Opinions – Maryland Court of Appeals: 3/14/11

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Civil Procedure

Continuance of trial

BOTTOM LINE: Trial court abused its discretion in denying a continuance of trial in order to accommodate plaintiff’s religious beliefs, which prohibited any appearance or advocacy on his behalf during a particular religious holiday that occurred in the midst of trial.

CASE: Neustadter v. Holy Cross Hospital of Silver Spring, Inc., No. 12, Sept. Term, 2010 (filed Feb. 24, 2011) (Judges Bell, Harrell, Battaglia, GREENE, Murphy, Adkins & Barbera). RecordFax No. 11-0224-21, 59 pages.

FACTS: In October of 2006, Alexander Neustadter filed a complaint in the circuit court against Capital Internal Medicine, LLC, Ahmed Nawaz, MD, and Holy Cross Hospital of Silver Spring, alleging negligent medical care of his father, Israel Neustadter, who died on March 27, 2003.

Initially, the ten-day trial was scheduled to commence in February 2008. On motion by Holy Cross, the trial was subsequently rescheduled to begin instead on June 2, 2008. Between January and May, 2008, Neustadter and his counsel communicated with opposing counsel about an anticipated scheduling conflict due to Neustadter’s observance of Shavous, a Jewish holiday, which would fall on the fifth and sixth days of trial.

In May, Neustadter filed a “Motion to Suspend Trial Days for Religious Holidays,” stating that as an Orthodox Jew, he was prohibited from doing any work including attending trial during Shavous, and that his attorney was prohibited, as his agent, from doing work on his behalf. The motion further stated that on the Sabbath, Orthodox Jews strictly observed the requirement prohibiting them from doing work or from having an agent perform work on their behalf. Neustadter’s motion also summarized the attempts that had been made with opposing counsel to resolve the scheduling conflict without the intervention of the court.

The circuit court denied Neustadter’s motion. Neustadter raised the scheduling conflict again at a subsequent discovery hearing, notifying the court that he would file a motion to reconsider.

On May 19, 2008, Neustadter filed a “Motion to Reconsider Motion to Suspend Trial Days for Religious Holidays.” Neustadter reiterated his argument from the previous motion and submitted an affidavit from his Rabbi citing the specific prohibitions of the Sabbath and concluding that it would be impossible for either him or his attorney to participate in any way in a legal proceeding on June 9th and 10th. Neustadter also contended that conducting the trial on the Sabbath would violate his First Amendment Rights, that he had a right to attend and appear at trial, and that he would be prejudiced if the trial was held in his absence. The trial court denied the Motion to Reconsider.

On June 2, 2008, the day before trial was to begin, Neustadter filed a third “Motion to Postpone Trial for Religious and Fairness Reasons” asserting two grounds, prejudice and fairness (because of an earlier accommodation to the defendants). The Administrative Judge denied the Motion. On June 3rd, before the trial judge, Neustadter raised the issue of postponement one more time. The trial judge once again declined to postpone the trial.

The trial began on June 3, 2008. At the conclusion of Neustadter’s case on Friday, June 6, 2008, Holy Cross moved for judgment, which the court denied. After the jury was dismissed, upon inquiry by the trial judge, Neustadter’s counsel confirmed that neither he nor Neustadter would be present at trial the following Monday and Tuesday, and objected to the court’s moving forward with the trial on those days. Court proceedings were set to begin mid-morning on Wednesday so that Neustadter could listen to a recorded transcript of the trial proceedings.

On Monday and Tuesday, June 9th and 10th, in Neustadter’s absence, Holy Cross put on its entire case-in-chief, which included the testimony of four expert witnesses and one of Israel Neustadter’s treating physicians, all of whom offered to refute the Hospital’s liability for damages. On Wednesday, June 11, 2008, Neustadter and his counsel appeared at trial. That day, the jury returned a verdict in favor of Holy Cross. The Court of Special Appeals affirmed.

Neustadter appealed to the Court of Appeals, which reversed.

LAW: It is well established that the trial court has authority over the management of its trial docket. Goins v. State, 293 Md. 97, 111 (1982). The decision to grant a continuance lies within the sound discretion of the trial judge. Touzeau v. Deffinbaugh, 394 Md. 654, 669 (2006). Generally, an appellate court will not disturb a ruling on a motion to continue unless discretion is arbitrarily or prejudicially exercised.” Dart Drug Corp. v. Hechinger Co., 272 Md. 15, 28, (1974).

