, we
vacate the district court’s judgment concluding otherwise and remand
for further proceedings.
I
On May 22, 1991, Provident Bank of Maryland was served with a
summons and complaint in the case of Suriel Finance, N.V. v. Provi-
dent Bank of Maryland, filed in the District of Maryland. The com-
plaint alleged that Provident Bank wrongfully dishonored a draft
drawn on a letter of credit it had issued. The suit demanded over $9
million in damages. Provident Bank forwarded the suit papers to
Travelers Property Insurance Company ("Travelers"), its insurer.1
Travelers acknowledged its receipt of the papers by a letter dated July
2, 1991, and notified Provident Bank of Travelers’ appointment of
counsel to defend the bank. In the letter, Travelers also stated:
As you are aware, your coverage for this suit falls under the
[Check Stop Payment Liability] endorsement to your policy.
The limit of insurance on this endorsement is $100,000, sub-
ject to a deductible of $2500 per claim.
The total amount of damages sought by the plaintiff is in
excess of your policy limits and, therefore, any judgment
rendered against you in excess of your policy limits will not
be covered.
1The original insurer was a subsidiary of Aetna Life & Casualty Com-
pany, and Aetna Life and its subsidiaries subsequently merged with
Travelers.
2 PROVIDENT BANK v. TRAVELERS PROPERTY CASUALTY CORP.

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But a few weeks later Travelers wrote Provident Bank again and
stated that it had reviewed the allegations and "other information
available to us at this time" and was reserving its right to "disclaim
coverage":
There may be coverage under special Endorsement # 6, for
count III [wrongful dishonor claim]. If it is determined that
coverage is available under this endorsement, the amount of
coverage is limited to [$]100,000. This limit of insurance is
stated in the Endorsement language.
We will conduct any investigational activity in conjunc-
tion with the case under a full reservation of the company’s
rights. Such investigation or activity does not prejudice our
right to disclaim coverage at a later date.
We will inform you of our decision on these issues when
our investigation is complete. In the meantime, your rights
and interests are being protected.
The initial litigation was succeeded by a second suit entitled Banca
del Sempione v. Suriel Finance, N.V. and Provident Bank of Mary-
land, which presented the same claims relating to Provident Bank’s
wrongful dishonor of a draft drawn on a letter of credit issued by it.
Thereafter, in May 1992, Travelers again wrote Provident Bank about
coverage, stating that Travelers had submitted the coverage question
to its outside lawyers "for purposes of assisting our coverage determi-
nation." The letter continued:
The findings of our coverage counsel were in agreement
with the previous correspondence forwarded to you. We
have been advised, however, that there does exist a potenti-
ality of coverage with respect to Count III (Wrongful Dis-
honor of the Letter of Credit Under the UCC) as a result of
Special Endorsement VI (Check Stop Payment Liability).
The letter reassured Provident Bank that Travelers would provide a
defense for the wrongful dishonor claim and requested Provident
Bank to have its counsel coordinate with Travelers’ counsel to defend
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that claim. Travelers never withdrew its agreement to provide a
defense of Count III through Provident Bank’s lawyers, but it did con-
tinue to reserve its right not to pay any part of a resulting judgment.
Following a six-week bench trial during March and April of 1997, the
district court entered judgment against Provident Bank in the amount
of $5,264,399.
The background against which this underlying suit was litigated
involved a $6.7 million loan made by Banca del Sempione to Suriel
Finance, N.V., which in turn loaned the money to its client, Rock
Solid Investments, Ltd. Suriel Finance required Rock Solid Invest-
ments to secure the interest on this loan with an irrevocable letter of
credit issued by a bank to Suriel Finance in the amount of $750,000,
which credit was to renew annually. To obtain the letter of credit,
Rock Solid Investments deposited $800,000 in certificates of deposit
with Provident Bank and paid the bank a $39,375 fee. Under the
arrangement, the beneficiary of the letter of credit, or any assignee
thereof, could present a draft to Provident Bank for an amount up to
the face amount of the credit and be paid that amount by the bank.
The draft had to be accompanied by a certification that Rock Solid
Investments had defaulted on its obligation to pay interest on the
underlying loan.
