ST. PAUL TRAVELERS v. Millstone

RODOWSKY, J. Maryland Code (1974, 2006 RepLVol.), § 5-101 of the Courts and Judicial Proceedings Article (CJ) provides: “Three-year limitation in general. “A civil action at law shall be filed within three years from the date it accrues unless another provision of the Code provides a different period of time within which an action shall be commenced.” Maryland Code (1975, 2003 RepLVol.), § 12-104 of the Insurance Article (IA) provides: “Validity and effect of limitations periods. ⁴²⁷ “(a) In general.—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) Effect.—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 principal issue in this case is whether IA § 12-104 permits an insurer contractually to provide that the time of accrual of a cause of action on the policy is earlier than the time of accrual under CJ § 5-101, so long as the period within which suit must be brought following the contractually defined time of accrual is at least three years. As we shall explain below, we hold that, under the contractual limitations period in the policy presented here, IA § 12-104 is violated. The facts relevant to the above-described issue are undisputed. Effective October 1, 1998, Travelers Casualty and Surety Company of America, referred to in this case as the Petitioner, St. Paul Travelers (Insurer or Travelers), issued a commercial crime policy (the Policy) to Montgomery Scrap Corporation Profit Sharing Plan (the Plan) providing coverage for loss to the Plan resulting directly from employee dishonesty occurring during the Policy period, subject to certain conditions, limitations, exclusions, and other terms of the insurance contract.

The Policy was renewed annually and was in force at the times of the losses involved in this case. Between April 1997 and June 2002, a Montgomery Scrap employee stole approximately $49,000 from the Plan. The Plan discovered this loss in October 2002. The employee was prosecuted, pleaded guilty to theft over $500, and made partial ⁴²⁸ restitution. 1 The Plan gave notice of the loss to Travelers in March 2005 and presented its proof of loss on April 6, 2005.

On January 23, 2006, this action was filed in the Circuit Court for Montgomery County. It was brought by the respondent, Robert Millstone, as Trustee of the Plan, inasmuch as he had reimbursed the Plan for its net loss. Travelers raised a number of defenses, which are not before us and on which we do not intimate any opinion. The sole issue before us is a statute of limitations defense on which the Circuit Court granted Travelers summary judgment.

The defense is based upon one of the General Conditions of the Policy. In the body of the Policy, the subject condition reads: “7. 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 “b.

Until 90 days after you have filed proof of loss with us; and “c. Unless brought within 2 years from the date you discover the loss.” By a Maryland Changes Endorsement (the Endorsement), the two years referred to in the above-quoted condition is enlarged to three years. The summary judgment in favor of Travelers was granted solely on the ground that more than three years had elapsed from the Plan’s discovery of the loss to its institution of this suit. Respondent appealed to the Court of Special Appeals, which reversed.

Robert Millstone as Trustee of Montgomery Scrap Corp. Profit Sharing Plan v. St. Paul Travelers, 183 Md.App. 505 , 962 A.2d 432 (2008). The Court first looked to the normal rules governing the statute of limitations in contract actions, saying: “Applying the normal rules that govern contract actions in Maryland, the statute of limitations for a breach of contract ⁴²⁹ action against the insurer could not have begun to run prior to the time Travelers was called upon to perform its obligations under the contract, and that date, at the very earliest, was April 6, 2005 [when the proof of loss was submitted]. Consequently, a suit filed on January 23, 2006, would have been well within the three year statute of limitations that is generally applicable to contract actions.” Id. at 512 , 962 A.2d at 437 . Addressing the Insurer’s principal argument that the Endorsement did not violate IA § 12-104 because it contractually established only a time of accrual of the cause of action, as distinguished from shortening the period of limitations, the Court reviewed certain decisions relied upon by Travelers.

