NY Court Applies Old Late Notice Rule to A Post-January 17, 2009 Policy

In its recent decision in Indian Harbor Ins. Co. v. The City of San Diego, 2013 U.S. Dist. LEXIS 137873 (S.D.N.Y. Sept. 25, 2013), the United States District Court for the Southern District of New York had occasion to consider whether New York’s “notice prejudice” rule set forth in New York Insurance Law §3420(a) applies to a policy not “issued or delivered” in New York, but which is otherwise governed by New York law.

For decades, the law in New York had been that timely notice of occurrence or suit was a condition precedent to an insured’s right to coverage under an insurance policy.  As such, New York courts long recognized that an insured’s failure to provide prompt notice of a triggering event (i.e., occurrence, suit, claim, etc.) operated as a forfeiture of the insured's right to coverage, regardless of whether the insurer was prejudiced as a result.  See, Great Canal Realty Corp. v. Seneca Ins. Co., Inc., 800 N.Y.S.2d 521(N.Y. 2005); Security Mut. Ins. Co. v. Acker-Fitzsimons Corp., 340 N.Y.S.2d 902 (N.Y. 1973).

This law changed, in part, with the New York Legislature’s implementation of amendments to New York Insurance Law §3420(a) that went into effect on January 17, 2009.  This revised rule states, in pertinent part, that:

(a)  No policy or contract insuring against liability for injury to person, except as provided in subsection (g) of this section, or against liability for injury to, or destruction of, property shall be issued or delivered in this state, unless it contains in substance the following provisions…

                       

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(5) A provision that failure to give any notice required to be given by such policy within the time prescribed therein shall not invalidate any claim made by the insured, injured person or any other claimant, unless the failure to provide timely notice has prejudiced the insurer … (Emphasis supplied.)

Thus, for policies “issued or delivered” in New York on or after January 17, 2009, a disclaimer of coverage based on late notice will only be upheld when the insurer has been prejudiced.  New York courts, however, continue to apply the “no prejudice” rule to policies issued or delivered prior to this date.   See, Charter Oak Fire Ins. Co. v. Fleet Bldg. Maint., Inc., 707 F. Supp. 2d 329, (E.D.N.Y. 2009); Rockland Exposition, Inc. v. Great Am. Assur. Co., 2010 U.S. Dist. LEXIS 103267 (S.D.N.Y. Sept. 29, 2010).

The recent decision in City of San Diego addresses whether the prejudice rule established in §3420(a) applies to policies issued after January 17, 2009, that are governed by New York law, but not actually issued or delivered within the state.  The policy before the court was a pollution liability policy issued by Indian Harbor (on XL Specialty paper) to the California State Association of Counties.  The policy was a claims made and reported policy in effect for the three year period from July 1, 2009 to July 1, 2012, but nevertheless required the insured to give Indian Harbor notice of claims “as soon as practicable.”  Notably, while the policy was issued to a California insured to provide pollution liability coverage for California entities, the policy contained a New York choice of law and a New York forum selection provision.

The City of San Diego – an insured under the policy – sought coverage for three underlying pollution claims, each of which was first made and ultimately reported to Indian Harbor while the policy was in effect.  In each instance, however, the City’s notice to Indian Harbor was significantly delayed.  For one claim, the City waited some thirty-one months to give first notice.  For another, the City waited more than twelve months.  For the third claim, the City waited almost two months before giving notice. Indian Harbor denied coverage to the City for each of the claims on the basis of late notice.

In a subsequent declaratory judgment action, Indian Harbor argued that it had no coverage obligation with respect to the underlying claims as a result of the City’s failure to have provided timely notice of same.  In support of this, Indian Harbor cited to the long line of New York cases standing for the proposition that even small delays in giving notice to an insurer – even as little as twenty-one days – can result in a forfeiture of coverage, regardless of prejudice.  The court agreed that in each instance, the City’s first notice to Indian Harbor was not given as soon as practicable under this line of cases, and that in each instance, the City failed to offer a reasonable explanation that would excuse its delay.  Among other things, the City argued that its delays should be excused since in each case, it still complied with the requirement that the claim be reported during the policy period.  The court rejected this argument, explaining that the policy’s notice provision enables the insurer to commence a timely investigation, which serves a different purpose than the claims reported provision, which provides certainty to the insurer as to when it is "off the risk."  The court further explained that the City’s argument, taken to its logical extreme, would improperly “read out the requirement that notice be given as soon as practicable and require only that notice be provided during the policy period.”

More notably, the City asserted that the policy should not be governed by the “no prejudice” line of New York cases because the policy was issued after January 17, 2009, i.e., when the changes to §3420(a) went into effect.  In support of this position, the City argued the policy was either expressly governed §3420(a) in light of the policy’s New York choice of law provision, or in the alternative, the changes to §3420(a) signified a shift in New York common law that now requires a showing of prejudice even in instances where the statute does not apply.  The court rejected both arguments. 

In terms of whether the statute governed the policy, the court noted that by its express terms, §3420(a) only applies to policies “issued or delivered” in New York.  The court found that the policy was delivered in California, and that it was not issued in New York but instead was issued in Exton, Pennsylvania, which is where the policy was prepared and signed by Indian Harbor.   Thus, while the court agreed that the policy was governed by New York law as a result of its express choice of law provision, it nevertheless concluded that the policy was not governed by §3420(a) since the policy was neither issued nor delivered in the state. 

