St. Paul Fire & Marine Insurance v. House

RODOWSKY, Judge.

Maryland Code (1957, 1986 Repl. Vol.), Art. 48A, § 482 provides in pertinent part:

“Where any insurer seeks to disclaim coverage on any policy of liability insurance issued by it, on the ground that 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.”

We granted certiorari in this case to determine whether § 482 applies when an insurer asserts that there is no coverage under a “claims made” liability policy because the claim was not made while the policy was in effect. That issue is not presented on the facts of this case, however, because that issue arises only if the policy here involved is construed as the insurer contends. As explained below, we do not accept the policy construction on which the insurer’s argument is premised.

Respondents, Homer C. House, M.D. and his professional corporation (Dr. House), had a series of annual policies (the policy) with Petitioner, St. Paul Fire and Marine Insurance Company (St. Paul) beginning January 1, 1983, the last of which ended on January 1, 1986. The policy had a retroactive date of January 1, 1977. It was a physicians and surgeons professional liability policy and was written in a “claims made” form. It provided in part:

“When is a claim made?
*331“A claim is made on the date you first report an incident or injury to us or our agent.”

On October 29, 1984, Dr. House performed surgery on Shirley J. Platzer (Platzer) and allegedly left part of a needle in her knee. The object was removed on November 27, 1984. Subsequently, Dr. House received two letters from counsel for Platzer, dated June 21, 1985, and September 16, 1985. The letters stated a claim against Dr. House for damages and advised him to turn the matter over to his insurance carrier.

On November 15, 1985, Platzer initiated proceedings against Dr. House before the Health Claims Arbitration Office. A statement of claim was served on Dr. House on January 6,1986, and was forwarded by him in a letter dated February 12, 1986, to his insurance broker. That broker was an agent for St. Paul.

St. Paul declined to defend Dr. House, asserting that it did not receive notice of the claim at any time before February 14, 1986, when the agent received Dr. House’s letter. That notice, St. Paul maintained, was not received within the policy period and the claim was, therefore, not a covered risk.1

On July 1, 1986, Dr. House filed a declaratory judgment action in the Circuit Court for Baltimore City, claiming that Art. 48A, § 482 required that St. Paul prove actual prejudice before it could deny coverage for lack of notice. Both parties moved for summary judgment. The court concluded that, as a matter of law, § 482 was applicable and granted summary judgment to Dr. House.

St. Paul appealed to the Court of Special Appeals, arguing that § 482 was inapplicable to denials of claims made coverage. The intermediate appellate court recognized “the persuasiveness of [St. Paul’s] argument to the contrary and *332the cases in support thereof,” but finding the unqualified language of § 482 to be “dispositive,” it affirmed the judgment. St. Paul Fire & Marine Ins. Co. v. House, 73 Md.App. 118, 132, 533 A.2d 301, 308 (1987). We granted certiorari.2

Section 482 was originally enacted by Ch. 185 of the Acts of 1964, in apparent response to our decision in Watson v. United States Fidelity & Guar. Co., 231 Md. 266, 189 A.2d 625 (1963).3 Watson was an insurer’s action against the insured seeking a declaratory judgment that an occurrence coverage, automobile liability policy did not apply to claims arising out of a particular accident. Reporting the accident to the insurer, as soon as practicable, was an express condition precedent to any action on the policy. Watson held that the condition was not satisfied because the insured, who was present at the accident of March 5, 1961, did not report to the insurer until April 10, 1961. The response of § 482, in substance, makes policy provisions requiring notice to, and cooperation with, the insurer covenants and not conditions. The statute measures by the standard of actual prejudice the materiality of any breach of those covenants by the insured for the purpose of determining if the breach excuses performance by the insurer.

St. Paul’s argument rests on the difference between claims made policies and occurrence policies. In Mutual Fire, Marine & Inland Ins. Co. v. Vollmer, 306 Md. 243, 252, 508 A.2d 130, 134 (1986), we contrasted the two types of policies.

“ ‘Generally speaking, “occurrence” policies cover liability inducing events occurring during the policy term, irrespective of when an actual claim is presented. Converse*333ly, “claims made” (or “discovery”) policies cover liability inducing events if and when a claim is made during the policy term, irrespective of when the events occurred. There are, of course, hybrids of the two varieties. [Parker, The Untimely Demise of the “Claims Made” Insurance Form? A Critique of Stine v. Continental Casualty Company, 1983 Det.C.L.Rev. 25, 27-28 (footnotes omitted).]’ ”

St. Paul’s position is, quite simply, that the subject policy is a claims made policy, that it defines when a claim is made as “the date you first report an incident or injury to us or our agent,” and that here the claim was not made, in accordance with that definition, while the policy was in effect. Under that reading of the policy, there never has been any claims made coverage for Platzer’s claim, St. Paul has not disclaimed coverage by basing the disclaimer on the insured’s failure to give notice required under the policy, and, consequently, § 482 does not apply.

