By Blake Stafford

On April 14, 2016, the Fourth Circuit issued a published opinion in St. Paul Mercury Insurance Co. v. American Bank Holdings, Inc., a civil case concerning the denial of insurance coverage based on untimely notice to the insurer by the insured of the underlying claim.  American Bank Holdings, Inc. (“American Bank”) was served with a complaint and summons that went unanswered, resulting in a default judgment of $98.5 million against it.  Eight months after receiving the summons, American Bank notified its insurance company, St. Paul Mercury Insurance Co. (“St. Paul Insurance”), of the lawsuit, and St. Paul Insurance denied coverage due to the late notice.  American Bank incurred $1.8 million in having the default judgment vacated and the lawsuit dismissed.  The parties filed cross-motions for summary judgment, both seeking declaratory judgments regarding reimbursement of the legal fees incurred by American Bank.  The district court entered judgment for St. Paul Insurance, and the Fourth Circuit affirmed, finding that American Bank failed to provide notice “as soon as practicable,” as required by the terms of its insurance policy, and that the late notice caused St. Paul Insurance prejudice.  Thus, St. Paul Insurance was within its right to deny coverage.

Facts & Procedural History

On June 11, 2008, Amiel Cueto filed an action against American Bank (a Maryland company) and ten other defendants in Illinois state court alleging that they caused an $8 million sale of Cueto’s real property to collapse.  Both parties agreed that the suit was frivolous.  The complaint and summons were served on June 18, 2008, on CT Corporation—American Bank’s designated agent for receiving service of process in Maryland.  The next day, CT Corporation sent the papers to American Bank’s office, addressed to the CFO, in accordance with the terms of their agency.  The CFO-addressee, however, had left the employ of American Bank, and the suit went unanswered.  A $98.5 million default judgment against American Bank was entered on July 23, 2008.

American Bank received collection papers from Cueto on February 13, 2009, which were forwarded to St. Paul Insurance on February 25, 2009.  This was the first time St. Paul Insurance had any knowledge of the suit, the default judgment, or the collection papers.  On February 27, 2009, American Bank’s general counsel contacted St. Paul Insurance’s claims counsel and asked “if [they] were covered for this,” to which the claims counsel responded “yes.”  However, after the investigation that followed, and multiple draft letters that “reserved the right to deny coverage due to late notice,” St. Paul formally notified American Bank that it was denying coverage due to a lack of timely notice.

Even before notifying St. Paul Insurance of the default judgment, American Bank had retained the law firms Bryan Cave and Sidley Austin in efforts to vacate the default judgment and dismiss the lawsuit, resulting in approximately $1.8 million in legal fees and costs.  St. Paul Insurance sought a declaratory judgment that it had no duty to provide coverage to American Bank because American Bank failed to provide it with timely notice of the Cueto suit, as required by the policy.  American Bank filed a counterclaim for a declaratory judgment that it was covered under the policy and for damages of reimbursement of the $1.8 million, and a claim under Maryland law for a lack of good faith in denying insurance coverage.  The district court entered judgment in favor of St. Paul Insurance, concluding that American Bank had provided late notice of Cueto’s suit and that St. Paul Insurance had suffered prejudice as a result.  On appeal, American Bank contended  that it provided timely notice to St. Paul and that material factual disputes precluded summary judgment against it with respect to its waiver, estoppel, and bad faith claims.

Timely Notice

The Fourth Circuit affirmed the district court’s conclusions.  To start, the Court held that American Bank failed to provide timely notice under the policy, which provided:

The Insureds shall, as a condition precedent to their rights under this Policy, give to the Insurer written notice of any Claim made against the Insureds as soon as practicable, but in no event later than: (a) sixty (60) days after expiration of the Policy Year in which the Claim was first made . . . .

American Bank contended that, due to the internal oversight, it did not have “actual knowledge” of the action until the collection notice.  The Fourth Circuit rejected this argument for two reasons.  First, the Court held that “actual knowledge” was not required under the policy; the requirement to give notice was triggered by “service of a complaint,” which occurred when the complaint and summons service to CT Corporation.  Second, the Court held that, in any event, American Bank was imputed with “actual knowledge” as a matter of law, as knowledge of an agent acquired within the scope of the agency relationship is imputable to the corporation.  Thus, because American Bank’s duty to notify St. Paul Insurance was triggered when it was served with the complaint and summons, and because it did not provide St. Paul Insurance with notice until eight months later, it’s notice to St. Paul was not “as soon as practicable” as required by the policy.

Additionally, Maryland law requires that an insurance company establish actual prejudice resulted from the lack of timely notice.  Md. Code Ann., Ins. § 19-110.  The Court held that American Bank’s delay denied St. Paul Insurance the opportunity to (1) participate in the selection of counsel, (2) speak with counsel, (3) discuss credible defense strategies for dismissal, and (4) involve itself in considering the possibility of settlement negotiations.  Each of these rights was part of the policy; thus, St. Paul Insurance suffered actual prejudice.  Therefore, the Court held that St. Paul Insurance was entitled, by reason of late notice, to deny insurance coverage to American Bank for the Cueto suit.

Waiver and Estoppel

American Bank also contended that St. Paul Insurance waived or was estopped from asserting its late-notice defense, relying on the telephone call between American Bank’s general counsel and St. Paul Insurance’s claims counsel.

(1) Waiver.  For waiver, Maryland law requires “an actual intention to relinquish an existing right, benefit, or advantage, with knowledge, either actual or constructive, of its existence, or such conduct as to warrant an inference of such intention to relinquish.”  Here, the telephone conversation did not relate to the late-notice issue; in fact, the conversation did not include any discussion of notice, nor did it indicate that St. Paul Insurance was waiving any late-notice defense.  Thus, St. Paul Insurance did not provide any actual intention to relinquish its rights, and the Court held that it did not waive its late-notice defense.

(2) Estoppel.  For estoppel, Maryland law requires that the party asserting estoppel “have been misled to his injury and have changed his position for the worse.”  Here, the Court found that American Bank’s early retention of Bryan Cave suggested that American Bank was not thinking of settlement or any form of alternative dispute resolution given the suit’s apparent frivolity.  Thus, the Court held that American Bank’s estoppel argument amounted to pure speculation.

Good Faith Denial of Coverage

Finally, American Bank contended that St. Paul Insurance failed to act in good faith in denying coverage for the Cueto claim, violating Maryland statutory law.  Md. Code Ann., Cts. & Jud. Proc. § 3-1701.  However, the Court found that this claim also contains a statutory requirement in favor of the insured that coverage actually exists.  Because American Bank failed to satisfy a condition precedent for coverage, the Court held that American Bank failed to satisfy this statutory requirement.


Ultimately, the Court affirmed the district court’s declaratory judgment that American Bank’s late notice to St. Paul Insurance was prejudicial; thus, St. Paul Insurance had the right to deny coverage.