In an unpublished decision applying Maryland law, a federal court has held that a subjective standard should be applied to determine whether a prior knowledge exclusion applies to preclude coverage for a matter. McDowell Building, LLC v. Zurich American Ins. Co., 2015 WL 1656497 (D. Md. April 13, 2015). The court also held that while Section 19-110 of the Insurance Article of the Maryland Code does not apply to notices of circumstances, Section 19-110 does require insurers to establish prejudice to deny coverage under claims-made-and-reported policies on late notice grounds.

The insurer issued a professional liability insurance policy to the insured, which was hired by a real estate developer to complete applications for tax credits in connection with a building project. The insured later discovered that no application had been filed and the state historical trust advised that it was too late at that point to file the application for the tax credit. As a result, the real estate developer filed suit against the historical trust and its accounting firm. A cross claim was also filed by an individual against the insured in June 2006, but that claim was stayed pending the outcome of the case against the trust.

In May 2009, the accounting firm also filed a cross-claim against the insured and in June 2009, the insured notified the insurer of the matter. In September 2010, the accounting firm’s claims were settled, pursuant to which the insured did not pay anything. The real estate developer’s case against the trust also proceeded to trial in September 2010, and the court found that the developer failed to prove that it had filed its application for the tax credit. At that time, the insured again notified the insurer of the matter and sought coverage under its professional liability policy for the June 2006 cross claim. The insurer denied coverage pursuant to the policy’s prior knowledge exclusion and coverage litigation ensued.

In denying the insurer’s motion for summary judgment, the court first applied a subjective knowledge standard to determine whether the policy’s prior knowledge provision applied to preclude coverage. According to the court, although there was no question that the insured was aware of the facts that ultimately gave rise to its liability to the real estate developer prior to the effective date of the policy at issue, the insured’s contention that the developer assured him that he would not be sued was sufficient to avoid summary judgment. Additionally, the court determined that summary judgment in favor of the insured was not appropriate because of evidence of internal correspondence from the developer implying that the insured could be the subject of a lawsuit.

The court rejected the argument that a prior policy provided coverage, finding that Section 19-110 of the Insurance Article of the Maryland code, which requires a showing of prejudice in order to deny coverage on late notice grounds, did not apply to a notice of circumstance. Thus, the court determined that the prior policy did not respond to the matter because a claim had not been made during that policy period. The court did find, however, that Section 19-110 applied to claims-made-and-reported policies, but denied the parties’ motions because factual issues regarding whether the insurer was prejudiced as a result of the late notice of the matter remained unresolved.