The court further rejected the City’s argument that §3420(a) “creates a new public policy for New York that changes the historic no-prejudice rule.”  The court observed that numerous New York courts have continued to apply the “no prejudice” rule to policies issued prior to January 17, 2009, and that if New York public policy truly had changed, then these courts would be reaching a different result.  The court also noted that in the Second Circuit decision in Marino v. New York Tel. Co., 944 F.2d 109 (2d Cir. 1991), the court declined to apply a different aspect of §3420 to a policy issued and delivered outside the state, but which was nevertheless governed by New York law.  From this holding, the court concluded that “Section 3420(a)(5) applies to policies issued or delivered in New York and has not changed the common law of New York.”  In other words, the “no prejudice” common law rule continues to apply to policies governed by New York law that are not otherwise subject to §3420(a).

In passing, the court rejected the City’s argument that the New York choice of law provision was unconstitutional.  The City offered no meaningful case law support for this contention, nor could it otherwise demonstrate that the provision was the result of fraud or overreaching.  Instead, explained the court, the parties freely contracted to include the provision, and Indian Harbor had sufficient contacts in New York (including the office of its CEO-chairman, general counsel and numerous corporate directors).  As such, the court agreed that “there is nothing unfair about enforcing the parties’ choice-of-law clause.”

5th Circuit Holds Late Notice Bars Coverage Under Buy-Back Pollution Coverage

In its recent decision in Starr Indemnity & Liability Co. v. SGS Petroleum Service Corp., 2013 U.S. App. LEXIS 12425 (5th Cir. 2013), the United States Court of Appeals for the Fifth Circuit, applying Texas law, had occasion to consider the effect of an insured’s failure to give notice of a pollution incident within the time specified in a supplementary pollution liability coverage endorsement.

Starr Indemnity issued an umbrella liability policy to SGS.  While the policy form originally contained an absolute pollution exclusion, the exclusion was deleted by endorsement and replaced by a limited pollution liability coverage “buy-back,” stating that the pollution exclusion would not apply to certain pollution events, assuming that certain conditions precedent were satisfied.  One such condition was that SGS was required to report the pollution incident to Starr, in writing, within thirty (30) days of it first becoming aware of the incident.  Following an accidental release of various chemicals, SGS sought coverage for cleanup costs from Starr.  SGS, however, failed to report the pollution incident to Starr within the thirty-day reporting period, but instead reported the release to Starr fifty-nine (59) days after it first learned of the release.  Starr sought a judicial declaration that it was not obligated to provide coverage to SGS for the incident as a result of SGS’ non-compliance with the reporting provision.

The lower court and the Fifth Circuit both agreed that the Fifth Circuit’s decision in Matador Petroleum Corp. v. St. Paul Surplus Lines Ins. Co., 174 F.3d 653 (5th Cir. 1999) was determinative of the issue.  There, the Fifth Circuit, in considering a similar pollution liability buy-back, held that an insured’s eight-day delay in complying with the reporting provision was fatal to the insured’s right to coverage, regardless of whether the insurer was prejudiced by the delay. The Fifth Circuit concluded that because the policy language in the Starr policy was similar to the policy in Matador, its prior holding was determinative and as such, SGS’ failure to have reported the pollution incident within the time allotted barred its right to coverage, whether or not SGS’ delay resulted in prejudice to Starr.

SGS nevertheless argued that since the 1999 decision in Matador, the Texas Supreme Court heightened the notice-prejudice rule in its holdings in PAJ, Inc. v. Hanover Ins. Co., 243 S.W.3d 630 (Tex. 2008) and Prodigy Communications Corp. v. Agricultural Excess & Surplus Ins. Co., 288 S.W.3d 374 (Tex. 2009).  The Fifth Circuit rejected this contention, noting that the decisions in PAJ and Prodigy were premised on the fact that the notice provisions in the policies at issue were not an essential part of the “bargained for exchange.”  By contrast, the thirty-day notice provision in the pollution buy-back was “a specific endorsement, separately negotiated by the parties, and with a clear notice requirement.”  Thus, while the Fifth Circuit agreed that under ordinary circumstances, an insurer is required to demonstrate prejudice in order to disclaim coverage based on late notice, the court agreed that the notice provision in the buy-back was to be treated differently than the standard notice provisions.   As such, concluded the court, the holding in Matador was not disturbed by PAJ and Prodigy decisions, and Matador, therefore, was determinative of SGS’ right to coverage.

Missouri Court Holds Prejudice Requirement Inapplicable to Claims Made Policy

In its recent decision in Secure Energy v. Phila. Indem. Ins. Co., 2013 U.S. Dist. LEXIS 69320 (E.D.Mo. May 15, 2013), the United States District Court for the Eastern District of Missouri had occasion to consider whether under Missouri law, an insurer need demonstrate prejudice in order to disclaim coverage based on an insured’s failure to report a claim within the time allotted under a claims made policy.

