Washington v. Federal Kemper Insurance

LISS, J. This case was originally filed in the Circuit Court for Anne Arundel County by appellants Rollie J. Washington, Trustee for the benefit of Washington and Washington ²⁹⁰ Enterprises, Inc., and Rollie J. Washington, individually, against Federal Kemper Insurance Company, the appellee (hereafter Kemper). The complaint sought declaratory judgment and other relief and recited the following facts. Washington and Washington Enterprises, Inc. was a Maryland corporation whose charter was permitted to be dissolved and Rollie J. Washington succeeded as trustee for the benefit of the corporation. During its existence the corporation was a small, family-owned residential construction business.

In March of 1979, appellants entered into a contract to erect a dwelling in Anne Arundel County for William J. and Annie G. Lewis. On April 24, 1979, Washington and Washington Enterprises, Inc. purchased a Combination Automobile-General Liability Policy of insurance from the appellee through Arrow Insurance Agency (not a defendant or otherwise a party to this case). Appellants alleged that this policy of insurance covered among other subjects, warranties of fitness and quality of the named insured’s products and warranties that the work performed by or on behalf of the named insured would be performed in a workmanlike manner. When the house had been completed the Lewises were dissatisfied with the construction of the dwelling and sued Washington and Washington Enterprises, Inc. and Rollie J. Washington and Dorothy A. Washington, his wife, in the Circuit Court for Anne Arundel County.

The complaint contained eight counts: Count One (breach of contract); Count Two (unjust enrichment); Count Three (breach of express warranty); Count Four (breach of implied warranty); Count Five (negligence); Count Six (breach of fiduciary duty); Count Seven (fraud); and Count Eight (“common law tort”) Counts Six, Seven, and Eight were not against any of the Washingtons individually only Counts Four and Five alleged personal injury to the Lewises. Rollie J. Washington was served with process in the Lewis suit on May 28, 1981 and on June 12, 1981 filed a ²⁹¹ general issue plea through his attorney, Alan Feigelson. It is conceded that Kemper was not then notified of the Lewis suit. The Lewis action was tried before an Anne Arundel County jury in October of 1982.

At the close of the plaintiff’s case, Washington’s attorney moved for a directed verdict and the presiding judge granted the motion as to Counts Two and Five. At the close of the entire case the trial judge granted a directed verdict in favor of the defendants on Count One. The case was then submitted to the jury on Counts Three and Four and the jury returned a verdict in favor of the Lewises against the defendants in the amount of $11,616.07. The night after the verdict was entered, Mr. Washington testified that he received a “vision” from God, and as a result he tore through his business records and discovered the Kemper insurance policy which he had purchased in April of 1979.

The Washingtons unsuccessfully appealed the Lewis verdict to this Court. See Washington v. Lewis, No. 608, September Term, 1983, filed February 16, 1984. On November 9, 1982, Mr. Washington’s attorney put Kemper on notice of the Lewis lawsuit and the subsequent verdict and appeal. Kemper denied coverage, refused to pay the judgment, and refused to take over the prosecution of the Washingtons’ appeal.

The result of this action by Kemper was the institution of the declaratory judgment suit which is the subject matter of this appeal. In that suit appellants sought to have the trial court declare that the policy issued by the appellee extended full coverage to them for the Lewis lawsuit, and that appellee be required to pay all costs of defense including legal fees, costs of appeal and new trial, if necessary. The Circuit Court, after a hearing, declared that Kemper owed the appellants no defense or reimbursement for costs of defense in the Lewis case, and was not required to indemnify the plaintiffs for any judgment that resulted from the trial of the Lewis complaint. He further held that appellee ²⁹² was not obligated to assume any costs in connection with the appeal to this Court of the verdict in the Lewis case or for costs in the declaratory judgment suit.

It is from that decree that this appeal was seasonably filed and the following questions were raised by the appellant: I. Did the lower court err in not permitting Rollie Washington to testify as to what he was told by Arrow Insurance Company?

II

Did the lower court err in ruling that Kemper met its burden of proof as to actual prejudice?

III

Did the lower court err in holding that the exception to the exclusion does not create an ambiguity to be construed against the draftsman?

IV

Did the lower court err in failing to. find that Kemper owed a duty to pay Rollie Washington’s counsel fees for defending Lewis’ suit? We find it necessary to answer only the second and fourth questions raised by the appellant as the answers to these queries are dispositive of the controversey in this case.

II

The policy issued to Washington and Washington by Federal Kemper contained a standard condition requiring the insured to notify the insurer of any occurrence or claim possibly falling within the coverage provided. No. 4: Insured’s Duties in the Event of Occurrence, Claims or Suit. (a) In the event of an occurrence, written notice containing particulars sufficient to identify the insured and also reasonably obtainable information with respect to the time, place and circumstances thereof, and the names and addresses of the injured and of available witnesses, shall be given by or for the insured to the company or any of its authorized agents as soon as practicable. (b) If claim is made or suit is brought against the insured, the insured shall immediately forward to the ²⁹³ company every demand, notice, summons or other process received by him or his representative.

The inclusion of such a notice provision is valid and enforceable under the law. Couch on Insurance § 51:123 at page 630 (2d Ed.1959) states: The purpose of such requirement is to enable the insurer to defend itself promptly concerning the accident, investigate the circumstances and prepare a timely defense, if necessary, on behalf of the insured. Prior to 1964, the rule in Maryland was that an insurer was not liable to defend an insured unless there was compliance by the insured with the policy requirement of notice of the accident and forwarding of the suit papers to the insurer. Compliance with the policy provision was a condition precedent to the insurer’s liability, whether or not the insurer was prejudiced.

Watson v. United States Fidelity and Guarantee Co., 231 Md. 266 , 189 A.2d 625 (1963); Employer’s Liability Assurance Corp. v. Perkins, 169 Md. 269 , 181 A. 436 (1935). In response to the Court of Appeals decision in Watson , the Maryland General Assembly enacted Chapter 185 of the Laws of 1964, effective June 1, 1964. This statute is now codified as Section 482 of Article 48A of the Maryland Code: 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. It is clear, therefore, that the law in Maryland presently requires proof not only that the insured failed to provide the requisite notice to the insurance company but that the insurer suffered actual prejudice from the insured’s failure to comply with the policy requirements. ²⁹⁴ At the hearing on the declaratory judgment suit the insurer presented the evidence of one of its liability claims supervisors who testified concerning the procedure which would be adopted by Kemper where a dispute arose between the insurer and the insured as to coverage under a specific policy.

The supervisor indicated that an agreement to defend form would be required to be executed by both parties in order to protect the rights of all parties to the dispute. Once the agreement to defend had been signed, counsel to defend would be assigned by Kemper, and Kemper would continue its investigation and assist counsel with