St. Paul Fire and Marine Ins. Co. v. House

ALPERT, Judge. A dispute over insurance coverage for a medical malpractice claim spawned this appeal, raising a question of first impression in the State of Maryland. The issue is whether article 48A, § 482 of the Annotated Code of Maryland, that requires an insurer to prove “actual prejudice” in order to disclaim coverage because of the insured’s failure to give notice, applies to professional liability insurance written in the form of a “claims made” or “discovery” policy. We hold that it does.

Homer C. House, M.D. (appellee herein), an orthopedic surgeon, performed arthroscopic surgery on Mrs. Shirley J. Platzer on October 29, 1985 and allegedly left “a foreign body” (a needle) in her knee. The needle was subsequently removed by Dr. House’s associate approximately one month later. In June and September, 1985, counsel for Mr. and Mrs. Platzer wrote to Dr. House, making a claim for damages and requesting that the matter be turned over to Dr. House’s insurance carrier.

The record indicates that Dr. House took no action in response to these communications. On November 15, 1985, the Platzers filed a claim with the Health Claims Arbitration Board and the parties agreed to a settlement on December 4, 1986. ¹²⁰ During the foregoing time, Dr. House was insured by St. Paul Fire & Marine Ins. Co. (appellant) under a “Physicians' Professional Liability Policy—Claims Made.” The policy was in effect from January 1, 1983 to January 1, 1986, with a retroactive date of January 1, 1977. Pertinent provisions of the policy provided: When you’re covered To be covered the professional service must have been performed (or should have been performed) after your retroactive date that applies.

The claim must also first be made while this agreement is in effect. When is a claim made? A claim is made on the date you first report an incident or injury to us or our agent. You must include the following information: —Date, time and place of the incident. —What happened and what professional service you performed. —Type of claim you anticipate. —Name and address of injured party. —Name and address of any witness.

The policy’s retroactive date was January 1, 1977. Thus, the policy covered Dr. House for claims made between January 1, 1983 and January 1, 1986 relating to services that were performed or should have been performed between January 1, 1977 through January 1, 1986. On February 12, 1986, Dr. House notified Swope-Offut, his insurance broker, of the Platzers’ suit. St. Paul learned of the claim indirectly shortly thereafter.

Coincidentally, Swope-Offut was an agent for both appellant St. Paul and for Medical Mutual Liability Insurance Society, Dr. House’s new insurer. 1 Both insurance companies denied coverage for the Platzer claim. ¹²¹ On July 1, 1986, Homer C. House, M.D. and Homer C. House, M.D., P.A., filed an action for declaratory judgment in the Circuit Court for Baltimore City seeking an order requiring St. Paul to insure him in the Platzer case then pending before the Health Claims Arbitration Board. Both Dr. House and St. Paul moved for summary judgment. The trial court, finding no genuine dispute as to any material fact, held § 482 of the Insurance Code controlling, granted judgment for Dr. House, and ordered St. Paul to defend Dr. House’s case before the Health Claims Arbitration Board. St. Paul filed this timely appeal.

Article 48A, § 482 of the Md.Code provides: Where any insurer seeks to disclaim coverage on any policy of liability insurance issued by it, on the ground that the insured or anyone claiming the benefits of the policy through the insured has breached the policy by failing to cooperate with the insurer or by not giving requisite notice to the insurer, such disclaimer shall be effective only if the insurer establishes, by a preponderance of affirmative evidence that such lack of cooperation or notice has resulted in actual prejudice to the insurer. Appellant argues that because of the basic differences between “claims made” and “occurrence” policies, § 482’s requirement that prejudice be shown is inapplicable to “claims made” policies. Section 482 was enacted to remedy the harsh result of Watson v. U.S.F. & G. Co., 231 Md. 266 , 189 A.2d 625 (1963), which held that the insurance company could disclaim coverage of an occurrence policy for late notice even if it was not prejudiced thereby. Appellant notes that in a “claims made” policy the “operative event” pertinent to the insurer’s liability is the date of notification to the insurer; in an “occurrence” policy, however, the operative event is the date of the allegedly negligent act.

Thus, according to appellant, a statutorily or judicially imposed extended notice period in a “claims made” policy ¹²² amounts to a rewriting of the contract negotiated by the parties and increases the coverage purchased by the insured. See Zuckerman v. National Union Fire Ins. Co., 100 N.J. 304 , 495 A.2d 395, 406 (N.J.1985). On the other hand, Dr. House, appellee, argues that the clear and unambiguous language of § 482 and the rules of statutory construction mandate application of the statute to the policy at bar.

