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.

10th Circuit Certifies Late Notice and Reporting Questions to Colorado Supreme Court

In its recent decision in Craft v. Philadelphia Indem. Ins. Co., 2014 U.S. App. LEXIS 2680 (Feb. 11, 2014), the United States Court of Appeals for the Tenth Circuit, applying Colorado law, had occasion to consider whether Colorado’s notice-prejudice rule applies to claims made and reported policies, or is limited to occurrence-based policies.

Philadelphia insured Campbell’s C-Ment Contracting under a directors and officers policy for the period November 2009 to November 2010.  While the policy was in effect, one of the insured’s officers, Craft, was sued for alleged misrepresentations he made in connection with a corporate merger.  Craft, apparently, was unaware of the policy at the time and thus undertook his own defense.  He did not learn of the policy’s existence until March 2012, at which time he tendered his defense.  Craft later settled the underlying suit before Philadelphia issued a formal coverage position.

Craft later sued Philadelphia, seeking reimbursement of defense costs and the settlement amount.  Philadelphia moved to dismiss on the grounds that Craft had failed to comply with the policy’s notice provision, which required notice of claim as soon as practicable, and that he also failed to comply with the policy’s reporting provision, which required that the claim be reported to Philadelphia within sixty days of the policy’s expiration.  Relying on the Colorado Supreme Court decision in Friedland v. Travelers Indem. Co., 105 P.3d 639 (Colo. 2005), Craft argued that Philadelphia could only sustain its late notice disclaimer if it could demonstrate prejudice as a result of his non-compliance with the notice and reporting provisions.

In considering the issue, the 10^th Circuit noted a clear distinction in Colorado law between claims made and occurrence-based policies.  Whether the Friedland decision applied in both contexts, however, was an issue for which the court could find no guidance.  The court nevertheless observed that if it determined that the notice-prejudice rule applied to claims-made policies, such a decision “would render Colorado law an outlier on this issue,” since the majority of jurisdictions agree that prejudice is not a consideration for claims-made policies.  The court also recognized that applying a prejudice rule to claims-made policies could greatly impact the insurance market in Colorado, since insurers typically can offer claims-made policies at a lower premium precisely because of the limited notice period.  Finally, the court acknowledged that imposing a prejudice requirement on a claims-made policy would, in essence, effect a rewrite of the policy language, something Colorado courts are loathe to do. 

Given these significant concerns, the court certified to the Colorado Supreme Court the question of whether the notice-prejudice rule applies to claims made and reported policies.  The court also certified the related question of whether a prejudice requirement applies to the provision requiring notice of claim as soon as practicable; in other words, claims for which notice is given within the policy period, but still late under the circumstances.

Florida Court Holds Notice After Default Not Necessarily Prejudicial

In its recent decision in Indemnity Ins. Co. v. Caylao, Case No. 1D12-5733 (Fla. 1st DCA. Feb. 4, 2014) the First District Court of Appeals for the state of Florida had occasion to consider whether an insurer who receives notice of a lawsuit against its insured after a default judgment is entered against the insured can disclaim coverage under a notice of suit condition in its policy.

Lelilani Caylao alleged that an employee of Coast Entertainment, LLC (“Coast”) injured her in an altercation at a club that Coast owned. Caylao’s counsel wrote a letter to Coast about her assault and battery claim and Coast’s insurance agent forwarded the letter to Indemnity Insurance Company (“Indemnity”), Coast’s commercial general liability insurer. Indemnity investigated the pre-suit claim and concluded that Coast had no liability and denied the claim. Caylao subsequently filed suit without notifying Indemnity or its counsel. Coast did not answer or otherwise respond to the complaint and ultimately a final default judgment was entered against Coast.

Caylao subsequently initiated a garnishment proceeding against Indemnity as Coast’s insurer. Indemnity asserted that Coast forfeited coverage because it had breached a policy condition requiring Coast to notify Indemnity of lawsuits and to forward suit papers “as soon as practicable.”  Thus, electing not to represent Coast in its effort to set the judgment aside, Indemnity wrote a letter to Coast denying coverage and disclaiming any obligation to pay Caylao. The trial court nevertheless held that Indemnity was not relieved of its obligation to pay Caylao, reasoning that Indemnity failed to demonstrate that it exercised due diligence and good faith in trying to bring about the insured’s cooperation once the insured notified it of the claim. The trial court entered a judgment in favor of Caylao and Indemnity appealed.

The Florida Court of Appeals remanded for a determination as to whether Indemnity was prejudiced by the late notice provided by Coast.  The court held that Indemnity’s duty to defend extended to moving to set aside Caylao’s judgment against Coast in the garnishment proceeding, if such a motion was feasible and grounds to set aside the default existed.   As the trial court took no evidence on the question, the Court reversed and remanded the matter to the trial court for an evidentiary hearing as to whether Indemnity demonstrated prejudice as a result of the breach of the notice condition.

