Maryland Court Holds Prejudice Rule Applies to Claims Made and Reported Policy

In its recent decision in Navigators Specialty Ins. Co. v. Med. Benefits Administrators of Maryland, 2014 U.S. Dist. LEXIS 22631 (D. Md. Feb. 21, 2014), the United States District Court for the District of Maryland had occasion to consider whether Maryland Code § 19-110, which establishes a prejudice requirement for late notice disclaimers, applies to claims made and reported policies.

Navigators insured Medical Benefits Administrators of Maryland (“MBA”) under successive claims made and reported professional liability policies for periods October 31, 2009 to October 31, 2010 and October 31, 2010 to October 31, 2011.  MBA was a claims administrator for Brit Insurance with respect to employer benefit plans.  A dispute arose between Brit and MBA concerning funds that MBA allegedly failed to repay or reconcile, and litigation ultimately followed.

While the parties disputed when Brit first asserted its claim against MBA – prior to the first of the two policies or during the term of one of the policies – the court ultimately determined that the claim was first made while the 09-10 Navigators’ policy was in effect.  MBA, however, did not report the claim to Navigators until July 2011.  Navigators thus contended that MBA’s failure to have reported the claim prior to the October 31, 2010 expiration of the 09-10 policy vitiated any right that MBA had to coverage under that policy.  MBA countered that under Maryland law, its failure to have reported the claim while the 09-10 policy was still in effect would only serve as a bar to coverage if Navigators was actually prejudiced as a result.

In support of its assertion, MBA relied on Maryland Code § 19-110, which states:

An insurer may disclaim coverage on a liability insurance policy on the ground that 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.    

While this rule has been applied routinely to occurrence-based policies, the court noted that there were only a handful of Maryland cases that considered it in the context of claims made and reported policies.  In Sherwood Brands, Inc. v. Great Am. Ins. Co., 13 A.3d 1268 (Md. 2011), Maryland’s Supreme Court applied in the rule in the context of a claims-made policy.  Two subsequent Maryland federal district courts distinguished the holding in Sherwood when considering claims made and reported policies.  The court also noted the recent decision in McDowell Bldg., LLC v. Zurich Am. Ins. Co., 2013 U.S. Dist. LEXIS 132854 (D. Md. Sept. 17, 2013), where Maryland’s federal district court applied the rule in the context of a claims made and reported policy.

In considering these cases, the court focused heavily on the reasoning in Sherwood, in particular the Sherwood Court’s determination that the purpose of § 19-110 was to make “policy provisions requiring notice to, and cooperation with, the insurer covenants and not conditions.”  Accordingly, the court agreed that the rule articulated in Sherwood applies to all policies, including claims made and reported policies.  As such, the court determined that Navigators was required to demonstrate actual prejudice, by a preponderance of the evidence, in order to disclaim coverage under the 09-10 policy.