T.H.E. Insurance v. P.T.P. Inc.

RODOWSKY, Judge. This case involves the effect of the notice-prejudice provisions of Md.Code (1957, 1991 Repl.Vol.), Art. 48A, § 482, on an insurer’s denial of coverage under a claims made liability insurance policy for a claim made and reported after the policy had expired. It is the issue that we did not reach in St. Paul ⁴⁰⁸ Fire & Marine Ins. Co. v. House, 315 Md. 328 , 554 A.2d 404 (1989), but which the dissenting judges in House would have reached.

In deciding the issue in this case we apply, in substance, the analysis presented in Chief Judge Murphy’s dissént in House . Under that analysis § 482 does not produce coverage in this case. One of the three appellees, P.T.P. Incorporated (P.T.P.), operated a go-kart track near Ocean City, Maryland. On August 27, 1987, nine year old Lisa Buckley (Buckley) was injured at P.T.P.’s track when the go-kart in which she was riding with her uncle struck a barrier.

Buckley was ministered to by her mother at the scene and left the premises with her, without receiving any other medical attention. At that time P.T.P. was insured under a comprehensive general liability policy issued in April 1987 by the appellant, T.H.E. Insurance Company (T.H.E.). The policy was the first one issued to P.T.P. by T.H.E. P.T.P. purchased the policy through Atlantic Insurance Associates (Atlantic), whose president is Alfred Melson (Melson). Both are appellees.

At the time of Buckley’s accident, P.T.P. did not report the 'occurrence to T.H.E., Atlantic, or Melson. The policy acquired by P.T.P. from T.H.E. was written on a claims made basis. The policy period was from April 2, 1987, to April 2, 1988, with a retroactive date of April 2, 1987. 1 In the following year T.H.E. issued to P.T.P. a comprehensive general liability “renewal” policy for the period May 27, 1988, to May 27, 1989, with a retroactive date of May 27, 1988. On June 6, 1988, counsel for Buckley, by letter, made a claim for damages against P.T.P. based on the accident of August 27,1987.

This claim letter was sent some nine months after the accident and more than sixty days after the policy period that ended April 2, 1988. P.T.P. informed Atlantic of the claim, and Atlantic mailed notice of the claim to T.H.E. The insurer’s response of June 23, 1988, stated that the claim ⁴⁰⁹ was received on June 20, 1988. In that response T.H.E. denied coverage for the Buckley claim. Thereafter, Buckley sued P.T.P. and others in an action that ultimately was transferred to the United States District Court for the District of Maryland.

T.H.E. did not defend. On April 18, 1990, P.T.P. filed in the Circuit Court for Worcester County a complaint for declaratory judgment and damages against T.H.E., Atlantic, and Melson. P.T.P. sought a judgment declaring that under either the initial or renewal policy T.H.E. provided indemnity for, and had a duty to defend, the Buckley claim. P.T.P. also claimed damages for breaches of the insurance contract.

The complaint further alleged that Atlantic and Melson were negligent in failing to place proper insurance coverage. Atlantic and Melson cross-claimed against T.H.E. All parties to the state court action moved for summary judgment, raising a multitude of issues. The circuit court decided only one issue, and that by reliance on only one legal ground. The circuit court entered a judgment declaring that the original T.H.E. policy, ie., the policy for the period April 2, 1987, to April 2, 1988, obliged T.H.E. to defend the Buckley claim.

The trial judge reasoned that under Art. 48A, § 482, the burden was on T.H.E. to show that it had been prejudiced by the fact that the Buckley claim was reported to it sometime after June 1, 1988, but that there was no evidence that T.H.E. had been prejudiced by late reporting of the claim. 2 Art. 48A, § 482 reads: “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 ⁴¹⁰ 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.” In concluding that § 482 applied in that fashion to claims made policies, the circuit court relied entirely upon the opinion by the Court of Special Appeals in St. Paul Fire & Marine Ins. Co. v. House, 73 Md.App. 118 , 533 A.2d 301 (1987). Although it recognized that decisions in other states supported St. Paul’s contention, the intermediate appellate court read “any insurer” in § 482 to mean every insurer, including those writing claims made policies. 73 Md.App. at 135 , 533 A.2d at 309 . The decision by the Court of Special Appeals in House was affirmed, in a 4-3 decision by this Court, on policy construction grounds and not by applying § 482 in the fashion approved by the Court of Special Appeals. 315 Md. 328 , 554 A.2d 404 .