A dispute later arose among the parties whether Provident Bank’s
$750,000 obligation under the letter of credit would automatically be
"re-available" each year under a revolving arrangement, providing
beneficiaries of the letter of credit with a total of $5.25 million upon
which to draw. Provident Bank took the position that credit was lim-
ited to $750,000, and therefore, when Banca del Sempione, as
assignee of the letter of credit, presented drafts that exceeded
$750,000 by $113,250, Provident Bank refused to pay the $113,250
"overdraft."
The district court in the underlying case concluded, for complex
factual reasons involving a purported side-letter amendment to the let-
ter of credit, that Provident Bank was obligated to honor drafts on a
revolving basis up to $5.25 million, and on that basis, it entered a
$5.26 million judgment in favor of Banca del Sempione and against
Provident Bank. We affirmed that judgment in Banca del Sempione
v. Provident Bank, 160 F.3d 992 (4th Cir. 1998). In defending this
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lengthy litigation, which involved two separate appeals, Provident
Bank incurred over $2 million in attorneys fees and costs.
Provident Bank filed this action to obtain reimbursement from
Travelers for its litigation costs under a "Commercial General Liabil-
ity" policy issued by Travelers to Provident Bank for the period April
1, 1990 through April 1, 1991. This policy included coverage for
"wrongful dishonor" liability, or "Check Stop Payment Liability" as
the endorsement was denominated. On cross-motions for summary
judgment filed by the parties, the district court denied Provident Bank
coverage under the policy. The court ruled that the Check Stop Pay-
ment Liability endorsement did not cover the wrongful dishonor
claim because the endorsement contained an exclusion that withheld
coverage for liability assumed by Provident Bank "under any agree-
ment to be responsible for a loss," and the court found the letter of
credit to be such an agreement. The court also ruled that Travelers did
not have a duty to defend the underlying litigation for wrongful dis-
honor because, even if the exclusion did not apply, the Check Stop
Payment Liability endorsement contained no duty to defend. The
court added,
[I]n the final analysis Provident’s reading of the policy as a
whole is strikingly unreasonable. It is simply beyond imagi-
nation that the Check Stop Payment Liability containing a
$100,000 limit of liability was intended to impose "potential
liability" upon Travelers for millions of dollars in fees and
costs for defending Provident in a sophisticated commercial
transaction into which it voluntarily entered.
From the judgment entered in favor of Travelers, Provident Bank
noticed this appeal.
II
Under Maryland law, which applies in this diversity action, the
duty to defend, as may be imposed by a liability insurance policy, is
a question of contract law determined by the intent of the parties as
manifested in the language of the policy. See Mesmer v. Maryland
Auto. Ins. Fund, 725 A.2d 1053, 1058 (Md. 1999). And the duty to
defend exists only if (1) the insurance contract contains language that
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imposes the duty, and (2) there is a "potentiality" or "possibility" that
the claim could be covered by the policy’s duty to indemnify. See Litz
v. State Farm Fire & Cas. Co., 695 A.2d 566, 570 (Md. 1997); Bro-
hawn v. TransAmerica Ins. Co., 347 A.2d 842, 850 (Md. 1975); Utica
Mut. Ins. Co. v. Miller, 746 A.2d 935, 939 (Md. Ct. Sp. App. 2000).
Thus, in resolving the case before us, we first must determine
whether, through application of Maryland contract law principles, the
policy before us includes language imposing a duty to defend Check
Stop Payment Liability endorsement claims, and second, if there is
such language, whether the claim for which a duty to defend is
asserted is potentially covered by the endorsement. We address these
issues in order.
A
In ruling that the Travelers policy does not provide a duty to defend
a potential claim under the Check Stop Payment Liability endorse-
ment, the district court relied on a structural argument. It observed
first that the endorsement itself does not include language imposing
a duty to defend. It also noted that the body of the Commercial Gen-
eral Liability policy provides coverages, A, B, and C, and that each
coverage individually addresses whether Travelers has a duty to
defend for claims made under the coverage. The court’s analysis con-
tinued:
Two of them, Coverages A and B, each contain a duty to
defend clause. However, there is a third coverage, Coverage
C, that does not. The Check Stop Payment Liability
endorsement, in effect, provides a fourth coverage. Presum-
ably, if a duty to defend were to attach to that coverage, the
parties would have expressly so stated.
But the court then questioned its own conclusion. It stated:
I recognize that the endorsement can be read not as creating
a fourth category of coverage but as modifying the coverage
provided by Coverage A. Under that interpretation of the
policy, the duty to defend established in Coverage A might
reasonably be deemed to be incorporated by reference into
the endorsement.