The Court concluded: “In contrast to the accrual agreements in those cases, the provision in the Travelers policy makes no mention of accrual of actions. Although the Travelers provision does purport to set a three year limitation period beginning with the date of discovery of a loss, it does not establish the date upon which an insured may commence an action for an alleged breach of contract on the part of the insurer. The provision purports to establish a final date for bringing legal action but does not establish the point at which the insured may first file suit for any alleged breach of contract.” Id. at 515, 962 A.2d at 438 . Travelers applied to this Court for the writ of certiorari, which we granted.

St. Paul Travelers v. Millstone, 408 Md. 149 , 968 A.2d 1064 (2009). The petition presented five questions for review, but we need address only the first issue presented, namely: “1. Does the ... [Endorsement ... requiring that legal action against the insurer involving loss be brought within 3 years from the date the insured discovers the loss, violate Section 12-104 of the Insurance Article?” 2 Whether the Circuit Court properly granted summary judgment on this issue is a question of law. ⁴³⁰ Petitioner’s argument in this Court rests on distinguishing between the contractual accrual of an action and the statutory-period of limitations. The submission is that the Endorsement fixes by contract the time of accrual of an action on the Policy, and that such a contract does not violate IA § 12-104, even if the contractual point in time of accrual is earlier than that operative under the statute of limitations.

Under the Insurer’s argument, IA § 12-104 is not at all concerned with the time of accrual, but only with the length of the period of time provided by a contractual limitations provision. Because the Endorsement provides a three-year period, the Insurer concludes that there is no violation of IA § 12-104. The Court of Special Appeals’ response to this argument denied that the Endorsement even addressed accrual or, at least, denied the effectiveness of the language of the Endorsement to achieve a change in the time of accrual from the time of accrual normally utilized when applying the statute of limitations. Under the normal rule, a cause of action would ⁴³¹ not arise until the insurer breached the contract by erroneously denying the claim in whole or in part, or by withholding any decision on the claim for an unreasonable length of time.

Here, the claim, as evidenced by the Plan’s proof of loss of April 6, 2005, had not been explicitly rejected when this suit was filed on January 28, 2006. But, under the construction of the Endorsement by the Court of Special Appeals, there was no contractual prohibition against early commencement of the suit. Further, because the three-year period of limitations under CJ § 5-101, pursuant to the normal rule, cannot have begun to run earlier than the filing of the proof of loss, and because less than three years elapsed between April 6, 2005, and January 23, 2006, the suit was not barred by limitations. We need not express agreement or disagreement with the above analysis.

If the Endorsement does not contractually alter the time of accrual under the normal application of CJ § 5-101, then Respondent’s suit was not barred by limitations under CJ § 5-101. On the other hand, if we assume, arguendo, that the Endorsement employed language that would be effective contractually to alter the ordinary time of accrual, absent IA § 12-104, then the issue becomes whether IA § 12-104 is concerned only with the duration of contractual limitations or whether its terms also embrace the time at which the period of limitations begins to run. As we explain below, IA § 12-104 regulates the time of accrual of actions on certain policies as well as the duration of the limitations period. The Text Travelers points to the language in IA § 12-104(a) that prohibits contractually setting “a shorter time to bring an action” and concludes that the prohibition applies only to the duration of the period of limitations.

This is myopic. “LSjhorter” is the comparative degree of the adjective. To determine its application, “shorter” must be related to something else. IA § 12-104(a) directs that the comparison be made to the time “required by the law of the State when the insurance contract ... is issued!.]” The limitations law of the State applicable to the Policy is CJ § 5-101. That statute ⁴³² embraces two elements, the three-year period, and the beginning point of that measurement, namely, the date that the civil action accrues.

The Insurer’s construction of IA § 12-104(a) leaves the three-year period required by CJ § 5-101 floating as a conceptualization of time, unattached to any point in time when the contractual measurement is required to commence. This construction would allow an insurer contractually to anchor the beginning of the limitations period at any point in real time, including anchoring the beginning of the contractual period at a point in time that has the practical effect of shortening, to less than three years from accrual of the cause of action, the time within which suit must be brought. That construction reads out of IA § 12-104(a) its requirement that the comparison for determining if a contract provision is “shorter” be made to the otherwise applicable limitations statute. Here, that statute, CJ § 5-101, measures by using two components, the length of the period and the time of accrual.

