Millstone v. ST. PAUL TRAVELERS

MEREDITH, J. In this appeal, we shall rule that the Circuit Court for Montgomery County erred in granting a motion for summary judgment in favor of the appellee, St. Paul Travelers (“Travelers”), on the basis of the statute of limitations in a case filed by the appellant, Robert Millstone As Trustee for the Montgomery Scrap Corporation Profit Sharing Plan (“the Plan”). The Plan filed suit against Travelers on January 23, 2006, alleging that Travelers had breached its obligation to pay a claim the Plan made by proof of loss submitted April 6, 2005, pursuant to a contract of insurance covering employee dishonesty. Because the Plan’s cause of action for breach of the insurance contract accrued, at the earliest, after the proof of loss was submitted, and suit was filed within three years of that date, the claim was not barred by the statute of limitations. Accordingly, we shall reverse the judgment of the circuit court and remand the case for further proceedings.

Factual And Procedural Background The facts that led to the litigation in this case are largely undisputed. The Plan is an employee benefit program for employees of Montgomery Scrap Corporation. As a qualified profit sharing plan, the Plan is required by law to maintain insurance coverage, in an amount equal to 10% of the assets in the plan, to protect against losses due to employee dishonesty. For the period beginning October 1, 1998, and continuing thereafter, Travelers issued a policy to the Plan insuring against employee dishonesty.

One of the employees for Montgomery Scrap Corporation was able to misappropriate over $30,000 of the Plan’s funds by ⁵⁰⁸ presenting checks labeled as “loans” to the Plan trustee, although the employee was not entitled to receive such loans and had no intention of repaying the loans. The Plan became aware of the employee’s scheme sometime in October of 2002. The employee was prosecuted, and she pled guilty to theft. The Plan delayed reporting the loss to Travelers until March of 2005, and did not file a proof of loss regarding the employee’s theft until April 6, 2005.

In a joint settlement/pretrial statement, the parties stipulated that the employee’s false representations made to obtain the funds “would constitute ‘employee dishonesty’ under the [Travelers] Policy if made by [the employee] with the manifest intent not to repay the loans.” Although the parties exchanged correspondence subsequent to the submission of the proof of loss, no payment was made by Travelers to the Plan, and on January 23, 2006, the Plan filed suit against Travelers alleging breach of the insurance contract. Travelers responded by denying liability generally and asserting affirmative defenses alleging, among other things, that the Plan’s claims were barred by the applicable statutes of limitations and by the Plan’s failure to comply with conditions precedent to coverage under the policy. Travelers eventually filed a motion for summary judgment asserting two principal arguments. First, Travelers argued that the claim had not been timely submitted because the policy includes language that imposes a duty upon the insured who discovers a loss to “[n]otify us [, ie.

Travelers,] as soon as possible,” and “[g]ive us a detailed, sworn proof of loss within 120 days.” Travelers argued that the Plan failed to meet these policy terms and was, therefore, barred from pursuing the claim. The motion court rejected this argument as a basis for summary judgment, and Travelers has not contested that ruling in this appeal. There were, in any event, factual disputes regarding the reason for the Plan’s delay in filing a claim. The Plan contended the delay was attributable to its inability until 2005 to confirm the existence of coverage.

The ⁵⁰⁹ Plan further argued that Travelers had suffered no prejudice as a consequence of the delay. The second argument advanced by Travelers in support of its motion for summary judgment was based upon a “Maryland Changes” endorsement to the policy that purported to limit the time for filing suit, and provided as follows: Legal Action Against Us: You may not bring any legal action against us involving loss: a. Unless you have complied with all the terms of this insurance; and a. Until 90 days after you have filed a proof of loss with us; and a.

Unless brought within 3 years from the date you discover the loss. Travelers argued that it was undisputed that the Plan discovered the loss sometime in October 2002, and therefore, under the provision of the policy endorsement requiring any legal action to be brought “within 3 years from the date you discover the loss,” the deadline for filing suit would have been October 2005. Depending on the exact date in October 2002 when the loss was discovered, the Plan’s suit was filed three to four months (more precisely, 84 days to 114 days) beyond the expiration of three years after discovery of the loss. In opposition to the motion for summary judgment, the Plan responded that Maryland law — specifically, Maryland Code (1995, 2003 Repl.Vol.), Insurance Article (“IA”), § 12-104— prohibits an insurer from imposing a time limit in a policy such as this that would reduce the time for filing suit to a shorter time than the amount of time the insured would otherwise have to file suit under the applicable statute of limitations.