Appellee also contends that Washington v. Federal Kemper Insurance Co., 60 Md.App. 288 , 482 A.2d 503 (1984), cert. den., 302 Md. 289 , 487 A.2d 292 (1985), and Medical Mutual Liability Insurance Society of Maryland v. Miller, 52 Md.App. 602 , 451 A.2d 930 (1982), “reveal an inclination by the Maryland Court of Special Appeals to regard Section 482 as applicable to claims made policies.” Because this case presents an issue of first impression, an explication of “claims made” policies is both necessary and appropriate. CLAIMS MADE POLICIES “Claims made” or “discovery” insurance policies have gained popularity and wide use in the professional liability insurance field during the past 20 years. See J. Parker, “The Untimely Demise of the ‘Claims Made’ Insurance Form? A Critique of Stine v. Continental Casualty Company,” 1983 Det.C.L.Rev. 25, 28-29; Comment, “The ‘Claims Made’ Dilemma in Professional Liability Insurance,” 22 UCLA L.Rev. 925, 926 (1975).

Generally, “claims made” policies cover liability inducing events if and when a claim is made during the policy term, irrespective of when the events occurred. Parker, supra, at 27-28. “Occurrence” policies, on the other hand, “cover liability inducing events occurring during the policy term, irrespective of when an actual claim is presented.” Id. The United States Supreme Court explained the difference between the two types of policies succinctly: “An ‘occurrence’ policy protects the policyholder from liability for any act done while the policy is in effect, whereas a ¹²³ ‘claims made’ policy protects the holder only against claims made during the life of the policy.” St. Paul Fire & Marine Ins. Co. v. Barry, 438 U.S. 531, 535, fn. 3 , 98 S.Ct. 2923, 2926, fn. 3 , 57 L.Ed.2d 932 (1978).

Another commentator noted: The major distinction between the “occurrence” policy and the “claims made” policy constitutes the difference between the peril insured. In the “occurrence” policy, the peril insured is the “occurrence” itself. Once the “occurrence” takes place, coverage attaches even though the claim may not be made for some time thereafter. While in the “claims made” policy, it is the making of the claim which is the event and peril being insured and, subject to policy language, regardless of when the occurrence took place.

S. Kroll, “The Professional Liability Policy ‘Claims Made’,” 13 Forum 842, 843 (1978). The Court of Appeals of Maryland recently recognized the “claims made” policy in Mutual Fire, Marine & Inland Insurance Co. v. Vollmer, 306 Md. 243 , 508 A.2d 130 (1986). In response to a certified question from the United States District Court for the District of Maryland (see Md.Cts. of Jud.Proc.Code Ann. §§ 12-601 to -609 (1984 Repl.Vol.)), the court held that the “claims made” policy in question covered claims of malpractice allegedly committed after the retroactive date. The Court of Appeals contrasted the function of “claims made” policies with that of the more familiar “occurrence” policies: There is greater public familiarity with the “occurrence” type of policy than with the “claims made” type, largely because automobile insurance liability policies are “occurrence” policies, although other perils are covered in such policies as well.

Coverage in an “occurrence” policy is provided no matter when the claim is made, subject, of course, to contractual and statutory notice and limitations of actions provisions, providing the act complained of occurred during the policy period. Because the insurer’s ¹²⁴ liability in such policies ordinarily relates to a definite, easily identifiable and notorious event such as an automobile accident, a fire, a slip and fall injury, or a ship collision, the insurer is ordinarily able to conduct a prompt investigation of the incident and make an early assessment of related injuries and damages with the result that actuarial considerations permit relative certainty in estimating loss ratios, establishing reserves and fixing premium rates. “Claims made” or “discovery” policies, on the other hand, are of relatively recent origin and were developed primarily to deal with situations in which the error, omission, or negligent act is difficult to pinpoint and may have occurred over an extended period of time. In the case of a “claims made” policy written to cover professional liability, the error or omission may be a discrete act or failure to act, or it may consist of a lengthy process and remain latent and undiscoverable for a number of years. Examples include a physician’s misdiagnosis, an attorney’s fraudulent concealment, or an architect’s defective design.

From an underwriting perspective, occurrence policies are unrealistic for such risks because of the long or open “tail” exposure which results. When the “event” intended to be covered cannot easily be fixed and the liability for the consequent injury extends long into the future, often well after expiration of the policy, considerations of inflation, upward spiraling jury awards, and legislative and judicial adoption of newly developing concepts of tort law mean that actuarial factors, including fixing premium rates and establishing adequate reserves, are highly speculative. The result, logically, is the establishment of a premium rate schedule sufficiently high to accommodate “worst scenario” jury verdicts returned years after the error, omission, or negligent act. Vollmer, 306 Md. at 253-54 , 508 A.2d 13 (emphasis in original) (citing Stine v. Continental Casualty Co., 419 Mich. 89, 90-100 , 349 N.W.2d 127, 131-32 (1984)). ¹²⁵ Although the foregoing applies generally to “claims made” policies, the specific terms of the individual policies may vary.