Philadelphia Indemnity insured Secure Energy under successive one-year claims made directors and officers policies during the period October 11, 2007 through October 11, 2012.  The policies contained the following reporting provisions:

In the event that a Claim is made against the Insured, the Insured shall, as a condition precedent to the obligations of the Underwriter under this Policy, give written notice to the Underwriter as soon as practicable after any of the directors, officers, governors, trustees, management committee members, or members of the Board of Members first become aware of such Claim, but, no later than 60 days after the expiration of this Policy, Extension Period, or Run-Off Policy, if applicable.

In December 2007, a claim was asserted against Secure Energy’s board of directors by an individual demanding payment of commissions he claimed he was owed.  Suit was filed in 2008 against one of Secure Energy’s directors, and it was later amended in 2009 to add Secure Energy as a direct defendant.  Secure Energy, however, did not provide notice of the suit to Philadelphia until late 2011.  It claimed that it did not do so earlier because it was unsure that the matter would qualify for coverage.   Philadelphia later denied coverage to Secure Energy, and its directors, based on the failure to report the suit in the time required by the applicable policy.

Secure Energy argued that while it did not strictly comply with the policies’ notice requirements, Missouri law required Philadelphia to demonstrate prejudice in order to disclaim coverage, citing to decisions such as the Missouri Supreme Court’s decision in Weaver v. State Farm Mut. Auto. Ins. Co., 936 S.W.2d 818 (Mo. 1997).  The district court noted, however, that in Wittner, Poger, Rosenblum, & Spewak, P.C. v. Bar Plan Mut. Ins. Co., 969 S.W.2d 749 (Mo. 1998), the Missouri Supreme Court held that the prejudice requirement articulated in Weaver did not extend to claims made policies, but instead was limited to occurrence-based policies.   Observing that several lower state courts and Missouri federal courts recognized the distinction stated in Wittner, the court agreed that Philadelphia need not demonstrate that it was prejudiced as a result of Secure Energy’s failure to have provided notice of the claim in the time required by the applicable policy.

New York Court Holds Wholesale Broker Is Insured’s Agent for Delivery of Policy

In its recent decision in B&A Demolition & Removal Inc. v. Markel Ins. Co., 2013 U.S. Dist. LEXIS 55946 (E.D.N.Y. Apr. 18, 2013), the United States District Court for the Eastern District of New York had occasion to consider when an insurance policy is considered “issued or delivered” for the purpose of the “notice prejudice” rule set forth in New York Insurance Law §3420(a).

Markel Insurance Company insured B&A Demolition & Removal, Inc., a New York company, under a combined general liability and contractors pollution liability policy for the period October 22, 2008 through October 22, 2009.  In April 2009, B&A was sued for allegedly having caused property damage to a neighboring building while performing construction work on its own premises.  B&A delayed giving notice to Markel for nearly seven months.  Markel, as a result, denied coverage to B&A based on its failure to have complied with the policy condition requiring prompt written notice of claim or suit.

At issue in the resulting coverage action was whether B&A’s policy was governed by New York’s “no prejudice” rule, whereby an insurer need not demonstrate prejudice in order to sustain a disclaimer of coverage based on an insured’s delay in providing notice of claim or suit, or whether the policy was governed by the “notice prejudice” standard set forth in New York Insurance Law §3420(a), as amended by the New York legislature effective January 17, 2009.  The amended §3420(a) states late notice disclaimers will only be effective if the insurer has been prejudiced by the insured’s delay in providing notice.  Importantly, New York’s legislature stated that the changes to §3420(a) only apply to policies “issued or delivered” on or after January 17, 2009, and every court to have since considered the issue has agreed that the prejudice standard set forth in §3420(a) does not apply retroactively to policies issued or delivered prior to that date.

Notwithstanding the October 22, 2008 effective date of the Markel policy, B&A argued that the policy should not be considered “issued or delivered” prior to January 17, 2009 because of a purported delay in when the policy was actually delivered.  This alleged delay involved the roles of the retail and wholesale brokers in procuring the policy on behalf of B&A.  There was no dispute that the Markel underwriter transmitted a copy of the policy, via email, to the wholesale broker, Gremesco, on December 1, 2008.  The Gremesco employee responsible for the account testified that she emailed a copy of the policy to the retail broker, Halland, on the same day.  Halland, however, claimed not to have received the email because of an apparent technical problem with its email server.  Halland further contended that it did not have actual receipt of a copy of the policy until sometime in February 2009 after having asked Gremesco to resend it.  B&A contended that as a result of this delay, the policy could not be considered delivered until after January 17, 2009, and that as such, the policy was necessarily governed by the new late notice rule.

Markel initially moved to dismiss B&A’s complaint, arguing that certain documents referenced in the pleading established that the policy was at the very least issued prior to January 17, 2009.  The court denied Markel’s motion on the basis that the documents were not properly considered on motion to dismiss.  In dictum, however, the court noted that even if Markel could demonstrate that the policy was issued prior to January 17, 2009, it would still need to establish that delivery did not take place after this date.