While the Buckley action was pending in the federal court, the parties to the action before us stipulated to P.T.P.’s cost of defense of the Buckley action. Based on that stipulation and on its prior grant of partial summary judgment, the circuit court entered judgment in favor of P.T.P. against T.H.E. in the stipulated amount for breach of the duty to defend. At the request of all parties to this action, the circuit court certified as a final judgment its declaration that T.H.E. was obliged under the original policy to defend P.T.P. against the Buckley claim, and the court certified as a final judgment its award of damages for that breach. T.H.E. appealed to the Court of Special Appeals. 3 We granted certiorari on our own motion prior to consideration of the matter by the intermediate appellate court. ⁴¹¹ I T.H.E.’s argument rests on the original policy provisions, and P.T.P.’s argument in support of the circuit court’s ruling necessarily rests on § 482.

Relevant to these arguments are the following policy provisions: “SECTION I—COVERAGES “COVERAGE A. BODILY INJURY AND PROPERTY DAMAGE LIABILITY “1. Insuring Agreement. a. We will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies ____ This insurance does not apply to ‘bodily injury’ or ‘property damage’ which occurred before the Retroactive Date, if any, shown in the Declarations or which occurs after the policy period.... We will have the right and duty to defend any ‘suit’ seeking those damages.... b.

This insurance applies to ‘bodily injury’ and ‘property damage’ only if a claim for damages because of the ‘bodily injury’ or ‘property damage’ is first made against any insured during the policy period. (1) A claim by a person or organization seeking damages will be considered to have been made when written notice of such claim is received and recorded by ⁴¹² US...." [ 4 ] “SECTION IV—COMMERCIAL GENERAL LIABILITY CONDITIONS “2. Duties In The Event Of Occurrence, Claim Or Suit. a. You must see to it that we are notified as soon as practicable of an ‘occurrence’ which may result in a claim.

To the extent possible, notice should include: (1) How, when and where the ‘occurrence’ took place; (2) The names and addresses of any injured persons and witnesses; and (3) The nature and location of any injury or damage arising out of the ‘occurrence.’ b. If a claim is received by any insured you must: You must see to it that we receive written notice of the claim as soon as practicable.” “SECTION V—EXTENDED REPORTING PERIODS “2. A Basic Extended Reporting Period is automatically provided -without additional charge. This period starts with the end of the policy period and lasts for: a.

Five years for claims arising out of an ‘occurrence’ reported to us, not later than 60 days after the end of the policy period, in accordance with paragraph 2.a. of SECTION IV ...; or b. Sixty days for all other claims.” “4. Extended Reporting Periods do not extend the policy period or change the scope of coverage provided. They ⁴¹³ apply only to claims for ‘bodily injury’ or ‘property damage’ that occurs before the end of the policy period (but not before the Retroactive Date ...).

Claims for such injury or damage which are first received and recorded during the Basic Extended Reporting Period ... will be deemed to have been made on the last day of the policy period.” T.H.E.’s argument is basic. Although the accident occurred (8/27/87) after the retroactive date (4/2/87), and before the end of the policy period (4/2/88), the claim was not first made until more than sixty days after the end of the policy period. Under the policy involved here, for a claim to be first made, it must be received by the insurer. Policy, § I.A.l.b(l).

The outside time limit within which either the occurrence of Buckley’s accident or a claim asserted by Buckley was to be reported to the insurer was not later than sixty days after the end of the policy period, i.e., on or before June 1, 1988. The occurrence, as an occurrence, was not reported and, under the evidence, the claim made could not have been reported prior to June 6, 1988. Thus, submits T.H.E., there is no coverage because the insuring agreement applies only to claims for damages “first made against any insured during the policy period,” or during its sixty day extension. 5 P.T.P. relies on § 482, quoted above. P.T.P.’s argument, in the posture in which this case comes to us, is that T.H.E.’s disclaimer of coverage rests on P.T.P.’s failure to give the requisite notice, in that notice should have been given by June 1, 1988, but was not given until later. 6 Under § 482, P.T.P. submits, T.H.E. must show actual prejudice resulting from the delay measured from June 1,1988, to the date T.H.E. received the report.

