Fund for Animals, Inc. v. National Union Fire Insurance

⁶⁴⁷ DEBORAH S. EYLER, J. In Maryland, an insurer on a liability insurance policy may disclaim coverage on the ground that the insured breached the policy by giving late notice of a claim “only if the insurer establishes by a preponderance of the evidence that the ... [late] notice has resulted in actual prejudice to the insurer.” Md.Code (1997, 2011 Repl.Vol.), § 19-110 of the Insurance Article (“Ins.”). In this case, we hold that when an insured gives late notice and during the period of delay in notification the insured’s defense becomes impaired, to the actual prejudice of the insurer, the insurer may disclaim coverage only if there is a causal link between the late notice and the prejudice. The Fund for Animals, Inc. (“the FFA”), the appellant, was an insured on a liability policy issued by National Union Fire Insurance Company of Pittsburgh, Pa. (“National Union”), the appellee.

National Union disclaimed coverage on a claim against the FFA on the ground that the FFA gave it late notice. In the Circuit Court for Montgomery County, the FFA sued National Union for breach of the insurance policy. At the close of all the evidence in a jury trial, the circuit court granted National Union’s motion for judgment, ruling that the evidence established as a matter of law that the FFA’s late notice of the claim had caused actual prejudice to National Union, and therefore it properly disclaimed coverage. We shall reverse the judgment and remand the case for further proceedings not inconsistent with this opinion.

FACTS AND PROCEEDINGS The FFA, a national non-profit organization headquartered in Gaithersburg, is dedicated to the protection of animals. Since 2005, it has been an affiliate of the Humane Society of the United States (“HSUS”). It operates animal sanctuaries and wildlife centers around the country and engages in lobbying and advocacy, including litigation, to advance its goals. National Union issued a “Not-For-Profit Individual and Organization Insurance Policy” to HSUS that was in effect ⁶⁴⁸ between January 1, 2007, and June 8, 2008 (“the 2007 Policy”).

The FFA is an “Additional Insured” on the policy. As relevant, Coverage C provides: This policy shall pay on behalf of the Organization [here, the FFA] Loss arising from a Claim first made against the Organization during the Policy Period ... and reported to the Insurer pursuant to the terms of this policy for any actual or alleged Wrongful Act of the Organization. The Insurer shall, in accordance with and subject to Clause 8, advance Defense Costs of such Claim prior to its final disposition. This language establishes that the 2007 Policy is a claims-made-and-reported-policy, which means that it will cover a claim (otherwise covered by the policy) made against the insured and reported to the insurer during the policy period.

The relevant policy language defines a “Claim” to mean “a written demand for monetary relief’ or “a civil ... proceeding for monetary ... relief which is commenced by ... service of a complaint or similar pleading.” ¶ 2.(b)(1) & (2). The “Notice/Claim Reporting Provisions” section of the policy states that “the Insureds shall, as a condition precedent to the obligations of the Insurer under this policy, give written notice to the Insurer of any Claim made against an Insured as soon as practicable [or at] anytime during the Policy Year.” ¶ 7.(a). “A Claim shall be considered to have been first made against an Insured when written notice of such Claim is received by any insured.... ” ¶ 7. In the 2007 Policy, National Union assumes a duty to pay defense costs for any covered claim, but does not assume a duty to defend unless the insured tenders a Claim to it within thirty days of the claim being made. ¶¶ 1 & 8. Even if a claim is not tendered, National Union maintains the right to “effectively associate with the Insureds in the defense of any Claim that appears reasonably likely to involve [National Union], including but not limited to negotiating a settlement.” ¶ 8.

Three lawsuits are in play in this coverage dispute: the Endangered Species Act case (“ESA Case”); the Racketeer Influenced and Corrupt Organizations Act case (“RICO ⁶⁴⁹ Case”); and the “Coverage Case.” The FFA was a plaintiff in the ESA Case. It, other organizational plaintiffs, and one individual plaintiff 1 sued Feld Entertainment, Inc. (“Feld”), the owner of Ringling Brothers and Barnum & Bailey Circus (“Ringling Brothers”), and Ringling Brothers. 2 While the ESA Case was pending, Feld brought the RICO Case against the FFA and the other organizational plaintiffs in the ESA Case, alleging that they were bribing the individual plaintiff to testify falsely and were committing other criminal acts in prosecuting the ESA Case, for the purpose of establishing standing to sue. In the RICO Case, Feld sought to recover as damages the attorneys’ fees and costs it was incurring in defending the ESA Case. It is undisputed that the FFA did not give National Union notice of the RICO Case for more than two years after it was filed.