The premise of St. Paul’s argument is that the clause — “When is a Claim Made?” — exclusively controls how a claim is made under this policy. St. Paul treats that clause as a special definition which changes the ordinary meaning of “claim made.” The ordinary meaning of “claim made” refers to the assertion of a claim by or on behalf of the injured person against the insured. In this case Platzer’s claim was made, in the ordinary meaning, during the policy period. St. Paul reads the policy specially to define “claim made” as the reporting of a claim or potential claim by the insured to the insurer. On that basis the claim was not made until after the policy had expired.

Reading the policy as a whole leaves St. Paul’s interpretation far from clear. The policy is, at a minimum, ambiguous on whether a claim is made only by the insured’s reporting to the carrier, and ambiguous on whether a claim can ever be made solely by the injured person’s assertion of a claim against the insured. The policy can fairly be read (1) to cover unreported claims made (in the ordinary meaning) during the policy period and (2) to give a power to the *334insured to effect coverage during the policy period for a claim which has not yet been made (in the ordinary meaning) but which the insured anticipates will be made (in the ordinary meaning). The insured may effect the latter expansion of basic coverage by reporting an anticipated claim to the insurer before that claim is made (in the ordinary meaning). In other words, the policy can be read to be a hybrid of claims made and reporting.

Demonstrating the ambiguity requires immersion in the policy as a whole. The introduction page and two other pages of the policy are headed “Physicians and Surgeons Professional Policy — Claims Made.” The policy advises that “[w]e [i.e., St. Paul] have written this policy in plain English” and “in clear, straightforward English.”4 The page containing the insuring agreement is introduced by the following:

“Important Note: This is a claims made coverage. Please read it carefully, especially the When A Claim Is Made and Optional Reporting Endorsement sections.”

The basic insuring agreement provides “protection against professional liability claims which might be brought against you in your practice as a physician or surgeon.”

The page containing the insuring agreement, after explaining the monetary limits of the coverage, presents two clauses which we shall call, respectively, the “Basic Coverage Clause” and the “Accelerated Coverage Clause.” They read in full:

“When you’re covered [Basic Coverage Clause]
“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.
*335“When is a claim made? [Accelerated Coverage Clause] “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.”

(Emphasis added).

When the two clauses are read together in their entire-ties, the first clause seems to cover “claims made,” using the ordinary meaning, while the second clause seems to deal with claims which have not been made, using the ordinary meaning, but which are anticipated to be so made and must be reported by the insured in order to become covered in their anticipatory state. St. Paul reads the “Accelerated Coverage Clause” as the policy definition. But, because every report “must” contain the “[t]ype of claim you anticipate,” the clause seems to address only part of the claims spectrum. Further, we shall see, infra, that St. Paul's definition does not fit in other parts of the policy.

St. Paul relies heavily on three decisions involving claims made policies in which the courts held there was no coverage where the claim was not reported until after the policy had expired. Contrasting the policy language in those cases with that of the St. Paul policy presented here is instructive.

In Zuckerman v. National Union Fire Ins. Co., 100 N.J. 304, 495 A.2d 395 (1985), the coverage clause of the insuring agreement read:

“To pay on behalf of the insured all sums which the insured shall become legally obligated to pay as money damages because of any claim or claims first made against the insured and reported to the company during the policy period, arising out of an act or omission of the *336insured in rendering or failing to render professional services for others____”

Id. at 307, 495 A.2d at 396-97. In City of Harrisburg v. International Surplus Lines Ins. Co., 596 F.Supp. 954 (M.D.Pa.1984), aff'd without op, 770 F.2d 1067 (3d Cir. 1985), the coverage clause read:

“The Company will pay on behalf of the Insureds all Loss the Insureds shall be legally obligated to pay for any civil claim or claims first made against them because of a Wrongful Act, provided that the claim is first made during the policy period and written notice of said claim is received by the Company during the policy period.”

Id. at 958. In the third case relied upon, the insurer was obligated “to indemnify the insured on account of damages paid ‘because of any claim or claims ... first made against the insured and reported to the Company during the policy period.’ ” New England Reinsurance v. National Union Fire Ins. Co., 654 F.Supp. 742, 744 (C.D.Cal.1986), rev’d 822 F.2d 887, vacated, withdrawn, reh’g granted 829 F.2d 840 (9th Cir.1987).

