State Farm Mutual Automobile Insurance v. Gregorie

ADKINS, Judge. We examine in this appeal the nature and extent of the prejudice from an insured’s refusal to cooperate, that a liability insurer must show, pursuant to Md.Code (1995, 1997 Repl. Vol.), § 19-110 of the Insurance Article (“IA”) in order for the insurer to be relieved from its obligation to provide insurance coverage. State Farm Mutual Automobile Insurance Company, appellant, contends that the Circuit Court for Prince George’s County erred in finding that prejudice existed, but nonetheless imposed liability for coverage.

Allstate Insurance Company (“Allstate”), appellee, defends the decision of the circuit court, contending that it properly made a factual finding regarding the extent to which appellant was actually prejudiced and required coverage only to that extent. FACTS AND LEGAL PROCEEDINGS This case arises out of an automobile accident that occurred on the Capital Beltway (“Beltway”) on February 10, 1994. Appellee Corazón A. Gregorie was a passenger in a car she owned that was operated by Mark Winston. At some time after midnight, Latricia S. Kirby Agbemashion 1 (“Kirby”) was also driving a car on the Beltway and was traveling in front of Gregorie’s car in the same lane and direction.

At some point, Gregorie’s car struck the rear end of Kirby’s vehicle. ³²⁰ Significant disputes arose concerning the circumstances surrounding the accident. According to Gregorie, it had snowed heavily earlier in the day and at that time the roads were wet and damp. She testified, however, that when Winston and she" were driving on the Beltway around midnight, the snow had stopped and the roads had been plowed and were dry. She further testified that when Winston and she approached their exit on Kenilworth Avenue: I noticed a very slow moving dark car that had no lights on it, no taillights, no license lights. [[Image here]] I didn’t say anything, because I was waiting to exit — I was waiting for either [Winston] to exit or brake.

He was not doing anything after a couple of seconds, and at that point I said look out, because apparently he didn’t see the car. * * * [I said look out] because I would have reacted at that point. I would have either been — I would have applied my brakes. * * * Winston did apply the brakes at that point, and very shortly after we crashed into the car in front of us, [Kirby’s] car. Winston corroborated Gregorie’s version of the incident. He testified that at the time of the accident the temperature was freezing “[t]here was a slight dampness to the pavement, slight discoloration.

Other than that, the pavement on the Beltway was clear.” According to Winston, That section of the Beltway was dark. It was about a hundred yards before the ramp started off to the right, and there were lights on the ramp. But on a portion of the ³²¹ Beltway the roadway was dark and the pavement was dark also. * * * As I looked, double clutched and looked to the right from my rearview mirror ... [Gregorie] said look out.... I immediately went on the brakes when I saw ahead of me a car with no lights.

My initial reaction to that car was that it was stopped in the Beltway. [[Image here]] I went full on the brakes. But even as I was going through on the brakes, it was not a question of avoiding that person, it was just too late, it was a question of how much speed I was going to scrub [sic] off before I went into that car ahead of me. My car swerved about five degrees to the right once I applied the brakes. And it was in that position that I went directly into the rear of the car ahead of me. [[Image here]] —while I was in the middle of my skid there, I saw what I believed to be a slight flicker, signal flicker of red light to the rear.

After the accident, appellant interviewed Kirby. Kirby claimed that she was driving “about 50, 55” and that she was worried about ice on the road. She also stated that she believed that the other car involved in the accident was “going too quickly.” Linda Weiner was driving behind Winston in the same lane at the time of the accident. In a statement made to appellant’s representative, she stated that Kirby’s car was “going very, very slow, or just stopped completely” and that she saw that Kirby’s car “had on its hazards.” She further stated that the weather was clear and she did not see any ice on the roadway.

Finally, she stated that she and the other cars on ³²² the Beltway were traveling at approximately the same rate of speed as Winston. At the time of the accident, Kirby was insured under an automobile insurance policy (“policy”) with appellant. After learning of the accident, appellant investigated the claim. In doing so, appellant: (1) obtained a recorded statement from Weiner and Kirby; (2) acquired a copy of the police report and a weather report for the day of the accident; and (3) took pictures of Kirby’s vehicle.