Following discovery, Markel moved for summary judgment on the basis that the policy was, in fact, delivered prior to January 17, 2009, notwithstanding the apparent question of fact as to when Halland received a copy of the policy from Gremesco.  Markel argued that because Gremesco, as the wholesale broker, was B&A’s agent rather than Markel’s agent, delivery should be considered effected when Markel transmitted a copy of the policy to Gremesco in December 2008, since.  In support of this argument, Markel cited to case law holding that wholesale brokers are generally considered the insured’s agent, or sub-agent, and that there was no evidence to support the contention that Gremesco was Markel’s agent.  Markel pointed out, among other things, that Gremesco had no authority to bind policies, set premiums, or even collect premiums on behalf of Markel.  Markel further pointed to deposition testimony from both the Halland and Gremesco employees evidencing the fact that Halland used Gremesco to “tap into” the wholesale insurance market and that Gremesco, in this role, acted as a mere intermediary between Halland and Markel. 

In considering this issue, the court noted that an insurance broker typically will typically be considered the agent of the insured rather than the insurer, absent “exceptional circumstances” demonstrating an agency relationship between the insurer and the broker.  The court concluded that based on the evidence before it, no such exceptional circumstances were present.  On the contrary, the evidence demonstrated as a matter of law that Gremesco was B&A’s agent rather than Markel’s.  Having concluded that Gremesco was B&A’s agent, the court agreed that the policy was delivered on December 1, 2008, and thus governed by New York’s pre-January 17, 2009 “no prejudice” rule.  As such, and given B&A’s seven-month delay in giving notice of the underlying suit, the court held that, as a matter of law, Markel’s denial of coverage based on late notice was proper.

11th Circuit Addresses Late Notice and Related Claims

In its recent decision in Sharp Realty & Mgmt. v. Capitol Specialty Ins. Corp., 2013 U.S. App. LEXIS 243 (11^thCir. Jan. 4, 2013), the United States Court of Appeals for the Eleventh Circuit, applying Alabama law, considered whether an insured’s untimely notice of suit under a professional liability policy vitiated its right to coverage, regardless of prejudiced.  Additionally, the court addressed the concepts of related claims.

The insured, Sharp Realty & Management (“SRM”), was insured under a professional liability policy issued by Allied World Assurance Company (“AWAC”) during the period November 2007 through November 2009, and later under a professional liability policy issued by Capitol Specialty Insurance Corp. (“Capitol”) for the period November 2009 through 2010.   In July 2009, SRM was sued by several parties for its alleged mismanagement of a property.   SRM, however, did not give notice of the suit to AWAC until March 2010 – some eight months later.  SRM also gave notice of the underlying suit to Capitol.  AWAC agreed to provide SRM with a defense under a reservation of rights on several grounds, including SRM’s failure to comply with its policy’s notice provision.  Capitol denied coverage to SRM on the basis that the claim was first made prior to the inception date of its policy.  SRM later brought a declaratory judgment action against AWAC and Capitol in an Alabama federal district court.  Both insurers were successful on motion for summary judgment.

On appeal, the Eleventh Circuit considered first whether SRM’s non-compliance with the notice provision in the AWAC policy precluded its right to coverage.  In considering this issue, the court noted that under Alabama law, the only relevant considerations concerning an insured’s compliance with a notice provision are length of delay and reason for delay.  Under Alabama law, prejudice is not a consideration unless the policy fails to contain a provision making timely notice a condition precedent to coverage.  See, Travelers Indem. Co. of Connecticut v. Miller, 86 So. 3d 338, 342 (Ala. 2011); American Fire & Cas. Co. v. Tankersley, 116 So. 2d 579, 581 (Ala. 1959).   The notice provision in the AWAC policy stated:

B. WHAT TO DO IF AN INSURED HAS A CLAIM

If there is a Claim, or a circumstance or incident likely to result in a Claim, the Insured must promptly do the following:

1.   Notify the Company in writing . . .

2.   Send the Company copies of all . . . legal papers received in connection with the Claim or potential Claim; . . .

C. LEGAL ACTION AGAINST THE COMPANY . . .

2.   No action may be brought against the Company unless the Insured has fully complied with all terms and conditions of this Policy.

SRM argued that this notice provision did not constitute a condition precedent to coverage because it did not contain that phrase, and as such, AWAC need be prejudiced in order to disclaim coverage.  The court disagreed, explaining that the notice provisions “make it clear that SRM was required to promptly notify [AWAC] of any claim before it could bring an action against it.”  As such, the court concluded that the only relevant considerations were the length of SRM’s delay and the reason for its delay.

With respect to the first factor, the court held as a matter of law that SRM’s eight-month delay in giving notice to AWAC was late, observing that in Nationwide Mut. Fire. Ins. Co. v. Estate of Files, 10 So. 3d 533, 536 (Ala. 2008), the Alabama Supreme Court had held that a shorter delay of five months was late as a matter of law.  The court also concluded that SRM could offer no reasonable excuse for its eight-month delay.  While SRM pointed out that it immediately gave a copy of the lawsuit to its attorney, and that its attorney failed to send a copy of the suit to AWAC, the court nevertheless held that the failure of SRM’s attorney was still a delay on SRM’s part and thus not a reasonable excuse for its non-compliance with the policy’s notice provision.  Thus, finding that the length of SRM’s delay in giving notice of suit was too long, and that there was no reasonable excuse for this delay, the court affirmed the lower court’s ruling of summary judgment in AWAC’s favor.