NY Court Applies Old Late Notice Rule to A Post-January 17, 2009 Policy

In its recent decision in Indian Harbor Ins. Co. v. The City of San Diego, 2013 U.S. Dist. LEXIS 137873 (S.D.N.Y. Sept. 25, 2013), the United States District Court for the Southern District of New York had occasion to consider whether New York’s “notice prejudice” rule set forth in New York Insurance Law §3420(a) applies to a policy not “issued or delivered” in New York, but which is otherwise governed by New York law.

For decades, the law in New York had been that timely notice of occurrence or suit was a condition precedent to an insured’s right to coverage under an insurance policy.  As such, New York courts long recognized that an insured’s failure to provide prompt notice of a triggering event (i.e., occurrence, suit, claim, etc.) operated as a forfeiture of the insured's right to coverage, regardless of whether the insurer was prejudiced as a result.  See, Great Canal Realty Corp. v. Seneca Ins. Co., Inc., 800 N.Y.S.2d 521(N.Y. 2005); Security Mut. Ins. Co. v. Acker-Fitzsimons Corp., 340 N.Y.S.2d 902 (N.Y. 1973).

This law changed, in part, with the New York Legislature’s implementation of amendments to New York Insurance Law §3420(a) that went into effect on January 17, 2009.  This revised rule states, in pertinent part, that:

(a)  No policy or contract insuring against liability for injury to person, except as provided in subsection (g) of this section, or against liability for injury to, or destruction of, property shall be issued or delivered in this state, unless it contains in substance the following provisions…

                       

                                    *     *     *

(5) A provision that failure to give any notice required to be given by such policy within the time prescribed therein shall not invalidate any claim made by the insured, injured person or any other claimant, unless the failure to provide timely notice has prejudiced the insurer … (Emphasis supplied.)

Thus, for policies “issued or delivered” in New York on or after January 17, 2009, a disclaimer of coverage based on late notice will only be upheld when the insurer has been prejudiced.  New York courts, however, continue to apply the “no prejudice” rule to policies issued or delivered prior to this date.   See, Charter Oak Fire Ins. Co. v. Fleet Bldg. Maint., Inc., 707 F. Supp. 2d 329, (E.D.N.Y. 2009); Rockland Exposition, Inc. v. Great Am. Assur. Co., 2010 U.S. Dist. LEXIS 103267 (S.D.N.Y. Sept. 29, 2010).

The recent decision in City of San Diego addresses whether the prejudice rule established in §3420(a) applies to policies issued after January 17, 2009, that are governed by New York law, but not actually issued or delivered within the state.  The policy before the court was a pollution liability policy issued by Indian Harbor (on XL Specialty paper) to the California State Association of Counties.  The policy was a claims made and reported policy in effect for the three year period from July 1, 2009 to July 1, 2012, but nevertheless required the insured to give Indian Harbor notice of claims “as soon as practicable.”  Notably, while the policy was issued to a California insured to provide pollution liability coverage for California entities, the policy contained a New York choice of law and a New York forum selection provision.

The City of San Diego – an insured under the policy – sought coverage for three underlying pollution claims, each of which was first made and ultimately reported to Indian Harbor while the policy was in effect.  In each instance, however, the City’s notice to Indian Harbor was significantly delayed.  For one claim, the City waited some thirty-one months to give first notice.  For another, the City waited more than twelve months.  For the third claim, the City waited almost two months before giving notice. Indian Harbor denied coverage to the City for each of the claims on the basis of late notice.

In a subsequent declaratory judgment action, Indian Harbor argued that it had no coverage obligation with respect to the underlying claims as a result of the City’s failure to have provided timely notice of same.  In support of this, Indian Harbor cited to the long line of New York cases standing for the proposition that even small delays in giving notice to an insurer – even as little as twenty-one days – can result in a forfeiture of coverage, regardless of prejudice.  The court agreed that in each instance, the City’s first notice to Indian Harbor was not given as soon as practicable under this line of cases, and that in each instance, the City failed to offer a reasonable explanation that would excuse its delay.  Among other things, the City argued that its delays should be excused since in each case, it still complied with the requirement that the claim be reported during the policy period.  The court rejected this argument, explaining that the policy’s notice provision enables the insurer to commence a timely investigation, which serves a different purpose than the claims reported provision, which provides certainty to the insurer as to when it is "off the risk."  The court further explained that the City’s argument, taken to its logical extreme, would improperly “read out the requirement that notice be given as soon as practicable and require only that notice be provided during the policy period.”