By then, the court in the ESA Case had granted judgment in favor of Feld, on the ground that the ESA plaintiffs lacked standing. That ruling was based on numerous detailed factual findings, including that the FFA and the organizational plaintiffs had paid the individual plaintiff for testimony that was false. National Union denied coverage to the FFA based on late notice. In the Coverage Case brought against it by the FFA, National Union took the position that it suffered actual prejudice due to the late notice because, as a defendant in the RICO Case, the FFA would be precluded from contesting many of the essential facts found by the court in the ESA Case, and those facts undermined any defense the FFA would have. 1.

The ESA Case In 2000, in the United States District Court for the District of Columbia, the FFA, the American Society for the Preven ⁶⁵⁰ tion of Animal Cruelty (“ASPCA”), the Animal Welfare Institute (“AWI”), and Thomas Rider sued Feld for declaratory and injunctive relief, upon allegations that Ringling Brothers’ mistreatment of Asian elephants in its circus violated the Endangered Species Act, 16 U.S.C. § 1531 et seq. The ESA Case was brought under the citizen-suit provision of the ESA, which eliminates judicially imposed limits on the exercise of federal jurisdiction, known as “prudential standing.” See Bennett v. Spear, 520 U.S. 154, 164 , 117 S.Ct. 1154 , 137 L.Ed.2d 281 (1997). There still must be standing under the “case or controversy” provision of Article III of the United States Constitution, however. Id.

Thus, at least one plaintiff must show that he or she (1) ... suffered an “injury in fact” — an invasion of a judicially cognizable interest which is (a) concrete and particularized and (b) actual or imminent, not conjectural or hypothetical; (2) that there [is] a causal connection between the injury and the conduct complained of — the injury must be fairly traceable to the challenged action of the defendant, and not the result of the independent action of some third party not before the court; and (3) that it [is] likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision. Id. (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-561 , 112 S.Ct. 2130 , 119 L.Ed.2d 351 (1992)). In the operative complaint in the ESA Case, Rider alleged that he had worked for Ringling Brothers for two years as a barn man, cleaning up after the elephants; that, during that time, he had grown emotionally attached to some of the elephants, who he called “his girls”; that he had witnessed their mistreatment with bull hooks at the hands of other Ringling Brothers’ employees; and that he wished to “visit” the elephants again and “enjoy observing them,” but he could not do so because he feared he would witness their scars and behavioral tics, which are manifestations of abuse, and would experience emotional distress. ⁶⁵¹ The ESA Case was assigned to Judge Emmet G. Sullivan.

In 2001, Judge Sullivan granted a motion to dismiss for lack of Article III standing. In particular, Judge Sullivan ruled that the facts alleged in the operative complaint were legally insufficient to support a finding that Rider had suffered a cognizable and redressable injury; and, with the exception of one organizational plaintiff (not the FFA), the organizational plaintiffs only could demonstrate standing through Rider. The FFA, the other organizational plaintiffs, and Rider appealed, and on February 4, 2003, the United States Court of Appeals for the District of Columbia reversed. ASPCA v. Ringling Bros. and Barnum & Bailey Circus, 317 F.3d 334 (D.C.Cir.2003).

The court held that the operative complaint alleged facts sufficient to show that, because of Rider’s personal, emotional attachment to the elephants, the alleged ESA violations had caused him to suffer a cognizable injury that differed in kind from any injury experienced by members of the public at large and that amounted to more than a generalized interest in the enforcement of the law; and Rider’s injury was redressable because, were Ringling Brothers to be enjoined from using the elephant training techniques the organizational plaintiffs were alleging to be abusive, Rider could visit the elephants he once tended to without suffering emotionally, or fearing that he would. On remand to the district court, the FFA and the other plaintiffs filed a new lawsuit making the same allegations against Feld and Ringling Brothers and dismissed their original action without prejudice. 3 (We continue to refer to this litigation as the ESA Case.) The Animal Protection Institute (“API”) later joined as a plaintiff. In February of 2007, Feld filed a motion for leave to amend its answer and to file a counterclaim against the ESA plaintiffs based on violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1961 et seq., and the Virginia Conspiracy Act, Va.Code Ann. § 18.2-499. Judge ⁶⁵² Sullivan denied the motion on the ground that it was filed for dilatory purposes and would prejudice the plaintiffs.