It is clear that, under the traditional meaning of “accrues,” the insured’s cause of action against Travelers did not accrue when the Plan discovered the loss caused by theft. This Court said in Trimper v. Porter-Hayden, 305 Md. 31 , 501 A.2d 446 (1985), that “[t]he law is concerned with accrual in the sense of testing whether all of the elements of a cause of action have occurred so that it is complete. There must be both the injuria and the damnum of the common law. See Oxtoby v. McGowan, 294 Md. 83, 94 , 447 A.2d 860, 866 (1982).

But the injured party need not know that he has suffered a legally cognizable injury which has resulted in harm in order to have a complete cause of action.... The discovery rule does affect when limitations under § 5-101 will begin to run by adding an additional element, knowledge, to ‘accrues,’ but the discovery rule does not change the time when a cause of action becomes conceptually complete.” Id. at 42, 501 A.2d at 452 (footnote omitted). Here, it is important to keep in mind that the Plan’s discovery of the theft by a Montgomery Scrap employee would ⁴³³ have operated to extend, beyond traditional accrual, the three-year period of limitations for a suit by the Plan against that employee, but the issue before us is when the cause of action by the Plan against the Insurer accrued. For purposes of analyzing the operation of IA § 12-104, on the record before us, it is unnecessary to decide how the discovery rule might impact IA § 12-104, because, under the traditional law of accrual, Respondent’s cause of action against the Insurer could not have been complete prior to the Plan’s submission of its proof of loss.

Lane v. Nationwide Mut. Ins. Co., 321 Md. 165 , 582 A.2d 501 (1990), illustrates the traditional accrual of an action by an insured against its insurer. The case involved uninsured motorist coverage.

The opinion does not even reflect the date of the automobile accident, when the cause of action against the tortfeasors would have accrued. Suit against the tortfeasors was filed December 14, 1982, and, three days thereafter, the insured gave notice to its insurer that that action had been taken. While the underlying suit was still pending, the insured, on April 14, 1986, sued the insurer, claiming under the uninsured motorist coverage. The insurer raised a statute of limitations defense, asserting that the cause of action had accrued when its insured learned that the tortfeasors were uninsured.

Reversing a judgment entered on limitations grounds in favor of the insurer, this Court ruled: “[T]he decisions below cannot be squared either with general contract principles or with this Court’s opinions. By holding that the statute of limitations began to run as soon as the [insured] learned that the tortfeasors were uninsured, the Court of Special Appeals in effect held that limitations in a contract action begin to run before there is a breach of contract.” Id. at 170 , 582 A.2d at 503 . Travelers notes that Lane involved statutorily required coverage, but Lane is not distinguishable from the instant matter on the point for which we cite Lane . ⁴³⁴ Antigua Condominium Ass’n v. Melba Investors Atlantic, Inc., 307 Md. 700 , 517 A.2d 75 (1986), illustrates the need to identify, in a contract action, the promise that has been breached. That was an action by unit owners in a condominium against the developer who, at the various closings, had covenanted to repair certain defects of which it was given notice within one year following the respective closings.

The Court of Special Appeals held that, for limitations purposes, the cause of action for breach of the repair covenant could not have occurred later than the time when a particular plaintiff discovered a defect. Because notice had been given by the plaintiffs no later than September 18, 1978, and suit had not been filed until September 24, 1981, the Court of Special Appeals affirmed dismissal of those claims. Rejecting that argument, this Court held: “We do not interpret the Repair Clause as simply a warranty of the condition of a unit or of the common elements as of the time of closing with a Unit Owner. Had [the developer] simply guaranteed the condition of the property as of the date of closing with a Unit Owner, any breach of that guarantee would necessarily occur at closing and, absent a special statute, the cause of action would accrue for limitations purposes when the breach was discovered.

See Poffenberger v. Risser, 290 Md. 631 , 431