More notably, the City asserted that the policy should not be governed by the “no prejudice” line of New York cases because the policy was issued after January 17, 2009, i.e., when the changes to §3420(a) went into effect.  In support of this position, the City argued the policy was either expressly governed §3420(a) in light of the policy’s New York choice of law provision, or in the alternative, the changes to §3420(a) signified a shift in New York common law that now requires a showing of prejudice even in instances where the statute does not apply.  The court rejected both arguments. 

In terms of whether the statute governed the policy, the court noted that by its express terms, §3420(a) only applies to policies “issued or delivered” in New York.  The court found that the policy was delivered in California, and that it was not issued in New York but instead was issued in Exton, Pennsylvania, which is where the policy was prepared and signed by Indian Harbor.   Thus, while the court agreed that the policy was governed by New York law as a result of its express choice of law provision, it nevertheless concluded that the policy was not governed by §3420(a) since the policy was neither issued nor delivered in the state. 

The court further rejected the City’s argument that §3420(a) “creates a new public policy for New York that changes the historic no-prejudice rule.”  The court observed that numerous New York courts have continued to apply the “no prejudice” rule to policies issued prior to January 17, 2009, and that if New York public policy truly had changed, then these courts would be reaching a different result.  The court also noted that in the Second Circuit decision in Marino v. New York Tel. Co., 944 F.2d 109 (2d Cir. 1991), the court declined to apply a different aspect of §3420 to a policy issued and delivered outside the state, but which was nevertheless governed by New York law.  From this holding, the court concluded that “Section 3420(a)(5) applies to policies issued or delivered in New York and has not changed the common law of New York.”  In other words, the “no prejudice” common law rule continues to apply to policies governed by New York law that are not otherwise subject to §3420(a).

In passing, the court rejected the City’s argument that the New York choice of law provision was unconstitutional.  The City offered no meaningful case law support for this contention, nor could it otherwise demonstrate that the provision was the result of fraud or overreaching.  Instead, explained the court, the parties freely contracted to include the provision, and Indian Harbor had sufficient contacts in New York (including the office of its CEO-chairman, general counsel and numerous corporate directors).  As such, the court agreed that “there is nothing unfair about enforcing the parties’ choice-of-law clause.”

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.

5th Circuit Holds Late Notice Bars Coverage Under Buy-Back Pollution Coverage

In its recent decision in Starr Indemnity & Liability Co. v. SGS Petroleum Service Corp., 2013 U.S. App. LEXIS 12425 (5th Cir. 2013), the United States Court of Appeals for the Fifth Circuit, applying Texas law, had occasion to consider the effect of an insured’s failure to give notice of a pollution incident within the time specified in a supplementary pollution liability coverage endorsement.

Starr Indemnity issued an umbrella liability policy to SGS.  While the policy form originally contained an absolute pollution exclusion, the exclusion was deleted by endorsement and replaced by a limited pollution liability coverage “buy-back,” stating that the pollution exclusion would not apply to certain pollution events, assuming that certain conditions precedent were satisfied.  One such condition was that SGS was required to report the pollution incident to Starr, in writing, within thirty (30) days of it first becoming aware of the incident.  Following an accidental release of various chemicals, SGS sought coverage for cleanup costs from Starr.  SGS, however, failed to report the pollution incident to Starr within the thirty-day reporting period, but instead reported the release to Starr fifty-nine (59) days after it first learned of the release.  Starr sought a judicial declaration that it was not obligated to provide coverage to SGS for the incident as a result of SGS’ non-compliance with the reporting provision.

The lower court and the Fifth Circuit both agreed that the Fifth Circuit’s decision in Matador Petroleum Corp. v. St. Paul Surplus Lines Ins. Co., 174 F.3d 653 (5th Cir. 1999) was determinative of the issue.  There, the Fifth Circuit, in considering a similar pollution liability buy-back, held that an insured’s eight-day delay in complying with the reporting provision was fatal to the insured’s right to coverage, regardless of whether the insurer was prejudiced by the delay. The Fifth Circuit concluded that because the policy language in the Starr policy was similar to the policy in Matador, its prior holding was determinative and as such, SGS’ failure to have reported the pollution incident within the time allotted barred its right to coverage, whether or not SGS’ delay resulted in prejudice to Starr.

