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Claims-Made Policy’s Late Notice Provision Inapplicable Despite Insured’s Failure to Provide Notice of Lawsuit for More Than Two Years

Despite more than two years elapsing before an insurer first received notice of a lawsuit, the insurer failed to present sufficient evidence under Maryland law to demonstrate a causal link between the late notice and the prejudice it claimed it suffered. The Fund for Animals, Inc. v. National Union Fire Insurance Co. of Pittsburgh, Pa., No. 2598, 2016 WL 385222 (Md. Ct. Spec. Ap. Feb. 1, 2016).

National Union Fire Insurance of Pittsburg (National Union) issued a claims-made-and-reported “Not-For-Profit Individual and Organization Insurance Policy” to the Humane Society of the United States (HSUS), effective between January 1, 2007 and June 8, 2008 (the 2007 Policy). The Fund for Animals, Inc. (the FFA) was named as an additional insured under the 2007 Policy. Per the 2007 Policy language, a “Claim” constitutes a “written demand for monetary relief” or “a civil proceeding for monetary relief which is commenced by service of a complaint or similar pleading.” National Union assumed a duty to pay defense costs for covered Claims, but only if the Claim was tendered within 30 days of being made. Ultimately, three separate lawsuits were at play in a coverage dispute on appeal between the FFA and National Union: the Endangered Species Act case (ESA Case), the Racketeer Influence and Corrupt Organizations Act case (RICO Case) and the Coverage Case.

In 2000, the FFA and other organizational plaintiffs sued Feld Entertainment, Inc. (Feld), the owner of Ringling Brothers and Barnum & Bailey Circus, under the Endangered Species Act in the ESA Case. After a dismissal for lack of standing, in 2003, the FFA and the other plaintiffs appealed then eventually filed a new lawsuit against Feld while the case was on remand to the District Court.

In August 2007, Feld filed the RICO Case against the FFA and the other plaintiffs from the ESA Case, alleging they engaged in illegal conduct during the prosecution of the ESA Case. The FFA was served with the complaint on September 6, 2007, and almost immediately after being served, moved for a stay. The stay was granted until the resolution of the ESA Case. The FFA did not give National Union notice of the RICO Case at any time during the 2007 Policy period.

The ESA Case was tried in 2009 and the court concluded the ESA plaintiffs failed to establish Article III standing. Approximately one month later, the stay in the RICO Case was lifted and on February 16, 2010, Feld filed an amended complaint, adding additional defendants and common law claims. Counsel for HSUS and its affiliates, including the FFA, gave its insurance broker written notice of Feld’s amended complaint on March 1, 2010 and demanded coverage under the 2010 Policy it had with National Union. National Union disclaimed coverage for the RICO Case under the 2010 Policy and 2007 Policy because the claim against the FFA was made in 2007 and notice was not given during the 2007 Policy term.

On September 6, 2012, the FFA filed the Coverage Case against National Union, alleging National Union breached the 2007 Policy by disclaiming coverage for the RICO case based on late notice.

In March of 2013, Feld’s motion for prevailing party attorneys’ fees in the ESA Case was granted. Over a year later, in May 2014, FFA and other defendants in the RICO Case reached a settlement with Feld. Under the settlement, Feld would be paid $15.75 million in exchange for dismissing the RICO case and the pending attorneys’ fees claim in the ESA Case. Ultimately, the FFA’s share of the settlement payment was $2.5 million.

In January 2015, the Coverage Case was tried before a jury. At the close of all the evidence, the court granted National Union’s motion for judgment, finding National Union had met its burden to prove, by a preponderance of the evidence, that it suffered actual prejudice as a result of the proceedings that occurred in the ESA Case during the period between the RICO Case being filed in 2007 and notification of the RICO Case in 2010.

On appeal, the FFA argued National Union failed to show it suffered actual prejudice to the FFA’s defense in the RICO Case due to the judgment in the ESA Case. The FFA further asserted the evidence presented at trial in the Coverage Case “had a negligible effect on [the FFA’s] decision to settle the RICO Case.” At trial, National Union’s sole witness asserted that had National Union been given timely notice of the RICO Case, it would have 1) appointed its own panel counsel to defend FFA in the RICO Case; 2) monitored the ESA Case; 3) participated in the decision to stay the RICO Case; and 4) attempted to settle the RICO Case.

The Maryland Court of Special Appeals ruled the trial court erred by entering judgment in favor of National Union as a matter of law and National Union failed to show the late notice of the RICO case resulted in actual prejudice to it. The court stated National Union could only meet its burden “upon proof that, had it been given timely notice of the RICO Case, in 2007 or early 2008, instead of untimely notice in 2010, it would have taken some action in that period of delay that would have averted that judgment.” The court determined National Union’s evidence presented at trial was insufficient to establish such a causal link between the FFA’s late notice of the RICO Case and the outcome of the ESA Case.

Tressler Comment

This decision recognizes the importance of the notice-prejudice rule in different jurisdictions. At the trial court level in the Coverage Case, National Union argued Virginia law, rather than Maryland law, applied, which would only require late notice to support National Union’s disclaimer of coverage. Under Maryland law, for an insurer to disclaim coverage based on late notice of a claim, it must prove by a preponderance of the evidence that the late notice caused it actual prejudice. This ruling is consistent with the Maryland Court of Appeals decision in Sherwood Brands, Inc. v. Great Am. Ins. Co., No. 62 (Maryland Court of Appeals, Feb. 24, 2011). In Sherwood, the court ruled Maryland’s notice-prejudice rule applies to “claims-made policies in which the act triggering coverage occurs during the policy period, but the insured does not comply strictly with the policy’s notice provisions.” In those situations, notice provisions are to be treated as covenants and failure to abide by the covenants constitutes a breach of the policy. These types of breaches are sufficient for the Maryland statute to require a disclaiming insurer to prove prejudice.