Turning to coverage under Capitol’s policy, the court agreed that the claim was first made in July 2009, prior to the inception date of Capitol policy, and thus did not trigger that policy’s coverage that was limited to claims first made and reported during the policy period.  SRM argued that because the underlying suit was amended during the policy period to include new claims regarding information first learned by plaintiffs during discovery, the amended complaint should be considered a cnew laim first made after the policy’s November 2009 inception date.  The Capitol policy, however, contained a multiple claims provision stating that all claims arising out of the same “erroneous act” would be considered first made on the date the first claim was made against the insured.    Additionally, the Capitol policy contained a related acts provision stating that all erroneous acts that are “logically or causally connected by common facts, circumstances, transactions, events and/or decision” would be considered a single erroneous act.  The court agreed that the new erroneous acts alleged in the amended complaint related to those initially pled, explaining:

All of the claims in the underlying action are based on related Erroneous Acts. The same claimant sued the same defendant for the same type of wrongdoing (failure to collect rent and maintenance fees) at the same location over an overlapping period of time. Both audits examined whether SRM was collecting rent and fees from the same tenants in accordance with the same leases. Thus, while there may be separate occurrences, those occurrences are clearly related because they are "logically or causally connected by common facts, circumstances, transactions, events and/or decisions.

As such, the court agreed that all claims arising out of the alleged erroneous act would be deemed first made in July 2009, and thus prior to the inception date of the Capitol policy.

Florida Court Affirms Late Notice Disclaimer

In its recent decision in Wheeler's Moving & Storage v. Markel Ins. Co., 2012 U.S. Dist. LEXIS 125726 (S.D. Fla. Sept. 5, 2012), the United States District Court for the Southern District of Florida had occasion to consider under what circumstances an insured’s failure to comply with a policy’s notice provision results in a forfeiture of coverage.

Markel Insurance Company insured Wheeler’s Moving & Storage under a general liability policy that, among other things, required notice of occurrence or suit “as soon as practicable.”  Wheeler’s was named as a defendant in a personal injury lawsuit, but failed to give notice of the suit to Markel until eighteen months after suit was filed, by which time discovery had already closed.  At the time notice was received, a mediation was scheduled for one week later and the trial scheduled for two weeks later.  Markel denied coverage on the basis of late notice, as well as on the basis of its policy’s auto exclusion.  Subsequent to Markel’s denial of coverage, Wheeler’s defense counsel successfully withdrew from the case and Wheeler’s elected not to retain new counsel.  The matter ultimately went to trial on damages alone and the underlying plaintiff was awarded $1.4 million.

Wheeler’s later sued for coverage, arguing that Markel’s late notice disclaimer was invalid.  On motion for summary judgment, the court began its analysis by observing that under Florida law, an insured’s failure to provide timely notice creates a “rebuttable presumption of prejudice to the insurer.”  Thus, it is the insured’s burden to prove that its late notice did not result in prejudice to the insurer.   Notwithstanding, it is the insurer’s burden of showing a lack of any material facts as to “(1) what the policy required with respect to notice, (2) when notice was provided, within the meaning of the policy and Florida law, (3) whether notice was timely, and (4) whether prejudice exists, either by operation of the unrebutted presumption or otherwise.”

In considering these factors, the court agreed that Wheeler’s failure to have provided notice to Markel of the underlying suit until eighteen months into the litigation -after discovery had closed and on the eve of trial - was late as a matter of law.  Notice as soon as practicable, as required by the Markel policy, required that notice be given with reasonable dispatch and within a reasonable time in view of the facts and circumstances.  As the court explained, “[n]o reasonable interpretation of the record evidence supports a finding that notice was timely.”  As such, Markel was entitled to a presumption of prejudice.

Wheeler’s attempted to rebut this presumption by proffering two expert opinions concluding that Markel was not prejudiced and, in fact, that Markel had breached its policy obligations by not undertaking a thorough investigation into whether Wheeler’s late notice actually prejudiced its ability to defend the underlying case.  The court rejected this assertion, explaining that because prejudice is presumed, Markel was not required to undertake an investigation into prejudice.  The court also rejected the experts’ opinions concerning Markel’s ability to defend the underlying case, concluding that the opinions were based on speculation only and without any credible supporting evidence.

Wheeler’s also argued that Markel was not entitled to rely on the late notice defense since it also denied coverage on the basis of its policy’s auto exclusion.  Wheeler’s specifically argued that “[w]here an insurer possesses enough information to permit it to deny the claim on other grounds, Florida courts have consistently held that an insurer waives the right to reject coverage on the basis that the insured failed to provide timely notice of the claim.”  This argument relied on the decision in Keenan Hopkins Schmidt and Stowell Contractors, Inc. v. Continental Cas. Co., 653 F. Supp. 2d 1255, 1263 (M.D. Fla. 2009), in which a Florida federal district court held that the insured successfully rebutted a presumption of prejudice by demonstrating that the insurer was able to fully investigate and determine the application of a policy exclusion. 

