When Timely Notice Isn’t Enough and When It Isn’t Even Necessary

When Timely Notice Isn’t Enough and When It Isn’t Even Necessary

By David A. Gauntlett*

Introduction

Policyholders must be diligent in providing notice of potential claims to their insurers. Many policyholders, and even insurance brokers, make the mistake of assuming there will be no coverage for a particular matter and fail to do so. This is a mistake.[1] Another mistake can be made by failing to provide notice according to the procedure required by the policy. Though ultimately resolved in favor of the policyholder, one Illinois case had to be litigated up to the state’s Supreme Court to secure coverage, all of which could have been avoided by providing notice according to the terms of the policy.

W. Am. Ins. Co. v. Yorkville Nat’l Bank

In the Yorkville appellate decision,[2] the court determined that the notice provision of the policy had not been satisfied and thus no duty to defend existed. At issue were six alleged instances of oral notice claimed that could constitute actual notice triggering the duty to provide coverage. The court recited the pertinent elements:

Defendant's first allegation of “actual notice” involves a conversation in late 2001 or early 2002 between Richard Dickson, who at the time was an agent of Zeiter-Dickson, and James Liggett, who was serving as defendant's president. Liggett states that he told Dickson that defendant was involved in a defamation suit and that the current D & O carrier would not cover the suit. He then asked Dickson whether defendant would have coverage under the Zeiter-Dickson policy. Dickson allegedly responded probably not. The second allegation of “actual notice” involves a conversation in late 2002 between Liggett and Joel Ottosen, another agent of Zeiter-Dickson. Liggett stated that this conversation was very similar to the one he had with Dickson in that he inquired as to whether the policy would provide coverage. Ottosen denies that this conversation ever occurred. The third and fourth allegations of “actual notice” involve two conference calls in 2001 and 2002 between Liggett, Ottosen and Daniel Kramer, who at the time was serving as defendant's in-house counsel. During the alleged calls Liggett again inquired as to whether defendant would have any coverage under the policy. No notes or confirming correspondence exist memorializing these conversations. Ottosen also denies that either of these conversations ever took place. The fifth and sixth instances of claimed “actual notice” occurred during defendant's Board of Directors meetings on September 16, 2002, and November 18, 2002. Dickson was present at both of these meetings. According to the minutes of the meetings, Liggett disclosed to the board that defendant had been sued for defamatory comments made by Wiegmann. He also disclosed the parties to the litigation and that there were some additional legal expenses involved with the lawsuit.[3]

The court determined that written notice, 27 months after the suit was filed, before the matter was scheduled for trial, did not comply with the policy’s notice provision. In so ruling, the court cited Country Mutual Insurance Co. v. Livorsi Marine, Inc.[4] There, it was determined that the insurer did not receive reasonable notice of an occurrence or lawsuit, and the insured could not recover, regardless of whether the lack of reasonable notice prejudiced the insurer.[5] Since written notice was required as soon as practicable, oral notice was of no moment. The court found that actual notice did not trump the policy’s technical language.

The court also relied on Cincinnati v. Western American Ins. Co.,[6] noting its discussion of actual notice. It stated:

While Cincinnati does in fact stand for the proposition that the duty to defend arises when the insurer has “actual notice” of a suit pending against its insured, it appears clear that an insurer can be absolved of this duty by obtaining a declaratory judgment that it has no obligation to defend or indemnify under the actual terms of the policy.[7]

The court ruled it was the actual language of the notice provision of the policy, not actual notice as discussed in Cincinnati, that was germane because the suit was initiated by the insured against the insurer for coverage,

Supreme Court Reversal

Luckily, the Yorkville policyholder was eventually vindicated by the Illinois Supreme Court,[8] which reversed the appellate decision. After determining that the insurer had not been prejudiced by the delayed notice in compliance with the terms of the policy, it concluded that receiving timely actual notice was sufficient to trigger the duty to defend.

