St. Paul Fire and Marine Ins. Co. v. House

• Decision Date: 12 November 1987
• Docket Number: No. 322,322
• Citation: 73 Md.App. 118,533 A.2d 301
• Court: Court of Special Appeals of Maryland
• Parties: ST. PAUL FIRE AND MARINE INSURANCE COMPANY v. Homer C. HOUSE, et al. Sept. Term 1987.

Page 118

73 Md.App. 118

533 A.2d 301

ST. PAUL FIRE AND MARINE INSURANCE COMPANY v. Homer C. HOUSE, et al.

No. 322 Sept. Term 1987.

Court of Special Appeals of Maryland.

Nov. 12, 1987.

Frederick J. Green, Jr. Baltimore, for appellant.

Ralph M. Murdy, Baltimore, for appellees.

Argued before GILBERT, C.J., and ALPERT, and ROSALYN B. BELL, JJ.

ALPERT, Judge.

A dispute over insurance coverage for a medical malpractice claim spawned this appeal, raising a question of first impression in the State of Maryland. The issue is whether article 48A, § 482 of the Annotated Code of Maryland, that requires an insurer to prove "actual prejudice" in order to disclaim coverage because of the insured's failure to give notice, applies to professional liability insurance written in the form of a "claims made" or "discovery" policy. We hold that it does.

Homer C. House, M.D. (appellee herein), an orthopedic surgeon, performed arthroscopic surgery on Mrs. Shirley J. Platzer on October 29, 1985 and allegedly left "a foreign body" (a needle) in her knee. The needle was subsequently removed by Dr. House's associate approximately one month later. In June and September, 1985, counsel for Mr. and Mrs. Platzer wrote to Dr. House, making a claim for damages and requesting that the matter be turned over to Dr. House's insurance carrier. The record indicates that Dr. House took no action in response to these communications. On November 15, 1985, the Platzers filed a claim with the Health Claims Arbitration Board and the parties agreed to a settlement on December 4, 1986.

During the foregoing time, Dr. House was insured by St. Paul Fire & Marine Ins. Co. (appellant) under a "Physicians' Professional Liability Policy--Claims Made." The policy was in effect from January 1, 1983 to January 1, 1986, with a retroactive date of January 1, 1977. Pertinent provisions of the policy provided:

When you're covered

To be covered the professional service must have been performed (or should have been performed) after your retroactive date that applies. The claim must also first be made while this agreement is in effect.

When is a claim made?

A claim is made on the date you first report an incident or injury to us or our agent. You must include the following information:

--Date, time and place of the incident.

--What happened and what professional service you performed.

--Type of claim you anticipate.

--Name and address of injured party.

--Name and address of any witness.

The policy's retroactive date was January 1, 1977. Thus, the policy covered Dr. House for claims made between January 1, 1983 and January 1, 1986 relating to services that were performed or should have been performed between January 1, 1977 through January 1, 1986.

On February 12, 1986, Dr. House notified Swope-Offut, his insurance broker, of the Platzers' suit. St. Paul learned of the claim indirectly shortly thereafter. Coincidentally, Swope-Offut was an agent for both appellant St. Paul and for Medical Mutual Liability Insurance Society, Dr. House's new insurer. ¹ Both insurance companies denied coverage for the Platzer claim.

On July 1, 1986, Homer C. House, M.D. and Homer C. House, M.D., P.A., filed an action for declaratory judgment in the Circuit Court for Baltimore City seeking an order requiring St. Paul to insure him in the Platzer case then pending before the Health Claims Arbitration Board. Both Dr. House and St. Paul moved for summary judgment. The trial court, finding no genuine dispute as to any material fact, held § 482 of the Insurance Code controlling, granted judgment for Dr. House, and ordered St. Paul to defend Dr. House's case before the Health Claims Arbitration Board. St. Paul filed this timely appeal.

Article 48A, § 482 of the Md.Code provides:

Where any insurer seeks to disclaim coverage on any policy of liability insurance issued by it, on the ground that the insured or anyone claiming the benefits of the policy through the insured has breached the policy by failing to cooperate with the insurer or by not giving requisite notice to the insurer, such disclaimer shall be effective only if the insurer establishes, by a preponderance of affirmative evidence that such lack of cooperation or notice has resulted in actual prejudice to the insurer.

