MD High Court: Prejudice Stemming from Late Notice Must Be Shown

Medical professionals frequently carry claims-made, not occurrence-type, insurance. With occurrence policies, injuries suffered at the hands of the insured are covered if they occur during the policy period. With a claims-made policy, the insured is entitled to defense and indemnification of a claim if the claim is lodged during the term of the policy, even if the injury complained of happened years before the policy went into effect. However, if the insured drops his claims-made insurance and is sued three years later, his insurer will disclaim liability even if the injury occurred during the term of the policy.

The terms of the policy will determine the period in which such notice of a claim having been made may be given to the insurer. If the policy is what is known as a “pure claims-made” policy, notice of the claim to the insurer must generally be given “as soon as practicable.” This can be during the policy period or, arguably, any time thereafter. The more common type of policy is of the type known as “claims-made and reported.” Under this type of policy, the insured must report a claim against it within certain time periods, such as “during the policy period” or “within 90 days of the end of the policy period.”

While these requirements may seem fairly straightforward, disputes concerning notice often arise between medical caregivers and their insurance carriers. One party may have a different idea of what constitutes notice “as soon as practicable.” Sometimes there is confusion because a policy states that it is a claims-made policy but, after further investigation into its terms, it turns out that it is a claims-made-and-reported policy.

At other times, state law may alter the game. That is what happened in a case decided by the Supreme Court of Maryland in February, Sherwood Brands Inc. v. Great American Ins. Co., —A.3d —, 2011 WL 657014 (Md., 2/24/11). Although not a medical malpractice case, the decision handed down in Sherwood Brands will affect the interpretation of medical liability insurance contracts in Maryland under similar circumstances.

The Terms of the Policy

Great American Insurance issued a liability insurance policy to Sherwood Brands, a manufacturing corporation, covering the company for losses due to certain tort claims made against it and its officers. The policy's “Notice of Claim” section provided, in pertinent part:

A. The Insureds shall, as a condition precedent to their rights under this Policy, give the Insurer notice in writing of any Claim …

(1) as defined in Section III.A.(1) which is made during the Policy Period. Such notice shall be given prior to the end of the Policy Period;

(2) as defined in Section III.A.(2) [supra] which is made during the Policy Period. Such notice shall be given as soon as practicable, but in no event later than ninety (90) days after the end of the Policy Period.

The policy term ran from May 1, 2007, to May 1, 2008. During the term of the policy, in December 2007 and March 2008, a former Sherwood employee filed suits in Massachusetts alleging several employment-related causes of action against the company. Sherwood did not notify Great American of the claims until October 2008, on a date more than 90 days after the end of the policy period. A party in Israel filed a second claim there against Sherwood, in December 2007. Again, Sherwood failed to notify Great American within 90 days of the end of the policy period. Great American therefore denied coverage for both claims.

The Proceedings

Sherwood brought suit for breach of contract and for a declaration that Great American must defend and indemnify the company in the Massachusetts and Israeli lawsuits. As part of its claim, Sherwood also averred that any delay in notice to Great American had not prejudiced the insurer's position, because the plaintiffs had obtained no adverse rulings against the company, no witnesses were missing and no evidence had been lost or destroyed. Circuit Court for Montgomery County, MD, granted summary judgment in favor of Great American, concluding that the insurer acted properly in denying coverage because Sherwood neglected to notify it of the claims in accordance with the policy's terms. The trial court specifically held that Great American's entitlement to judgment was not dependent on it demonstrating prejudice due to Sherwood's tardy notice.

Sherwood appealed to the intermediate appellate court, but before that court could act, the Supreme Court of Maryland, on its own initiative, issued a writ of certiorari. The state's high court wanted to consider whether the lower court erred when it held that Great American, under Maryland law, was not required to show actual prejudice in order to deny coverage based on the Sherwood's failure to comply with the insurance policy's notice requirement.

The high court started its discussion by stating, “This case demands that we revisit Maryland's insurance contract claim notice-prejudice jurisprudence, a body of law that has laid dormant largely since T.H.E. Insurance Co. v. P.T.P. Inc., 331 Md. 406 (1993) [a case cited by Great American in support of its case]. As the trial judge observed, this involves 'quite a workout.'”

A continuation of this discussion appears in next month's issue.