The trial court held that Liggett's “in passing” conversation with Dickson as well as the reports at the board meetings provided West American with sufficient information to “locate and defend” the defamation lawsuit. We agree. Through its authorized agent, the insurer knew both: (1) that a lawsuit had been filed against its insured; and (2) that the defamation suit potentially fell within the scope of coverage of the Policy. Although no details were given as to when the alleged defamation took place or where the lawsuit was filed, Liggett conveyed that the bank had been sued for defamation and that the alleged events took place in Ottawa, Illinois. . . . West American was put on notice at an early stage in the litigation that Yorkville was a defendant in a lawsuit that was potentially covered under the policy. At the very least, the agent could have followed up with Yorkville by requesting to see a copy of the complaint before advising it that the lawsuit probably was not covered.[9]

Although the eventual resolution favored the policyholder, it came at the expense of over six years of litigation. This case illustrates how insurers are often wrong in how they handle a claim, but it also demonstrates the burden of proving that. It is must less costly to diligently report potential claims according to the terms of a policy.

In Many States, Statutes Control Late Notice Rules

In New York, for example, a statute writes a provision into every policy that late notice is irrelevant unless the insurer can demonstrate prejudice.[10] Insurers try to avoid this statutory influence by relying on “voluntary payments” provisions, which forbid policyholders from “voluntarily mak[ing] a payment, assum[ing] any obligation, or incur[ring] any expense for damages [or] ‘loss’.”[11] While New York has not yet resolved whether such a provision can be used to bypass the intended effect of the statute enabling recovery of pretender fees, other states with analogous legal landscapes have tackled the issue head on and determined the provisions are not enforceable in that manner.[12]

Conclusion

The leeway granted to policyholders in providing notice to an insurer can vary greatly, based on both the specific terms of the policy and the laws of the controlling state. The safest and least costly practice is always to provide prompt notice of potential claims by the procedure described in the policy itself. When in doubt, expert coverage counsel should be consulted immediately as long delays can lead to even longer litigation required to enforce your rights.

*David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. Mr. Gauntlett can be reached at (949) 514-5662 or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.

[1] See David A. Gauntlett, Why Policyholders Should Retain Insurance Coverage Savvy Counsel, https://www.gauntlettlaw.com/news/why-policyholders-should-retain-insurance-coverage-savvy-counsel (Jan. 5, 2023).

[2] W. Am. Ins. Co. v. Yorkville Nat'l Bank, 388 Ill. App. 3d 769 (2009).

[3] Id. at 771–772.

[4] 222 Ill. 2d 303 (2006).

[5] Id. at 311–12.

[6] 183 Ill. 2d 317 (1998).

[7] Yorkville, 388 Ill. App. 3d at 778.

[8] W. Am. Ins. Co. v. Yorkville Nat'l Bank, 238 Ill. 2d 177 (2010).

[9] Id. at 190.

[10] N.Y. Ins. Law § 3420(a)(5).

[11] Many policies contain substantially similar language. The quoted provision here is taken from Navigators’ Form NAV NP3 + Cyber (07/16) CGL coverage.

[12] Episcopal Church v. Church Ins. Co., 53 F. Supp. 3d 816, 828 (D.S.C. 2014) (“[T]he duty to defend arises when an underlying suit is brought against the insured with allegations that are arguably within the scope of the insurance policy's coverage. Therefore, an insurer's duty to defend is triggered when the underlying claim is brought and thus ‘pre-exists any obligation on the part of the insured as to notice or compliance with the voluntary payment provision of an insurance contract.’”) (quoting Liberty Mut. Ins. Co. v. Black & Decker Corp., 383 F. Supp. 2d 200, 205 (D. Mass. 2004)) (internal citation omitted); Desert Mountain Props. Ltd. P’ship v. Liberty Mutual Fire Ins. Co., 236 P.3d 421, 433 (Ariz. Ct. App. 2010) (“[A]n insured’s breach of the [voluntary payments] clause ordinarily would ‘relieve[ ] a prejudiced insurer of liability under the policy.’”) (quoting Ariz. Prop. & Cas. Ins. Guar. Fund v. Helme, 153 Ariz. 129, 136–37 (1987)); Griffin v. Allstate Ins. Co., 108 Wash. App. 133, 139–141 (2001) (“Allstate urges . . . that the majority of states disallow recovery of pre-tender defense costs . . . but . . . in Washington the rule is otherwise. . . . [A]n insurer’s duty to defend arises upon the filing of a covered complaint, and the duty is not excused against late notice unless the insurer is prejudiced. . . . [In Washington,] ‘the insurer is not relieved of its duty to defend unless it can prove that the late notice resulted in actual and substantial prejudice.’”) (emphasis added) (quoting Unigard Ins. Co. v. Leven, 97 Wash. App. 417, 427 (1999)).