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Sherwood Brands,Inc. v. Hartford Accident and Indemnity Company, et al. No. 104, September Term, 1996

Insurance -- duty to defend -- liability of insurer for litigation expenses incurred by insured prior to insurer being notified of claim.

IN THE COURT OF APPEALS OF MARYLAND

No. 104 September Term, 1996 ______________________________________

SHERWOOD BRANDS, INC.

v.

HARTFORD ACCIDENT AND INDEMNITY COMPANY, et al.

______________________________________

Bell, C.J. Eldridge Rodowsky Chasanow Karwacki Raker Wilner, JJ. ______________________________________ Opinion by Wilner, J. ______________________________________

Filed:

August 26, 1997

This is a dispute between two allied insurance companies (Hartford) and their insured, Sherwood Brands, Inc. (Sherwood), over whether (1) Hartford breached its duty under the insurance policies to defend Sherwood in an action brought against it by a competitor, Osem Food Industries, Ltd. (Osem), and (2) if it did breach its duty, Hartford is liable for attorneys' fees and other litigation costs incurred by Sherwood prior June 18, 1991 -- the date Sherwood notified Hartford of the underlying action by Osem and demanded coverage. Through rulings on a motion for partial summary judgment and a jury verdict, the Circuit Court for Montgomery County determined that Hartford had breached its duty, that the expenses incurred by Sherwood prior to the notice were reasonable, that Hartford was liable to Sherwood for them, but that Sherwood was not entitled to pre-judgment interest. The total judgment entered by the circuit court was for $497,366, of which $100,000 represented the amount paid by Sherwood in settlement of the Osem litigation, $89,237 was for expenses incurred in prosecuting the instant breach of contract and declaratory judgment action, and the balance was for attorneys' fees and other expenses incurred in the Osem litigation, some part of which was incurred prior to June 18, 1991. The Court of Special Appeals, resolving cross-appeals by the parties, held, in relevant part, that (1) because Hartford was not prejudiced by the delay in notification, it was liable for the costs incurred by Sherwood on and after June 18, 1991, (2) because Hartford's duty to defend did not arise until it was notified, it was not liable for any fees or costs incurred prior to that date, despite the absence of prejudice from the delayed notice, and (3) Sherwood was entitled as a matter of law to pre-judgment interest on the amount properly owed to it. Hartford Accident v. Sherwood, 111 Md. App. 94, 680 A.2d 554 (1996). The court

remanded the case so that the circuit court could modify its judgment by excluding expenses incurred prior to June 18, 1991 and adding pre-judgment interest on the remainder. We granted certiorari to consider the one question of whether Sherwood was entitled to reimbursement for reasonable litigation expenses incurred prior to June 18, 1991.1 We shall hold that it was so entitled and therefore shall vacate the judgment of the Court of Special Appeals.

BACKGROUND Sherwood, a North Carolina corporation, markets and distributes food products. On January 6, 1989, it and other related defendants were sued by Osem in the United States District Court for the Middle District of North Carolina under both the Federal Lanham Act, 15 U.S.C.

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Maryland Law