Failure To Provide Timely Notice Of Claim Defeats Coverage Under Management Liability Insurance Policy

Failure To Provide Timely Notice Of Claim Defeats Coverage Under Management Liability Insurance Policy

   
By Kevin M. LaCroix, Esq., Executive Vice President, OakBridge Insurance Services

In a May 16, 2013 decision (here) [enhanced version available to lexis.com subscribers], Eastern District of Missouri Magistrate Judge Terry Adelman, applying Missouri law, determined that the failure of an insured under a management liability insurance policy to provide timely notice of claim precluded coverage under the policy, even in the absence of a showing of prejudice to the insurer.

Background       

On December 28, 2007, Secure Energy's Board of Directors received a demand from Michael McMurtrey regarding commissions he allegedly was owed. On May 16, 2008, McMurtrey filed a lawsuit against Kenny Securities and against John Kenny, a director and founder of Secure Energy. On April 13, 2009, McMurtrey added Secure Energy as a defendant to the lawsuit. McMurtrey sought to recover $1.8 million in commissions and $2 million in punitive damages. McMurtrey alleged breach of contract, unjust enrichment, fraud, negligent misrepresentation, and conspiracy against Secure Energy. McMurtrey voluntarily dismissed his suit on June 25, 2009 but refilled it against the same defendants on July 8, 2009.

Secure Energy's management liability insurance policy provided that the insured must provide notice of claim to the insurer as soon as practicable after becoming aware of the claim but no later than 60 days after the expiration of the policy. However, Secure Energy did not notify the insurer of the claim until May 4, 2011. According to the Magistrate Judge's opinion, the reason for Secure Energy's delay in providing notice was it was unsure whether it had a claim. However, the Magistrate Judge also noted that in 2009, the company's insurance broker had advised the company that while there may be little or no coverage under the policy for the claim, the only way to determine coverage is to submit a claim.

The insurer rejected coverage for Secure Energy's claim on the grounds of late notice. Secure Energy then filed an action seeking a judicial declaration that there was coverage for the claim under the policy. The insurer filed a motion for summary judgment arguing that coverage was precluded because Secure Energy had failed to provide timely notice. Secure Energy argued that coverage was not precluded because the insurer had suffered no prejudice from the untimely notice.

The May 16, 2013 Decision

In a short May 16 opinion, Magistrate Judge Adelman granted the insurer's motion for summary judgment. Secure Energy had tried to argue that under Missouri law, an insurer cannot deny coverage for a claim based on late notice unless the insurer can demonstrate that the insured's failure to comply with the notice provisions prejudiced the insurer. The insurer argued that under Missouri case law, in order to deny coverage on the basis of late notice, an insurer under a "claims made" policy need not demonstrate prejudice.

After reviewing the case law, Magistrate Judge Adelman observed that "the Missouri Supreme Court distinctly held that an insurer is not required to show prejudice in a 'claims made' policy. Several Missouri state and federal courts have followed this reasoning." Magistrate Judge Adelman concluded that the insurer "is not required to demonstrate that it was prejudiced by Secure Energy's failure to provide notice under the claims made policies. Secure Energy's failure to give the requisite notice precludes it from coverage."

Discussion         

Delayed notice is a recurring problem for policyholders seeking to obtain insurance coverage for claims. The reasons that the notice is delayed are innumerable. All too often, it will emerge that the reason the notice was delayed is that the policyholder did not think there was coverage or, as apparently was the case here, the policyholder did not think there was yet a claim. In other cases, the insured simply concluded that the claim was no big deal - only to find out later that it is a bigger problem than first appeared. Because I have seen these patterns so many times over the years, I have developed a simple rule - always give notice. No good comes from withholding notice. If you are asking the question whether or not you should give notice, then you should give notice.

But if policyholders sometimes hurt themselves by withholding notice, it can sometimes appear that some carriers in some instances seek to use the notice requirements as a coverage dodge. (Please note that in making this observation here, I am in no way commenting on the carrier's behavior in the Secure Energy case.). For that reason, I am concerned when late notice can serve as a basis to deny coverage even in the absence of prejudice to the insurer. In fairness, the notice here was years late. The tardiness of the notice here is hard to excuse, particularly when two years prior to actually providing notice, the company had been advised by its broker to go ahead and give notice. But even here, the carrier does not appear to have prejudiced by the delay - or, at a minimum, did not claim to have been prejudiced by the delay.

The best way for companies to avoid problems with the notice requirement is to have processes to ensure that notice to the insurer is quickly provided after a claim has arisen. However, long experience has taught me that in the real world, the insurer is not always notified right away. The simple fact is that company management, particularly at some smaller companies, is focused on operational issues and is not always sophisticated about insurance issues. Courts evolved the "notice prejudice" rule in recognition of this practical reality.

I know that there are a number of jurisdictions where the courts have held that the "notice prejudice" rule is not applicable in the claims made context. I would argue that the "notice prejudice" rule has a place, even in the world of "claims made" policies. As I discussed in a prior post (here), some courts have applied the notice prejudice rule even in the claims made context (although, it should be noted, in that prior post, I noted some concerns with the court's application of the rule in that specific case).

My concern is that without the application of the "notice prejudice" rule, the notice requirements can become a trap for the unsophisticated or uninformed insured and result in an inadvertent loss of the insured's rights under the policy. I recognize that insurers want to be able to be involved in claims and don't want to get caught up in murky questions about what may constitute "prejudice," and therefore prefer a bright-line notice test. I would argue that the "notice prejudice" provides an appropriate balancing of interests. Obviously, the later a policyholder's notice of claim is, the harder it would be for a policyholder to obtain coverage under the policy.  

I know my friends on the carrier side may have differing views, and in particular may well contend that the notice provisions serve important purposes that should not lightly be set aside. I invite readers to add their views using this blog's comment feature in the right hand column.

Read more at The D & O Diary.
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