Most people pay their car insurance bill every month or four times a year. Sometimes that auto insurance bill is exorbitant, but your payment to the insurance company is a contract of sorts. Think about this way: you are paying your insurance company to insure you through the good times and the bad times.  The insurance company cannot suddenly drop you, fail to pay the bills, or decide not to defend you if you are in an accident and/or sued. The fact that they may have to settle a high bill does not give them the right to fail to defend you. This decision was settled over fifteen years ago with Mesmer v. MAIF in Maryland. You need to know your rights when it comes to your insurance company, your policy, and the company’s possible failure to defend your interests.

There is a clear rule concerning remedies for the insured when an insurance company wrongfully fails to provide a legal defense. The penalties for an insurance company are strict. This is true regardless of whether it is a business insurance, automobile insurance, EPLI insurance, E&O insurance, Directors and officers insurance, or Commercial General Liability policy for a business, the principles are the same and our law firm has drafted dozens of lawsuits against insurance companies for failure to defend with successful results.

An insurance company can and should be obligated to follow through with the maximum policy limit and attorney fees, if their failure to defend is determined wrongful by the legal system. Mesmer v. MAIF is evidence of wrongful failure to defend by an insurance company. The highest court of Maryland determined that a failure to defend is a breach of contract only, and the awarded damages are limited to the actual insurance policy limits in addition to the attorney fees and court expense from defending the suit.

The MAIF Insurance Policy Details

In Mesmer v. MAIF, the insured bought an auto policy from the Maryland Automobile Insurance Fund, also known as MAIF, for her daughter and herself. On the original car insurance policy issued by MAIF both the insured and her daughter were listed as operators of the automobile, a 1981 Buick. Thereafter the insured got a new car that was titled under her boyfriend’s name. As directed, she notified MAIF of the new car purchase and requested the necessary policy changes and adjustments. She and her daughter were both to still be included with the new car insurance plan issued by MAIF.

A new policy was then created and listed by MAIF, but it stated that the insured’s daughter was the primary driver of the new automobile. The daughter then got into an automobile accident and it was determined that she was operating the vehicle in a negligent fashion at the time of the accident. The other driver, Peggy Lyons, was injured in the automobile accident. She filed suit for damages arising from the automobile accident.

When MAIF investigated Ms. Lyon’s claim, they determined that the insured was not the owner of the vehicle (the boyfriend held the title), as the policy had stated. They then declared the automobile policy null and void and also refused to defend the daughter of the insured (who was on the policy).

The Court Case and Determinations

A trial took place and a jury then submitted judgment against the daughter to the tune of $ 19,563,203.00 for Ms. Lyons. The daughter was stuck with a large debt that she felt was unfair and then decided to join with the plaintiff in the underlying tort suit against the Maryland Automobile Insurance Fund. They filed a declaratory judgment against the Maryland Automobile Insurance Fund hoping and seeking to recover the whole sum of the judgment as well as any costs associated with the underlying suit.

The court determined that Maryland Automobile Insurance Fund failed on its duty to defend their insured client and this was deemed a breach of contract. However, the award was for the $20,000.00 policy limit and legal fees only. The $19,563,203.00 was not included in the reward.

Then the Court of Appeals Ruling

The affirmation from the Maryland Court of Appeals quickly followed the appeals case stating the insurer had failed to defend their rightful customer in the court of law. The Maryland Court of Appeals declared the grounds that the company said there was no valid insurance policy a breach of contract.

The Maryland Court of Appeals was very careful to distinguish in its ruling between the breach of contract (lack of defense) and those claims that arose from tort action (the $ 19,563,203.00). The court stated, “It is when the [insurer] has proceeded on the basis that a contractual obligation exists, has undertaken that obligation, and has undertaken it with violation of the appropriate standard of care, that the plaintiff may, in some circumstances maintain a tort action.” In layman’s terms, the automobile insurance company’s failure to provide a legal support team will give rise to the tort action. However, when the insurance company declines coverage and refuses to defend there is no independent tort duty. So the maximum recovery amount for the insuree is the limit of the policy plus attorney fees.  The total amount awarded was $ 20,000.00 from the policy and $ 9,673.95 for payment for the defense team.

What This Means to You

This case gives clarification concerning options available to the insured when the insurance company wrongfully fails to provide an insurer’s defense.  This precedence makes sure that the insurance company treats its customers fairly and appropriately. You may want to get out your car insurance paperwork and make sure all of the information on the policy is up to date and is correct. Checking your information may save you a lengthy court battle.

If you do think that your insurance company has wrongful failed to carry on its duties concerning your car insurance or defense, please contact us.

San Diego Litigation Attorney (619) 399-7700