In just six months in 2016, more than a dozen courts across the U.S. have ruled on “late notice” issues in insurance coverage disputes. The outcomes varied, depending on the jurisdiction and the specifics of the claims. All types of policies and all sorts of claims can involve this topic. Here are several takeaways from thirteen state and federal decisions (with undoubtedly still others having been reached but not included here), applying ten states’ laws:
The “Notice-Prejudice” Standard: The Wyoming Supreme Court ruled on August 17, 2016 that an insurer “must be prejudiced before being entitled to deny coverage when the insured has failed to give notice ‘as soon as practicable.’” In addressing a certified question from the 8th Circuit Court of Appeals, the Century Surety Co. v. Jim Hipner LLC opinion1 said it is joining 38 other states with a notice-prejudice rule. Under the rule, the court held that a late notice determination requires that there first be a determination that notice was untimely and then a finding that the insurer was prejudiced. The court based its decision on various public policy grounds, citing a number of cases saying that the prejudice requirement balances the unequal position of a policyholder with little control of the language of the policy and the need for an insurer to be able to investigate, defend and reserve for losses. According to the court, the rule also better allows for compensation to third- party claimants.2
The Public Policy Distinguishing Occurrence-Based from Claims-Made Policies: The “notice-prejudice” position is not unqualified, however, according to three recent decisions. Under the laws of three states, each championing the requirement that an insurer show it has been prejudiced by late notice, courts made clear the obligation did not apply to claims-made policies. The cases focused on the public policy undergirding the notice-prejudice rule. The Supreme Court of New Jersey, in one of the three opinions, discussed the importance of prompt notice to insurers issuing occurrence-based policies in order “to aid the insurance carrier in investigating, settling and defending claims.”3 The court in Templo Fuente De Vida Corp. v. Nat’l Union Fire Ins. Co. distinguished the purpose of notice for claims-made policies, saying that the requirement to report a claim by a specific date brings commercial certainty of when an insurer’s potential liability will end and move on to the insurer of a subsequent policy.4 Because of the distinct public policy purposes and based on the facts of the matter before it, the Supreme Court of New Jersey held that late notice “constituted a breach of the policy, and [that the insurer] may decline coverage without demonstrating appreciable prejudice.”5This general decision was also endorsed by a Colorado appellate court and a federal appellate court applying Kentucky law.6
The Effect of Sophisticated Parties: In holding the insured to the notice language of the policy, the New Jersey Supreme Court noted that it is typical that policyholders buying claims- made policies are business or professional entities which understand that claims must be notified by the date specified in the contracts. Because of such policyholders’ relative sophistication as compared to everyday consumers buying occurrence-based policies, the court was comfortable holding the plaintiff insured to the terms of its contract. The court was careful to say that “we need not make a sweeping statement about the strictness of enforcing the … notice requirement in ‘claims made’ policies generally” and instead said that the particular policyholder knew what it was buying and must comply with the notice provision.7 A decision a few months later applying New Jersey law reinforced the difference in outcome between the two types of policies. In a case involving an occurrence-based policy, the insurer attempted to use the Templo Fuente decision to have the court find that untimely notice should bar coverage without any requisite showing of prejudice to the insurer because the policyholder (a medical technology company) was a sophisticated buyer. The federal district court rejected the argument, saying that the Templo Fuente case did not address an occurrence-based policy. The court relied instead on an earlier New Jersey Supreme Court decision that held that there may be exceptions to the rule requiring proof of appreciable prejudice, acceptable exceptions do not include whether an insured is sophisticated or whether a policy is a contract of adhesion.8
The Impact of Specific Policy Language: The occurrence-based policy examined by the Wyoming Supreme Court contained a provision that read “Failure to notify us … as soon as practicable will result in exclusion of coverage whether we are prejudiced or not.” Without any discussion of the sophistication of the insured, the court rejected the insurer’s language that said late notice could preclude coverage “whether [the insurer] is prejudiced or not.” The court concluded that the provision was void as against the public policy supporting the notice-prejudice rule.9
The Determination of a “Good Excuse” and “Prejudice”: Several of the recent cases, in the context of a notice-prejudice requirement, considered whether the facts of the claims before the courts permitted insureds to prove they had a good reason to be late with their notice.10 If the delay can be satisfactorily explained, some courts conclude that there is no breach of the notice provision.11 If the tardiness is without any - or any sufficient - reason, the provision is abrogated but the insurer must then prove they were sufficiently prejudiced to disclaim coverage. In two decisions applying Texas law and involving property policies, federal courts reached opposite conclusions. In one, the court denied a motion for summary judgment filed by the insurer which contended it was prejudiced. In having the case continue, the court noted that despite the policyholder’s unexplained and tardy notice, the insurer was “able to investigate the property, differentiate between hail damage and wear-and- tear, and determine the amount of loss.”38 In the other, the court recognized that the insurers lost access to critical evidence and found the insurer had been prejudiced as a matter of law by the unexplained late notice.12 A federal appellate court found under Maryland law that an insured waited eight months without good reason to give notice and prejudiced the insurer by precluding it “from exercising meaningful contractual rights provided to it by the [management liability] policy - in this case, all the contractual rights ….”13 A Washington appellate court upheld a trial court decision in favor of the policyholder in a pollution coverage case involving general liability policies. Although the insured’s notice was untimely by some number of years, the insurers failed to show enough prejudice.14
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These cases demonstrate how important context is to a late notice dispute. The applicable state law matters. The type of policy at issue matters. The sophistication of the parties may matter. The facts of the claim matter. While the rules likely to be applied by a state may be known or highly predictable, the effect of the specifics may affect the outcome and so close review of the law, the policy language and the facts is essential.
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