250_C035

STATE LAW VOIDED POLICY’S STATUTE OF LIMITATIONS

Crime/Dishonesty Insurance	Writ of Certiorari
Statute of Limitations	Legal Action Clause

St. Paul Travelers (Travelers) issued a commercial crime policy to Montgomery Scrap Corporation Profit Sharing Plan (Plan) effective October 1, 1998. The policy provided coverage for loss to the Plan that resulted directly from employee dishonesty that occurred during the policy period, subject to certain conditions, limitations, exclusions, and other terms. The policy was renewed every year and was in force at the times of the losses involved in this case. Between April 1997 and June 2002, a Montgomery Scrap employee stole approximately $49,000 from the Plan.

The Plan discovered the loss in October 2002. The employee was prosecuted, pleaded guilty to theft over $500, and made partial restitution, resulting in the loss being reduced to $38,000. The Plan informed Travelers of the loss in March 2005 and presented its proof of loss on April 6, 2005. Robert Millstone, as trustee for the Plan filed suit against Travelers on January 23, 2006 because he reimbursed the Plan for its net loss but Travelers refused to pay. The trial court granted Travelers summary judgment based on the statute of limitations and the Plan appealed. The Court of Special Appeals reversed and remanded. Travelers petitioned the Court of Appeals for a writ of certiorari.

Editor’s note: A writ of certiorari is a document that a superior appellate court issues to an inferior court at its discretion, ordering it to produce a certified record of a particular case it has tried. It does this in order to determine whether any irregularities or errors occurred that justify reviewing the case. It is also a device the United States Supreme Court uses to exercise its discretion in selecting the cases it will review.

The sole issue before the appellate court was the statute of limitations defense that was the basis for the trial court’s decision that was one of the policy’s General Conditions. A Maryland statute extended the two-year notice period in the policy to three years. The trial court’s summary judgment was based solely on the grounds that more than three years had elapsed from the time the Plan discovered the loss until it filed this suit.

Travelers asked the following five questions in its appeal:

• Does the endorsement requiring that legal action against the insurer involving loss be brought within three years from the date the insured discovered the loss violate the Statute?
• Does the requirement in the Legal Action clause in the Maryland Changes endorsement that provides that the insured may not sue the insurer until 90 days after it filed proof of loss with the insurer operate to impermissibly shorten the three-year period of limitations in violation of the Statute?
• Does the Legal Action clause in the Maryland Changes endorsement that requires that legal action against the insurer be brought within three years from the date the insured discovered the loss establish the insured’s discovery of loss as the agreed accrual date for beginning the three-year limitation?
• Does a provision in the Legal Action clause in the Maryland Changes endorsement that requires that legal action against the insurer that involves loss be brought within three years from the date the insured discovered the loss establish a policy condition or covenant that requires substantial compliance by the insured?
• Was the circuit court legally correct in determining that the suit against Travelers was barred by the Legal Action clause that required bringing the suit within three years from the date the insured discovered the loss where it was undisputed that the insured discovered the loss more than three years before it filed suit?

The appellate court ruled that it had to address only the first question. In applying the normal rules that govern contract actions in Maryland, it determined that the statute of limitations for a breach of contract action against the insurer could not have begun to run prior to the time Travelers was called on to perform its obligations under the contract. The court stated that such date, at the very earliest, was April 6, 2005, the date when the proof of loss was submitted. As a result, a suit filed on January 23, 2006 was well within the three year statute of limitations that generally applies to contract actions. It affirmed the Court of Special Appeals judgment.

Court of Appeals of Maryland. St. Paul Travelers v. Robert Millstone as Trustee of Montgomery Scrap Corporation Profit Sharing Plan. No 31, Sept. Term, 2009. Jan 15, 2010. 412 Md. 424, 987 A.2d 116