Got Prejudice?

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Legal prejudice

Maryland law generally prohibits an insurer from denying liability insurance coverage on grounds of late notice unless it can show that the untimely reporting caused actual prejudice.

Given the sense of dread that must come with being sued, it is amazing how often – and how long – defendants can sometimes delay in putting their insurance carriers on notice of claims.  And yet, it happens time and again.  These delays can run afoul of contract clauses inserted by carriers to facilitate prompt investigation of claims, which require prompt notice of accidents, occurrences and/or claims as “conditions precedent” to coverage.

In some states – and in Maryland before 1964 – courts strictly upheld these notice provisions as mandatory “conditions precedent” to coverage.  In 1964, however, a carrier denied coverage on grounds that notice was given one month after an accident.  This drew the “prompt and decisive”[i] attention of the Maryland legislature, which thenceforth prohibited insurers from disclaiming coverage on grounds of late notice (or lack of cooperation) unless the insurer could show actual prejudice from the delay.[ii]  Thereafter, Maryland courts have construed notice provisions as non-obligatory covenants rather than strict conditions precedent.

At the time of enactment, most liability policies were written on an “accident” or “occurrence” basis.  Since then, more policies were written on a claims-made basis, where risks could be more easily quantified and rated, and premiums calculated to match.  Initially, it was an open question whether the statutory prejudice requirement would apply to these policies.  Like bubblegum attached to the sole of a shoe, however, it soon became clear that the prejudice requirement could not be easily dislodged from a late notice disclaimer.

The prejudice requirement was applied very quickly to “claims-made” policies.  This seemed logical.  An occurrence policy provides coverage if there is bodily injury or property damage during the policy period; a claims-made policy provides coverage if there is a claim made against the insured during the policy period.  Under either scenario, notice to the carrier is simply a subsequent requirement after coverage has already attached.  But “claims-made-and-reported” policies seemed different.  From the insurer’s viewpoint, coverage under these policies is not implicated until a claim is both “made” against the insured and “reported” to the insurance company; this provides predictability in anticipating claims, with corresponding benefits on premiums.  Under these policies, the failure to timely report seemed not to be merely “late notice,” but an absence of the very event that implicates coverage in the first place.  In other words, a “condition precedent” to coverage.  Sound familiar?

So insurers continued to deny coverage under these policies for claims made against an insured during the policy but not reported to the carrier until after the policy period, despite the absence of actual prejudice.  This rationale seemed to be supported by a pair of earlier decisions of the Maryland Court of Appeals.[iii]  But all this changed on Feb. 24, 2011, when the court held that a showing of prejudice was required to deny coverage on late notice grounds, even under a policy that defined a “claim” to mean one made against the insured and reported to the insurer. [iv]

The full import of that case, Sherwood Brands Inc. v. Gt. Am. Ins. Co., is not yet clear; for now, this state-law question has generated conflicting authorities in the federal courts.  Two federal trial judges have ruled that no showing of prejudice is required to deny coverage under a claims-made-and-reported policy. [v]  In later affirming one of these rulings, the Fourth Circuit articulated and rested its holding on a quite different ground, namely, that actual prejudice had in fact been shown.[vi]  Two other trial judges have held that the prejudice requirement does apply to claims-made-and-reported policies.[vii]

Overall, this may not bode well for the insurer’s position, and in handling claims or rating such policies in the future, a prudent insurer should assume that late notice alone is not enough deny coverage under a claims-made-and-reported policy, assuming the claim against the insured itself is within the coverage period.  One day, this may all be clarified further.  In the meantime, prejudice is the word of the day.  Have you noticed?

[i] Sherwood Brands, Inc. v. Great Am. Ins. Co., 418 Md. 300, 311 (2011).

[ii] Md. Code Ann. Ins. § 19-110 (originally enacted in Chapter 185 of the Acts of 1964).