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The court rejected this possibility, however, because of its determina-
tion that it was "beyond imagination, that the endorsement would pro-
vide a duty to defend costing Travelers millions of dollars in fees
when its indemnity obligation only covers $100,000." In making this
point, the district court failed to recognize that under Maryland law,
as elsewhere, the duty to defend is broader than the duty to indemnify.
See Litz, 695 A.2d at 569-70. And that duty may, indeed, result in
costs to the insurer greater than costs incurred to indemnify, unless,
of course, the language of the duty to defend limits the costs available
for a defense. See Sherwood v. Hartford Accident & Indem. Co., 698
A.2d 1078, 1083 (Md. 1997) ("Not infrequently, that expense [for
defense] may approximate or even exceed the amount of any judg-
ment rendered in the action"). Moreover, the court should not have
permitted the costs to Travelers of a duty to defend to justify its deter-
mination of whether Travelers had such a duty.
On appeal, Travelers not only relies upon the district court’s struc-
tural argument but also goes further, arguing that the Check Stop Pay-
ment Liability endorsement is "a stand-alone endorsement which does
not provide a duty to defend."
Neither the analysis provided by the district court nor the argument
made by Travelers examines the policy and endorsement as an inte-
grated contract from which the intent of the parties must be derived.
See Collier v. MD-Individual Practice Assoc., 607 A.2d 537, 539
(Md. 1992) ("To determine the intention of the parties . . . we con-
strue the instrument as a whole" (quoting Pacific Indem. Co. v. Inter-
state Fire & Cas. Co., 488 A.2d 486, 488 (Md. 1985)) (internal
quotation marks omitted)). That examination, when resorting to prin-
ciples of Maryland contract law, discloses that the parties intended
that the Check Stop Payment Liability endorsement would provide a
liability-type coverage, not an indemnity-type coverage, requiring
Travelers both to pay the litigation costs and to indemnify Provident
Bank for any judgment up to $100,000. See Brohawn, 347 A.2d at
851 ("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").
"In Maryland, insurance policies, like other contracts, are construed
as a whole to determine the parties’ intentions." Sullins v. Allstate Ins.
7 PROVIDENT BANK v. TRAVELERS PROPERTY CASUALTY CORP.

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Co., 667 A.2d 617, 619 (Md. 1995). Maryland does not follow the
rule that insurance policies are to be construed against the insurer
except when "an ambiguity remains after considering the intentions
of the parties from the policy as a whole and, if necessary, after
admitting and considering any relevant parol evidence." Bailer v. Erie
Ins., 687 A.2d 1375, 1378 (Md. 1997).
As is typical with insurance policies generally, the insurance policy
in this case contains (1) a page of declarations, stating the dollar lim-
its for the coverages; (2) the terms of the coverages provided; (3) a
list of endorsements that are incorporated into the policy; and (4) the
general terms and conditions applicable to the entire policy. The dec-
larations page lists three general coverages: Coverage A for liability
for bodily injury and property damage; Coverage B for liability for
personal and advertising injury; and Coverage C for first-party medi-
cal payments. These coverages are in turn modified by the endorse-
ments that are expressly incorporated. The list of endorsements begins
with the language — "It is hereby understood and agreed that this pol-
icy includes these endorsements and schedules" — followed by a list
of 20 endorsements that are incorporated into the policy. Endorsement
"Special VI," the Check Stop Payment Liability endorsement in ques-
tion here, is headed by the interpretive instruction: "This endorsement
modifies insurance provided under the following: Commercial Gen-
eral Liability Coverage Part." It is therefore apparent that this Check
Stop Payment Liability endorsement modifies the Commercial Gen-
eral Liability Part to the extent provided in the endorsement. While
the Check Stop Payment Liability endorsement itself does not include
any duty-to-defend language, all liability coverages in the main body
of the policy do include duties to defend. The only coverage for
which a duty to defend is not provided is the coverage for medical
payments, which is not a liability-type of coverage, but rather a first-
party coverage.
Therefore, the Check Stop Payment Liability endorsement expands
the liability protection to the insured, amending either Coverage A or
Coverage B, because Coverages A and B constitute the entirety of the
liability coverages. Regardless of which liability coverage the
endorsement amends, a duty to defend is provided.
