National Insurance Law Forum : Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

Washington just got a little stranger.  (No, not Washington, D.C.--the other one).  In a lengthy and fascinating opinion that the Washington Supreme Court released on September 4, a unanimous court (unusual in any of itself) has ruled that defending insurers can pursue a claim for subrogation but not equitable contribution against a carrier who was not identified until after the underlying construction defective claims were resolved.  As regards the claim for equitable contribution, the court ruled that the "selective tender" rule (insured chooses to tender to certain carriers but not others) trumped the "late tender" rule (delay in tender doesn't defeat coverage unless it causes prejudice). 

Does the Enumclaw opinion mean that Illnois is now no longer the only state that allows "targeted tenders"?   Frankly, it's not clear since it's not apparent that the insured in this case made a deliberate decision not to notify USF Insurance (or maybe they just confused USF with U.S. Fire!).  Even so, the broad language in the opinion made lead future litigants to press "targeted tender" claims in Washington State.

The real question is what difference it makes, since the court ruled that the settling insurers, who had obtained an assignment of the insured's rights, could still pursue a claim for subrogation.  Indeed, subrogation might be a preferred remedy since some courts have blocked claims for equitable contribution if the insurer asserting the claim was itself previously derelict in some respect such that it doesn't deserve to get equity.

The most interesting aspect of the claim is the court's treatment of the prejudice issue.  In most states, prejudice will be presumed as a matter of law if the insured's isn't notified of a claim until it has already settled.   In this case, however, the Supreme Court adopted a "flexible" or "nuanced" approach that will require USF to show exactly how its inability to participate in the insured's defense affected the outcome of the case or why its inability to conduct a timely investigation of the underlying claims impaired that investigation.  

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The ghost of Eliot Spitzer has been sighted roaming the state capitol in Albany!

 In 2007, the New York legislature hurriedly approved legislation that would have done away with New York’s traditional rule that the breach of a condition to coverage waves a policyholder’s right to recovery even if the insured’s untimely notice has not materially prejudiced the insurer. After some hesitation, Governor Spitzer vetoed the legislation, declaring in his veto statement that the issue was too important to be decided in such an abrupt manner.

Spitzer has since departed the scene but his successor, David Patterson, last week submitted a proposal to the legislature that largely embodies the proposals in the legislation that Spitzer vetoed. If enacted into law, this new bill would (1) allow third-party claimants to bring declaratory judgment actions against insurers in cases where an insurer has denied coverage on the basis of late notice; and (2) for the first time imposes a requirement of prejudice in order to avoid coverage on the basis of late notice.

The legislation has two principal parts:

The first part would amend Insurance Law Section 3420(a) to allow third-party claimants to bring claims for declaratory relief to determine the availability of coverage for their claim against policyholders. It appears from the legislation that this right is limited to disputes involving the unavailability of coverage due to late notice. It remains to be seen whether or how courts would allow third-party claimants to bring such actions in cases that involve multiple coverage issues, including late notice. Furthermore, the bill creates a safe harbor that eliminates the right of third-party claimants to bring such actions if, within 60 days of the denial on the grounds of late notice, the insurer itself brings a declaratory judgment action (thereby causing the insurer to subject itself to a claim for attorney’s fees under Mighty Midgets if it loses!)

The second part of the bill deals with the issue of late notice. New York is among the dwindling number of states that have not required notice. Indeed, despite expectations to the contrary, the New York Court of Appeals upheld this traditional view of notice requirements as recently as 2005.  As proposed, this bill would amend Insurance Law Section 3420 to include a requirement of prejudice. Furthermore, it will be the insurer’s burden to prove prejudice for any delay up to two years. Thereafter, however, the burden shifts to the insured, injured person or other claimant. Furthermore, there will be an irrebuttable presumption of prejudice if the insured’s liability has been determined or it has settled the case in the interim.

The explanatory memorandum accompanying this legislation states that the bill would prevent insurers from denying coverage based on a technicality and “eliminates the extreme hardship placed on those who paid for their premiums timely only to find in a time of need that their policy is not available.” The legislation expressly states, however, that it does not apply to the “claims made” and reporting provisions in “claims made” policies.

Of particular note is the fact that this new legislation would have prospective effect only. Section 8 of the bill states that it only applies to policies issued six months after the date that the bill becomes law. Accordingly, there will remain a vast body of pre-2008 policies, including “long-tail” claims concerning asbestos, pollution and other mass tort injuries, that will be governed by traditional common law requirements pertaining to prejudice.