The court held that Wheeler’s attempt to broaden the Keenandecision was unavailing, since by Wheeler’s reasoning “no insurer would ever be able to assert late notice as a defense unless it was the sole basis of a denial of coverage.”  Moreover, the court found Keenan inapplicable to the facts involving Wheeler’s:

The facts in Keenan and in the instant case, however, are radically different. In Keenan, the insurer had ten months notice and was able to investigate the claim, whereas in this case, Markel effectively had no notice and no ability to conduct discovery. Wheeler's asserts that Markel had an opportunity to investigate potential coverage defenses prior to the entry of judgment and had sufficient information to deny coverage on other grounds other than the late notice defense. These assertions are rejected.

Thus, concluded the court, Wheeler’s failed to rebut the presumption of prejudice, thereby entitling Markel to judgment as a matter of law based on the insured’s failure to comply with its policy’s notice provision.

Fifth Circuit Holds Excess Insurer Prejudiced By Late Notice

In its recent decision in Berkley Regional Ins. Co. v. Philadelphia Indemnity Ins. Co., 2012 U.S. App. LEXIS 15998 (5^thCir. Aug. 2, 2012), the United States Court of Appeals for the Fifth Circuit, applying Texas law, had occasion to consider how and under what circumstances an excess/umbrella insurer is prejudiced as a result of an insured’s failure to provide timely notice of occurrence or suit.

The insured, Towers of Town Lake Condominiums (“Tower”), had a $1 million primary policy with Nautilus and a $20 million excess/umbrella policy with Philadelphia.  Towers was sued when a dentist slipped and fell on its premises.  It placed Nautilus on notice of the suit, but did not give immediate notice to Philadelphia.  At a mediation held prior to trial, the plaintiff’s “bottom” demand was $215,000 and Nautilus’ “top” offer was $150,000.  The parties reached an impasse and the case, therefore, proceeded to trial.  A jury subsequently rendered a verdict in favor of the plaintiff in the amount of just under $1.7 million.  On the day of the verdict, Towers finally gave notice to Philadelphia.  Philadelphia thereafter denied coverage based on late notice.

The Philadelphia policy required prompt notice of any occurrence involving permanent disabilities, or otherwise involving a coverage issue that could result in a reservation of rights or disclaimer of coverage.  Additionally, the Philadelphia policy had a provision allowing it to associate in the defense, settlement and investigation of any underlying claim, at the discretion of Philadelphia.  Nautilus, suing on behalf of Towers, argued that Philadelphia’s late notice disclaimer was not valid as Philadelphia was not prejudiced by Towers’ untimely notice. The lower court held in Nautilus’ favor.  On appeal, the Fifth Circuit was asked whether as a matter of law “[d]oes the failure to give notice to an excess carrier until after an adverse jury verdict constitute evidence of prejudice that forfeits coverage?”    

Looking to Texas case law on late notice, the Fifth Circuit observed that the purpose of notice provisions are to protect the insurer’s right and ability to participate in the underlying suit and to minimize its potential loss.  While these cases generally involved primary insurers, the court could find no basis for drawing a distinction between the interests of primary insurers and excess insurers, explaining:

While their responsibilities are different and, thus, they may not suffer prejudice in all circumstances where a primary carrier would, [excess insurers] nonetheless have a contract with the insured and are entitled to rely upon the same contract principles [as do primary insurers].

The court noted that while it is not always easy to determine prejudice, certain bright lines can be drawn.  For instance, prejudice will be presumed where notice is first given after a default judgment.  The court further observed that notice given once the case is “over” is too late, citing to the Texas Supreme Court decision in National Union Fire Ins. Co. v. Crocker, 246 S.W.3d 603 (Tex. 2008).  Nautilus nevertheless argued that Crockerwas inapplicable because the case was defended by Nautilus.  In other words, a distinction should be drawn between a situation where a primary insurer does not have a chance to defend and where an excess insurer does not receive notice until after verdict.  The Fifth Circuit rejected this distinction, explaining:

[Nautilus] argues that this case is more like the “better late than never” cases and not like Crocker because no default was entered; rather, the case was litigated by competent counsel to a jury verdict.  We disagree … Philadelphia was not just notified “late,” it was notified after all material aspects of the trial process had concluded and an adverse jury verdict was entered.  It lost the ability to do any investigation or conduct its own analysis of the case, as well as the ability to “join in” Nautilus’ evaluation of the case.

Just as important for the court was that Philadelphia lost its opportunity to participate in the pretrial mediation: 

Mediation, by nature, is a dynamic process, and for that very reason, parties are expected (and usually ordered) to appear ready to negotiate and with “full” settlement authority … Thus, we cannot fully know what effect, if any, Philadelphia’s participation would have had on this process – e.g., convincing Nautilus to take [plaintiff’s] offer of $215,000, convincing [plaintiff] to come down further or accept Nautilus’ offer of $150,000, or even “dropping down” to pay the $65,000 difference between the parties’ offers (with or without a side agreement between itself and Nautilus to litigate who must ultimately pay that amount).  All of these rights were lost, leaving Philadelphia holding the bag for more than $700,000 in excess liability …

Finally, the court rejected Nautilus’ argument that Philadelphia’s rights were protected since it had an opportunity to participate in the appeal of the underlying verdict.  Given the posture of an appeal and the standard of review applicable to the appellate issues, the court observed that the “cows had long since left the barn when Philadelphia was invited to close the barn door.” 