We cannot agree with Travelers that the endorsement is a stand-
alone provision. Both the body of the policy and the endorsement
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itself belie Travelers’ argument. The body of the policy lists the
endorsements that are incorporated into the policy, including the
Check Stop Payment Liability coverage. Similarly, the endorsement
indicates that it "modifies" the liability coverage otherwise provided
by the policy. Because the endorsement is incorporated into the main
policy and modifies the liability coverage provided, it cannot be con-
strued as a stand-alone coverage. The proper construction includes the
endorsement coverage as part of the liability coverage afforded by the
policy. And, as we have observed, all liability coverages in the policy
afford not only indemnification for loss, but also the defense of
related lawsuits.
Virtually every other indication given by the policy in this case
points to the parties’ intention that Travelers would have the obliga-
tion, as well as the right, to defend and control any litigation covered
by the Check Stop Payment Liability endorsement. First, liability pol-
icies by definition typically include both a duty to defend and a duty
to indemnify. See Mesmer, 725 A.2d at 1061 ("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" (quoting
Brohawn, 347 A.2d at 851)); see also Rowland H. Long, The Law of
Liability Insurance, § 5.01 (pointing out that the duty to defend "is
one of the most important obligations imposed by the [liability] policy
of insurance and distinguishes liability insurance from most other
forms of insurance"); Couch on Insurance, §§ 103:4, 103:5, 103:7 (3d
ed. 1997) (indicating that the duty to defend is an important distinc-
tion between a liability policy and an indemnity policy).
Second, the general terms and conditions applicable to all liability
portions of the policy indicate that the insured was to be provided a
defense of lawsuits. Section IV of the policy, which is applicable to
the entire policy and which is entitled "Commercial General Liability
Conditions," imposes duties on Provident Bank to notify Travelers of
any claim "as soon as practicable," to send Travelers copies of suit
papers "immediately," and to "[c]ooperate with [Travelers] in the
investigation, settlement or defense of the claim or ‘suit.’" These "lia-
bility" conditions could not be meaningful in the absence of a duty to
defend. Because the Check Stop Payment Liability endorsement is a
modification to the policy’s liability coverage, it must be assumed
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that these "general" conditions are applicable also to that endorse-
ment.
Finally, Travelers itself, as well as its outside attorneys, reached the
conclusion that it had a duty to defend when it first received notice
of the lawsuit. In its letter acknowledging receipt of suit papers, Trav-
elers stated that it would be providing a defense. Later, when it pro-
vided the defense with the reservation of rights, it still took the
position that the Check Stop Payment Liability endorsement modified
either Coverage A or Coverage B, both of which provided for liability
coverage. Finally, after consulting with independent counsel, Travel-
ers wrote Provident Bank that "there does exist a potentiality of cov-
erage with respect to [the wrongful dishonor claim]," and therefore
Travelers "will provide a defense to [this claim]." The letter also
stated unconditionally that "the potentiality of coverage obligates
[Travelers] to provide a defense to this Count." While we agree with
the district court that such insurance company letters do not extend
coverage by estoppel where it otherwise would not exist, see Pruden-
tial Ins. Co. of Am. v. Brookman, 175 A. 838, 840 (Md. 1934), we
believe that these prelitigation interpretations by Travelers and its
independent counsel are highly probative of the parties’ actual intent
and confirm the conclusion that the policy at issue is properly con-
strued to provide typical liability-type coverage for wrongful dishonor
liability — i.e., coverage that provides both indemnity and a defense.
Because providing liability coverage without affording a defense
would have been so unusual, we believe that, had Travelers intended
to withhold coverage of defense costs, it would have expressly called
the endorsement an indemnification coverage or it would have dis-
claimed an obligation to defend Provident Bank against suits alleging
wrongful dishonor. Its language would have been modeled on indem-
nity policies, not liability policies. But both policy language and pol-
icy structure indicate the coverages of a typical liability policy.
Indeed, we find Travelers’ position somewhat unusual for an insur-
ance company that must administer many similar policies. By assert-
ing now that the Check Stop Payment Liability endorsement is simply
an indemnity provision, Travelers would, for the typical situation in
which the loss was within policy limits, deprive itself of control over
the defense of the litigation, encouraging the insured simply to default
on the claim and have Travelers pay the loss.