The policy in Zuckerman also contained a provision which might be analogized to the Accelerated Coverage Clause in the St. Paul policy. The clause in Zuckerman read:

“A claim is first made during the policy period or extended reporting period if: (a) during the policy or extended reporting period the insured shall have knowledge or become aware of any act or omission which could reasonably be expected to give rise to a claim under this policy and shall during the policy period or extended reporting period give written notice thereof to the Company in accordance with Condition VII.”

100 N.J. at 308, 495 A.2d at 397. It is not altogether clear whether the above-quoted clause was intended to expand the coverage clause from claims made (in the ordinary meaning) to permit including, by reporting, anticipated claims as well, or whether the above-quoted clause is a policy definition. That lack of clarity, however, does not result in the material ambiguity presented here. That is *337because the coverage clause in Zuckerman (as well as in City of Harrisburg and in New England Reinsurance) specifically required reporting during the policy period, even if the claim were made (using the ordinary meaning) during the policy period. The St. Paul policy does not clearly do that.

In the policy before us, under St. Paul’s contention, if a “reporting” definition of “claim made” is inserted in the Basic Coverage Clause, the two uses of “first” create a redundancy. There is no need to say in the Basic Coverage Clause that a claim must “first be made” while the policy is in effect if the only way in which a claim can be made is if the insured “first report[s]” the claim while the policy is in effect.

If “claim ... first ... made” is read in the ordinary sense in the Basic Coverage Clause, the double use of “first” can be explained by what Zuckerman calls the “moral hazard.”

“The reasonableness of excluding claims based on prior conduct that the insured could reasonably have foreseen might serve as the basis for a future claim is apparent. The insurance company is entitled to protect itself against the professional who, recognizing his past error or omission, rushes to purchase a ‘claims made’ policy before the error is discovered [by the injured person] and a claim asserted against [the professional]. ... This insurance

company concern has been termed the ‘moral hazard.’ ” 100 N.J. at 320 n. 3, 495 A.2d at 403-04 n. 3 (citation omitted). The policy in Zuckerman met this problem by excluding claims

“ ‘arising out of any acts or omissions occurring prior to the effective date of this policy if the insured at the effective date knew or could have reasonably foreseen that such acts or omissions might be expected to be the basis of a claim or a suit.’ ”

Id. at 308-09, 495 A.2d at 397.

The subject St. Paul policy does not contain a comparable specific exclusion. If coverage solely depends on whether *338the insured reported the claim to St. Paul during the policy period, the insured could bring about coverage under the subject policy simply by delaying any report to the insurer of an antecedent claim made in the ordinary sense. During the period prior to the effective date the insured either might have had no policy at all, or might have exhausted the monetary limits of a prior policy. The St. Paul policy does state that it “will be void if you ... hide any important information from us, mislead us, or attempt to defraud or lie to us about any matter concerning this insurance — either before or after a loss.” If the exclusive manner of effecting coverage under the St. Paul policy is by reporting, it is debatable whether the fact that a claim is anticipated or has been made before the effective date of the policy is “important information” and the efficacy of the fraud provision as a protection to St. Paul becomes questionable. Given no more specific clause than the fraud provision, it seems logical to have coverage attach under the St. Paul policy to a claim made before the policy period but reported during the policy period, if, as St. Paul contends, a claim made during the policy period but reported after the policy period is not covered. On the other hand, if in the Basic Coverage Clause the ordinary meaning is given to the sentence reading: “The claim must also first be made while this agreement is in effect,” then St. Paul is at least partially protected from the moral hazard, to the extent of claims first made prior to the policy period.

St. Paul’s definitional approach is also inconsistent with the policy provisions dealing with termination of coverage. The policy gave Dr. House the option, which he did not exercise, of purchasing a reporting endorsement, described as follows:

“This reporting endorsement will cover:
• Injuries or deaths that occur after the retroactive date and before that date this agreements ends. And
• Claims that are first made or reported to us after the ending date of this agreement and before the reporting endorsement ends.”

*339(Emphasis added). For purposes of the reporting endorsement claims “made” and claims “reported” expressly are treated as alternative events causing coverage to attach. Thus, reporting cannot be the exclusive meaning of “claim made” as the result of a definition applicable throughout this policy. Further, one is hard pressed to conceive of any reason why the actual assertion of a claim is an alternative to reporting as a means of having coverage attach during the extension period under the reporting endorsement, but actual assertion of a claim is not an alternative means of having coverage attach during the basic policy period. Because the policy contemplates that the reporting endorsement will have a definite termination date, St. Paul will still have the “tail” problem of a covered claim made, in the ordinary meaning, which has not been reported during the extension period. Yet, St. Paul argues that the reason why coverage arises only on reporting during the basic policy period is to avoid that very problem of covered claims unknown to the insurer.

