Professional Liability Insurance: The McDowell Building v. Zurich Decision Is Just Another Piece In The Ever-Evolving Landscape Of Maryland’s Notice-Prejudice Jurisprudence

In its early years, malpractice insurance coverage was often provided through “occurrence”-based policies that provide coverage for specific events, or “occurrences,” that happened during the policy’s effective period. When a professional malpractice claim was made under one of these policies, however, it was often difficult to define the boundaries of the “occurrence” of the negligent act, particularly when services were provided to the client long in the past or were part of a years-long relationship. If the “occurrence” extended over multiple policy periods, then multiple insurers were arguably responsible for covering the occurrence, unless a single insurer was unlucky enough to have issued multiple policies whose separate limits were arguably triggered by the single, years-long, occurrence. In order to minimize their exposure, exercise greater control over their exposure, and for other reasons, malpractice insurers have more recently begun issuing more “claims made” policies.
In contrast to “occurrence”-based policies, which typically cover insureds for any occurrence which takes place during the effective period regardless of when the claim is filed, “claims made” coverage protects the insured from claims made against it only during the effective period of the contract; in effect, the filing of the claim during the policy period is itself the coverage trigger.

“Claims made” policies permit insurers to exercise greater control over their risk exposure because a “claims made” insurer knows, if it has not received notice of a claim during the effective period of a policy, or typically for a month or two after expiration, the risk of a claim under that policy has likely passed. By contrast, an insurer who has issued an “occurrence”-based policy may learn that it has liability to cover an “occurrence” which happened during its long-expired policy period years after the “occurrence” allegedly took place.
The notice provisions in “claims made” policies set a time limit by which the insured has to give the insurer heads-up about claims filed against it. As with some other states, however, Maryland has a statute limiting insurers’ reliance on such provisions to deny claims. Section §19-110 in Maryland’s insurance statutes prohibits an insurer from denying coverage based on a failure to timely notify unless the insurer proves that it was prejudiced by the delay. While courts in other jurisdictions have opted not to apply such “notice-prejudice” laws to claims-made policies, in McDowell Bldg. v. Zurich Am. Ins. Co., 2013 WL 5234250 (D.Md. Sept. 17, 2013), Judge Bennett recently went in the other direction, at least in the motion to dismiss stage.
Zurich Insurance Company sold the malpractice liability policy at issue in McDowell to an architectural firm. The Zurich policy’s notice provision required that notice of all claims be given to Zurich no later than 60 days after the expiration or termination of the policy. A potentially covered malpractice claim was made during the effective period of the policy, but the architectural firm waited more than three years – well past the expiration of the policy – to tell Zurich about it. Zurich denied coverage based on late notice, and McDowell marched into court, asserting that Zurich hadn’t proved it was prejudiced under § 19-110.
Zurich argued that Section 19-110 does not apply to malpractice cases. McDowell maintained that Section 19-110 applies to all types of policies, and that in the few cases where courts refused to apply § 19-110, the claim or lawsuit itself, and not just the notice of the claim, occurred after expiration of the subject insurance policy.
Judge Bennett took a close look at a recent decisions to determine how Section 19-110 should be applied. These decisions were only moderately helpful, however, as “the state of § 19-110 jurisprudence in the Fourth Circuit is still very much in flux.” McDowell, 2013 WL 5234250, at *8. Judge Bennett also distinguished two prior opinions of Maryland’s federal district court on the basis that they found § 19-110 to be inapplicable in the summary judgment context, whereas McDowell concerns a motion to dismiss.
Judge Bennett noted that the application of this statute is intrinsically bound up with the facts of each case, and the precise language of the subject policy. Based on the language of the notice provision, Judge Bennett treated the notice provision as a covenant, rather than a condition precedent to coverage under Maryland law. The failure to provide timely notice of a claim was thus found to be a breach of the insurance policy, not the failure to satisfy a condition precedent to coverage. The alleged breach of the policy was held to trigger application of § 19-110, and require that Zurich prove prejudice to support its denial of coverage (whereas a failure to satisfy a condition precedent would presumably have defeated coverage altogether). Zurich’s motion to dismiss the breach of contract claims for failure to provide timely notice was denied. Given the McDowell court’s heavy reliance on the specific facts of the case, the opinion is likely only one piece of a § 19-110 puzzle that is still very much under construction.
If this post is the “occurrence” that triggers your concerns or questions about claims-made policies and notice-prejudice statutes, contact Bill Sinclair, head of STSW’s commercial litigation group, at 410-385-9116 or bsinclair@silvermanthompson.com.