[iii] St. Paul Fire & Mar. Ins., Co. v. House, 315 Md. 328 (1989); T.H.E. Ins. Co. v. P.T.P. Inc., 331 Md. 406 (1993).

[iv] Sherwood Brands, 418 Md. at 333.

[v] Minnesota Lawyers Mut. Ins. Co. v. Baylor & Jackson, PLLC, 852 F.Supp.2d 647 (D.Md. 2012) (Bredar, J.); Financial Indus. Reg. Auth. v. Axis Ins. Co., 951 F.Supp.2d 826 (D.Md. 2013) (Grimm, J.).

[vi] Minnesota Lawyers Mut. Ins. Co. v. Baylor & Jackson, PLLC, 531 F.App’x 312 (4th Cir. 2013).

[vii] McDowell Bldg., LLC v. Zurich Am. Ins. Co., 213 WL 5234250 (D.Md. Sept. 17, 2013) (Bennett, J.); Navigators Spec. Ins. Co. v. Medical Benefits Adm’rs of Md., Inc., 2014 WL 768822 (D.Md. Feb. 21, 2014) (Hollander, J.).

It’s Not All About The Benjamins

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Why equity, and not money, is what matters when pursuing a separate claim for breach of fiduciary duty in Maryland

Why equity, and not money, is what matters when pursuing a separate claim for breach of fiduciary duty in Maryland.

More than sixteen years after the decision in Kann v. Kann, 344 Md. 689, 690 A.2d 509 (1997), confusion still exists concerning the scope and viability of independent claims for breach of fiduciary duty in Maryland.  Indeed, the decision in Kann has recently prompted one federal court in Maryland to conclude, “[to] be sure, the post-Kann landscape has been a bit muddled,” Novara v. Manufacturers and Traders Trust Co., No. ELH-11-736, 2011 WL 3841538, at *11 (D.Md. Aug. 26, 2011), and another to remark that “[c]ourts have not entirely agreed on how to interpret the language of Kann.”  McGovern v. Deutsche Post Global Mail, Ltd., JFM-04-0060, 2004 Lexis 15215, at *37-38 (D.Md. Aug. 4, 2004).  Much of the confusion stems from Kann’s elliptical analysis of the issue and some of the reasoning used by several cases that followed, particularly as to what kind of actions could give rise to independent claims for breach of fiduciary duty.  Important for practitioners, it appears clear that breach of fiduciary duty claims for money damages will largely, if not entirely be disallowed, while claims seeking equitable relief remain viable.

Some Background

The tort of breach of fiduciary duty has a relatively recent and unusual history in Maryland, and was first recognized as a potential, independent cause of action in Hartlove v. Maryland School for the Blind, 111 Md.App. 310, 681 A.2d 584 (1996).  In Hartlove, the Maryland Court of Special Appeals relied on the Restatement (Second) of Torts § 874 in concluding that a separate and independent cause of action did indeed exist for breach of fiduciary duty.

After Hartlove, however, the Maryland Court of Appeals in the aforementioned Kann v. Kann, 344 Md. 689, 690 A.2d 509 (1997), ruled that “there is no universal or omnibus tort for the redress of breach of fiduciary duty by any and all fiduciaries.”  690 A.2d at 521.  Expressly disapproving of Hartlove, the Court of Appeals reasoned that breach of fiduciary duty as an independently viable tort would lead to the duplication of existing remedies at law in some cases, and the elimination of the “nearly complete exclusivity of equitable jurisdiction” in others.  Just months after Kann, the Maryland Court of Special Appeals, Bresnehan v. Bresnehan, 115 Md. App. 226, 693 A.2d 1, 5 (1997), held, “[i]n light of Kann, it is doubtful that Hartlove’s creation of an independent tort of breach of fiduciary duty has survived.”