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B
Although we have concluded that the policy required Travelers to
defend lawsuits against Provident Bank under the Check Stop Pay-
ment Liability endorsement, that duty is triggered only when a claim
in a lawsuit is made against Provident Bank that, if resolved adversely
to the bank, would potentially require Travelers to indemnify Provi-
dent Bank for the loss. See Litz, 695 A.2d at 570; Brohawn, 347 A.2d
at 850; Utica Mut., 746 A.2d at 939. As the Court of Appeals stated
in Brohawn,
Even if a . . . plaintiff does not allege facts which clearly
bring the claim within or without the policy coverage, the
insurer still must defend if there is a potentiality that the
claim could be covered by the policy.
347 A.2d at 850. Thus, we must turn to the language of the endorse-
ment itself.
The Check Stop Payment Liability endorsement in this case pro-
vides in relevant part:
CHECK STOP PAYMENT LIABILITY
THIS ENDORSEMENT MODIFIES INSURANCE PRO-
VIDED UNDER THE FOLLOWING:
COMMERCIAL GENERAL LIABILITY COVERAGE
PART
1. We will pay those sums you become legally obligated
to pay as damages arising out of: . . .
B. the refusal to certify or pay; . . .
with respect to any check, note, or draft drawn
upon or payable by any insured, and drawn or
made by or bearing the acceptance of any deposi-
tor of the insured.
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* * *
2. This insurance does not apply to:
A. liability assumed by the insured under any
agreement to be responsible for a loss . . . .
Provident Bank contends that when it wrongfully dishonored a
draft presented by Banca del Sempione, as assignee of the letter of
credit, it incurred liability for "the refusal to pay any draft" — pre-
cisely the liability covered by the endorsement. Although the bank
acknowledges that the Stop Check Payment Liability endorsement
excludes "liability assumed by [it] under any agreement to be respon-
sible for a loss," it argues that a letter of credit is not an agreement
to be responsible for a loss. Rather, it claims that a letter of credit is
a primary obligation undertaken independently from the obligations
of third parties.
Travelers, on the other hand, urges that we adopt the reasoning of
the district court to find that the exclusion applies to deny Provident
Bank coverage. The district court reasoned that the exclusion applied
because Banca del Sempione was not entitled to draw upon the letter
of credit unless its draft was accompanied by a certification that Rock
Solid Investments had defaulted on its obligation to pay Banca del
Sempione interest pursuant to the underlying loan agreement. This
certification was made an express condition of any draft drawn on the
letter of credit. Accordingly, the district court concluded that, because
a draft could be honored only if accompanied by the certification of
a default in the underlying loan, Provident Bank’s dishonor of the
draft resulted in a "liability assumed by the insured under [an] agree-
ment to be responsible for a loss."
We agree with Provident Bank, as well as with other courts, that
the bank’s issuance of an irrevocable letter of credit on which drafts
may be drawn creates the type of duty which, when breached, is cov-
ered by Check Stop Payment Liability insurance, i.e., "wrongful dis-
honor" insurance. This is because the bank’s liability is created by its
own default on an instrument that it issued, i.e., the letter of credit.2
2During the period relevant to this case, a "letter of credit" was defined
by the Uniform Commercial Code to mean "an engagement by a bank or
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Its liability does not arise from its agreement to answer for the loss
of a third party, as would be the case in a hold-harmless agreement.
The exclusion relied on by Travelers applies only if the bank’s liabil-
ity arises secondarily from an agreement to be responsible for a third
party’s primary liability. Typically, the exclusion covers liability of
third persons adopted by the bank through an agreement to indemnify
or hold harmless. See, e.g., Dreis & Krump Mfg. Co. v. Phoenix Ins.
Co., 548 F.2d 681 (7th Cir. 1977) (concluding that policy language
— "liability assumed [by the insured] under any written contract" —
means "a specific written agreement between the insured and some
third party whereby the insured agrees to ‘indemnify’ the third
party"); Commercial Union Ins. v. Basic Am. Med., 703 F. Supp. 629,
633 (E.D. Mich. 1989) (holding that policy language — "liability
assumed by the insured under any contract or agreement" — does not
refer to liability incurred as a result of a breach of contract, but that
contractual exclusion language operates only to deny coverage "in
cases in which the insured in a contract with a third party agrees to
save harmless or indemnify such party"); Olympic, Inc. v. Providence
Washington Ins. Co., 648 P.2d 1008, 1011 (Alaska 1982) ("‘[l]iability
assumed by the insured under any contract’ refers to liability incurred
when one promises to indemnify or hold harmless another, and does
not refer to the liability that results from breach of contract" (quoting
Continental Ins. Co. v. Bussell, 498 P.2d 706, 710 (Alaska))).
