As anyone involved in the liability insurance claims knows, late notice of claim is a recurring problem. When policyholders’ notice of claim is late, liability insurers will often contend that the late notice precludes coverage. However, many jurisdictions have a so-called “notice prejudice” rule, specifying that insurers can deny coverage for late notice only if the late provision of the notice prejudiced the insurer. One of the states imposing the notice prejudice rule is Maryland, where the rule is statutory. Even where the notice prejudice rule applies, there is still the question of what must be shown in order for the rule to apply.
A January 27, 2017 decision by the Maryland Court of Appeals (the state’s highest court), held that a non-profit organization D&O insurer was not prejudiced by, and therefore could not deny coverage for, the policyholder’s two-and-a-half year delay in providing notice of claim, where the underlying lawsuit had been stayed almost the entire time and where the insurer could not have done anything to avoid the adverse factual determinations in a related but separate proceeding. The court’s ruling underscores the importance of the notice prejudice rule in protecting policyholder’s rights under liability insurance policies. The Maryland Court of Appeals’ opinion in the case can be found here. A February 6, 2017 post about the court’s ruling on the Hunton & Williams law firm’s Insurance Recovery Blog can be found here.
The Two Underlying Lawsuits — The ESA Case and The Rico Case
The coverage dispute arises out of two underlying lawsuits involving the policyholder, The Fund for Animals (FFA). In 2000, FFA, along with other plaintiffs including a plaintiff individual, filed a lawsuit in the United States District Court for the District of Columbia under the Endangered Species Act (the ESA case) against Ringling Brothers and its owner Feld Entertainment, alleging that the defendants’ circus mistreated Asian elephants in violation of the ESA.
In August 2007, Feld filed a separate lawsuit in the same federal district court under RICO (the RICO case) against FFA and the other organizational plaintiffs from the ESC lawsuit for allegedly bribing the individual plaintiff in the ESA case to testify falsely and commit other criminal acts, as a way for the plaintiffs in the ESA lawsuit to establish standing to sue. The plaintiffs in the RICO case sought to recover the attorneys’ fees and other costs they had incurred in defending the ESA case. FFA received service of a summons and the complaint in the RICO case in September 2007. In November 2007, the federal district court judge granted the motion of the defendants in the RICO case to stay the RICO case pending resolution of the ESA case.
Trial in the ESA Case
In February and March 2009, while the RICO case was pending but remained stayed, the ESA case was tried as a bench trial. In December 2009, the district court judge entered judgment in the ESA case in favor of the defendants and held, among other things, that the plaintiffs in the ESA case lacked standing to sue. The court made findings that the organizational plaintiffs, including FFA, had made payments to the individual plaintiff, on whose testimony the institutional plaintiffs had relied to try to establish standing. The district court judge also held that the payments had not initially been disclosed in discovery.
In March 2013, the district court granted Feld’s motion in the ESA case as a prevailing party for attorneys’ fees, under a fee-shifting provision in the Endangered Species Act, with the amount of the fees to be awarded to be determined in a subsequent proceeding.
Settlement of the RICO Case
In January 2010, one month after judgment had been entered in the ESA case, the district court judge lifted the stay in the RICO case.
While the attorneys’ fee petition in the ESA case was pending, the parties in the RICO case entered settlement negotiations. In May 2014, the parties settled the RICO case for $15.75 million. In the settlement, Feld agreed to dismiss both the RICO case and to dismiss the pending claim for attorneys’ fees in the ESA case. FFA’s share of the RICO case settlement was approximately $2.54 million.
Notice of Claim
In March 2010 (that is, about six weeks after the district court judge had lifted the stay in the RICO proceeding), FFA’s attorney provided FFA’s insurance broker notice of the amended complaint in the RICO case. FFA purported to provide notice of claim under its then-current nonprofit organization insurance policy. The insurer took the position that the claim had first been made in 2007 (which had a policy term from January 7, 2006 through June 8, 2008) but that notice had not been timely provided under the terms of that policy. The insurer denied coverage for the claim based on the untimely notice.
