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MARYLAND COURT OF SPECIAL APPEALS HOLDS THAT WHERE INSURED SETTLED WITHOUT INSURER’S CONSENT, INSURER DOES NOT HAVE TO DEMONSTRATE ACTUAL PREJUDICE IN ORDER TO DISCLAIM COVERAGE
The Maryland Court of Special Appeals has held that § 19-110 of the Insurance Code is inapplicable when an insurer defends on the basis that its insured failed to meet the condition precedent set forth in a "no-action" clause. Section 19-110 request that actual prejudice be shown before an insurer can disclaim coverage based on the insured’s failure to cooperate or failure to give notice. Here, the insured, a construction firm, settled a third-party design defect claim without the knowledge or consent of its professional liability insurer. Then the insured filed suit to enforce the insurance policy, event though no loss under the policy had been "fixed or rendered certain by either a final judgment" against the insured or "by agreement . . . [made] with the written consent" of the insurer, as required by the policy’s "no-action" clause. The insurer moved for summary judgment based on the failure of the insured to satisfy the condition precedent to suit under the "no-action" clause. The insured argued that its failure to comply with the "no-action" clause was unimportant because the insurer had not been prejudiced by its breach. The trial court granted summary judgment to the insurer. On appeal, the insured argued that the provision in the "no-action" clause requiring it to obtain the insurer’s written consent to an agreement as to the amount of the loss necessarily involves the duties of cooperation and notice, since consent cannot be obtained without notice to the insurer and cooperation in letting the insurer decide whether to consent to the settlement. The Court rejected that argument, reasoning that even if the insured had notified the insurer of the intended settlement and gave the latter its full cooperation, the condition precedent would still have been breached if the insurer failed to give its written consent to that settlement. Thus, the Court made the point that written consent was an element in addition to notice and cooperation. The Court pointed out that § 19-110 was deliberately drafted so as to apply only where disclaimer was based on the insured’s failure "to cooperate with the insurer or by not giving requisite notice to the insurer." Section 19-110 does not apply to every possible policy defense that may be raised by the insurer. The Court also pointed out that one of the main purposes of the no-action clause is to protect the insurer from collusive or overly generous or unnecessary settlements by the insured at the expense of the insurer. The Court reasoned that if an insured could disregard the no-action clause, sue its insurer, it would put a nearly impossible burden on the latter of showing collusion or demonstrating, after the fact, the true worth of the settled claim. |
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