Because the circuit court held, correctly in ⁴¹⁴ P.T.P.’s view, that T.H.E. has not shown prejudice, T.H.E. may not disclaim coverage based on P.T.P.’s failure to give the requisite notice. In rebuttal T.H.E. argues that § 482 does not enlarge the policy period, or the extended reporting period, of a claims made policy to create coverage for a claim that was first made after the policy had expired by its terms. Rather, the purpose of § 482 is to prevent forfeitures of coverage that had attached and not to create coverage that never attached. 7 II Section 482 was enacted by Chapter 185 of the Acts of 1964, in apparent response to Watson v. United States Fidelity & Guar. Co., 231 Md. 266 , 189 A.2d 625 (1963).

House, 315 Md. at 332 , 554 A.2d at 406 . Watson applied a strict condition precedent analysis to the insured’s obligation to give notice of an accident under an occurrence coverage, automobile liability policy. Id. “The response of § 482 [to Watson ], in substance, makes policy provisions requiring notice to, and cooperation with, the insurer covenants and not conditions. The statute measures by the standard of actual prejudice the materiality of any breach of those covenants by the insured for the purpose of determining if the breach excuses performance by the insurer.” ⁴¹⁵ Id.

Section 482 accomplishes its objective by requiring two elements: First, there must be a specified type of breach by the insured; and second, the insurer must show the materiality of the breach by demonstrating that the lack of notice or cooperation has resulted in actual prejudice. Here, T.H.E. does not deny coverage because of an alleged material failure by P.T.P. to perform a covenant to give notice, or to satisfy a policy provision that might be phrased as a condition that must be satisfied to prevent the loss of coverage that otherwise would apply. In this case the extended reporting period under the original policy had expired before P.T.P. reported the Buckley claim to T.H.E. The original policy had come to an end with respect to newly reported claims. Section 482 could no more revive the original policy to cover the Buckley claim than § 482 could reopen an occurrence policy to embrace a claim based on an accident that happened after the end of the policy period.

This analysis was well developed by Chief Judge Murphy in his dissent in House, portions of which we set forth below with modifications adapted to the facts of the instant case. “The fundamental question now is whether, at the time [P.T.P.] reported the [Buckley] claim, there existed a contract between the parties, for one cannot breach a contract which is not in existence. “To answer this question, [we] look again to the nature of claims made and occurrence policies. Both types of policies include provisions which define (1) the events for which coverage is provided and (2) when and how coverage can be initiated. For example, an occurrence policy has a fixed time period defining what specific events or occurrences will be covered. When this time period ends, however, the insurer’s responsibilities under the policy do not end, for it may be held liable for the covered events, barring statutes of limitations, at any time thereafter. “Claims made policies are almost the mirror image of occurrence policies in that they often cover claims based on events which occurred many years before the policy came ⁴¹⁶ into effect, but limit the scope of coverage to claims based on these events which are made within the limited time period of the policy.

Unlike the occurrence policy, the insurer’s potential liability ends when the policy expires. “Therefore, when the claims made policy at issue here expired there was nothing left. The policy could not be breached because there was no longer a policy to be breached. Any claim made after its expiration is of the same effect as an accident or event which occurs after the ‘expiration’ of an occurrence policy. There was no breach; there was simply no coverage. [We] therefore think that § 482 is inapplicable to a ‘reporting’ type of claims made policy when the claim is made after the expiration of the policy.” House, 315 Md. at 355-56 , 554 A.2d at 418 (Murphy, C.J., dissenting).

The foregoing analysis is consistent with the overwhelming weight of authority, measured both numerically and by persuasiveness. The notice-prejudice rule is the law of many states, having been adopted either legislatively or judicially. Typically, a state’s notice-prejudice rule was adopted when the insuring agreements of liability policies covered occurrences during the policy period. After claims made coverages began to be written, and when insureds, who had reported their claims after their claims made policies had expired, sought to have the notice-prejudice rule applied to their claims made policies, the nearly universal response of courts was to reject the argument of the insureds.

This is because the effect of the argument is to enlarge the policy to embrace claims that it was never intended to cover. In Massachusetts the notice-prejudice rule, like that of Maryland, was enacted by the legislature. Massachusetts General Laws ch. 175, § 112 (1987), dealing with automobile and “any other” liability policies that insure against personal injury and property damage, in relevant part provides: “An insurance company shall not deny insurance coverage to an insured because of failure of an insured to seasonably notify an insurance company of an occurrence, incident, claim or of a suit founded upon an occurrence, incident or ⁴¹⁷ claim, which may give rise to liability insured against unless the insurance company has been prejudiced thereby.” Johnson Controls, Inc. v. Bowes, 381 Mass. 278 , 409 N.E.2d 185 (1980), had held that the rule enunciated in the statute was also the common law of Massachusetts, and that the rule applied to all types of insurance policies. In Chas.

