Court rejects $3 million liability ruling

August 20, 1991|By Blair S. Walker

Because of an editing error, an article in Tuesday's Business section incorrectly stated that the Court of Appeals and the Court of Special Appeals nullified a $3 million insurance liability award to the Maryland Deposit Insurance Fund. Only the Court )) of Appeals overturned the award.

The Sun regrets the errors.

In a ruling expected to have national ramifications, Maryland's highest court has overturned a $3 million insurance liability award to the state stemming from alleged mismanagement by the directors of a failed Silver Spring thrift.

The Court of Appeals' decision Friday hinged on a contractual clause between First Maryland Savings and Loan Association and its insurance firm, American Casualty Co. of Reading, Pa. The clause protects the insurance company from having to cover directors and officers for liability claims related to the violation of state or federal regulatory laws.


The appellate case was brought by American Casualty against the Maryland Deposit Insurance Fund. MDIF took over First Maryland after it was declared insolvent in 1985. The regulatory agency then brought suit against the thrift's executives, claiming fraud, false representation and breach of duties of care and loyalty.

"This is a very important decision," said Mark Sargent, a University of Maryland law professor who specializes in business law.

"A different result would have thrown into question the scope of thousands of director and officers' liability insurance policies across the country," he added.

The decision also was hailed by James J. Hanks Jr., a corporate lawyer with Weinberg and Green who filed a friend-of-the-court brief in the case on behalf of the Maryland Chamber of Commerce.

"The court's ruling emphasized that contracts, including insurance policies, should be enforced as written," Mr. Hanks said.

The lawyer representing American Casualty, Thomas S. Schaufelberger, said: "In essence, this opinion upholds the right of private contract in the face of a challenge by governmental authority on public policy grounds, where the public policy asserted is little more than a desire to fill the public coffers."

The Court of Appeals ruling overturned a decision by the Baltimore Circuit Court, which ruled American Casualty had to pay $3 million to MDIF. The Court of Special Appeals nullified the award, and the state's highest court agreed with that ruling.

However, American Casualty did not achieve a clear-cut victory. It had another liability policy with First Maryland containing an anti-collusion clause forbidding the directors or officers from suing one another. American Casualty claimed that MDIF in effect took over the duties and responsibilities of First Maryland's executives, and therefore couldn't sue them. The Court of Appeals sent the issue to Baltimore Circuit Court for further adjudication, a development that encouraged the attorney representing MDIF, Neil J. Diloff.

"We look at this case as if we're still alive," said Mr. Diloff, who works for Piper & Marbury.

Because the policy with the anti-collusion clause was in effect prior to the one containing the regulatory exclusion clause, MDIF will contend that First Maryland's directors and officers were covered under the former, Mr. Diloff said.

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