SGS nevertheless argued that since the 1999 decision in Matador, the Texas Supreme Court heightened the notice-prejudice rule in its holdings in PAJ, Inc. v. Hanover Ins. Co., 243 S.W.3d 630 (Tex. 2008) and Prodigy Communications Corp. v. Agricultural Excess & Surplus Ins. Co., 288 S.W.3d 374 (Tex. 2009).  The Fifth Circuit rejected this contention, noting that the decisions in PAJ and Prodigy were premised on the fact that the notice provisions in the policies at issue were not an essential part of the “bargained for exchange.”  By contrast, the thirty-day notice provision in the pollution buy-back was “a specific endorsement, separately negotiated by the parties, and with a clear notice requirement.”  Thus, while the Fifth Circuit agreed that under ordinary circumstances, an insurer is required to demonstrate prejudice in order to disclaim coverage based on late notice, the court agreed that the notice provision in the buy-back was to be treated differently than the standard notice provisions.   As such, concluded the court, the holding in Matador was not disturbed by PAJ and Prodigy decisions, and Matador, therefore, was determinative of SGS’ right to coverage.

Missouri Court Holds Prejudice Requirement Inapplicable to Claims Made Policy

In its recent decision in Secure Energy v. Phila. Indem. Ins. Co., 2013 U.S. Dist. LEXIS 69320 (E.D.Mo. May 15, 2013), the United States District Court for the Eastern District of Missouri had occasion to consider whether under Missouri law, an insurer need demonstrate prejudice in order to disclaim coverage based on an insured’s failure to report a claim within the time allotted under a claims made policy.

Philadelphia Indemnity insured Secure Energy under successive one-year claims made directors and officers policies during the period October 11, 2007 through October 11, 2012.  The policies contained the following reporting provisions:

In the event that a Claim is made against the Insured, the Insured shall, as a condition precedent to the obligations of the Underwriter under this Policy, give written notice to the Underwriter as soon as practicable after any of the directors, officers, governors, trustees, management committee members, or members of the Board of Members first become aware of such Claim, but, no later than 60 days after the expiration of this Policy, Extension Period, or Run-Off Policy, if applicable.

In December 2007, a claim was asserted against Secure Energy’s board of directors by an individual demanding payment of commissions he claimed he was owed.  Suit was filed in 2008 against one of Secure Energy’s directors, and it was later amended in 2009 to add Secure Energy as a direct defendant.  Secure Energy, however, did not provide notice of the suit to Philadelphia until late 2011.  It claimed that it did not do so earlier because it was unsure that the matter would qualify for coverage.   Philadelphia later denied coverage to Secure Energy, and its directors, based on the failure to report the suit in the time required by the applicable policy.

Secure Energy argued that while it did not strictly comply with the policies’ notice requirements, Missouri law required Philadelphia to demonstrate prejudice in order to disclaim coverage, citing to decisions such as the Missouri Supreme Court’s decision in Weaver v. State Farm Mut. Auto. Ins. Co., 936 S.W.2d 818 (Mo. 1997).  The district court noted, however, that in Wittner, Poger, Rosenblum, & Spewak, P.C. v. Bar Plan Mut. Ins. Co., 969 S.W.2d 749 (Mo. 1998), the Missouri Supreme Court held that the prejudice requirement articulated in Weaver did not extend to claims made policies, but instead was limited to occurrence-based policies.   Observing that several lower state courts and Missouri federal courts recognized the distinction stated in Wittner, the court agreed that Philadelphia need not demonstrate that it was prejudiced as a result of Secure Energy’s failure to have provided notice of the claim in the time required by the applicable policy.

Nevada Supreme Court Addresses Late Notice

In Las Vegas Metropolitan Police Dep’t. v. Coregis Ins. Co., 2011 Nev. LEXIS 52 (Aug. 4, 2011), the Supreme Court of Nevada addressed whether an insurer must be prejudiced in order to disclaim coverage based on late notice, and if so, which party has the burden of demonstrating prejudice or the lack thereof.

The insured, Las Vegas Metropolitan Police Department, was named as a defendant in an underlying civil rights lawsuit.  The Department did not give notice to Coregis of its potential liability until ten years after the incident giving rise to the litigation.  Coregis denied coverage for the matter on the basis of the insured’s late notice.  In subsequent coverage litigation, the lower court granted summary judgment in favor of Coregis, concluding that the Department’s notice was late and that Coregis was prejudiced as a result.

On appeal, the Supreme Court of Nevada initially concluded that there was a genuine issue of material fact as to whether the Department’s notice was late, since there was a question as to which of the policy’s notice requirements applied.  More significantly, the court addressed which standard should apply for late notice disputes under Nevada law.  Citing to what it considered the “majority rule,” the court held that an insurer must be prejudiced in order to deny coverage based on late notice and that it is the insurer’s burden to demonstrate prejudice.  Prejudice, explained the court, exists “where the delay materially impairs an insurer’s ability to contest its liability to an insured or the liability of the insured to a third party.”  The court further noted that prejudice is necessarily an issue of fact.