T. Main, Inc. v. Fireman’s Fund Ins. Co., 406 Mass. 862 , 551 N.E.2d 28 (1990), an engineer, the insured under a claims made policy expiring May 1, 1985, did not report a claim until March 1987. The Supreme Judicial Court of Massachusetts pointed out that the purpose of giving notice “as soon as practicable” in an occurrence policy “is to permit an insurer to make an investigation of the facts and occurrence relating to liability,” while, in claims made policies, “fairness in rate setting is the purpose of a requirement that notice of a claim be given within the policy period or shortly thereafter.” 551 N.E.2d at 29 . The court then explained the significance of the different purposes, saying: “The closer in time that the insured event and the insurer’s payoff are, the more predictable the amount of the payment will be, and the more likely it is that rates will fairly reflect the risks taken by the insurer.

The purpose of a claims-made policy is to minimize the time between the insured event and the payment. For that reason, the insured event is the claim being made against the insured during the policy period and the claim being reported to the insurer within that same period or a slightly extended, and specified, period. If a claim is made against an insured, but the insurer does not know about it until years later, the primary purpose of insuring claims rather than occurrences is frustrated. Accordingly, the requirement that notice of the claim be given in the policy period or shortly thereafter in the claims-made policy is of the essence in determining whether coverage exists.

Prejudice for an untimely report in this instance is not an appropriate inquiry.” Id. at 30. Of even more significance here is that the court in Chas. T. Main, Inc., expressly rejected the argument that the Massa ⁴¹⁸ chusetts notice-prejudice statute applied to the claims made policy at issue. Such a requirement, the court said, “would defeat the fundamental concept on which claims-made policies are premised....

It would be unreasonable to think that the Legislature intended such a result.” Id. (footnote omitted); see also National Union Fire Ins. Co. v. Talcott, 931 F.2d 166, 167-68 (1st Cir.1991) (applying Massachusetts law). New Jersey adopted a notice-prejudice rule in Cooper v. Government Employees Ins.

Co., 51 N.J. 86, 237 A.2d 870, 874 (1968), a case involving automobile liability insurance. In Zuckerman v. National Union Fire Ins. Co., 100 N.J. 304 , 495 A.2d 395 (1985), the Supreme Court of New Jersey refused to apply that rule to a claims made policy. The court reasoned as follows: “By contrast, the event that invokes coverage under a ‘claims made’ policy is transmittal of notice of the claim to the insurance carrier.

In exchange for limiting coverage only to claims made during the policy period, the carrier provides the insured with retroactive coverage for errors and omissions that took place prior to the policy period. Thus, an extension of the notice period in a ‘claims made’ policy constitutes an unbargained-for expansion of coverage, gratis, resulting in the insurance company’s exposure to a risk substantially broader than that expressly insured against in the policy. Obviously, such an expansion in the coverage provided by ‘claims made’ policies would significantly affect both the actuarial basis upon which premiums have been calculated and, consequently, the cost of ‘claims made’ insurance. So material a modification in the terms of this form of insurance widely used to provide professional liability coverage both in this State and throughout the country would be inequitable and unjustified.

The Cooper [v. Government Employees Ins. Co., 51 N.J. 86, 237 A.2d 870 (1968) ] doctrine has a clear application to policies analogous to the automobile liability policy there involved. It has, however, no application whatsoever to a ‘claims ⁴¹⁹ made’ policy that fulfills the reasonable expectations of the insured with respect to the scope of coverage.” 495 A.2d at 406 . The Supreme Court of Florida adopted a notice-prejudice rule in the automobile liability insurance case of Tiedtke v. Fidelity & Casualty Co. of N.Y., 222 So.2d 206, 209 (Fla.1969).

The contention advanced by P.T.P. to us was advanced by an insured to the Supreme Court of Florida in Gulf Ins. Co. v. Dolan, Fertig & Curtis, 433 So.2d 512 (Fla.1983). The court rejected the argument as one seeking an extension of coverage, by the court, which was different from “a mere condition of the policy,” and which would “in effect rewrite[ ] the contract between the two parties.” Id. at 515-16 . The Supreme Court of Rhode Island adopted a notice-prejudice rule in Pickering v. American Employers Ins.

Co., 109 R.I. 143 , 282 A.2d 584, 592-93 (1971), a case involving the uninsured motorists provisions of an automobile liability policy. The United States Court of Appeals for the First Circuit recently has