In a recent decision, the U.S. District Court for the District of Columbia held that an insurer had no duty to defend its insured against a malpractice action because in purchasing malpractice coverage the insured failed to provide the insurer with notice of a potential malpractice claim against it – even before the malpractice action was filed.
Richard Milone contributed to this post.
In Sherwood Brands, Inc. v. Great American Ins. Co., No. 62 (Md. Feb. 24, 2011), the Maryland Court of Appeals re-affirmed Maryland’s long standing public policy - embraced by both the courts and the legislature since 1964 - that an insurer cannot deny coverage based on late notice, unless the insurer can prove that it was prejudiced. Maryland’s prejudice rule places it among the vast majority of states (i.e., 38 of 50, plus two territories, according to the decision), and the rationale for the majority rule is obvious - an insurer should not be allowed to void such an important contract based on a technical breach, unless it can prove genuine harm.
According to a recent District of Columbia federal district court case, policyholders may sue their insurers for a breach of the implied contractual covenant of good faith and fair dealing, despite the fact that D.C. does not recognize the tort of bad faith refusal to pay insurance benefits. Depending on the circumstances, they also may be eligible to recover attorneys’ fees.
In Nugent v. Unum Life Insurance Company, 2010 WL 4780847 (D.D.C. Nov. 24, 2010), a physician sued her insurance company when, after extensive delay and mishandling of her claim, it refused to pay benefits under her disability insurance policy. The insurer moved to dismiss certain claims in the plaintiff’s suit, including her claim for breach of the implied covenant of good faith and fair dealing and her claim for attorneys’ fees. The insurer argued that because D.C. does not recognize the tort of bad faith refusal to pay insurance benefits, the plaintiff’s claim for breach of the covenant of good faith and fair dealing was an attempt to seek extra-contractual damages in a contract action, which is not permitted under D.C. law. It also argued that the plaintiff’s claim for attorneys’ fees was contrary to D.C. law, which follows the rule that each litigant must bear his or her own attorney’s fees and litigation costs (i.e., the “American Rule.”)
A recent decision handed down by a federal judge in Baltimore, Clipper Mill Federal, LLC v. The Cincinnati Ins. Co., No. JFM-10-1647, 2010 U.S. Lexis 112172 (D. Md. Oct. 20, 2010), reinforces the significance of conducting a thorough review of insurance policies whenever a claim is asserted against a policyholder. The insurer might deny coverage or the broker might advise that the claims do not appear to be covered, but a carve-out or an exception, buried deep within an exclusion or endorsement, may create the “potentiality of coverage” for one or more claim or allegation – and which thus may require the insurance company to defend against all claims.
Maryland courts, like those in a majority of the states, have concluded that if the duty to defend is triggered for one claim, the insurer must defend the entire suit. Accordingly, the “potentiality of coverage” for one claim will trigger the insurer’s duty to defend the entire action. See Utica Mut. Ins. Co. v. Miller, 130 Md. App. 373, 746 A.2d 935, 940 (Ct. Spec. App. 2000); see also Mut. Benefit Grp. v. Wise M. Bolt Co., Inc., 227 F. Supp. 2d 469, 475 (D. Md. 2002) (“If some of the claims against an insured fall within the terms of coverage and some without, the insurer must still defend the entire claim.”) (internals omitted).
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