Appellate courts do not defer to discretionary rulings of the trial judge, however, when the judge has resolved the issue on ‘unreasonable or untenable’ grounds. Abuse of discretion is defined as “discretion manifestly unreasonable, or exercised on untenable grounds, or for untenable reasons.” Jenkins v. City of College Park, 379 Md. 142, 165 (2003). Abuse occurs when a trial judge exercises discretion in an arbitrary or capricious manner or when he or she acts beyond the letter or reason of the law. Touzeau, 394 Md. at 669. So long as the circuit court applies the proper legal standards and reaches a reasonable conclusion based on the facts before it, an appellate court should not reverse a decision vested in the trial court’s discretion merely because the appellate court reaches a different conclusion. Aventis Pasteur Inc. v. Skevofilax, 396 Md. 405, 433, 436 (2007).

In this case, it was necessary to consider whether the interests of the court and Neustadter, the plaintiff, were properly balanced. Maryland courts have consistently affirmed denials of motions to continue when litigants have failed to exercise due diligence in preparing for trial, in the absence of unforeseen circumstances to cause surprise that could not have been reasonably mitigated, where untimely requests were made, where procedural rules were ignored, where attorneys failed to adequately prepare for trial, where a witness was missing, and where a litigant’s chosen counsel was absent but alternative counsel was available. See Touzeau, 394 Md. 654, 678 (2006); Dart Drug Corp., 272 Md. at 28; Abrams v. Gay Inv. Co., 253 Md. 121, 124 (1969).

In contrast, reversible error has been found in the denial under certain circumstances, such as when the continuance was mandated by law, or when counsel was taken by surprise by an unforeseen event at trial, when he had acted diligently to prepare for trial. See Mead v. Tydings, 133 Md. 608, 612 (1919); Plank v. Summers, 205 Md. 598, 604-05 (1954). Likewise, the intermediate appellate court has reversed when a wife sought more time to obtain counsel in a contentious and complex divorce proceeding, Reaser v. Reaser, 62 Md.App. 643, 650 (1985), and when a mother could not attend a custody hearing because the child whose welfare was in issue was ill, In re McNeil, 21 Md.App. 484, 499-500 (1974).

Here, the trial judge abused her discretion in denying Neustadter’s initial motion for continuance of trial, and discretion was unreasonably exercised with regard to Neustadter’s three subsequent pleas for a suspension of the proceeding, because the articulated rationales failed to reasonably accommodate Neustadter’s right to engage in religious conduct and to meaningfully participate in his trial.

The absence of Neustadter and his counsel from trial could not have been and was not meaningfully mitigated. Moreover, Neustadter’s notice to the court and opposing counsel of the scheduling conflict was not so untimely as to preclude accommodation or indicate an utter lack of diligence.

Although the plaintiff’s motions and briefs directed the court’s attention to the various tests employed by the Supreme Court upon claims of violations of the Free Exercise Clause of the First Amendment, the issue presented here (i.e., the propriety of repeatedly denying Neustadter’s motions to suspend or postpone his trial) was resolved without reaching the constitutional question.

The judgment of the Court of Special Appeals was reversed, and the case was remanded to the circuit court.

COMMENTARY: When an appellate court determines that a trial court has abused its discretion in denying a motion to continue, to the prejudice of the movant, the appropriate action is to overturn the ruling. Jackson v. State, 214 Md. 454, 459 (1957).

Here, Neustadter contended that prejudice should be presumed because he was “wrongfully excluded” by the trial judge, citing the decision in Safeway Stores v. Watson, 317 Md. 178 (1989).

In Safeway Stores, it was held that a corporate entity had a right under Md. Rule 2-513 to designate a representative to be in the courtroom and that the trial judge’s exclusion of Safeway’s expert designee was wrongful and presumptively prejudicial so that Safeway did not have to prove both error and the prejudice. Safeway Stores v. Watson, 317 Md. at 184. However, while there is a right of presence in the courtroom, that right is not absolute. Some exclusions are appropriate given the circumstances of the case, while others are reversible error. Green v. N. Arundel Hosp. Ass’n, 366 Md. 597, 620 (2001). A determination of whether exclusion of a party constitutes sufficient prejudice, either presumed or actual, to warrant a new trial depends, to some extent, on the circumstances. Id.

In the present case, Neustadter’s absence from court was analogous to the “wrongful exclusion” in Safeway Stores. In essence, the trial court in this case precluded Neustadter from effectively litigating his case when it created a circumstance in which Holy Cross presented its entire case in Neustadter’s absence; therefore, prejudice to Neustadter is presumed. Upon the presumption of prejudice, the non-complaining party must prove that the error did not impact the outcome of the case, which Holy Cross failed to do. See e.g., Harris v. David S. Harris, P.A., 310 Md. 310, 319 (1987).