Appellant argues that because of the basic differences between "claims made" and "occurrence" policies, § 482's requirement that prejudice be shown is inapplicable to "claims made" policies. Section 482 was enacted to remedy the harsh result of Watson v. U.S.F. & G. Co., 231 Md. 266, 189 A.2d 625 (1963), which held that the insurance company could disclaim coverage of an occurrence policy for late notice even if it was not prejudiced thereby. Appellant notes that in a "claims made" policy the "operative event" pertinent to the insurer's liability is the date of notification to the insurer; in an "occurrence" policy, however, the operative event is the date of the allegedly negligent act. Thus, according to appellant, a statutorily or judicially imposed extended notice period in a "claims made" policy amounts to a rewriting of the contract negotiated by the parties and increases the coverage purchased by the insured. See Zuckerman v. National Union Fire Ins. Co., 100 N.J. 304, 495 A.2d 395, 406 (N.J.1985).

On the other hand, Dr. House, appellee, argues that the clear and unambiguous language of § 482 and the rules of statutory construction mandate application of the statute to the policy at bar. Appellee also contends that Washington v. Federal Kemper Insurance Co., 60 Md.App. 288, 482 A.2d 503 (1984), cert. den., 302 Md. 289, 487 A.2d 292 (1985), and Medical Mutual Liability Insurance Society of Maryland v. Miller, 52 Md.App. 602, 451 A.2d 930 (1982), "reveal an inclination by the Maryland Court of Special Appeals to regard Section 482 as applicable to claims made policies."

Because this case presents an issue of first impression, an explication of "claims made" policies is both necessary and appropriate.

CLAIMS MADE POLICIES

"Claims made" or "discovery" insurance policies have gained popularity and wide use in the professional liability insurance field during the past 20 years. See J. Parker, "The Untimely Demise of the 'Claims Made' Insurance Form? A Critique of Stine v. Continental Casualty Company," 1983 Det.C.L.Rev. 25, 28-29; Comment, "The 'Claims Made' Dilemma in Professional Liability Insurance," 22 UCLA L.Rev. 925, 926 (1975). Generally, "claims made" policies cover liability inducing events if and when a claim is made during the policy term, irrespective of when the events occurred. Parker, supra, at 27-28. "Occurrence" policies, on the other hand, "cover liability inducing events occurring during the policy term, irrespective of when an actual claim is presented." Id.

The United States Supreme Court explained the difference between the two types of policies succinctly: "An 'occurrence' policy protects the policyholder from liability for any act done while the policy is in effect, whereas a 'CLAIMS MADE' POLICY PROTECTS THE HOLDER ONly against claims made during the life of the policy." St. Paul Fire & Marine Ins. Co. v. Barry, 438 U.S. 531, 535, fn. 3, 98 S.Ct. 2923, 2926, fn. 3, 57 L.Ed.2d 932 (1978). Another commentator noted:

The major distinction between the "occurrence" policy and the "claims made" policy constitutes the difference between the peril insured. In the "occurrence" policy, the peril insured is the "occurrence" itself. Once the "occurrence" takes place, coverage attaches even though the claim may not be made for some time thereafter. While in the "claims made" policy, it is the making of the claim which is the event and peril being insured and, subject to policy language, regardless of when the occurrence took place.

S. Kroll, "The Professional Liability Policy 'Claims Made'," 13 Forum 842, 843 (1978).

The Court of Appeals of Maryland recently recognized the "claims made" policy in Mutual Fire, Marine & Inland Insurance Co. v. Vollmer, 306 Md. 243, 508 A.2d 130 (1986). In response to a certified question from the United States District Court for the District of Maryland (see Md.Cts. of Jud.Proc.Code Ann. §§ 12-601 to -609 (1984 Repl.Vol.)), the court held that the "claims made" policy in question covered claims of malpractice allegedly committed after the retroactive date.

The Court of Appeals contrasted the function of "claims made" policies with that of the more familiar "occurrence" policies:

There is greater public familiarity with the "occurrence" type of policy than with the "claims made" type, largely because automobile insurance liability policies are "occurrence" policies, although other perils are covered in such policies as well. Coverage in an "occurrence" policy is provided no matter when the claim is made, subject, of course, to contractual and statutory notice and limitations of actions provisions, providing the act complained of occurred during the policy period. Because the insurer's liability in such policies ordinarily relates to a definite, easily identifiable and notorious event such as an automobile accident, a fire, a slip and fall injury, or a ship collision, the insurer is ordinarily able to conduct a prompt investigation of the incident and make an early assessment of related injuries and damages with the result that actuarial considerations permit relative certainty in estimating loss ratios, establishing reserves and fixing premium rates.

"Claims made" or "discovery" policies, on the other hand, are of relatively recent origin and were developed primarily to deal with situations in which the error, omission, or negligent act is difficult to pinpoint and may have occurred over an extended period of time. In the case of a "claims made" policy written to cover professional liability, the error or omission may be a discrete act or failure to act, or it may consist of a lengthy process and remain latent and undiscoverable for a number of...