Gregorie filed a complaint against Winston to recover for injuries she allegedly sustained in the accident. Winston then filed a Third-Party Complaint against Kirby seeking contribution and indemnification, and Gregorie amended her complaint to name Kirby “as a co-defendant. Kirby also brought a separate action against Winston, which was consolidated with Gregorie’s tort action. Winston then filed a counter-claim against Kirby in that action.

Appellant retained counsel to defend Kirby against Grego-rie’s and Winston’s claims, and Kirby retained separate counsel to prosecute her own claims. Nevertheless, Kirby refused to cooperate with any of her attorneys. Apparently, Kirby relocated to Georgia and did not respond to appellant’s repeated attempts to contact her. Specifically, appellant claims that it: (1) forwarded letters to Kirby by certified mail and first class mail requesting she contact appellant or counsel; (2) left at least ten messages by telephone at her residence; (3) contacted their local office in Georgia and had a representative go to Kirby’s residence to obtain her cooperation; (4) retained a private investigator to confirm Kirby’s whereabouts and attempt to contact her; and (5) offered to pay all expenses incurred by Kirby to participate in her defense.

In total, appellant claims that it “undertook at least 84 attempts to contact [Kirby] and obtain her cooperation.” Kirby’s deposition was noted for June 10,1996, and October 3, 1996, but she failed to appear on both occasions. Additionally, appellant claims that it was unable to respond to written discovery and answer interrogatories due to Kirby’s refusal to ³²³ communicate with counsel. Gregorie and Winston subsequently filed motions for sanctions. By order dated May 6, 1997, the circuit court ordered that Kirby was “precluded from introducing any evidence of or concerning the circumstances surrounding the ... accident.” A trial was held on liability issues only.

Again, Kirby failed to appear, and pursuant to the court order, appellant was forbidden to introduce any evidence in her defense. The jury returned a verdict against Kirby only in favor of Gregorie. Appellant filed a motion for judgment notwithstanding the verdict, which was denied. Before a jury trial on damages, appellant brought a declaratory judgment action seeking a declaration that it was not obligated to defend and indemnify Kirby for any claim or judgment due to Kirby’s failure to cooperate.

Gregorie simultaneously brought a declaratory judgment action against appellant and the insurer of her vehicle, Allstate, seeking a declaration whether appellant or Allstate would be liable to Gregorie. On March 5, 1999, the trial court found that Kirby had failed to cooperate with appellant and that appellant was actually prejudiced by her failure. The court entered an order holding that appellant was not obligated to defend or indemnify Kirby for claims that arose out of the accident. On Allstate’s motion for reconsideration, however, the trial court held in a written opinion that appellant was obligated to defend or indemnify Kirby only to the extent that it was actually prejudiced.

The trial court then examined the evidence presented at trial, and evidence that appellant proffered that it would have presented had Kirby cooperated. Based on this evidence, the trial court found that Kirby and Winston were both negligent, and that appellant was “responsible] for fifty percent (50%) of Gregorie’s damages up to the limits of [appellant’s] liability coverage on the Kirby vehicle.” This appeal followed. ³²⁴ DISCUSSION a. In a declaratory judgment action, the trial court determines issues of law and fact, and its conclusions as to the facts will not be disturbed unless clearly erroneous. See Aetna Cas. and Sur.

Co. v. Brethren Mut. Ins., 38 Md.App. 197, 206 , 379 A.2d 1234 (1977), cert. denied, 282 Md. 730 (1978). In reviewing the trial court’s legal conclusions, we must determine whether the trial court was legally correct. See Heat & Power v. Air Products, 320 Md. 584, 591 , 578 A.2d 1202 (1990).