Thus, the trial court’s act of conducting the trial in Neustadter’s absence was presumptively prejudicial and required reversal.

PRACTICE TIPS: The Free Exercise Clause protects against governmental hostility that is masked as well as overt. Even a facially neutral law of general applicability, or a facially neutral judicial action, might be discriminatory in violation of the Free Exercise Clause because of its design, operation or in the manner in which it is enforced. In determining whether a trial court’s ruling on a motion was truly neutral, the appellate court must consider not only the face of the ruling, but also whether the record of the case contains any evidence from which one could infer reasonably that the trial court was acting in a manner other than a neutral arbiter.

Insurance

Notice of claim

BOTTOM LINE: An insurer may disclaim coverage on a liability insurance policy on the ground that the insured has breached the policy by not giving the insurer required notice only if the insurer establishes that the lack of notice has resulted in actual prejudice to the insurer.

CASE: Sherwood Brands, Inc. v. Great American Insurance Co., No. 62, Sept. Term, 2010 (filed Feb. 24, 2011) (Judges Bell, HARRELL, Battaglia, Greene, Murphy, Adkins & Barbera). RecordFax No. 11-0224-23, 39 pages.

FACTS: Sherwood Brands, Inc. was a North Carolina corporation with its principal office in Rockville, Maryland. Great American Insurance Company issued Sherwood a series of annual “Directors’, Officers’, Insured Entity and Employment Practices Liability Insurance” policies including Policy DOL5741758 (the “Policy”), which was effective 1 May 2007 to 1 May 2008.

The Policy provided, in relevant part, that as a condition precedent to the insured’s rights under the Policy, the insured was required to give the Insurer notice in writing of any claim prior to the end of the Policy Period, as soon as practicable, but in no event later than 90 days after the end of the Policy Period.

In December 2007, a former employee of Sherwood filed claims against Sherwood and its subsidiaries with the Commonwealth of Massachusetts Commission Against Discrimination. The employee filed a related complaint in the Plymouth County (Massachusetts) Superior Court in March, 2008, against Sherwood and its subsidiaries. Both of these actions were filed and served on Sherwood during the time period that the Policy was in effect.

Sherwood did not notify Great American of the claims until October 27, 2008, more than 90 days after the May 1, 2008, expiration date of the Policy. In November of 2008, Great American informed Sherwood that the insurer had denied coverage based on the 90-day notice requirement, because the Policy had terminated on May 1, 2008, and Great American did not receive notice of the suit until October 27, 2008.

Meanwhile, in October, 2007, two Israeli business entities filed an unrelated suit against Sherwood, its officers, and other entities in the Tel-Aviv District Court. Service of process on Sherwood was made in the Israeli suit in December, 2007, during the effective period of the Policy. Sherwood notified Great American of this suit on November 6, 2008, more than 90 days following the expiration date of the Policy. Great American again informed Sherwood that coverage of the Israeli claim had been denied, based on Sherwood’s failure to comply with the 90-day notice period.

In February 2009, Sherwood filed in circuit court a “Complaint for Breach of Contract and Declaratory Relief” against Great American, alleging that the Massachusetts and Israeli actions were “claims” under the 2007-08 Policy and that Great American breached the Policy when it refused to pay any losses Sherwood was or might be obligated to pay as a result of the two lawsuits.

Sherwood also averred that Great American was not prejudiced by any alleged delay in notification as to the lawsuits. Sherwood requested that the Circuit Court enter a judgment declaring Great American to be obligated to pay all losses Sherwood became legally obligated to pay in the underlying suits. Great American asserted that coverage for the underlying actions under the 2007-2008 Policy was barred due to Sherwood’s failure to give written notice to Great American as soon as practicable and no later than within 90 days after the end of the Policy period.

The circuit court granted summary judgment in favor of Great American, and Sherwood appealed to the Court of Special Appeals. The Court of Appeals, on its own certiorari, vacated the circuit court judgment and remanded the case to the circuit court.

LAW: In Watson v. United States Fidelity and Guaranty Co., 231 Md. 266 (1963), an insurance carrier issued an insurance policy to an individual that “required the insured, as a condition precedent, to give written notice of an accident to the insurer ‘as soon as practicable’ following an accident.” Watson, 231 Md. at 269. The insurer denied Watson’s claim on the ground that Watson had not given prompt notice of the accident. Watson, 231 Md. at 270. The Court held that because the insured had not given notice “as soon as practicable,” the insurer was within its rights to deny coverage. Id.

