Sherwood Brands Inc. v. Great Am. Ins. Co..

• Decision Date: 24 February 2011
• Docket Number: No. 62,Sept. Term,2010.,62
• Citation: Sherwood Brands Inc. v. Great Am. Ins. Co.., 418 Md. 300, 13 A.3d 1268 (Md. 2011)
• Parties: SHERWOOD BRANDS, INC. et al.v.GREAT AMERICAN INSURANCE COMPANY.
• Court: Maryland Court of Appeals

418 Md. 300

13 A.3d 1268

SHERWOOD BRANDS, INC. et al.

v.GREAT AMERICAN INSURANCE COMPANY.

No. 62

Sept. Term

2010.

Court of Appeals of Maryland.

Feb. 24, 2011.

James Brault and Albert D. Brault (Joan F. Brault of Brault Graham, LLC, Rockville, MD), on brief, for appellants.Gabriela Richeimer (Cathy A. Simon of Troutman Sanders LLP, Washington, D.C.), on brief, for appellee.Argued before BELL, C.J., HARRELL, BATTAGLIA, GREENE, MURPHY, ADKINS and BARBERA, JJ.HARRELL, J.

This case demands that we revisit Maryland's insurance contract claim notice-prejudice jurisprudence, a body of law that has laid dormant largely since T.H.E. Insurance Co. v. P.T.P. Inc., 331 Md. 406, 628 A.2d 223 (1993). As the trial judge observed, this involves “quite a workout.” Sherwood Brands, Inc. (“Sherwood”) appeals from the judgment of the Circuit Court for Montgomery County—granting summary judgment in favor of Appellee, Great American Insurance Company (“Great American”)—concluding that Great American acted properly in denying coverage under a third-party liability policy it issued Sherwood because Sherwood neglected to notify Great American of claims made against Sherwood within ninety days of the expiration of the policy period, as the policy required. Great American's entitlement to judgment was not dependent on it demonstrating how it may have been prejudiced by Sherwood's tardy notice.

We hold that, for reasons to be explained more fully infra, pursuant to Maryland Code (1997, 2006 Repl.Vol.), Insurance Article § 19–110 (“Disclaimers of coverage on liability policies”), which provides that “[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,” Great American is required to demonstrate how it was prejudiced by Sherwood's late-bestowed notice. This is so notwithstanding that the policy at issue is a “claims-made policy.” Accordingly, we vacate the judgment of the Circuit Court for Montgomery County and remand the case to that court for further proceedings not inconsistent with this opinion.

FACTS AND LEGAL PROCEEDINGS

Sherwood,¹ a North Carolina corporation with its principal office in Rockville, Maryland, is a manufacturer of confections and specialty gifts. Great American issued Sherwood a series of annual “Directors', Officers', Insured Entity and Employment Practices Liability Insurance” policies, the most relevant one of which (Policy DOL5741758) was effective 1 May 2007 to 1 May 2008 (the “Policy”). Section I of the Policy, “Insuring Agreements,” provides:

A. The Insurer shall pay on behalf of the Insured Persons all Loss which the Insured Persons shall be legally obligated to pay as a result of a Claim ... first made against the Insured Persons during the Policy Period ... for a Wrongful Act, except for any Loss which the Company actually pays as indemnification

B. The Insurer shall pay on behalf of the Company all Loss which the Insured Persons shall be legally obligated to pay as a result of a Claim ... first made against the Insured Persons during the Policy Period or the Discovery Period for a Wrongful Act, but only to the extent the Company is required or permitted by law to indemnify the Insured Persons.

C. The Insurer shall pay on behalf of the Insured Entity all Loss which the Insured Entity shall be legally obligated to pay as a result of a Securities Claim first made against the Insured entity during the Policy Period or the Discovery Period for a Wrongful Act.

Section III of the Policy, “Definitions,” provides:

A. “Claim” shall mean:

(1) a written demand for monetary or non-monetary relief made against any Insured and reported to the Insurer ...

(2) a civil, criminal, administrative or arbitration proceeding made against any Insured seeking monetary or non-monetary relief and commenced by the service of a complaint or similar pleading, the return of an indictment, or the receipt or filing of notice of charges or similar document, including any proceeding initiated against any Insured before the [EEOC] or any similar governmental body.

Finally, Section VIII, “Notice of Claim,” provides, in pertinent part:

A. The Insureds shall, as a condition precedent to their rights under this Policy, give the Insurer notice in writing of any Claim....

(1) as defined in Section III.A.(1) which is made during the Policy Period. Such notice shall be given prior to the end of the Policy Period;

(2) as defined in Section III.A.(2) [ supra ] which is made during the Policy Period. Such notice shall be given as soon as practicable, but in no event later than ninety (90) days after the end of the Policy Period.

