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REPORTED IN THE COURT OF SPECIAL APPEALS OF MARYLAND No. 1535 September Term, 1996 _______________________________

GERALD S. KLEIN, ET AL.

V.

FIDELITY & DEPOSIT COMPANY OF AMERICA

_______________________________ Salmon, Eyler, Sonner, JJ. _______________________________ Opinion by Salmon, J. _______________________________ Filed: September 24, 1997

The major challenge presented in this case is to interpret correctly the meaning of the term "claim" as used in a "claims made" directors' and officers' liability insurance policy.1 The dispute that gives rise to this issue had its origin in the 1985 Savings and Loan debacle, which ultimately cost Maryland taxpayers over $125,000,000.2 One of the largest

Maryland savings and loan associations that suffered severe financial difficulties in 1985 was the Merritt Commercial Savings & Loan Association ("Merritt"), formerly known as Merritt Savings and Loan, Inc. At all times here relevant,

Merritt was a wholly owned subsidiary of Middle States Financial Corporation ("Middle States"). Gerald S. Klein

("Klein") held all outstanding shares of stock in the holding company that owned Middle States. Klein, in turn, controlled

1 In St. Paul Fire & Marine Ins. v. House, 315 Md. 328, 332-33 (1989) (quoting Mutual Fire, Marine & Inland Ins. Co. v. Vollmer, 306 Md. 243, 252 (1986)), the Court said: "`Generally speaking, "occurrence" policies cover liability inducing events occurring during the policy term, irrespective of when an actual claim is presented. Conversely, "claims made" (or "discovery") policies cover liability inducing events if and when a claim is made during the policy term, irrespective of when the events occurred. There are, of course, hybrids of the two varieties. [Parker, The Untimely Demise of the "Claims Made" Insurance Form: A Critique of Stine v. Continental Casualty Company, 1983 Det. C.L. Rev. 25, 27-28 (footnotes omitted).]'"

The May 5, 1997, issue of The Daily Record paraphrased the Maryland Comptroller, Louis L. Goldstein, as saying: Maryland initially estimated its loss from the savings and loan crisis at $500 million. But after nearly 12 years of litigation and the sale of thousands of assets, the loss has been whittled down to $125 million with just one major property remaining unsold. Mary Pemberton, "Md. S&L Crisis Closer to Closure," The Daily Record, May 5, 1997, at 3A.

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numerous other corporations and partnerships in Maryland, many of which were subsidiaries of Merritt. In 1983, Fidelity Deposit Company of Maryland ("Fidelity") issued a $3,000,000 "Directors and Officers Liability Insurance Policy" ("D & O policy") to Merritt. D & O policy covered two of Merritt's subsidiaries, Institutional Service Corp. and Merritt Capital Corp., along with some twenty-two subsidiaries of either Institutional Services Corporation or Merritt Capital Corporation. The The

policy was for "claims made" during the period between August 12, 1983, and October 14, 1986.3 Under Paragraph 6 of the D &

O policy, if the insured received a notice of contemplated claim within the policy period and gave notice of the potential claim to the insurer, that potential claim was to be treated as covered in the event that a claim was later made against directors or officers of the insured. Klein, one of the appellants, was the President of Merritt and the Chairman of Merritt's Board of Directors at the time Fidelity's D & O policy was issued. He continued as Thereafter,

an officer and director until November 26, 1984.

he asserted personal control over most of the important aspects of Merritt's operations. Due to "extreme liquidity pressures" and because depositors had lost confidence in privately insured savings

Although the policy period extended until October 14, 1986, it provided coverage only for "Wrongful Acts" committed by officers and directors before October 14, 1985.

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and loans associations in Maryland, Merritt entered into a voluntary conservatorship effective May 13, 1985. The

Maryland Deposit Insurance Fund Corporation ("MDIF") was appointed by the court to be Merritt's conservator. The

conservator immediately limited withdrawals to $1,000 per account per month. On June 20, 1985, the Circuit Court for

Baltimore City eliminated all withdrawals from Merritt to continue until September 20, 1985, or until changed by the court. A. The Four Notice Letters

In regard to the crisis at Merritt, Fidelity received four letters that are important to our narrative. Of the

four letters, only the first, the Trice letter, was sent to any of the appellants. 1. The Trice Letter

In 1985, Paul Trice was a Senior Vice President of Maryland Savings Share Insurance Corporation ("MSSIC"), the predecessor of MDIF. He wrote a letter to Klein on May 2,

1985, and complained about a number of serious problems his office had found with scores of loans made by Merritt. Mr.

Trice complained, for example, that Merritt had lent Delmarva Venture Corporation ("Delmarva") a total of $9,240,710, even though Klein indirectly owned Delmarva through a holding company and was a "controlling person" within the meaning of Maryland Code Annotated, Financial Operations section 9323(e)(3). That section, in 1985, required that loans to a

"controlling person" must be approved by the Division Director 2

of the Division of Savings and Loan Associations.

No such

approval was in Mr. Trice's files, and he demanded a complete explanation for the "violation of section 9-323(e)(3) . . . along with a plan for the immediate removal of these loans from Merritt with no loss thereto." After listing many other violations, or purported violations, of banking laws or regulations by Merritt, Mr.

Trice concluded his fifteen-page letter by saying: In summary, the nature and volume of the items noted above is of paramount concern to this Corporation. Underlying these comments, obviously, are numerous major issues such as the question of independence of Merritt Commercial's board of directors from influence by its stockholder; the apparent lack of adequate internal controls and adequate underwriting in major investments; the concentration of large dollar investments ) direct or by loans ) in three (3) geographic locations and the timely recovery of these funds without loss to Merritt in the current economy; the ability of Merritt Commercial to complete funding and effect recovery of its major loans and investments in the current environment and marketplace (vis-

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