At the legislative session immediately following Watson, the General Assembly enacted former Maryland Code (1957, 1972 Repl.Vol.), Article 48A, §482. See Chapter 185 of the Acts of 1964. Following a 1966 amendment, §482 provided, in relevant part, that “[w]here “any insurer seeks to disclaim coverage on any policy of liability insurance issued by it, on the ground that the insured or anyone claiming the benefits of the policy through the insured has breached the policy by failing to cooperate with the insurer or by not giving requisite notice to the insurer, such disclaimer shall be effective only if the insurer establishes, by a preponderance of affirmative evidence, that such lack of cooperation or notice has resulted in actual prejudice to the insurer.” The legislation aimed to prevent the unfairness resulting from a situation in which an insurance company is permitted to disclaim liability even though it is not prejudiced by the insured’s breach of a condition precedent, and the insurer thereby receives an unjustifiable windfall. See A Legal Process Analysis for a Statutory and Contractual Construction of Notice and Proof of Loss Insurance Disclaimers, 38 Md.L.Rev. 299, 309-10 (1978).

St. Paul Fire & Marine Ins., Co. v. House, 315 Md. 328, 352 (1989) involved a professional liability policy providing that claim was “made” on the date an incident or injury was first reported by the insured to the insurer or its agent. House, 315 Md. at 331. Of greater significance than the holding in House was the dissent, which advanced Maryland’s notice-prejudice jurisprudence. The dissent proffered potential policy rationales for the adoption of approaches like Maryland’s requiring insurers denying coverage of claims for reasons related to notice deficiencies to make a showing of prejudice, and noted that although a policy may speak of a notice provision in terms of “condition precedent,” what is actually involved is a forfeiture, and it is unreasonable to find that the carrier may forfeit the coverage even though there is no likelihood that it was prejudiced by the breach. See House, 315 Md. at 345-47. The dissent added that the purpose of a provision requiring notice of an accident or loss to be given within a certain time is to give the insurer an opportunity to acquire, through an adequate investigation, full information about the circumstances of the case, on the basis of which, it can proceed to disposition of the claim – in short, to protect the insurer’s interests from being prejudiced. Where the insurer’s interests have not been harmed by a late notice, the reason behind the notice condition in the policy is lacking, and it follows neither logic nor fairness to relieve the insurer of its obligations under the policy in such a situation. Id. at 346-47.

The House dissent also noted a distinction between “occurrence” policies and “claims-made” policies. Coverage in an “occurrence” policy is provided no matter when the claim is made, providing the act complained of occurred during the policy period. Because the insurer’s liability in such policies ordinarily relates to a definite, easily identifiable and notorious event such as an automobile accident, a fire, a slip and fall injury, or a ship collision, the insurer is ordinarily able to conduct a prompt investigation of the incident and make an early assessment of related injuries and damages with the result that actuarial considerations permit relative certainty in estimating loss ratios, establishing reserves, and fixing premium rates. Id. at 349. In contrast, claims-made policies were developed primarily to deal with situations in which the negligent act is difficult to pinpoint and may have occurred over an extended period of time, such as a physician’s misdiagnosis or an architect’s defective design. Id.

As posed by the dissent in House, the fundamental question becomes whether, at the time that the insured reported the claim, there existed a contract between the parties, for one cannot breach a contract which is not in existence. To answer this question, it was necessary to again consider the nature of claims-made and occurrence policies.

An occurrence policy has a fixed time period defining what specific events or occurrences will be covered. When this time period ends, however, the insurer’s responsibilities under the policy do not end, for it may be held liable for the covered events, barring statutes of limitations, at any time thereafter.

Claims-made policies are almost the mirror image of occurrence policies in that they often cover claims based on events which occurred many years before the policy came into effect, but limit the scope of coverage to claims based on these events which are made within the limited time period of the policy. Unlike the occurrence policy, the insurer’s potential liability ends when the policy expires. Thus, when a claims-made policy expires, there is no longer a contract, and the policy therefore cannot be breached. Any claim made after its expiration is of the same effect as an accident or event which occurs after the “expiration” of an occurrence policy. In such cases, there is no breach; there is simply no coverage under the policy.