Although nothing is certain in Albany these days, it does appear likely that this bill will be signed into law, thus bringing to a close New York’s role as the last large commercial lines state to follow traditional late notice rules. In doing so, however, New York is taking the intermediate approach that has been pioneered by states such as Wisconsin. Thus, rather than simply adopting the “notice prejudice” standard that has been followed in most states, New York is treating certain types of cases as qualitatively different. Thus, the burden of proof with respect to prejudice, which is often the most difficult aspect of such cases, is placed on the policyholder where notice is more than two years old. Furthermore, prejudice is presumed as a matter of law in certain cases, as where the insured has settled or has received a judgment.

Unfortunately, the legislation is vague with respect to certain important aspects of such cases. For instance, current general liability forms contain three separate events that trigger an insured’s notice obligations: (1) accident or occurrence; (2) the insured’s receipt of a claim; and (3) the insured’s receipt of a lawsuit. However, although the legislation appears to apply to all three requirements, it fails to address the problems that may arise where an insured gives timely notice of an accident but is late with respect to the notice of a claim or suit or the reverse.

Such problems were addressed by the Court of Appeals three years ago in  Argo Corp.. v. Greater New York Mut. Ins. Co., 4 N.Y.3d 332, 827 N.E.2d 762 (2005). In that case, the Court of Appeals had ruled that the notice of suit requirement was more significant than notice of an accident as it allowed insurers to “take an active, early role in the litigation process and in any settlement discussions and to set reserves.” As a result, the court ruled in Argo that late notice of a suit created a rebuttable presumption of prejudice that the insured must overcome. In Argo, the insured had failed to give notice of the accident and the suit. In its companion opinion in Rekemeyer v. State Farm Mut. Auto Ins. Co., however, the insured had given timely notice of the accident but was late with respect to the suit. As a result, the court had held that the insurer was required to prove prejudice as a result of the delay.

In contrast to this more nuanced approach, it appears that the proposed legislation would require that the issue of prejudice be considered in the overall context of the claim such that prejudice would be more likely to exist if the insured had failed to give notice of the original accident and less likely to exist if the insurer had had the opportunity to investigate the accident but did not receive timely notice of the suit.

It appears that this legislation would also resolve any question with respect to whether notice of a claim must be received from the policyholder. Plainly, actual notice from any source is sufficient under the legislation.

Finally, we note the inequity that this legislation fails to address in Insurance Law Section 3420(d). Under current New York law, an insurer may be estopped to raise coverage defenses for claims for bodily injury under policies issued in New York if it waits more than a reasonable period of time to deny coverage. Despite the harsh effect of Section 3420(d), it did not seem inequitable to place this requirement on insurers when policyholders were held to a similarly strict standard with respect to their notice obligations. Insofar as a much looser standard now applies with respect to the notice obligations of insurers, it would have seemed fair to similarly loosen the estoppel provisions of Section 3420(d) so that an insurer would only be precluded from raising coverage defenses insofar as its delay had prejudiced the policyholder. Unfortunately, although it is believed that there was some discussion of this issue, it was not included in the final proposed legislation.

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The Montana Supreme Court this week ruled that a policy issued to a corporation provided no coverage to an officer of the corporation and that the officer’s 38-month delay in notifying the insurer was late notice. The case, Lee v. Great Divide Insurance Co., involved an automobile accident between an uninsured driver and Lee.  Lee was driving a Ford pickup insured by American States Insurance Company under a corporate policy issued to his corporation. Great Divide insured two trailers and a Ford pickup pursuant to a separate commercial policy issued to the corporation specifically naming Lee as an insured that was later amended by endorsement removing Lee. Lee filed suit against the driver of the other vehicle and for UM benefits from American States in May 2002 ultimately settling with American States and obtaining a $1 million default against the uninsured driver in April 2005. Lee did not notify Great Divide concerning the original lawsuit, the default or the settlement with American States then filed suit against Great Divide seeking to recover the amount of the default.

In affirming the trial court’s dismissal of the case, the Montana Supreme Court first rejected Lee’s argument that the Great Divide policy was ambiguous as to its general reference to “you” as used in the section of “Who is an insured” and thus officers of the named insured corporate entity should be considered insureds. In rejecting this argument the court noted that the definition of “you” in the policy was the named insured corporation and the policy itself was identified as a “corporate policy.”



The Court also found that the policy expressly required Lee to “promptly send [Great Divide] copies of the legal papers if a 'suit' is brought.’” The court found that in addition to the large amount of time it took for Lee to notify Great Divide of the cases, he omitted the “most significant information of this claim and suit” from his notice which was a material breach of his policy obligations. This information included his failure to provide Great Divide a copy of the initial Complaint alleging UM coverage against American States as well as a copy of his Second Amended Complaint until 2 ½ years after filing his original complaint. Moreover, Lee’s notice to Great Divide failed to disclose that he had obtained a default judgment against the uninsured driver and he would be seeking coverage. Accordingly, the court found the late notice was sufficient to deny coverage to Lee.