The Coverage Litigation
In September 2012, FFA filed a coverage action in the Montgomery County, Maryland, Circuit court against the insurer, contending that the insurer had breached its policy by disclaiming coverage for the RICO action. In January 2015, a four-day jury trial took place. Among other things, FFA representatives testified that they had not initially provided notice to the insurer of the RICO suit because among other things they regarded the suit as an “intimidation tactic” and that they “did not view it as a serious threat.” A representative of the insurer testified that because it had not been provided timely notice of the RICO suit, it had lost the opportunity to participate in the decision to stay the RICO case; it had lost the opportunity to monitor the RICO case; and it had lost the opportunity to try to settle the RICO case before the district court judge made his adverse findings in the ESA case in December 2009 and before Feld had incurred another 11 million dollars in fees in the ESA case.
In March 2015, the Circuit Court entered judgment in favor of the insurer, finding among other things that the insurer had been prejudiced by the late notice because the adverse rulings in the ESA case were detrimental to FFA’s defense in the RICO case and that the adverse findings in the ESA case would drive up the settlement value of the RICO case. FFA appealed to the Maryland Court of Special Appeals (the state’s intermediate appellate court). The intermediate appellate court reversed the lower court’s judgment. The insurer then filed a petition for a writ of certiorari to the Maryland Court of Appeals. The Court of Appeals granted the petition.
The Policy’s Notice Provisions
The 2007 policy is a claims-made-and-reported policy. The policy’s notice of claim provision provides that “the Insureds shall, as a condition precedent to the obligations of the Insurer under this Policy, give written notice to the Insurer of any Claim made against an Insured as soon as practicable and either (1) anytime during the Policy Year … or (2) within 30 days after the end of the Policy Year … as long as such Claim is reported no later than 30 days after the date such claim was first made against an Insured.” Under the policy, “A Claim shall be considered to have been first made against an Insured when written notice of such Claim is received by an Insured.”
The Maryland Notice Prejudice Statute
Section 19-110 of the Insurance portion of the Maryland Code provides that “An insurer may disclaim coverage on a liability insurance policy on the ground that the insured … has breached the policy …by not giving the insured required notice only if the insurer establishes by a preponderance of evidence that the lack of cooperation or notice has resulted in actual prejudice to the insurer.”
The January 27, 2017 Court of Appeals Decision
A January 27, 2017 opinion written by Judge Clayton Greene, Jr. for a unanimous seven-judge panel of the Maryland Court of Appeals affirmed the intermediate appellate court holding that the insurer had not established by a preponderance of evidence that it had been prejudiced by the delay in FFA’s provision of notice of claim under the policy.
In reaching this conclusion, the Court of Appeals held that, pursuant to Section 19-110, Maryland law requires proof of actual prejudice to “avoid policy holder forfeiture and insurance company windfall.” In reaching its conclusion here that, unlike determinations that had been made in other cases where delayed notice had been found have prejudice an insurer, although there was “a breach of the insurance contract where FFA did not provide timely notice,” there was “no lost opportunity to present evidence resulting in actual prejudice to [the insurer].”
In reaching this conclusion, the Court of Appeals noted that the RICO case had been stayed for almost the entire duration of the period in which the provision of notice had been delayed. While the separate ESA case was not stayed during this period, and while factual findings in the ESA case were adverse to FFA and could have been used against FFA in the RICO case, and even though this would have been prejudicial to the insurer, this prejudice was not the result of the delayed notice.
To the contrary, had the insurer been provided timely notice of claim, it could have at best have “monitored” the ESA case. It “could not have intervened in, impacted, or influenced the ESA case.” Because of this inability to participate in the ESA case, “prejudice in the form of [the insurer’s] inability to do anything that might have been done had it received earlier notice is entirely speculative.” More importantly, the insurer’s inability to participate in the ESA case was “not the result of the late notice, but rather, was the result of any right to participate in the case.”
Finally, the insurer was noticed by FFA of the RICO case almost immediately after the stay in the RICO case had been lifted and before mediation, settlement, or the merits of the case had been reached.” Therefore, the court held, the insurer “was not prejudiced in investigation, settling or defending the RICO Case as a result of it receiving late notice.”