Moreover, “in a declaratory judgment action which presents an issue of coverage under the terms of an insurance policy, ‘it is the function of the court to interpret the policy and decide whether or not there is coverage.’ ” Mitchell v. Maryland Casualty, 324 Md. 44, 56 , 595 A.2d 469 (1991) (quoting St. Paul Fire & Marine Ins. v. Pryseski, 292 Md. 187, 194 , 438 A.2d 282 (1981)). b. The policy between appellant and Kirby required her to cooperate with appellant, and assist in (1) making settlements, (2) securing and giving evidence, and (3) attending hearings and trials. Although Maryland courts have recognized the validity of such clauses, an insurer is required to prove more than a mere failure to cooperate in order to disclaim coverage. By statute, Maryland law provides: 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 ... 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.

IA § 19-110. A cooperation clause in an insurance contract requires that “[t]he insured ... assist in good faith in making every legitimate defense to a suit for damages.” Indemnity ³²⁵ Ins. Co. of N.A. v. Smith, 197 Md. 160, 164 , 78 A.2d 461 (1951). Under such a clause, the insured must make full and frank disclosures to the insurer, see Travelers Insur.

Co. v. Godsey, 260 Md. 669, 673 , 273 A.2d 431 (1971), give the insurer information needed for the defense, and be available for court proceedings and hearings. See Smith, 197 Md. at 164-65 , 78 A.2d 461 . For example, in Smith , the insureds left the jurisdiction, did not inform relatives or friends where they were going, and did not appear for trial. See id. at 166 , 78 A.2d 461 .

The insurer sent an investigator to attempt to find the insured, but the investigator was unsuccessful. See id. Based on this evidence, the Court held that the insureds had failed to cooperate with the insurer. See id. at 167 , 78 A.2d 461 .

There is no dispute that Kirby failed to cooperate. Further, the trial court found that appellant was actually prejudiced by Kirby’s failure to cooperate. Under IA section 19-110, a finding of actual prejudice permits an insurer to disclaim coverage. Nevertheless, the trial court, relying on the Court of Appeals’s decision in Fid. & Cas.

Co. v. McConnaughy, 228 Md. 1 , 179 A.2d 117 (1962), went on to make factual findings regarding the outcome of the litigation if Kirby were to have cooperated, and on that basis, in Kirby’s absence, held appellant liable for a proportionate share of appellee’s injuries. Appellant contends the trial court erred and that it should have been permitted to disclaim all coverage under the policy once actual prejudice was found. We agree with appellant. What constitutes actual prejudice has not been fully developed in Maryland cases.

See Andrew Janquitto, Maryland Motor Vehicle Insurance, (2d ed.1999) § 7.13(A) at 262. Whether actual prejudice exists must be determined on a case-by-case basis. See id. at 263. It is clear that “an insurer may not disclaim coverage on the basis [that the prejudice] is only possible, theoretical, conjectural, or hypothetical.” General Acc.

Ins. Co. v. Scott, 107 Md.App. 603, 615 , 669 A.2d 773 , cert. denied, 342 Md. 115 , 673 A.2d 707 (1996). ³²⁶ In Harleysville Ins. v. Rosenbaum, 80 Md.App. 74 , 351 A.2d 197 (1976), an insurer claimed that an insured breached the “notice” and “assistance and cooperation” provisions of an insurance policy, and that it suffered actual prejudice because “the insured died before trial, without having given [the insurer] any account of the accident.” Id. at 83, 351 A.2d 197 . We held that the trial court’s conclusion that there was actual prejudice was premature because the finding was made before the trial of the underlying action. See id. at 86, 351 A.2d 197 .

Nevertheless, we suggested that, in determining whether actual prejudice exists, it is necessary to show an act on the part of the insured ‘which had or could have had any effect upon the jury which induced them or in any way caused them to" render the verdict against himself.’ Stated another way, the insurer must establish a substantial likelihood that if the cooperation or notice clause had not been breached, the insured would not have been held liable.... It is necessary to have available the facts and circumstances surrounding the accident which is the basis for the claim against the insured, because a finding of actual prejudice inherently depends to some extent upon the closeness of the case. Id. at 84, 351 A.2d 197 (footnotes omitted). The above language in Rosenbaum, suggests that an insurer must show facts that would have allowed it to prevail at trial in order to show actual prejudice.