Janice G. Inman is Editor-in-Chief of this newsletter.

Medical professionals frequently carry claims-made, not occurrence-type, insurance. With occurrence policies, injuries suffered at the hands of the insured are covered if they occur during the policy period. With a claims-made policy, the insured is entitled to defense and indemnification of a claim if the claim is lodged during the term of the policy, even if the injury complained of happened years before the policy went into effect. However, if the insured drops his claims-made insurance and is sued three years later, his insurer will disclaim liability even if the injury occurred during the term of the policy.

The terms of the policy will determine the period in which such notice of a claim having been made may be given to the insurer. If the policy is what is known as a “pure claims-made” policy, notice of the claim to the insurer must generally be given “as soon as practicable.” This can be during the policy period or, arguably, any time thereafter. The more common type of policy is of the type known as “claims-made and reported.” Under this type of policy, the insured must report a claim against it within certain time periods, such as “during the policy period” or “within 90 days of the end of the policy period.”

While these requirements may seem fairly straightforward, disputes concerning notice often arise between medical caregivers and their insurance carriers. One party may have a different idea of what constitutes notice “as soon as practicable.” Sometimes there is confusion because a policy states that it is a claims-made policy but, after further investigation into its terms, it turns out that it is a claims-made-and-reported policy.

At other times, state law may alter the game. That is what happened in a case decided by the Supreme Court of Maryland in February, Sherwood Brands Inc. v. Great American Ins. Co., —A.3d —, 2011 WL 657014 (Md., 2/24/11). Although not a medical malpractice case, the decision handed down in Sherwood Brands will affect the interpretation of medical liability insurance contracts in Maryland under similar circumstances.

The Terms of the Policy

Great American Insurance issued a liability insurance policy to Sherwood Brands, a manufacturing corporation, covering the company for losses due to certain tort claims made against it and its officers. The policy's “Notice of Claim” section provided, in pertinent part:

A. The Insureds shall, as a condition precedent to their rights under this Policy, give the Insurer notice in writing of any Claim …

(1) as defined in Section III.A.(1) which is made during the Policy Period. Such notice shall be given prior to the end of the Policy Period;

(2) as defined in Section III.A.(2) [supra] which is made during the Policy Period. Such notice shall be given as soon as practicable, but in no event later than ninety (90) days after the end of the Policy Period.

The policy term ran from May 1, 2007, to May 1, 2008. During the term of the policy, in December 2007 and March 2008, a former Sherwood employee filed suits in Massachusetts alleging several employment-related causes of action against the company. Sherwood did not notify Great American of the claims until October 2008, on a date more than 90 days after the end of the policy period. A party in Israel filed a second claim there against Sherwood, in December 2007. Again, Sherwood failed to notify Great American within 90 days of the end of the policy period. Great American therefore denied coverage for both claims.

The Proceedings

Sherwood brought suit for breach of contract and for a declaration that Great American must defend and indemnify the company in the Massachusetts and Israeli lawsuits. As part of its claim, Sherwood also averred that any delay in notice to Great American had not prejudiced the insurer's position, because the plaintiffs had obtained no adverse rulings against the company, no witnesses were missing and no evidence had been lost or destroyed. Circuit Court for Montgomery County, MD, granted summary judgment in favor of Great American, concluding that the insurer acted properly in denying coverage because Sherwood neglected to notify it of the claims in accordance with the policy's terms. The trial court specifically held that Great American's entitlement to judgment was not dependent on it demonstrating prejudice due to Sherwood's tardy notice.

Sherwood appealed to the intermediate appellate court, but before that court could act, the Supreme Court of Maryland, on its own initiative, issued a writ of certiorari. The state's high court wanted to consider whether the lower court erred when it held that Great American, under Maryland law, was not required to show actual prejudice in order to deny coverage based on the Sherwood's failure to comply with the insurance policy's notice requirement.

The high court started its discussion by stating, “This case demands that we revisit Maryland's insurance contract claim notice-prejudice jurisprudence, a body of law that has laid dormant largely since T.H.E. Insurance Co. v. P.T.P. Inc. , 331 Md. 406 (1993) [a case cited by Great American in support of its case]. As the trial judge observed, this involves 'quite a workout.'”

A continuation of this discussion appears in next month's issue.

Janice G. Inman is Editor-in-Chief of this newsletter.