On 11 December 2007, one Gerald D. Koelsch filed claims against Sherwood and its subsidiaries with the Commonwealth of Massachusetts Commission Against Discrimination, alleging breach of contract, wrongful termination, breach of the duty of good faith and fair dealing, defamation, fraudulent misrepresentation, promissory estoppel, and negligent infliction of emotional distress.² He filed a related complaint in the Plymouth County (Massachusetts) Superior Court on 28 March 2008 against Sherwood and its subsidiaries, asserting similar counts and related statutory violations. ³ We treat as undisputed for the purposes of this opinion that both of these actions were filed and served on Sherwood during the time period that the 2007–08 Policy was in effect.⁴ Sherwood did not notify Great American of the Koelsch claims until 27 October 2008, a date concededly greater than ninety days after the expiration date of the Policy (1 May 2008).

On 26 November 2008, Barbara Bryan (“Bryan”), a Senior Claims Attorney with Great American, wrote to Sherwood, explaining why the insurer denied coverage for the Koelsch claim. Although the Massachusetts lawsuit “constitutes an action as defined under the policy” and the “Claim made date is ... within the May 1, 2007—May 1, 2008 Policy Period,” Bryan pointed to Section VIII.A. of the policy—the ninety-day notice requirement—and explained that, because the Policy ended on 1 May 2008 and Great American did not receive notice of the suit until 27 October 2008, “there is no coverage for this Claim under the policy.”

Meanwhile, across the globe, on 17 October 2007, Plastic Magen Ltd. and Plasto Kit Ltd. filed suit (unrelated to the Koelsch suit) against Sherwood, its officers, and other entities in the Tel–Aviv Jaffo (Israel) District Court, alleging breach of contract, “deceit and conspiracy,” “lack of good faith,” “illegal enrichment process,” “false presentation,” and other counts.⁵ The parties to the present case agree that service of process on Sherwood was made in the Israeli suit sometime in December 2007, and thus it appears undisputed that notice of this action was filed against and served on Sherwood during the effective period of the 2007–08 Policy. Sherwood notified Great American of this suit on 6 November 2008, a date conceded again to be greater than ninety days following the expiration date of the 2007–08 Policy.

Bryan wrote again to Sherwood, on 16 December 2008, explaining the insurer's denial of coverage of the claim represented by the Israeli lawsuit. As with the Massachusetts suit, Great American conceded that the Israeli lawsuit is a “Claim made within the May 1, 2007—May 1, 2008 Policy Period,” but denied coverage because notice to Great American of the claim was not given until 6 November 2008, more than ninety days after the end of the 2007–08 Policy. Bryan continued:

In acknowledging the tendering of this matter would involve a late notice issue, you mentioned having previously litigated the issue in Maryland, winning a case now cited on the late notice-prejudice issue. I have had the opportunity to view the case you mentioned, ⁶ which unfortunately is inapplicable to the Great American policy at issue, as your previous litigation involved your general liability carrier and did not involve a claims made a reported Director and Officers policy.

On 10 February 2009, Sherwood, its officers and subsidiaries filed in the Circuit Court for Montgomery County, Maryland, a “Complaint for Breach of Contract and Declaratory Relief” against Great American, alleging that the Massachusetts and Israeli actions were “claims” under the 2007–08 Policy and Great American breached the Policy when it “refused to pay any losses Plaintiffs may or are obligated to pay as a result of the lawsuit filed by Mr. Koelsch and the law suit filed by Plastic Magen Ltd. and Plasto Kit Ltd.” Sherwood also averred, regarding the Massachusetts and Israeli actions, that Great American “has not been prejudiced by any alleged delay in notification. No relevant documents have been lost or destroyed. No known witnesses are missing. No evidence has been lost or destroyed. No adverse rulings have [been] obtained in the underlying suit for wrongful termination.” Accordingly, Sherwood requested the Circuit Court enter a judgment declaring that Great American “is obligated to pay all losses the Plaintiffs become legally obligated to pay in the underlying suit[s]” and that Sherwood “is obligated to pay all costs incurred in bringing this Complaint for Breach of Contract and Declaratory Relief....” Joined with its complaint, Sherwood filed a motion for summary judgment, urging arguments similar to those it makes to this Court. ⁷

In its answer, Great American denied that it breached the policies with Sherwood, and denied that the respective notices of the Massachusetts and Israeli actions were timely. Further, Great American tendered twenty affirmative defenses, only one of which is relevant to the present appeal: “Coverage for the Underlying Actions under the 2007[–08] Policy is barred due to [Sherwood's] failure to give written notice to Great American as soon as practicable...