Massachusetts Court Holds No Coverage for Withheld Employee Tips

In its recent decision in Berkshire-Cranwell Limited Partnership v. Tokio Marine & Nichido Fire Ins. Co., 2012 U.S. Dist. LEXIS 93635 (D. Mass. July 6, 2012), the United States District Court for the District of Massachusetts had occasion to consider whether claims brought by the insured’s employees for wrongful withholding of tips triggered coverage under general liability and/or employee benefit liability policies.

The insured, Cranwell Resort, is a resort spa in Lenox, Massachusetts.  It charged “service fees” at its restaurants and spa, but it was alleged that these service fees were not distributed to the employees that actually performed the services.  Cranwell was named as a defendant in two separate class actions lawsuits brought by employees alleging violations of Massachusetts Tips Act and Massachusetts’ Wage Act, as well as causes of action for breach of contract, conversion, and breach of the implied covenant of good faith and fair dealing.  For reasons not even clear to the court, Cranwell did not give notice of the suits to its insurers until almost three and a half years after the suits were filed.  Cranwell had two potentially responsive policies: both general liability policies with employee benefit liability (“EBL”) extensions.  Both insurers denied coverage on the basis that the claims were not covered, and that in any event, Cranwell failed to give timely notice of the suits.

In considering coverage under the policies’ general liability coverage, the court identified the key issue as whether the suits qualified as claims for “property damage,” defined in pertinent part as loss of use of tangible property.  The court observed that some courts, such as those in Nevada and Arkansas, have considered cash to constitute tangible property.  The court further noted, however, that in each of these cases, it was “conversion of actual paper currency.”  For instance, in Capitol Indem. Corp. v. Wright, 341 F.Supp.2d 1152 (D.Nev. 2004), when an employee of a group home instructed a resident with Alzheimers’s disease to withdraw money from an ATM, the court concluded that the converted funds constituted tangible property.  Likewise, in Hortica-Florists’ Mut. Ins. Co. v. Pittman Nursery Corp., 2010 WL 749368  (W.D.Ark. Mar 2, 2010), where a company manager required each employee to pay him $1,000 to retain their jobs, the court held that the payments constituted tangible property.

The court noted that the distinction between the facts involving Cranwell and those in Wright or Pittman was that the monies involved in latter cases were “misappropriated as a physical object.”  Such was distinguishable from cases involving conversion of “non-currency monies,” such as wages.  The court explained this difference:

When the Black and Wechter plaintiffs alleged that their tips, characterized as service fees were wrongfully converted, they were clearly alleging that Plaintiff took their money for its exchange value and not in the form of some physical object or objects.  There was, with perhaps an occasional exception, no physical handover of tangible currency from the employees to Plaintiff.  Instead, Plaintiff simply retained the service fees, diverting them into its general account.  In this circumstance, no “tangible property” was involved, no duty to defend arises, and no coverage adheres.

In reaching this conclusion, the court considered and rejected Cranwell’s argument that in some instances, guests at the resort paid the service fees in cash, and that in some instances, this cash was paid directly to the employees before being diverted to Cranwell’s general account.  The court concluded that there was no allegation that the service fee payments were ever “in the hands” of the plaintiff employees. The court further hel that the decisions in Wright and Pittman, relied on by Cranwell, were not controlling on a Massachusetts court, and strongly suggested that their reasoning was improper.

Having determined that the underlying suits did not allege “property damage,” the court considered Cranwell’s argument that the suits triggered its employee benefits liability coverage.  The court noted that while Cranwell’s two EBL policies contained slightly different definitions of “employee benefits,” both pertained to “fringe benefits,” such as health insurance or retirement plans.  Applying the principle of ejusdem generis, the court concluded that “a reasonable insured would find the list of fringe benefits under the definition of ‘employee benefits’ to be inclusive of only traditional health, welfare and retirement benefits, and exclusive of wages such as cash tips.” 

Finally, while not necessary to the court’s decision in light of its other findings, the court held that Cranwell’s delay in giving notice to its insurers vitiated its right to coverage.  During the three and a half year delay, the classes were certified in the two lawsuits, several motions and cross motions for summary judgment were made, and Cranwell had begun settlement discussions with underlying plaintiffs.  Under the circumstances, the court concluded that Cranwell’s insurers suffered “substantial prejudice,” as required by Massachusetts law.  As the court concluded, “the transit of both lawsuits was all but over before Defendants even learned of them.  In such a situation, it would be unfair to expect Defendants to step in at the last minute to shoulder settlement and defense costs without any opportunity to shape the course of litigation.”

Texas Court Considers Notice Prejudice Rule for Time Element Pollution Exclusion

In its recent decision in St. Paul Surplus Lines Ins. Co. v. Davis Gulf Coast, Inc., 2012 U.S. Dist. LEXIS 81719 (S.D. Tex. June 13, 2012), the United States District Court for the Southern District of Texas had occasion to consider the enforceability of a provision requirement reporting of a pollution condition within ninety (90) days.