In a strongly worded dissent, Justice Cotter raised several points including the fact that Lee had moved for summary judgment at the trial court level and that the court, in addition to denying his motion, sua sponte granted Great Divide summary judgment on coverage issues which, she believed, deprived Lee of his ability to properly raise issues of fact precluding summary judgment.

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In Nejati v. Royal Indemnity Co., 2008 WL 483496 (N.D. Tex., February 19, 2008), Royal was sued by Nejati to enforce a $1.4 million default judgment obtained against Royal’s insured under a commercial auto policy.  Nejati obtained a default judgment because the insured failed to forward suit papers to Royal and repeatedly refused to communicate with Royal about the lawsuit.  Royal received actual notice of the suit from Plaintiff's counsel but it did not file an answer on its insured’s behalf because the insured never made a claim, never asked for a defense, and refused to cooperate with his insurer's efforts to try to protect him.  Royal also never issued a reservation of rights or submitted a non-waiver agreement.  It did, however, engage in limited discussions with Nejati’s attorneys once it was notified of the suit including asking for an extension of the answer date to enable to it contact the insured and including trying to settle the lawsuit before a default judgment was entered. On February 19th, Federal District Court Judge Barbara M.G. Lynn from the Northern District of Texas ruled on cross motions for summary judgment filed by Nejati and Royal. 

The court denied summary judgment determining two fact issues existed: (1) whether Royal was prejudiced by its insured’s breach of the cooperation clause; and (2) whether Royal waived the cooperation clause as a condition precedent to coverage through its conduct.  Consistent with the actions of other Texas courts in recent months, this court implicitly rejected the concept of “prejudice as a matter of law” in finding the referenced fact issues despite the insured’s gross failure to cooperate or to even demand defense or indemnity benefits from his liability insurer.  While there is nothing uniquely significant about this decision, it does illustrate an unfortunate trend among Texas courts (both state and federal) in the last 12 months to refuse to recognize "prejudice per se" when an insured refuses to make a claim, refuses to cooperate, and allows a default judgment to be entered.   While these decisions seem superficially beneficial to policyholders, they are actually harmful to policyholders over the long run.  For example, the efforts of the insurer to try to repeatedly contact the insured, to ask for an extension of time to answer, and to ask opposing counsel how much he wanted to settle the case are obviously good things for the insured.  But, as this case illustrates, if such "good efforts" are going to actually increase the insurer's exposure by creating a fact issue as to its actual prejudice, then the obvious lesson is for insurers to not try to help their insureds and simply wait for actual notice from their insured and wait for a demand for a defense before lifting a finger.  That is a very, very dangerous precedent, but it is the unfortunate implication of the refusal of Texas courts' to recognize prejudice per se or prejudice as a matter of law following late notice.   

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Last Friday, the Texas Supreme Court answered “no” to the following certified questions from the Fifth Circuit: 

"Where an additional insured does not and cannot be presumed to know of coverage under an insurer's liability policy, does an insurer that has knowledge that a suit implicating policy coverage has been filed against its additional insured have a duty to inform the additional insured of the available coverage?"  and,

"Does proof of an insurer's actual knowledge of service of process in a suit against its additional insured, when such knowledge is obtained in sufficient time to provide a defense for the insured, establish as a matter of law the absence of prejudice to the insurer from the additional insured's failure to comply with the notice-of-suit provisions of the policy?"

In National Union fire Insurance Co. v. Crocker, 2008 WL 400398 (Tex. February 15, 2008), a nursing home resident sued the insured nursing home and its employee for injuries suffered when hit by a door swung open by the employee. The employee was terminated after the incident but before suit was filed. The insurer defended the nursing home but did not defend the employee even though the claims against him were covered and the insurer knew he had been served. The insurer attempted to contact the employee by phone and mail without success. During the suit, the employee spoke privately with plaintiff’s counsel at a deposition but refused to speak with the nursing home’s defense counsel. At trial, the jury returned a take nothing defense verdict against the nursing home but the court entered a $1,000,000 default judgment against the employee. The injured resident then sought to collect against the liability insurer because of its alleged coverage on the employee. 

The federal district court hearing the coverage case found the insurer breached its duty to defend the employee by failing to notify him of the available coverage. That court also found prejudice had to be shown to establish a coverage defense based on late notice and the insurer’s “actual awareness” of the suit against the employee precluded it’s ability to establish the required prejudice. On appeal, the Fifth Circuit certified the above questions to the Texas Supreme Court. In addressing the notice requirement in last Friday’s decision, the Texas Court observed that a “more basic purpose” of requiring an insured to forward suit papers to the insurer is to advise them that the insured has been served and the insurer is expected to file an answer on their behalf. An insurer’s knowledge that suit has been filed “does not satisfy this ‘more basic purpose’ or require the insurer to “gratuitously subject itself to liability.” The high court noted: “Simply put, there is not duty to provide a defense absent a request for coverage.”