The plain English version of traditional notice provisions found in the subject policy is also seemingly at odds with St. Paul’s interpretation. Those provisions read in part:

“Someone Is Injured Or Something Happens Which Can Result In A Liability Claim
“If there’s an accident or incident covered under this policy you or any other protected person involved must:
“1. Tell us or our agent what happened as soon as possible. Do this even though no claim has been made but you or another protected person is aware of having done something that may later result in a claim. This notice should include:
“• The specific nature of the incident including the type of claim that may result[.]
“3. Send us copies of all demands or legal documents if someone makes a claim or starts a lawsuit.”

*340Manifestly the ordinary meaning of “claim made” is used in the first and third paragraphs of the above-quoted provisions. Indeed, paragraph 1 encourages the insured to effect coverage by using the Accelerated Coverage Clause even if coverage has not been effected under the Basic Coverage Clause by the actual assertion of a claim by the injured person.

St. Paul’s interpretation also means that reporting becomes increasingly more difficult the closer a claim is made (in the ordinary meaning) to a policy’s expiration, here, “at 12:01 a.m., standard time,” on January 1,1986. If coverage can be obtained only by reporting, reporting ultimately becomes practically impossible within the policy period, e.g., when the injured person asserts an unanticipated claim late on the last day of the policy period. This difficulty is avoided if the Basic Coverage Clause is triggered by a “claim made,” in the ordinary meaning. St. Paul’s answer is that the insured should purchase the optional reporting endorsement and that, otherwise, the insured will be obtaining coverage for a period of time for which no premium has been paid. That analysis would carry more force if this optional reporting endorsement were designed only to allow reporting after the policy period for claims made within the policy period. Here, claims “reported” and claims “first made” after policy expiration are each covered by the optional reporting endorsement, if purchased. This suggests that the purposes of the optional reporting endorsement include providing coverage under the St. Paul policy for a physician who retires from practice or who changes coverage to an occurrence policy.

Here the policy can be read as St. Paul contends. It can just as easily be read to have afforded coverage when a claim is made, using the ordinary meaning. The ambiguity results from what might have been an intentional trade off on the part of St. Paul in drafting the policy, whereby precision of language on the finer points of coverage was sacrificed in order to use fewer words, so as to justify the “simple English” labeling of the contract. In any event, *341under ordinary rules of contract construction, a genuine ambiguity should be resolved against the party who prepared the contract. See Vollmer, 306 Md. 243, 508 A.2d 130; Pacific Indent. Co. v. Interstate Fire & Cas. Co., 302 Md. 383, 488 A.2d 486 (1985); and Truck Ins. Exch. v. Marks Rentals, 288 Md. 428, 418 A.2d 1187 (1980).5

Under the alternative interpretation the Platzer claim was covered when it was made during the policy period. Under this interpretation, the protection to the insurer against delay in reporting by the insured after the claim is made rests on the provision: “If there’s an accident or incident covered under this policy you or any other protected person involved must ... [t]ell us or our agent what happened as soon as possible.” A policy defense resting on that covenant to give notice is foursquare within Art. 48A, § 482.

For these reasons the Court of Special Appeals reached the correct conclusion.

JUDGMENT OF THE COURT OF SPECIAL APPEALS AFFIRMED. COSTS TO BE PAID BY PETITIONER.

Dissenting Opinion by MURPHY, C.J., in which McAULIFFE and BLACKWELL, JJ., join.

. For that reason St. Paul takes the position in its brief that "[f]or the purpose of this appeal, it is not material whether St. Paul received notice of the Platzer claim on February 12, 1986, or on a later date....”

. St. Paul does not contend before us that, if § 482 applies, there is a genuine issue of material fact whether the insurer has been actually prejudiced.

. In its original form, § 482 applied only to motor vehicle liability policies. By Ch. 205 of the Acts of 1966, the General Assembly repealed and reenacted the statute in its present form.

. It seems somewhat inconsistent with the representation of “plain" English that the policy would contain, as the insurer urges, an exclusive definition of "claim made” which differs from the ordinary meaning of those words. Seemingly it would be more “straightforward" to label the policy “Physicians and Surgeons Professional Policy —Reporting.”

. We intimate no opinion on the construction of § 482 if its application is sought, under circumstances similar to those before us, to a claims made policy which unambiguously defines "claim made” to mean only "claim reported."