The insured, Davis Gulf Coast, operated an oil and gas lease on Matagorda Island in Texas.  Davis’ general liability policy, issued by St. Paul, had a pollution exclusion with a sudden and accidental cleanup cost exception, thus granting coverage for cleanup costs associated with a “sudden and accidental pollution incident,” defined by the policy as:

Sudden and accidental pollution incident means the discharge, dispersal, escape, or release of a pollutant that:

•     is sudden and accidental;

•     begins on a specific date and at a specific time while this agreement is in effect;

•     is first known within 30 days of its beginning by you or any of your employees, your operating agent or any of its employees, or your pumper-gauger or any of its employees;

•     any protected person, your operating agent, or your pumper-gauger attempts to end as soon as possible after it first becomes known by you or any of your employees, your operating agent or any of its employees, or your pumper-gauger or any of its employees; and

·      is reported to us within 90 days after it first becomes known to you or any of your employees, your operating agent or any of its employees, or your pumper-gauger or any of its employees.  (Emphasis supplied.)

Thus, by its express terms, “sudden and accident pollution incident” is defined as a discharge, dispersal, release, etc. that becomes known to the the insured within thirty (30) days of its commencement and that it is reported to St. Paul within ninety (90) days of such knowledge.  At issue before the court was Davis’ reporting of a pollution incident some two hundred days after it learned of the incident.  Davis and St. Paul agreed that this delay was a breach of the ninety-day reporting requirement.  Davis nevertheless argued that its non-compliance should be excused absent prejudice to St. Paul.

Applying Oklahoma law, the court agreed that the timing elements of the definition of “sudden and accidental pollution incident” (both as to learning of the release and reporting same) were not generic notice requirements, but instead were “an integral part of the definition of the risk covered.”  The court contrasted this with the notice provision applicable to the remaining coverages under the policy (i.e., bodily injury, property damage, and personal and advertising injury), which required only notice “as soon as possible.”  The court therefore concluded that there was an internally consistency within the policy of treating the cleanup cost coverage differently than the other risks covered under the policy, and that it would be improper to rewrite the policy so as to ignore the ninety (90) day reporting requirement. 

More significantly, the court rejected Davis’ argument that the Oklahoma body of case law concerning the notice-prejudice rule should be applied.  The court observed the ninety-day reporting requirement for cleanup cost coverage to be more akin to claims made coverage rather than occurrence-based coverage, and as such, case law concerning the latter were not relevant.  Moreover, the court found the ninety-day reporting requirement consistent with the risk offered and the premium charged, explaining:

It is common knowledge that oil and gas pollution clean-up costs can be enormous, and any comprehensive general liability occurrence policy with open-ended liability for that risk would undoubtedly carry with it a commensurately enormous premium. The bargain struck here by Davis and St. Paul is quite different. Davis acquired insurance only for pollution clean-up costs arising from a release of a pollutant that is "sudden and accidental," beginning on a specific date and time, which becomes known to the insured within 30 days of the release and is reported by the insured to St. Paul within 90 days after the insured learns of it. Thus, St. Paul by definition effectively assumed a rolling window of exposure for a maximum of 120 days after the date of any sudden and accidental pollution incident. Concomitantly the premium for such limited and narrowly-defined pollution clean-up costs, in the words of Judge Cauthron of the Western District of Oklahoma, would be "much more reasonable and thus affordable." Id. In sum, the 90 days reporting requirement at issue here is not a general notice provision that requires the insurer to show prejudice if the insured does not comply, but rather, in language approved by Oklahoma caselaw, is "a definition of coverage."

In reaching its decision, the cited favorably to other cases from the Fifth Circuit that declined to apply a prejudice requirement where the insured failed to comply with a strict reporting requirement.  See, e.g., Matador Petroleum Corp. v. St. Paul Surplus Lines Ins. Co., 174 F.3d 653 (5th Cir. 1999) (agreeing that insured’s eight day delay in reporting pollution incident negated coverage regardless of prejudice); Certain Underwriters at Lloyd's London v. C.A. Turner Constr. Co., 112 F.3d 184, 189 (5th Cir. 1997).

Nevada Supreme Court Addresses Late Notice

In Las Vegas Metropolitan Police Dep’t. v. Coregis Ins. Co., 2011 Nev. LEXIS 52 (Aug. 4, 2011), the Supreme Court of Nevada addressed whether an insurer must be prejudiced in order to disclaim coverage based on late notice, and if so, which party has the burden of demonstrating prejudice or the lack thereof.

The insured, Las Vegas Metropolitan Police Department, was named as a defendant in an underlying civil rights lawsuit.  The Department did not give notice to Coregis of its potential liability until ten years after the incident giving rise to the litigation.  Coregis denied coverage for the matter on the basis of the insured’s late notice.  In subsequent coverage litigation, the lower court granted summary judgment in favor of Coregis, concluding that the Department’s notice was late and that Coregis was prejudiced as a result.

On appeal, the Supreme Court of Nevada initially concluded that there was a genuine issue of material fact as to whether the Department’s notice was late, since there was a question as to which of the policy’s notice requirements applied.  More significantly, the court addressed which standard should apply for late notice disputes under Nevada law.  Citing to what it considered the “majority rule,” the court held that an insurer must be prejudiced in order to deny coverage based on late notice and that it is the insurer’s burden to demonstrate prejudice.  Prejudice, explained the court, exists “where the delay materially impairs an insurer’s ability to contest its liability to an insured or the liability of the insured to a third party.”  The court further noted that prejudice is necessarily an issue of fact.