Addressing the prejudice question, the court distinguished its recent decision in PAJ, Inc. v. Hanover Insurance Co. 2008 WL 109071 (Tex. 2008) (See Texas Insurance Law Newsbrief January 14, 2008), by observing in PAJ the notice was actually late in contrast to the present case where there was no notice from the additional insured at all. Because an insured may opt against seeking a defense from an insurer for a number of reasons, the Texas Supreme Court concluded that “insurers owe no duty to provide an unsought, uninvited, unrequested, unsolicited defense.” As such, the insurer had no duty to inform the employee of available coverage or to voluntarily undertake his defense. And, the high court concluded actual knowledge of the suit against him did not establish prejudice as a matter of law.

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In York Specialty Food, Inc. v. Tower Ins. Co. of New York (NY App., 1st Dept., Jan. 31, 2008), a New York appellate court has held that an insured, who became aware of the claimant’s accident within three days, but did not notify its insurer of the accident until eight months later, breached the notice requirements of its liability policy. The court rejected the insured’s excuse for delay premised upon an alleged good-faith belief in non-liability because the insured never investigated the possibility of its liability for the accident. The court found that an investigation by the insured that included interviews of employees who witnessed the accident would have revealed that the claimant, after falling in front of the insured's premises, had been taken from the scene in an ambulance. Since no investigation was conducted, the insured could not claim a good-faith belief in non-liability. As continues to be the law in New York, the insured was not required to demonstrate prejudice to invoke the late notice defense.

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Only two months after Governor Spitzer vetoed efforts to permit "direct actions" in New York and impose a requirement of prejudice in late notice cases, a new bill has been introduced in the State Senate and Assembly that would change New York law in much the same way that SB 06306 proposed to.  The new proposal, which is co-sponsored by 38 senators and 120 Assemblymen, would:

• Permit injured parties to bring declaratory judgment actions directly against the insurer of the party responsible for their injuries.
• Give insurers that deny coverage for bodily injury claims on the basis of late notice a 60 day grace period in which to file a DJ naming the third party claimant (in which event the claimant may not bring its own DJ). 
•  Stipulate that untimely notice will not invalidate coverage (except as to claims made policies) without proof of prejudice.  Prejudice is defined as the impairment of a "significant interest," including the ability to investigate, settle or defend a claim.
• Require insurers to prove prejudice if the delay was two years or less but assign the burden of disproving prejudice to policyholders if the delay was longer than two years.  Prejudice shall exist as a matter of law if, prior to notice, the insured's liability is fixed by a judgment, arbitration or settlement.        
• Add a new section to 3420(d) requiring insurers to confirm the existence and limits of liability insurance coverage to injured parties within 60 days of a written request.

To the extent that there are olive branches in this legislative thicket, they appear to be contained in the 60 day "safe harbor" provision; the shifting burden of proof provision and the determination of prejudice as a matter of law.

The "safe harbor" provision at least allows the insurer to choose where it wishes the coverage litigation to occur (but is there a trap here?--under Mighty Midgets, insurers are only liable for an insured's DJ fees if the the insurer commenced the DJ). 

The shifting burden rule reflects the compromise approach that some states have adopted by legislaton (Wisconsin) or common law and reflects the general view that prejudice is not only more likely to increase with the passage of time but that, as a practical matter, the longer the delay, the more difficult it is for the insurer to recreate what might have been to show how it would have investigated or responded to the claim had it been timely. 

The prejudice as a matter of law provision is welcome but does little more than is already accepted at common law.  It does at least moot the argument that has been accepted in some states that even a settlement is not prejudice per se unless the insurer can show that it would have gotten a better deal if it had control of the defense.

When Governor Spitzer vetoed SB06036 last August, he stated in his veto message that he felt that the bill had been brought forward precipitously and without adequate consideration for its implications.  While there has since been some consultation with the insurance industry, it' far from clear that this latest proposal truly takes into account the role that notice provisions play in a liability policy, the crucial inter-relationship between timely notice and an insurer's ability to exercie its right to defend or the consequences of such a significant restructuring of the common law mere years after it was affirmed by the Court of Appeal in Argo.  Nor does the legislation address the patent unfairness that a mere 60 day delay can estop an insurer from disputing coverage under 3420(d), whereas an insured can now wait up to two years with relative impunity.  Nevertheless, given the number of co-sponsors, it's clear that the insurance industry will face an uphill battle in any effort to block or substantially modify this new

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