A Maryland federal court has held that an insurer must show prejudice to deny coverage for late notice under a claims-made-and-reported policy.  The court also held that the policy’s prior knowledge/notice exclusion did not apply because the term “incident” was ambiguous.  Catlin Specialty Ins. Co. v. Aron, No. RDB-13-826 (D. Md. Aug. 6, 2014).

The policyholder doctor purchased several consecutive one-year insurance policies from an insurer, which policies incepted on January 1 of each year.  The policies required the insured to provide written notice of a claim before the expiration of the applicable policy period.  The policies’ prior knowledge/notice exclusion applied to “claims, incidents or loss events which were first brought to the attention of the Insured or reported to another insurer prior to the inception date.”

On December 30, 2010, the doctor performed surgery on a patient.  On January 3, 2011, a pathologist advised the doctor that he removed a small section of the patient’s ureter.  The doctor then notified the patient that she had to return to the hospital so that a catheter could be inserted until her ureter could be surgically repaired.  In the doctor’s renewal application for the 2012 calendar year, the doctor answered affirmatively to a question whether he was aware of any circumstances that might give rise to a claim although he did not include the required  “claims supplement” identifying the patient’s incident.  By letter dated November 26, 2012, the patient advised that she intended to file a medical negligence claim against the doctor and made a settlement demand of $725,000.  The doctor provided the insurer with notice of the demand letter, and the insurer denied coverage based on late notice and the prior knowledge/notice exclusion.

The court determined that the insurer’s denial of coverage for late notice was improper absent a showing of prejudice.  In so holding, the court rejected the insurer’s argument that § 19-110 of the Insurance Article of the Maryland Code—which requires a prejudice showing for a carrier to deny coverage — did not apply to a claims-made-and-reported policy.  The court found that irrespective of whether the notice requirement is contained in the insuring agreement or the conditions section, under Maryland law, notice provisions are construed as covenants and not conditions precedent.

The court also rejected the insurer’s argument that the prior knowledge/notice exclusion applied based on the doctor’s knowledge of the pathologist report in 2011.  In construing the undefined term “incident,” the court looked to the definitions of the other terms in the exclusion, which terms, the court found, were “defined not in terms of an actual injury to a patient but instead in terms of liability (or potential liability) for such injuries.”  In addition, the exclusion did not include the defined term “injury.”  Looking at the policy as a whole, the court found the term “incident” ambiguous.  Construing the policy against the insurer, the court concluded that the pathology report advised the doctor of an injury but not a potential or impending claim (i.e., an “incident”).