T.H.E. Insurance Co. v. P.T.P. Inc., 331 Md. 406, 407 (1993), involved a claims-made comprehensive general liability policy which required the insured to provide the insurer written notice of a claim “as soon as practicable,” and included a “Basic Extended Reporting Period” of 60 days. T.H.E., 331 Md. at 412. The appellate court upheld the circuit court’s denial of coverage of a claim because the extended reporting period under the original policy had expired before the insured reported the claim to the insurer, and the original policy had thus come to an end with respect to newly reported claims. Thus, the denial of coverage was upheld not on the basis of the insured’s breach of the notice provision, but because coverage was denied due to expiration of the policy under the terms of coverage. T.H.E., 331 Md. at 421.

In 1996, in codifying the Insurance Article, the Legislature recodified former §482 to Insurance Article §19-110. See Chapter 11 of the Acts of 1996. Section 19-110 now provides that “[a]n insurer may disclaim coverage on a liability insurance policy on the ground that the insured or a person claiming the benefits of the policy through the insured has breached the policy by failing to cooperate with the insurer or by not giving the insurer required notice only if the insurer establishes by a preponderance of the evidence that the lack of cooperation or notice has resulted in actual prejudice to the insurer.”

Thus, in order for § 19-110 to be in play, the insured must breach the insurance policy by failing to cooperate with the insurer or by not giving the insurer required notice. See House, 315 Md. at 355. Section 19-110 does not apply to claims-made policies in which the act triggering coverage (usually notice of a claim or suit being filed against and served upon an insured under third-party liability policies ) does not occur until after the expiration of the liability policy, as this non-occurrence of the condition precedent to coverage is not a “breach of the policy,” as required by the statute.

In this case, T.H.E. was not dispositive, because in T.H.E., the accident occurred after the retroactive date, and neither the insured’s report of the occurrence, nor the injured party’s claim against the insured, nor the insured’s report of the claim to the insurer, took place within the policy period. In contrast, here, the date that the injured party presented a claim against the insured was within the Policy coverage period, and §19-110 does apply to claims-made policies in which the act triggering coverage occurs during the policy period, but the insured does not comply strictly with the policy’s notice provisions.

Thus, central to the question of whether §19-110 required Great American to show that it was prejudiced by Sherwood’s late-delivered notice was whether, in giving Great American notice more than ninety days after the expiration date of the 2007-08 Policy, Sherwood “breached the policy.” If the notice provisions of the 2007-08 Policy were “conditions precedent” to coverage, then Sherwood did not breach the policy by failing to obey the notice provisions, as the nonoccurrence of a condition precedent would not constitute a breach but merely relieves the other party from performing under the contract/policy. See Restatement (Second) of Contracts §225 (1981). If, on the other hand, the notice provisions were deemed covenants, Sherwood’s failure to give Great American notice no later than ninety days after the expiration date of the 2007-08 Policy would constitute a “breach of the policy,” such that §19-110 would apply, thereby requiring Great American to show that it was prejudiced by Sherwood’s late-delivered notice.

The “Notice of Claim” section of Sherwood’s Policy with Great American provided that giving requisite notice was a “condition precedent” to Sherwood’s rights under the Policy. If the court were to treat them as such, Sherwood’s failure to give notice timely to Great American would be the non-occurrence of a condition, and not a breach.

However, notwithstanding this clear language, §19-110 mandates that the notice provisions of the Policy be treated as covenants, not conditions. By not giving notice to Great American within the time frame stated in the notice provisions, Sherwood breached the policy by not giving the insurer required notice as provided in §19-110. As such, the statute applied to require Great American to show how it was prejudiced by Sherwood’s late-delivered notice in investigating, settling, or defending against the Massachusetts and Israeli actions, and Great American did not prove actual prejudice.

Accordingly, the judgment of the circuit court was vacated and the case remanded.

COMMENTARY: Sherwood argued alternatively that, regardless of whether notice was proper under the 2007-08 Policy, the Policy defined the term “claim” in terms of when a complaint was served on an insured.

Under this argument, given that the underlying suit papers were served on Sherwood during the Policy Period, notice would be considered “timely” under the 2008-09 Policy. Because Sherwood prevailed on the question actually decided by the Circuit Court, the appellate court failed to address Sherwood’s alternative argument.

PRACTICE TIPS: Despite recent holdings requiring insurers denying claims on the basis of an insured’s failure to comply with notice requirements to prove actual prejudice, Maryland law does not extend indefinitely the time period of potential liability for insurers. The Maryland statute requiring an insurer to show actual prejudice as a result of the insured’s delayed delivery of notice applies only in circumstances in which notice of a claim, triggering the requirement to give notice to the carrier, occurs before expiration of the policy.