The fact that drafts drawn on the letter of credit had to be accompa-
nied by documentation certifying that the underlying loan agreement
was in default did not transform the letter of credit into an agreement
other person made at the request of a customer and of a kind within the
scope of this title (§ 5-102) that the issuer will honor drafts or other
demands for payment upon compliance with the conditions specified in
the credit." Md. Code Ann., Commercial Law I § 5-103(1)(a) (1997).
Effective October 1, 1997, "letter of credit" was redefined similarly to
mean "a definite undertaking that satisfies the requirements of § 5-104 of
this title by an issuer to a beneficiary at the request or for the account of
an applicant or, in the case of a financial institution, to itself or for its
own account, to honor a documentary presentation by payment or deliv-
ery of an item of value." Md. Code Ann. Commercial Law I § 5-
102(a)(10) (1999 Supp.).
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to answer secondarily for the loss of another. Indeed, Provident Bank
would have been obligated to honor a draft whether an underlying
loss had occurred or not. Upon presentation to Provident Bank of a
draft with the certifying documentation, whether the documentation
was substantively accurate or not, Provident Bank became obliged to
honor the draft. See Amwest Sur. Ins. Co. v. Republic Nat’l Bank, 977
F.2d 122, 128-29 (4th Cir. 1992) (interpreting same provision of the
UCC as codified in South Carolina). Thus, even if Banca del Semp-
ione had falsely certified the occurrence of the default when it
presented a draft, Provident Bank would not have been relieved of its
duty to honor the draft. This principle, known as the "independence
principle," distinguishes letters of credit from guarantee contracts, in
which, by contrast, the guarantor is only secondarily liable and there-
fore may assert any defense against the creditor’s claim for payment
that the primary debtor would have asserted. See, e.g., Banca del Sem-
pione v. Provident Bank, 160 F.3d 992, 995-96 (4th Cir. 1998); In Re
Slamans, 69 F.3d 468, 474 (10th Cir. 1995); Dibrell Bros. Int’l v.
Banca Nazionale del Lavoro, 38 F.3d 1571, 1579 (11th Cir. 1994);
Alaska Textile Co. v. Chase Manhattan Bank, 982 F.2d 813, 815 (2d
Cir. 1992); Security Fin. Group, Inc. v. Northern Ky. Bank & Trust,
Inc., 858 F.2d 304, 307 (6th Cir. 1988); Md. Code Ann., Commercial
Law I § 5-103(d), cmt. 1 (1999 Supp.). Thus, if the letter of credit
actually were a guarantee contract, as the district court held, and
Banca del Sempione falsely certified a default, Provident Bank would
have been within its rights to refuse payment on the guarantee until
Banca del Sempione proved the default of the primary debtor.
In this case, however, Banca del Sempione was entitled to payment
under the terms of the letter of credit whenever it presented conform-
ing documents. Provident Bank had no duty to ascertain the truth of
Banca del Sempione’s certification. See Amwest, 977 F.2d at 128-29;
cf. Wichita Eagle & Beacon Publ’g Co. v. Pacific Nat’l Bank, 493
F.2d 1285 (9th Cir. 1974) (treating a document denominated as a let-
ter of credit as a guarantee because the document’s "substantive pro-
visions require the issuer to deal not simply in documents alone, but
in facts relating to the performance of a separate contract"); Gunn-
Olson-Stordahl Joint Venture v. Early Bank, 748 S.W.2d 316, 320
(Tex. App. 1988) (treating a document as a guarantee contract and not
a letter of credit when the bank’s obligation to pay arose not upon the
tender of conforming documents, but rather upon the bank’s own fac-
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tual determination of actual performance of contract by beneficiary).
Because the contractual exclusion provision in the Check Stop Pay-
ment Liability endorsement is limited to agreements by the insured to
indemnify or hold harmless third parties, it excludes from coverage
only those third-party obligations that the insured assumed rather than
obligations that it incurred. A letter of credit is not an assumed liabil-
ity but is instead a primary liability of the issuer. When Provident
Bank failed to honor the terms of its letter of credit to Banca del Sem-
pione, it breached its own obligation; it did not assume the obligation
of the debtor in the underlying loan transaction. Accordingly, the
wrongful dishonor claim fell within the coverage of the Check Stop
Payment Liability endorsement, and Travelers’ duty to defend that
claim was triggered.