Later authority, however, makes clear that the insurer is not held to such a strict standard. In Washington v. Federal Kemper Ins., 60 Md.App. 288 , 482 A.2d 503 (1984), cert. denied, 302 Md. 289 , 487 A.2d 292 (1985), an insured provided notice of a claim only after an adverse judgment had been rendered. See id. at 291 , 482 A.2d 503 . The insurer claimed it was actually prejudiced because it lost the opportunity to evaluate the claim, choose counsel, and attempt to settle the matter.

See id. at 294 , 482 A.2d 503 . We held that the insurer was actually prejudiced. See id. In doing so, we rejected the strict standard suggested in Rosenbaum, labeling it dicta.

We explained: ³²⁷ We do not perceive that [IA § 19-110] requires the insurance carrier to assume the burden of proving a negative. It is impossible for the carrier to demonstrate to the court what witnesses it might have discovered, what defense it might have made, and what disposition it might have reached in settlement if it had received notice before the verdict was rendered in this case. Id. at 295-96, 482 A.2d 503 . Both Rosenbaum and Washington dealt with actual prejudice as a result of insufficient notice to the insurer.

In Nationwide Ins. Co. v. United States Fidelity & Guar. Co., 304 A.2d 283 (D.C.1973), the District of Columbia Court of Appeals was asked to apply Maryland law in determining whether an insurer was actually prejudiced by an insured’s failure to cooperate. In that case, as in the present one, an insured failed to appear for trial, and the insurer was forced to proceed without the insured.

See id. at 284 . The insured was found liable, and another driver sought to recover from the insurer for contribution. See id. The insurer argued that it was relieved from providing coverage based on its insured’s failure to cooperate.

See id. The party seeking contribution argued that the insured was not relieved from its duty to provide coverage because it failed to show prejudice — if the insured “had been present at the negligence trial, the outcome would have been the same.” Id. at 285 . The court disagreed and held that the insurer had shown actual prejudice. See id.

In doing so, the court reasoned: Although there are some cases which hold that ‘(t)he unreasonable failure of the insured to attend the trial and testify where he is a material witness is a breach of the cooperation clause, and ... prejudicial per se’ this no longer seems to be the rule in Maryland. In the instant case, however, where the record affirmatively shows that the insurer attempted in good faith to secure the presence of [the insured], ... [and] that it was unable to obtain his deposition or attendance at trial, and that he was the sole witness for the defense, we ³²⁸ cannot say that the trial court erred in finding that the insurer had been prejudiced. . Id. (footnotes omitted).

In the instant case, the trial court found that there was actual prejudice to the insurer. We agree. Kirby’s refusal to cooperate in discovery led the trial court to enter an order forbidding appellant from offering any evidence in appellant’s defense. As a result, the jury heard only the uncontroverted testimony of Gregorie and Winston that Kirby was driving at an unreasonably slow speed.

In a statement given by Kirby to appellant after the accident, she said that she was driving “about 50, 55,” that she was worried about ice on the road, and that the other car involved in the accident was “going too quickly.” Appellant was neither able to offer Kirby’s testimony nor provide an explanation for her alleged unreasonably slow speed. When the insured’s statement made about the circumstances of the accident indicates a defense to the action, a failure to assist in preparation for trial and attend the trial is ordinarily prejudicial to the insurance company. See Hynding v. Home Accident Ins. Co., 214 Cal. 743 , 7 P.2d 999, 1002 (1932); Rohlf v. Great Am.

Mut. Indem. Co., 27 Ohio App. 208 , 161 N.E. 232, 234 (1927); Cameron v. Berger, 336 Pa. 229 , 7 A.2d 293, 295 (1938) (trial court should have directed verdict as a matter of law where the insured was an essential witness at trial and only witness for the defense); State Farm Mut. Ins.

