Charter Oak: Maryland’s Federal District Court Issues a Critical Ruling that Bodes Well for Maryland Businesses

Could it be that Maryland courts have finally started empowering policyholders in lawsuits against insurers, alleging bad faith and fraud? Successfully prosecuting such cases against insurers has historically been difficult in Maryland, which makes District Judge Deborah Chasanow’s recent ruling in Charter Oak Fire Insurance Company, et al. v. American Capital, Ltd., et al., all the more worthy of attention.

In Charter Oak, Charter Oak’s parent company, Travelers Insurance of America, is accused of acting in bad faith in its dealing with a policyholder. The case has been kept largely out of public view for the past six years, with many of the records sealed and much of the discovery deemed “protected.” But that is about to change.

Last month, highly respected U.S. District Judge Deborah Chasanow ordered that the case against Travelers can proceed and she also ordered unsealed several filings that have been kept out of public domain since 2009. She rejected what she called “boilerplate issues” being used by the parties to frustrate the proceedings going forward.

Reporter Danny Jacobs of The Maryland Daily Record has been following the case and spoke with me about this latest development. I do not represent either party in the case but, as Senior Counsel to the Maryland Insurance Administration for several years, I am quite familiar with the difficulties policyholders face in filing bad-faith lawsuits against insurance providers despite changes in insurance law meant to make the system more policyholder-friendly.

In Charter Oak, the case involves an investment fund, American Capital, which, through its then-ownership of another company, became embroiled in more than 100 lawsuits pertaining to the drug heparin. American Capital had a comprehensive insurance policy through Charter Oak/Travelers. The insurance policy was underwritten to be in effect from 2006 through 2009.

By 2008, however, heparin lawsuits began flooding in. In early 2009, Travelers filed suit against American Capital to have the policy rescinded, alleging that American Capital had not insured its subsidiaries, just itself. In response, American Capital filed several counterclaims against Travelers alleging breach of contract, bad faith and promissory fraud.

In 2012, a federal court rejected Travelers’ argument about the exclusion of subsidiaries from coverage. In the court’s ruling last week, Judge Chasanow agreed with the lower court. She said that American Capital’s comprehensive coverage would include its subsidiaries. This is a critical ruling for all Maryland businesses, as well as any entities that do business in Maryland.

Judge Chasanow also rejected Travelers’ argument that American Capital had not filed several of its counterclaims against it in a timely manner. In fact, she chastised Travelers for its “intransigence during discovery” and blamed Travelers for any delays in American Capital’s ability to file its counterclaims more expediently. She said Travelers should not benefit from its “resistance to producing discoverable documents for much of this litigation.”

The case against Travelers will now proceed and the courts’ rulings so far may embolden other companies that believe they have legitimate bad-faith claims against insurers to seek action against them. Bad-faith claims, which fall under code 27-1001 of the Maryland Insurance Article, are notoriously hard to prosecute, but this case may change all that. Stay tuned.

If you would like assistance in addressing your company’s commercial insurance questions, or in reviewing your company’s current insurance coverages, please feel free to call Alex Brown, Chairman of the Insurance Department at Shapiro, Sher Guinot & Sandler, at 410-385-4220 or by email at ajb@shapirosher.com.