Equity In, Money Out

There is a particular passage in Kann that has been cited numerous times by courts and practitioners.  This language, coming directly after the court concluded that there was no universal tort for breach of fiduciary duty states, this “does not mean that there is no claim or cause of action available for breach of fiduciary duty.”  Kann, 344 Md. At 690, 690 A.2d at 521.  See also Stewart v. Baltimore Teachers’ Union, 243 F. Supp. 2d 377, 379 (D. Md. 2003) (“Maryland law is clear that there is no free-standing, independent tort for breach of fiduciary duty.”)  Counsel, the Kann court continued, have an obligation to “identify the particular fiduciary relationship involved, identify how it was breached, consider the remedies available and select those remedies appropriate to their client’s problem.”  Id. at 521.

What does this mean?  The U.S. District Court for the District of Maryland recently held that “Maryland courts have limited independent causes of action for breach of fiduciary duty to those seeking equitable relief.”  Allstate Ins. Co. v. Warns, No. CCB-11-1848, 2012 WL 681792, at *7 (D.Md. Feb. 29, 2012).  Kann and its progeny therefore do not obliterate the possibility of a separate cause of action for breach of fiduciary duty in an action seeking equitable relief.  Wasserman v. Kay, 197 Md. 586, 631, 14 A.3d 1193, 1219 (2011).

Pursuing Disgorgement Vis-à-Vis Breaches Of Fiduciary Duties

One kind of claim that practitioners should be cognizant of, particularly in the area of professional liability, is for disgorgement of fees.  Because disgorgement is not a claim for money damages, but lies in equity, disgorgement can be sought vis-à-vis a claim for breach of fiduciary duty.  S.E.C. v. Resnick, 604 F.Supp. 2d 773, 782 (D.Md. 2009); Benjamin v. Erk, 138 Md. App. 459, 471, 771 A.2d 1106, 1113 (2001).  Disgorgement is often tethered, at least in legal malpractice cases, to other claims for, among others, negligence and breach of contract.  While the law in Maryland concerning claims for disgorgement is not as well developed as the law of the District of Columbia.  See, e.g., Nat’l R.R. Passenger Corp. v. Veolia Transp. Services, Inc., No. 07-1263 (BJR), 2012 WL 3574350 (D.D.C. Aug. 21, 2012); Bode & Grenier, L.L.P. v. Knight, 821 F.Supp.2d 57 (D.D.C. 2011); Hendry v. Plelland, 73 F.3d 397 (D.C. Cir. 1996); Avianca v. Corriea, No. 85-3277 (RCL), 1992 WL 93128, *12 (D.D.C. April 13, 1992), disgorgement can still be a valuable tool, even though it is viewed by some Maryland courts as an extraordinary remedy.  See Lerner Corp. v. Three Winthrop Props., Inc., 124 Md. App. 679, 691, 723 A.2d 560, 566 (1999) (analyzing various jurisdictions’ approaches to disgorgement in breach of fiduciary duties case and holding that “Maryland has recognized the restitutionary remedy of disgorgement” when, for instance, an agent breaches a fiduciary duty to a principal).

Disgorgement In Legal Malpractice Cases

A claim for disgorgement can be extremely disquieting to those against whom it is sought.  In point of fact, claims for disgorgement are often used in legal malpractice cases (in addition to claims for compensatory damages), to place additional leverage on defendants who are extremely leery of having to produce all of their billing records or other materials relating to the fees they charged former clients.  Breach of fiduciary duty and disgorgement claims can be particularly effective in regards to corporate plaintiffs seeking redress against prior counsel and law firms.  Often, when a corporate client asserts legal malpractice claims against prior counsel, the scope and substance of billed time will necessarily also be at issue.  It is important for defense counsel to recognize that there is authority for the proposition that disgorgement may not be an appropriate remedy when a client is overbilled by his or her former law firm absent some other showing of a breach of fiduciary duty.  Fairfax Sav., F.S.B. v. Weinberg & Green, 112 Md. App. 587, 627-28, 685 A.2d 1189, 1209 (1996).  However, the argument can certainly be made even if an overbilled client cannot recover all of the fees he or she has been billed, they should be able to recover those portions directly attributable to the breach or breaches of fiduciary duty.