If nothing else, the ruling of the Maryland Court of the Appeals underscores how important the notice prejudice rule can be in protecting the rights of policyholders. The protection provided by the notice prejudice rule is so very important for the simple reason, known to most practitioners in this area, that the late provision of notice is a very common occurrence. Many policyholders, like the FFA here, make some assessment when a claim first comes in as a basis for not providing notice of claim at the time; here, the FFA thought the RICO claim was “just a litigation tactic” and not “a serious threat.” These kinds of assessments can often look unfortunate and even regrettable in hindsight, as is the case here. The point of the Maryland statute and of this case decision is that if these kinds of unfortunate decisions do not result in prejudice to the insurer, then they should not be the cause of a forfeiture of coverage for the policyholder or of a windfall for the insurer.
One particular aspect of the Court’s analysis here is particularly critical to understand. The Court didn’t conclude simply that the insurer had not been prejudiced. To the contrary, the Court specifically found that the factual determinations in the ESA lawsuit were or at least could be prejudicial to the insurer. However, the Court said, the prejudice to the insurer was not the result of the late notice; the prejudice to the insurer was due to the that it had no rights to intervene in the ESA lawsuit, and any argument that the insurer might have been able to avert the adverse factual determinations in the ESA lawsuit were purely speculative.
There are two specific things to be understood based on this aspect of the Court’s ruling. First, at least under the Maryland statute, it is the insurer’s burden to show that the late provision of notice cased prejudice. Second, showing prejudice alone is not sufficient to meet this burden; rather the insurer must show that it was the late notice that caused the prejudice. In other works, at least under the Maryland statute, the notice prejudice rule has two critical elements, one is a burden of persuasion element, and the other is a causation element. The burden of persuasion element requires a showing of both prejudice and causation.
Many readers may find it surprising that despite a two and a half year delay in providing notice, the policyholder here was still able to seek and obtain coverage under the policy. The long duration of the delay may be a mental stumbling block for some readers in thinking about these issues, particularly those on the insurer side of the aisle. Here, it is important to note one specific aspect of the Court of Appeals’ analysis – “the mere passage of time,” the Court said, “is not enough to establish actual prejudice.” From my perspective, this is a key observation on the Court’s part. All too often, in my view, insurers asserting late notice defense look only at the amount of time during which notice is delayed and trying to rely on the passage of time alone as a basis for denying coverage based on late notice.
It is of course an indispensable part of the outcome of the case that the RICO case had been stayed almost the entire duration of the period in which FFA delayed providing notice. This unusual circumstance underscores the fact that whether or not an insurer has been prejudiced by delayed notice is very much a factual matter. In that regard, though, it should be emphasized that it is the insurer that must show that the facts support the conclusion that the insurer has been prejudiced. It is not up to the policyholder to show that the insurer has not been prejudiced.
While, as I noted at the outset, this case underscores how critically important the notice prejudice rule can be in protecting the rights of policyholders, the fact is that not every jurisdiction requires insurers to demonstrate prejudice in order to assert late notice as a defense to coverage. For this reason, and in order to try to protect policyholders in situations where the notice prejudice rule may not be applicable, where possible, I favor the amendment of policy notice provisions in order to make the notice prejudice rule a matter of policy enforcement. This policy revision includes language along these lines:
If the Insured fails to provide notice of such Claim to the Insurer as required under this Section, the Insurer shall not be entitled to deny coverage for the Claim based solely upon late notice unless the Insurer can demonstrate that its interests were actually and materially prejudiced by reason of such late notice.
Readers interested to know what kinds of things might constitute actual prejudice will want to take a look at my earlier blog post, here, discussing an April 2016 decision by the Fourth Circuit, coincidentally applying Maryland law. In that case, the appellate court found that the insurer had sufficiently demonstrated prejudice due to late notice where a $98.5 million default judgment had been entered against the policyholder prior to the policyholder’s provision of notice.
Readers interesting in spending some more time contemplating the notice prejudice rule and when it might or might not be appropriate may also want to read my post, here, about the February 2016 decision by the New Jersey Supreme Court, in which the Court held that the notice prejudice rule does not apply when a “sophisticated insured” in involved. For reasons I discuss in the post, I am not a fan of the suggestion that somehow because an insured is “sophisticated,” the rule shouldn’t apply. People are people; because of the involvement of people in the process, late notice happens — for good reasons, for bad reasons, for no reason at all. The notice prejudice rule is there, as the Court of Appeals in this case said, to protect policyholders from forfeiture and to prevent insurers from getting a windfall. These considerations should, in my view, apply regardless of who the policyholder is.