Maryland’s highest court recently held that a policyholder’s failure to provide notice of a lawsuit for two and a half years was no basis for a denial of coverage. The court in Nat’t Union Fire Ins. Co. of Pittsburgh, PA v. Fund for Animals, Inc. held instead that, because National Union could not prove it suffered “actual prejudice” as a result of the late notice, Fund For Animals, Inc. (“FFA”) was entitled to receive the coverage it contracted for under its non-for-profit liability insurance policy (the “Policy”).

The coverage case involved two underlying lawsuits involving FFA. In the first, FFA had sued Ringling Brothers and others for alleged violations of the Endangered Species Act relating to the circus company’s treatment of elephants (the “ESA Case”).  In the second, the owner of Ringling Brothers sued FFA and others alleging that actions taken by FFA in the ESA Case—including paying a witness—violated the Racketeer Influenced and Corrupt Practices Act (the “RICO Case”).  Although the RICO Case was filed and served in September 2007, FFA did not notify National Union  until March 2010.  National Union denied coverage for the RICO Case on the grounds that FFA failed to provide notice as required under the Policy.

Ultimately, the Court of Appeals of Maryland rejected National Union’s position based on a Maryland statute requiring an insurer to show, by a preponderance of the evidence, that late notice of a claim by a policyholder “resulted in actual prejudice to the insurer.” The court held that National Union in fact suffered no actual prejudice based on the delay in receiving notice, since the RICO Case had been stayed from the time it had been filed and its ultimate settlement value (including a $2.54 million settlement payment by FFA) was based on factual findings in the ESA Case, which National Union had no right to participate in or influence..  Accordingly, despite the fact that FFA breached the policy’s covenant to provide notice as soon as practicable, the court directed that judgment be entered in favor of FFA.

This decision is an important reminder to policyholders that many jurisdictions now have statutory and other authority that require an insurer to have a principled basis for denying coverage. Technical breaches of policy requirements may not be enough. Fund for Animals is a reminder, therefore, that an insurer’s denial of coverage often is not the end of the matter and, thus, should not discourage policyholders from pursuing their rights when coverage is due.