The bottom line is this:  breach of fiduciary duty remains a viable claim in Maryland under certain circumstances.  It can be particularly useful when combined with a claim for disgorgement of fees in the legal malpractice context, although counsel should strive to fully delineate the scope of the breach or breaches, since there is authority limiting recovery to fees associated with the alleged breach.

Why Construction Delays Might Not Get You Paid

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Why Construction Delays Might Not Get You Paid

Like taxes and death, delays are often inevitable when doing a private construction job. Because delays can often be anticipated in construction, the parties will often try to address them in the contract.  So-called “No Pay For Delay” (or “no-damages-for-delay”) exculpatory clauses in private construction contracts between owners and general contractors are increasingly common and ostensibly designed to insulate the parties from exposure caused by delays.  In actuality, however, such delay clauses usually protect the owners and prime contractors at the expense of subcontractors.  In practice, a typical delay clause provides that one party cannot proceed against the other party for damages suffered due to construction delays.  By agreeing to a delay clause, one party (usually a subcontractor), bears the risk of all delays during construction.

Although a majority of courts have recognized the validity of these delay clauses in private contracts (as a natural extension of the principle of freedom of contract), depending on the jurisdiction, they are still generally subject to the implied obligation/covenant of good faith and fair dealing, the implied obligation/covenant of cooperation, and a number of exceptions that have been recognized to counter the general harshness of the clauses (other jurisdictions, including Colorado and Oregon for instance, prohibit such clauses in public construction contracts as against public policy, and Massachusetts and Washington State prohibit them in public AND private contracts).

The exceptions to delay clauses vary from state to state and can include delay caused by fraud, bad faith, active interference, gross negligence, delays not within the contemplation of the parties, or abandonment of the contract.  The courts of the DMV (the District of Columbia, Maryland, and Virginia), take a varied approach when confronted with delay clauses.

Maryland, for instance, takes a literal approach and holds that delay clauses are enforceable even if the delay is not contemplated by the parties.  See State Highway Admin. v. Greiner Engineering Inc., 577 A.2d 363 (1990) (the court still recognized several exceptions to delay clauses, however).  The District of Columbia takes a dimmer view of delay clauses, strictly construing them and recognizing the various exceptions, including active interference on the part of the prime contractor as well as delays not contemplated by the parties.  Blake Construction Co. v. C.J. Coakley Co. Inc., 431 A.2d 569 (D.C. 1981).  While Virginia courts have not squarely addressed delay clauses in the context of private contracts (Virginia has invalidated delay clauses in public contracts, see Blake Construction Co. v. Upper Occoquan Sewage Authority, 587 S.E.2d 711 (2003)), there is at least one case that suggests Virginia will generally enforce a delay clause unless one of the aforementioned exceptions exists.  McDevitt & Street Co. v. Marriott Corp., 713 F.Supp. 906 (E.D. Va. 1989).   In addition, at least one Fourth Circuit case has addressed the notion of seeking damages for active interference which delays a job.  See Dennis Stubbs Plumbing, Inc. v. Travelers Cas. & Sur. Co. of America, 67 Fed. Appx. 789, 792 (4th Cir. 2003) (noting that while “there is no authority from Virginia directly on point, we think Virginia would recognize an independent claim for damages resulting from active interference that were not themselves delay damages.”).

The bottom line is this:  know your jurisdiction, understand their view of delay clauses and draft accordingly.  If you’re a subcontractor, be mindful of agreeing to a delay clause that’s so broad that it would arguably vitiate the various recognized exceptions, including those for active interference, which often seems to be the most viable method to circumvent a well-crafted delay damages clause.  Finally, be aware that the analysis of any exceptions to a delay clause can vary depending on the facts of the case.