ASPCA v. Ringling Bros. and Barnum & Bailey Circus, 244 F.R.D. 49, 52 (D.D.C.2007). As we shall discuss, a few months later, on August 28, 2007, Feld filed the RICO Case as a separate action against the FFA and the other ESA organizational plaintiffs. After protracted discovery, the ESA Case was tried non-jury for six weeks in February and March of 2009. Rider testified about the mistreatment of the elephants and the emotional trauma he suffered as a consequence.

In December of 2009, the court issued a lengthy memorandum opinion and order and entered judgment in favor of Feld. The court concluded that neither Rider nor any of the organizational plaintiffs had established Article III standing. Am. Society for the Prevention of Cruelty to Animals v. Feld Entertainment, Inc., 677 F.Supp.2d 55, 91, 97-98 (D.D.C.2009).

The court made 85 findings of fact relative to standing. It rejected Rider’s testimony in its entirety, concluding that he was “essentially a paid plaintiff and fact witness who is not credible.” Id. at 67 . The following are among the findings pertinent to the court’s standing decision. From March of 2000 forward, Rider’s sole source of income was money paid to him by the organizational plaintiffs, including the FFA, and by animal rights organizations sympathetic to them.

These payments were made directly to him by Meyer, Glitzenstein & Crystal (“MGC”), the law firm representing the plaintiffs in the ESA Case, and indirectly to him by “grants” from the Wildlife Advocacy Project (“WAP”), a non-profit organization run by two of the named partners in MGC. The FFA paid Rider $4,400 through MGC and $1,000 directly; and, in addition, the FFA and HSUS together paid Rider $11,500 through WAP. Although these payments supposedly were compensation for media outreach by Rider in connection with the litigation, in reality, they were used to cover Rider’s basic living expenses. Moreover, the “primary purpose” of the payments was “to ⁶⁵³ keep[ ] Rider involved with the litigation[ ] because he [was] the only plaintiff who allege[d] a personal and emotional attachment to the elephants and an aesthetic injury based on the alleged mistreatment he claims to have witnessed.” Id. at 79 .

The FFA and the other organizational plaintiffs had to have known that the payments were improper; and they were “less than forthcoming about the extent of the payments” made to Rider, even when specifically asked about those payments in discovery. Id. at 82 . Having found that none of the plaintiffs in the ESA Case had standing, the court ruled that it lacked jurisdiction and declined to reach the merits of whether Feld had violated the ESA in its treatment of the Asian elephants. On appeal from the judgment entered in favor of Feld, the D.C. Circuit affirmed, holding, as relevant here, that the district court’s findings that Rider did not have a personal attachment to the elephants he handled during his employment with Feld were not clearly erroneous and that the district court correctly ruled that, absent such a personal attachment, Rider did not suffer an emotional injury sufficient to give rise to Article III standing.

See Am. Society for Prevention of Cruelty to Animals v. Feld, 659 F.3d 13 (D.C.Cir.2011). 4 On April 10, 2012, Feld filed a motion for prevailing party attorneys’ fees, under a fee-shifting provision of the ESA. See 16 U.S.C. § 1540 (g)(4). On March 29, 2013, Judge Sullivan granted the motion, finding that the ESA Case was meritless, frivolous, and vexatious.

He directed the parties to submit recommendations for further proceedings to determine the amount of attorneys’ fees Feld had incurred. ⁶⁵⁴ 2. The RICO Case As noted, on August 28, 2007, Feld filed the RICO Case, naming the organizational plaintiffs in the ESA Case as defendants. Like the ESA Case, the RICO Case was brought in the United States District Court for the District of Columbia and was assigned to Judge Sullivan. The FFA was served with the complaint on September 6, 2007.