According to the Plan, for a civil action alleging breach of an insurance contract, the action accrues on the date of the insurer’s breach, and the time limit for filing suit is three years from the date of the breach. See Maryland Code (1973, 2006 Repl.Vol.), Courts and Judicial Proceedings Article (“CJP”), § 5-101 (“A civil action at law shall be filed within three years from the date it accrues unless another provision ⁵¹⁰ of the Code provides a different period of time within which an action shall be commenced.”). Travelers countered that the endorsement providing that any action must be brought within three years after the discovery of the loss was not a limitations provision. According to Travelers, the provision was simply an agreement as to when an action against the insurer accrues, and because the provision permits an action against the insurer to be filed within three years thereafter, Travelers contends the policy provision does not run afoul of IA § 12-104, which provides: § 12-104.

Validity and effect of limitations periods. (a) A provision in an insurance contract or surety contract that sets a shorter time to bring an action under or on the insurance contract or surety contract than required by the law of the State when the insurance contract or surety contract is issued or delivered is against State public policy, illegal, and void. (b) If an insurance contract or surety contract contains a provision that is illegal under this section: (1) a State court may not give effect to the provision; and (2) a defense to liability under the insurance contract or surety contract may not be based upon the shorter limitation period. The motion court agreed with Travelers’s position that, under the terms of the policy, the Plan’s claim against the insurer for breach of contract accrued upon discovery of the loss.

Because the Plan did not file suit within three years after that date, the motion court ruled: “[T]he statute of limitations applies ... and [ ] the suit is barred.” For the reasons set forth below, we disagree. Legal Discussion The Plan’s claim that is the underlying basis for its suit against Travelers is for an ostensibly covered loss that occurred during a period there was a policy of insurance in effect. We say this without prejudice to any defenses Travel ⁵¹¹ ers may raise other than the statute of limitations defense that was the sole issue addressed by the motion court in granting the summary judgment. We express no opinion as to other defenses to the Plan’s claim.

But, for purposes of this appeal, there is no dispute regarding several basic facts. There is no dispute that Travelers provided insurance coverage to protect the Plan against losses due to employee dishonesty. There is no dispute that a dishonest employee misappropriated a substantial sum of the Plan’s funds during a time period when the Travelers policy was in effect. There is no dispute that the Plan discovered the employee’s dishonesty in October 2002.

There is no dispute that the employee pled guilty to theft in October 2003. There is no dispute that the Plan submitted a sworn proof of loss to Travelers on April 6, 2005. There is no dispute that Travelers paid nothing to the Plan to compensate it for any losses caused by the employee’s dishonesty. And there is no dispute that the Plan filed suit for breach of the insurance contract on January 23, 2006.

The sole basis for granting Travelers’s motion for summary judgment was the statute of limitations. We note that the general statute of limitations for a breach of contract action is three years from the date the cause of action accrues, as set forth in CJP § 5-101. In Lane v. Nationwide Mutual Insurance Co., 321 Md. 165 , 582 A.2d 501 (1990), which was a case involving a claim by an insured against its insurer for uninsured motorist benefits, the Court of Appeals rejected the insurer’s contention that limitations began to run as soon as the insured learned that the tortfeasers were uninsured. The Court held that the statute of limitations for breach of contract could not begin to run before the insured had made a claim against the insurer for the uninsured motorist benefits.

The Court stated, id. at 173 , 582 A.2d 501 : “As long as the insured does not demand compensation under his own insurance policy, the uninsured motorist carrier is not called upon to pay under the contract, and, therefore, there can be no breach of contract causing the statute of limitations to begin running.” ⁵¹² This is in accord with the general rule that a cause of action for breach of contract accrues upon the breach, as stated in 31 RICHARD A. LORD, WILLISTON ON CONTRACTS § 79:14 (4th ed.2004, updated through October 2008) (footnotes omitted): The general rule governing the commencement of the running of the statute of limitations is that the statutory period is computed from the time when the right of action that the plaintiff seeks to enforce first accrued; ordinarily, in an action based on a contract, accrual occurs as soon as there is a breach of contract, with some courts qualifying this by stating that accrual occurs when the promisee discovers or should have discovered the breach, and others stating that accrual occurs upon breach, whether or not the promisee is then aware of the breach. See Boyd v. Bowen,