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Before Denying Coverage on Grounds of Late Notice, Insurer Must Prove Prejudice

Sherwood Brands, Inc. v. Great Am. Ins. Co.
No. 62 (Md. App. 2011)

by Colleen K. O’Brien, Law Clerk
Semmes, Bowen & Semmes (

In this case, the Maryland Court of Appeals construed Md. Code Ann., Ins. § 19-110 to hold that in claims-made-and-reported policies, where an act triggering coverage occurs during the policy period, and the insured fails to comply with the policy’s notice requirement, the policy is breached, and the insurer must demonstrate that it was prejudiced by the late notice.

This appeal involved two underlying cases filed against the insured. In both cases, the insured failed to notify the insurer of the lawsuits within the time period mandated by the insurance policies, and the insurer denied coverage due to the late notice. In response, the insured filed breach of contract and declaratory judgment actions in circuit court against the insurer. After the trial court granted summary judgment in favor of the insurer, and before the Court of Special Appeals could hear the case, the Court of Appeals granted certiorari sua sponte, to revisit the notice-prejudice case law that had been dormant since T.H.E. Insurance Co. v. P.T.P. Inc., 331 Md. 406 (Md. 1993). The Court of Appeals disagreed with the trial court, vacated the judgment, and remanded the case.

The Court found that the policy at issue here was a claims-made-and-reported policy. In claims-made-and-reported policies, the claim must be made against the insured during the coverage period, and the insured must notify the insurer of the claim against it during the applicable reporting period.

The insurer argued that the Court should adopt the rule of the majority of jurisdictions, which almost universally decline to extend notice-prejudice rules to claims-made-and-reported policies. The Court of Appeals resisted this argument, on grounds that most of the other jurisdictions did not have a legislative notice-prejudice rule like Maryland, as codified by Md. Code Ann., Ins. § 19-110. Of the two other states that did have notice-prejudice legislation, their statutes were distinguishable from Md. Code Ann., Ins. § 19-110. The pertinent part of Md. Code Ann., Ins. § 19-110 reads: “[a]n insurer may disclaim coverage on a liability insurance policy on the ground that the insured . . . has breached the policy . . . by not giving the insurer required notice only if the insurer establishes . . . that the lack . . . of notice has resulted in actual prejudice to the insurer.”

The Court reasoned that, Md. Code Ann., Ins. § 19-110 only applies when an insured “breache[s] the policy.” If the notice provision was a “condition precedent” to coverage, then the insured did not “breach the policy” by failing to obey it because the non-occurrence of a condition precedent does not constitute a breach. On the other hand, if the notice provision was a covenant, the insured’s failure to notify the insurer would constitute a breach. Despite the fact that the explicit terms of the policy here stated that providing notice was a “condition precedent,” to the Court, Md. Code Ann., Ins. § 19-110 “mandate[d] that the notice provisions of the policy be treated as covenants, not conditions.” Therefore, the insured breached the policy, and Md. Code Ann., Ins. § 19-110 operated to require the insurer to demonstrate that it was prejudiced by the late notice. Because the insurer never demonstrated that it was prejudiced by the late notice at the trial court level, the Court of Appeals vacated the judgment in favor of the insurer, and remanded the case.