Maryland Court Considers Prejudice in Claims Made and Reported Policy

In its recent decision in McDowell Bldg. v. Zurich Am. Ins. Co., 2013 U.S. Dist. LEXIS 133166 (D. Md. Sept. 17, 2013), the United States District Court for the District of Maryland had occasion to consider Section 19-110 of the Insurance Article of the Maryland Code, and in particular whether this provision imposes a prejudice requirement in claims made and reported policies.

Zurich insured Brasher Design under a series of claims made and reported architects and engineers professional liability policy.  Brasher had been hired by McDowell, a real estate developer, to prepare and file various applications for tax credits for the construction of a building.  Upon learning that Brasher failed to file the applications in a timely fashion, McDowell filed against various entities, including Brasher.  Although suit was filed against Brasher in June 2006, Brasher did not give notice of the matter to Zurich until November 2009.  Zurich subsequently denied coverage under each of its prior policies on the basis that the claim was not first made and reported within the same one year policy period.  McDowell later settled with Brasher and took an assignment of Brasher’s rights under the Zurich policies.  It then filed a declaratory judgment action against Zurich, arguing that Zurich’s denial of coverage was improper since it failed to demonstrate that it was prejudiced as a result of Brasher’s failure to report the claim during the relevant policy period. 

At issue in the McDowell decision was the application of § 19-110 of the Maryland Code, which states:

An insurer may disclaim coverage on a liability insurance policy on the ground that the insured or a person claiming the benefits of the policy through the insured has breached the policy by failing to cooperate with the insurer or by not giving the insurer required notice only if the insurer establishes by a preponderance of the evidence that the lack of cooperation or notice has resulted in actual prejudice to the insurer.  (Emphasis supplied.)

Zurich argued on motion to dismiss that § 19-110 does not apply to policies under which notice is a condition precedent to coverage, such as claims made and reported policies.   

In considering the issue, the district court examined the history of the statute and the case law it generated, most significantly, the decision by the Maryland Court of Appeals (Maryland’s highest court) in Sherwood Brands, Inc. v. Great American Insurance Co., 13 A.3d 1268 (2011).   The court observed that intention of the statute is to prevent an insured’s forfeiture of coverage based on a technicality, but to also preserve the insurer’s right to void coverage “where the insured's failure to provide notice has undercut the carrier's opportunity to limit its liability.” 

The Sherwood Brands decision, explained the court, considered this rule in the context of a claims-made policy requiring notice as soon as practicable but no later than ninety (90) days after the policy’s expiration.  The Sherwood Brands court held that the statute did, in fact, apply to such a policy, and in doing so, articulated the following rule:

… we hold that § 19-110 does apply, as is the case at present, to claims-made policies in which the act triggering coverage occurs during the policy period, but the insured does not comply strictly with the policy's notice provisions. In the latter situation, § 19-110 mandates that notice provisions be treated as covenants, such that failure to abide by them constitutes a breach of the policy sufficient for the statute to require the disclaiming insurer to prove prejudice.

The McDowell court observed case law from the U.S. District Court of Maryland and from the Fourth Circuit calling into question the application of Sherwood Brands in the context of a true claims made and reported policy. Minnesota Lawyers Mut. Ins. Co. v. Baylor & Jackson, PLLC, 852 F.Supp. 2d 647 (D. Md. 2012); Financial Industry Regulatory Authority, Inc. v. Axis Ins. Co., 2013 U.S. Dist. LEXIS 82343 (D. Md. June 12, 2013).  The McDowell court questioned these subsequent decisions in light of the fact that the Sherwood Brands decision expressly applied its holding to any policy in which notice is a condition precedent to coverage, including claims made and reported policies.  As such, the court agreed that while Zurich demonstrated that Brasher’s notice was late, this alone was not sufficient to merit dismissal of McDowell’s lawsuit. The court therefore denied Zurich’s motion so that the issue of prejudice could be further developed.