Feld alleged that the ESA organizational plaintiffs had engaged, and were continuing to engage, in illegal conduct in their prosecution of the ESA Case, including by paying Rider over $100,000 to testify, falsely, that he had suffered an emotional injury as a result of the alleged mistreatment of the Asian elephants and by attempting to conceal those payments from Feld. Feld claimed that these acts constituted bribery under state and federal law, illegal witness payments, obstruction of justice, and mail and wire fraud, which were violations of RICO; a conspiracy to violate RICO; and violations of the Virginia Conspiracy Act. It sought to recover as damages its “ongoing” attorneys’ fees and costs in defending the ESA Case. The FFA did not give National Union notice (in writing or otherwise) of the RICO Case when it was served with the complaint, or any time during the policy period for the July 2007 Policy, i.e., before June 8, 2008. 5 Almost immediately upon being served, the defendants in the RICO Case, including the FFA, moved for a stay, which Feld opposed.

By order of November 7, 2007, Judge Sullivan granted the motion and the RICO Case was stayed pending the resolution of the ESA Case. In entering the stay, Judge Sullivan noted that the RICO Case was predicated upon the ESA Case and that the damages Feld was seeking to recover ⁶⁵⁵ in the RICO Case were the attorneys’ fees and costs it had incurred and was continuing to incur in the ESA Case. On January 15, 2010, about a month after entering judgment in favor of Feld in the ESA Case, Judge Sullivan lifted the stay in the RICO Case. On February 16, 2010, Feld filed an amended complaint in the RICO Case, adding HSUS, two HSUS employees, MGC, and six lawyers employed by MGC as defendants, and also adding common law claims for abuse of process, malicious prosecution, maintenance, and champerty.

Feld’s core allegation was that the ESA organizational plaintiffs and their attorneys had conspired to bribe Rider to lie about his attachment to the elephants in order to give the ESA organizational plaintiffs standing to pursue, by litigation, their campaign to bring a halt to Ringling Brothers’ use of Asian elephants in its circuses. On March 1, 2010, Roger Kindler, general counsel for HSUS and its affiliates, including the FFA, gave its insurance broker, BB & T Insurance Services, Inc. (“BB & T”), written notice of Feld’s amended complaint in the RICO Case. In his letter, Kindler stated that HSUS and its affiliates were demanding coverage under the National Union Policy for the 2010 term year (“the 2010 Policy”), which was substantially the same as the 2007 Policy. (The FFA was an “Additional Insured” on the 2010 Policy as well).

BB & T forwarded a copy of the amended complaint to National Union. In response, a claims adjuster for Chartis, National Union’s claims administrator, requested a copy of the original complaint in the RICO Case. By letter dated May 10, 2010, Kindler forwarded a copy of the original complaint to Chartis. He noted that the RICO Case had been “promptly stayed by the [district] court pending the outcome of the [ESA Case].” He further advised that the district court had scheduled mediation “of both these cases” for June 8 and June 24, 2010.

By letter of May 26, 2010, Chartis, on behalf of National Union, informed HSUS and the FFA that National Union was disclaiming coverage for both of them in the RICO Case under the 2010 Policy and under the 2007 Policy because the claim ⁶⁵⁶ was made against the FFA in 2007, and notice of the claim was not given during the 2007 Policy term. The letter included a general reservation of rights. On June 16, 2010, Kindler e-mailed Chartis to contest its coverage decision. He again advised that there was “ongoing, formal mediation in the District of Columbia involving all parties[ ] that ha[d] the potential of resolving the nest of claims between Feld ... and the charities and individuals named in the Amended RICO Complaint.” He went on to state that “[i]f the mediation fails, the parties and then-insurance carriers are looking forward to, it is safe to say, years of intense litigation and the associated costs.” Neither National Union nor Chartis responded to that email.

Indeed, from the time coverage was disclaimed, neither one had any involvement whatsoever in the RICO Case. The FFA hired counsel, participated in mediation, moved to dismiss the amended complaint, pursued (unsuccessfully) an interlocutory appeal from the denial of that motion, and engaged in discovery for over six months. 6 As discussed, in March of 2013, Judge Sullivan granted Feld’s motion for prevailing party attorneys’ fees in the ESA Case and directed the parties to submit recommendations for further proceedings to determine the amount of the fees incurred by Feld. Almost a year later, in February of 2014, the FFA, the other defendants in the RICO Case, and Feld engaged in settlement negotiations. In May of 2014, a settlement was reached in the RICO Case in which Feld would be paid $15.75 million in exchange for dismissing, with prejudice, that case and the pending attorneys’ fees claim in the ESA Case.

