Applying Maryland law, the United States District Court for the District of Maryland has held that an insurer was required to satisfy an underlying judgment because its insured’s failure to cooperate did not prejudice the insurer’s ability to defend. Mora v. Lancet Indem. Risk Retention Group, Inc., 2017 WL 4618461 (D. Md. Oct. 16, 2017).
A former patient suffered a fatal heart attack after receiving treatment at the insured, an urgent-care facility. The former patient’s family sued the insured and the acting doctor for medical malpractice. The insurer immediately retained legal counsel for both the insured and the doctor, who constituted an additional insured under the policy. However, the doctor never responded to either the insurer’s attempts to contact him or to defense counsel’s requests for consent to represent him. Citing a policy provision that allowed the insurer to void the policy in the event an insured’s failure to cooperate prejudiced the insurer’s ability to defend the claim, the insurer withdrew the defense for both the insured and the doctor. A judgment was ultimately rendered against the insured and the doctor in the underlying action for $2.56 million. The former patient’s family then filed a declaratory judgment action against the insurer, seeking a declaration that the insurer was required to satisfy the underlying judgment. The insurer filed a counterclaim and sought a declaration that the insuring agreement was void because the doctor had failed to comply with the policy’s cooperation provisions.
The court ruled that, because the doctor’s breach of the cooperation clause did not prejudice the insurer, the insurer was required to satisfy the underlying judgment. Because the policy did not define the term “prejudice,” the court looked to how the state legislature had defined the term “actual prejudice” in a notice-prejudice statute. Applying that definition, the court determined that an insurer suffers prejudice only if an insured’s willful conduct has or may reasonably have precluded the insurer from establishing a legitimate jury issue as to the insured’s liability.
As applied to the facts, the court held that the insurer had failed to meet its burden of proof regarding whether it had suffered prejudice. In so holding, the court rejected the insurer’s arguments that it was prejudiced by the doctor’s absence from the outset of the case. The court explained that, because the insurer had a duty to defend, defense counsel appointed by the insurer had an obligation to defend despite the doctors’ failure to cooperate. The court pointed to the policy’s language, which allowed the insurer to defend claims even in the absence of the insured’s consent. The court thus determined that the insurer had prejudiced itself when it chose not to defend the action from the outset. Accordingly, any arguments that the doctors’ absence might have harmed the insurer were, in the court’s view, merely hypothetical or speculative because the insurer refused to defend the claim at all.