As the Court of Appeals explained in Vollmer: A claims made professional liability policy may be written to cover all claims made within the policy period no matter when the act or omission giving rise to the liability claim is deemed to have occurred. See, e.g., the policy involved in Gereboff v. Home Indemnity Co., 119 R.I. 814 , 383 A.2d 1024 (1978). At the other end of the claims made spectrum is the type of policy involved in Stine v. Continental Casualty Co., supra, 419 Mich, at 94 , 349 N.W.2d at 129 , which provided that the act or omission on which a claim was made in the policy period also had to have occurred after the effective date of the first year of the policy so that, at least in that first year, the policy was not retroactive. Id. 306 Md. at 256 , 508 A.2d 13 .

As we noted, the policy involved in the case sub judice fell in between those two extremes. Although in effect only from January 1, 1983 to January 1, 1986, the policy had a retroactive date of January 1, 1977. Thus, if a claim was made during the policy period, St. Paul was liable for coverage for acts or omissions giving rise to the claim as far back as January 1977. Courts in other jurisdictions have addressed the question of whether prejudice must be shown before an insurer may deny coverage under an expired “claims made” policy.

None of the cases, however, involved application of a statute like Maryland’s § 482. Notwithstanding, the following cases support appellant’s theory that a requirement of proving prejudice is inapplicable to a “claims made” policy. In Gulf Insurance Co. v. Dolan, Fertig and Curtis, 433 So.2d 512 (Fla.1983), a professional liability insurance policy, like the St. Paul policy at bar, required “that the claim ¹²⁶ arise during the policy period 2 ; that the claim be known to or made against the insured during said period; and that the insured notify the insurer thereof during said period.” 3 Id. Dolan, a law firm, received notice of a malpractice claim from a former client on November 19, 1979, the final day of its policy with Gulf Insurance Co. It notified Gulf of the claim on February 12, 1980, after its new insurance carrier disclaimed liability.

Gulf denied liability because of lack of notice during the policy period. After in excess of $50,000 was awarded to Dolan’s former client, Dolan sought declaratory relief on whether Gulf or its new insurer or both were liable for the judgment. Ultimately, the following question was certified to the Supreme Court of Florida: “As a matter of policy may the court require that ‘claims made’ professional liability policies should [sic] be subjected to a reasonable additional period beyond the termination date of the policy for reporting claims that arise late in the contract term?”. Id. at 514 . 4 The court answered in the negative, id., explaining that in “claims made” policies notice to the insurer must be given “during the policy period itself.” Id. at 515 (emphasis in original).

The court stated: With claims-made policies, the very act of giving an extension of reporting time after the expiration of the policy period, as the district court proposes, negates the inherent difference between the two contract types. Coverage depends on the claim being made and reported to the insurer during the policy period. Claims-made or ¹²⁷ discovery policies are essentially reporting policies. If the claim is reported to the insurer during the policy period, then the carrier is legally obligated to pay; if the claim is not reported during the policy period, no liability attaches.

If a court were to allow an extension of reporting time after the end of the policy period, such is tantamount to an extension of coverage to the insured gratis, something for which the insurer has not bargained. This extension of coverage, by the court, so very different from a mere condition of the policy, in effect rewrites the contract between the two parties. This we cannot and will not do. Id. at 515-16 (emphasis in original, footnote omitted).

The court concluded by noting that Dolan had the option of extending the reporting period for a stated fee and specified time period. Dolan, however, rejected the extended coverage; therefore, Dolan “ ‘received what it paid for by the present policy, with premiums presumably reduced to reflect the limited coverage’____ Dolan cannot now be heard to complain.” Id. at 516 (citation omitted). In City of Harrisburg v. International Surplus Lines Insurance Co., 596 F.Supp. 954 (M.D.Pa.1984), the court considered whether Pennsylvania case law had established a prejudice requirement in “claims made” liability policies. The Supreme Court of Pennsylvania in Brakeman v. Potomac Insurance Co., 472 Pa. 66 , 371 A.2d 193 (1977), held that when “an insurance company seeks to be relieved of its obligations under a liability insurance policy on the ground of late notice, the insurance company will be required to prove that the notice provision was in fact breached and that the breach