Federal Liability Risk Retention Act Preempts Maryland’s Notice-Prejudice Statute for Non-Chartered Risk Retention Group

A Maryland federal court has held that the federal Liability Risk Retention Act (LRRA) preempts Md. Ins. Code § 19-110, Maryland’s notice prejudice statute, in circumstances where Maryland law otherwise would govern a contract issued by a non-chartered insurer.  Mora v. Lancet Indem. Risk Retention Grp., Inc., 2017 WL 818718 (D. Md. Mar. 1, 2017).

A patient received care from a doctor for heart-related issues.  The patient later died of a sudden cardiac event.  The patient’s widow and children filed suit against the doctor, who was insured under a claims-made-and-reported medical malpractice policy issued by a risk retention group based in Nevada.  The doctor failed to respond and did not participate in the defense of the suit.  Although the patient’s family put the doctor’s insurer on notice of the suit, the insurer declined to provide a defense, contending that it could not meaningfully defend without the participation of the doctor.  The court entered a default judgment against the doctor.

In the ensuing coverage litigation, the insurer asserted that coverage for the suit was barred because (a) the insured did not provide notice during the policy period and (b) the insurer was prejudiced by the insured’s failure to participate in the defense of the litigation.  The insurer further contended that the LRRA preempted Maryland’s notice-prejudice statute such that it was not required to demonstrate that it was prejudiced by the insured’s failure to provide notice during the policy period.

As the court noted, under the LRRA only the chartering state can “regulate the formation and every day operations of a risk retention group,” and the insurer here was chartered in Nevada.  The court concluded that Maryland’s notice-prejudice statute, Md. Ins. Code § 19-110, regulated the “operations” of insurers and thus it was preempted by the LRRA.  The court rejected the claimants’ assertion that the LRAA’s preemption exception for any “law governing the interpretation of insurance contracts” applied.  The court reasoned that this exception was inapplicable because “Section 19-110 does not assist in interpreting existing terms of an insurance contract, but imposes an additional burden on the insurer before it may disclaim coverage based on a lack of notice or cooperation, despite what the particular insurance policy says.”  As the policy was a claims-made-and-reported policy, the court held that notice was required during the policy period and that the insurer need not show prejudice.  However, resolving an issue of first impression, the court held that the third-party notice provided by the plaintiffs in the lawsuit, which occurred during the policy period, was sufficient.  Accordingly, the court denied the insurer’s motion for summary judgment on this basis.

The court also held that disputed issues of material fact remained as to whether the insured breached the cooperation clause.  The text of the cooperation clause specifically required a showing of “prejudice.”  Among other things, the court noted that it could not “determine on this record whether a defense expert at the underlying malpractice trial could have provided a reasonable and admissible standard of care or causation opinion in the insured-doctor's absence.”

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