Under the terms of the settlement agreement, the FFA and HSUS were responsible for $10,675 million of the $15.75 ⁶⁵⁷ million settlement amount. After accounting for other insurance, HSUS’s share, and a claw back provision in an agreement with another insurer, the FFA’s share of the settlement payment was $2,536 million. 3. The Coverage Case. In the meantime, on September 6, 2012, while the RICO Case was pending and before Judge Sullivan ruled on Feld’s motion for prevailing party attorneys’ fees in the ESA Case, the FFA filed the Coverage Case against National Union (from which this appeal stems), in the Circuit Court for Montgomery County.

It alleged that National Union breached the 2007 Policy by disclaiming coverage in the RICO Case based on late notice. 7 Initially, National Union took the position that Virginia law applied, under which the late notice alone was sufficient to support its disclaimer of coverage. It moved for summary judgment on that ground. On December 1, 2014, the court denied National Union’s motion, ruling that Maryland law, not Virginia law, applied, and under Ins. section 19-110, to effectively disclaim coverage based on the FFA’s late notice of the RICO Case, National Union had to prove, by a preponderance of the evidence, that it had suffered actual prejudice due to the late notice. 8 The court further ruled that, because National Union did not present any evidence in support of its motion to show that, “had [it] been given earlier notice, it would have joined the ESA trial team and changed the result of that case,” there was a genuine dispute of material fact on the issue of actual prejudice. 9 ⁶⁵⁸ From January 12 through 15, 2015, the Coverage Case was tried before a jury. The FFA called four witnesses: Michael Markarian, its president; George Wade, the CFO of HSUS; Kindler; and Roger Zuckerman, a partner at the Zuckerman Spaeder law firm.

Markarian testified that the FFA did not give National Union notice of the RICO Case in 2007, when it was filed, because it viewed the case as an “intimidation tactic,” not as a “serious threat,” and because the case was stayed almost immediately after it was filed. Kindler testified concerning the notice to National Union, through Chartis, and his email to Chartis after it issued its declination of coverage letter. He stated that he had discussions with Markarian and MGC in 2007, when the RICO Case first was filed, and it had been the “consensus” view at that time that Feld had filed the case merely as a “litigation tactic” in its defense of the ESA Case, not as a “substantive suit.” Zuckerman recounted the strategic decisions made by lawyers with his firm in defending the FFA in the RICO Case and in settling the case. He opined that the FFA had a reasonable chance of prevailing in a trial in the RICO Case, but the potential damages in the event of a defeat were too enormous to justify the risk of going to trial.

In his view, “the ESA [C]ase ... had virtually no impact on the settlement decision in the RICO case.” He testified that the FFA was seeking to recover its $2,536 million share of the settlement payment and the costs of defense it had incurred. Zuckerman further testified that he and other lawyers at his firm devoted a significant amount of time to researching the issue of collateral estoppel and ultimately concluded that the doctrine would not operate to preclude the FFA from litigating “from scratch” the facts decided against it in the ESA Case. At the close of the FFA’s case, National Union moved for judgment, arguing that the evidence adduced by the FFA proved that it (National Union) had suffered actual prejudice ⁶⁵⁹ as a matter of law and also that the FFA had failed to prove its damages with reasonable certainty. The court reserved on the motion.

National Union called Maureen Conboy as its sole witness. At the time of trial she was an assistant vice president with AIG Claims, Inc., formerly Chartis, a position she had occupied for two years. In that capacity, she supervised litigation. Before then, she had worked in the claims unit, adjusting claims on behalf of insureds, primarily under directors and officers liability policies.

If a claim were deemed to be covered, she would supervise and assist the insured in defending it by hiring panel counsel and paying defense costs, managing the litigation, and attending mediation. On direct examination, Conboy testified that because National Union was given late notice of the RICO Case it was deprived of an opportunity to participate in the decision to stay the [RICO Case,] ... monitor the ESA [Case] and to try to settle the stayed [RICO Case] before Judge Sullivan made his findings in December of 2009 and before Feld incurred another 11 million or so dollars in fees in the ESA [Case] during that period when we d[idn’t] know anything about this. She stated that, had notice been timely given, panel counsel assigned by National Union to represent the FFA as a defendant in the RICO Case could have collaborated with the lawyers representing the FFA as a plaintiff in the ESA Case. On cross-examination, when asked to elaborate, she acknowledged that National Union could not have appointed counsel to represent the FFA in the ESA Case.

It could have had panel counsel enter an appearance in the RICO Case and would have “monitored” the ESA Case. At