Co. v. Davies, 226 Va. 310 , 310 S.E.2d 167, 169 (1983). In the present case, however, despite finding actual prejudice from Kirby’s failure to prepare for or testify at trial, the trial court concluded that, had Kirby cooperated, both she and Winston would both be liable for Gregorie’s injuries. As a result of this finding, the court held that appellant could only disclaim coverage “to the value of its loss of the Right of Contribution from Winston, that is to say responsibility for fifty percent (50%) of Gregorie’s damages up to the limits of [appellant’s] coverage on the Kirby vehicle.” We disagree with the trial court’s application of McConnaughy , and explain. ³²⁹ In McConnaughy , two witnesses to Butler’s automobile accident told Butler’s insurer that Butler’s car had been on the correct side of the road and the other car on the wrong side. See McConnaughy, 228 Md. at 5 , 179 A.2d 117 .

Based on these statements, the insurer rejected a settlement offer of $3,500. See id. At some future date, the insurer discovered that Butler procured false testimony from the two witnesses and the insurer disclaimed liability based on violation of a cooperation clause. See id.

The settlement offer of $3,500 was subsequently withdrawn, and a verdict of $10,000 was entered against Butler. See id. at 6 , 179 A.2d 117 . In an action brought by the plaintiff in the underlying action to recover from the insurer, the insurer stated in an affidavit that it would have accepted the $3,500 had it not been for the false statements by the insured’s witnesses. See id.

Based on this affidavit, the Court of Appeals held that the insurer, while actually prejudiced, was responsible for payment of $3,500. See id. at 14 , 179 A.2d 117 . Writing for the Court, Judge Hammond explained: [W]e think the insurer itself has established that it was prejudiced only as to the excess of the policy limit over $3,500. In substance and effect, the insurance company has urged upon us, as the affidavit filed in support of its motion to deny summary judgment below stated, that it would have settled the case for $3,500 if Butler had not produced [fraudulent testimony], and we think that it should be liable for the amount it would have paid if Butler had been frank and fair.

It itself showed a lack of prejudice as to $3,500 of the liability. Id. at 14-15 , 179 A.2d 117 . The trial court erred in its application of McConnaughy to the present circumstances.' Unlike McConnaughy , appellant never attempted to settle the case for a specific dollar amount, and thus made no admission about the limits of its prejudice. Indeed, appellant was in a position that it could not evaluate the merits of the claims against the insured due to Kirby’s complete lack of cooperation. ³³⁰ To adopt the trial court’s approach would ignore our decision in Washington , in which we expressly stated that the insurer is not required to “prove a negative.” Washington, 60 Md.App. at 295 , 482 A.2d 503 .

Because of Kirby’s failure to cooperate, appellant was unable to offer Kirby’s testimony to support its position either in the trial of the underlying case or in the present litigation. By holding a hearing to make a factual determination as to the liability of Winston and Kirby on the hypothetical assumption that Kirby cooperated and testified, the trial court required that appellant prove at least two unknown matters: (1) how persuasive Kirby’s testimony would have been; and (2) what evidence or witnesses it might have discovered with her cooperation. This requirement of proof is the equivalent of the requirement we declined to impose on the insurer in Washington , characterizing the standard as “proving a negative.” Id. at 295 , 482 A.2d 503 . We think this standard, if adopted, would encourage impermissible speculation on the part of the litigants and the trier of fact.

Cases outside Maryland have used varying standards in defining what constitutes actual prejudice sufficient to justify a disclaimer of coverage by the insurer. See generally, Romualdo P. Eclavea, Annotation, Liability Insurance: Failure or Refusal of Insured to Attend Trial or to Testify as Breach of Cooperation Clause, 9 A.L.R.4th 218 , 240 (1981). The Supreme Court of Virginia formulated a particularly clear test in Davies, supra. Davies filed a personal injury action against Turner for injuries Davies sustained in an automobile accident.

See Davies, 310 S.E.2d at 168 . Turner failed to appear for trial and Davies won a judgment against Turner. See id. Turner’s insurer disclaimed liability on the ground that Turner’s failure to appear at trial constituted a breach of a cooperation clause.

See id. The trial court rejected the insurer’s contention because “evidence of liability [in the personal injury action] was rather overwhelming and it would stretch the