Because we conclude that Travelers Commercial General Liability
policy imposed on Travelers a duty to defend the claim presented to
it by Provident Bank, we vacate the district court’s judgment and
remand for further proceedings consistent with this opinion.
VACATED AND REMANDED
WILKINS, Circuit Judge, dissenting:
I respectfully dissent. In my view, the majority, while acknowledg-
ing that "the duty to defend exists only if . . . the insurance contract
contains language that imposes that duty," ante, at 5, proceeds to
ignore that rule and rewrite the insurance contract based on the major-
ity’s perception of the terms to which it would have expected the par-
ties to agree.
The relevant contract language is as follows. The form policy con-
tains a "Section I - Coverages," which is divided into three subsec-
tions: "Coverage A. Bodily Injury and Property Damage Liability,"
"Coverage B. Personal and Advertising Injury Liability," and "Cover-
age C. Medical Payments." J.A. 21-25. Subsection A states, "We will
pay those sums that the insured becomes legally obligated to pay as
damages because of ‘bodily injury’ or ‘property damage’ to which
this insurance applies. We will have the right and duty to defend any
‘suit’ seeking those damages." Id. at 21 (emphasis added). Subsection
B states, "We will pay those sums that the insured becomes legally
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obligated to pay as damages because of ‘personal injury’ or ‘advertis-
ing injury’ to which this coverage part applies. We will have the right
and duty to defend any ‘suit’ seeking those damages." Id. at 24
(emphasis added). Subsection C states, "We will pay medical
expenses as described below for ‘bodily injury’. . . ." Id. at 25. This
subsection contains no language concerning a duty to defend. Simi-
larly, the special endorsement appended to the policy states, "We will
pay those sums you become legally obligated to pay as damages aris-
ing out of" check stop payment claims. Id. at 41. Like Subsection C,
and unlike Subsections A and B, however, the endorsement at issue
contains no language creating a duty to defend.
Instead of focusing on the contractual terms to which the parties
agreed, the majority’s analysis consists primarily of its identification
of a number of reasons why it would have made sense for the contract
to impose a duty to defend check stop payment claims. These include
(1) that the policy provides for a duty to defend in regard to the other
categories of liability coverage, (2) that liability coverage generally
includes a duty to defend, (3) that certain conditions in the policy
would have no benefit to the insurer with regard to check stop pay-
ment claims if there were no duty to defend, (4) that it was in the
insurer’s interest that the policy provide for a right and duty to
defend, and (5) that the insurer initially concluded that it had a duty
to defend.
The closest the majority comes to identifying any contract lan-
guage purportedly creating a duty to defend check stop payment
claims is when it notes that by its terms the endorsement "modifies
insurance provided under the . . . Commercial General Liability Part"
of the policy. Id. The majority appears to believe that the "modifies"
language indicates that the endorsement is a modification of Subsec-
tions A or B rather than a "stand-alone provision," and therefore that
the duty to defend language from those subsections applies to check
stop payment claims as well. Ante, at 9. The majority’s analysis
would be correct if the policy stated that the insurer had a duty to
defend any suit in which the policy would provide coverage for a
judgment against the insured. In that case, since the endorsement is
incorporated into the policy, the general duty to defend would apply
to check stop payment claims. The policy imposes no such general
duty to defend, however. Rather, the insurer’s duty to defend explic-
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itly extends only to claims of "bodily injury and property damage"
and "personal and advertising injury." Accordingly, even if the spe-
cial endorsement is read as part of Subsection A or Subsection B, that
does not change the fact that the duty to defend language in those sub-
sections unambiguously does not apply to check stop payment claims.
In sum, I agree with the majority to the extent that it concludes that
the parties might have been expected to have agreed that there would
be a duty by the insurer to defend regarding check stop payment
claims. Nevertheless, the law of Maryland is clear that a court should
not undertake to rewrite an unambiguous insurance contract so as to
provide for coverage that otherwise would not exist. See Hankins v.
Pub. Serv. Mut. Ins. Co., 63 A.2d 606, 613 (Md. 1949); Bernhardt v.
Hartford Fire Ins. Co., 648 A.2d 1047, 1052 (Md. Ct. Spec. App.
1993). Accordingly, I believe the district court correctly entered judg-
ment against Provident, and I would affirm.
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