Substance Over Form: Insurance Notice Requirements Are Met When An Insurer Has Notice From Any Source

March 22, 2013

Insurers frequently attempt to avoid their coverage obligations by contending that their insureds provided late notice of claims or occurrences.

Most jurisdictions follow the commonsense rule that insurers cannot defeat coverage based on allegedly late notice unless they demonstrate that they suffered significant prejudice as a result — which insurers rarely can do.  See, e.g., Gazis v. Miller, 892 A.2d 1277, 1282 (N.J. 2006) (holding that the insurer is required to prove “appreciable prejudice” as a result of late notice); Shell Oil Co. v. Winterthur Swiss Ins. Co., 15 Cal. Rptr. 2d 815, 844 (Cal. App. 1st Dist. 1993) (insurer must demonstrate that the late notice actually and substantially prejudiced its ability to litigate the claim).

In some jurisdictions, however, courts have held that late notice may relieve insurers of their coverage obligations regardless whether they were prejudiced.  See, e.g., S. Guar. Ins. Co. v. Thomas, 334 So. 2d 879, 883 (Ala. 1976) (“whether the insurer was prejudiced by the delay is immaterial” to a determination of whether a policyholder’s late notice was reasonable).  This “get-out-of-jail-free” approach is flawed for a number of reasons, including that it violates the fundamental principle of contract law that a non-material breach by one party to a contract does not relieve the other party of its return obligations, that it runs afoul of the public policy disfavoring forfeitures, that it conveys a unwarranted windfall on insurers, and that it is fundamentally unfair.

In some cases, insurers have gone so far as to argue that even where they had actual, timely notice of claims or occurrences, they should be relieved of their coverage obligations because the notice did not come from the insureds, but rather was received from some other source.    There are a number of circumstances where this might be the case.  An insurer might receive notice from an additional insured, an underlying tort claimant, or a co-defendant insured.  This situation also might arise as a result of changes in corporate relationships — for example, where as a result of a sale of a subsidiary or a sale of corporate assets and transfer of related liabilities to the purchaser, corporate successors provide notice under policies designating their predecessors as the parties responsible for providing notice.

In jurisdictions that follow the show-prejudice rule described above, insurers with actual notice cannot legitimately claim prejudice because they did not receive notice directly from their insureds, or because they did not receive notice from the particular insureds specified as responsible for providing notice under the policies at issue.  See, e.g., McLaughlin v. Attorneys’ Title Guar. Fund, Inc., 61 Ill. App.3d 911, 917 (Ill. App. 1978) (“where the insurance company has actual notice of the loss or receives the necessary information from some other source, there is no prejudice to the insurer from the failure of the insured to give notice of the claim”); Bibb v. Dairyland Ins. Co., 205 N.W.2d 495, 498 (Mich. App. 1973) (notice of lawsuit by tort claimants’ attorney was not prejudicial and did not hinder the insurer’s ability to investigate the claim).

A number of courts in jurisdictions that do not universally require insurers to show prejudice in order to deny coverage based on allegedly late notice, however, have held that even where insurers have actual notice of a claim or occurrence, the fact that the notice was not received directly from their insureds may relieve them of their coverage obligations.  See, e.g., Roofing Consultants, Inc. v. Scottsdale Ins. Co., 273 A.D.2d 933, 709 N.Y.S.2d 782, 783 (4th Dep’t 2000) (finding that “neither notice provided by another insured nor the insurer’s actual knowledge of the claim satisfies the contractual obligation of an insured to give timely notice”); Am. Mfrs. Mut. Co. v. CMA Enters., 246 A.D.2d 373, 667 N.Y.S.2d 724 (3d Dep’t 1998) (same).

There is no reasonable justification for this approach.  The premise of cases holding that insurers do not have to demonstrate prejudice to avoid their coverage obligations due to late notice is that prejudice is so likely to flow from late notice that it is simply presumed.  See Canadyne-Georgia Corp. v. Continental Ins. Co., 999 F.2d 1547, 1557 (11th Cir. 1993).  This premise is, to put it mildly, extremely questionable.  It does not justify wiping away valuable coverage for which insureds paid substantial premiums without examining whether the premise is true in a particular case.  But at least it recognizes that insurers should not be able to avoid their coverage obligations based simply on a non-material “gotcha.”

Where insurers have notice from a source other than their insureds, insurers should not be able to void coverage based on late notice even in jurisdictions that in other circumstances allow insurers to escape their coverage obligations based on late notice without a showing of actual prejudice.  There is no basis to presume prejudice where insurers have actual notice.  Their ability to take steps to protect their legitimate interests is essentially the same whether they receive notice from their insured, from the insured designated in the policy to provide notice, or from some other source.  Indeed, there is a strong argument that insurers’ duties of good faith and fair dealing, implied in every insurance contract, obligate them to take affirmative steps to ensure that notice received from other sources is tied back to each of their affected insureds — particularly in the case of mass toxic tort claims, where insurers face numerous claims that involve myriad defendant insureds.

In a number of cases, courts in jurisdictions that strictly construe policy requirements governing notice have held that notice by one insured under a policy can satisfy another insured’s notice requirement.  See, e.g., Nat’l Union Fire Ins. Co. of Pittsburgh v. Ins. Co. of N. Am., 188 A.D.2d 259, 261 (1st Dep’t 1992) (“The IAS court erred in granting defendant’s motion for summary judgment upon the finding that defendant INA did not receive timely notice . . . it has been held that where two claimants are similarly situated notice by one claimant may be deemed applicable to the other”); Ambrosio v. Newburgh Enlarged City Sch. Dist., 5 A.D.3d 410, 412 (2d Dep’t 2004) ([T]imely notice of the occurrence provided by the Kennel Club of Hanover . . . a few weeks after the accident is deemed notice of the occurrence by the [co-insured] School District, because the Kennel Club and School District were not adverse to each other”); Rose v. State of New York, 265 A.D.2d 473, 474 (2d Dep’t 1999) (same).

Although third-party notice should stand on the same footing as notice directly from an insured (or designated notice party), insureds, out of an abundance of caution, should analyze policy language to determine whether their policies require that notice come from a particular source and should follow that protocol to the extent possible, particularly in jurisdictions that may follow the restrictive approach to late notice.

In the context of corporate transactions, the purchaser of an insured entity or corporate assets that may generate insured claims should ensure that it has an appropriate notice protocol in place after the transaction is consummated.  For example, the transaction documents can provide that the party designated in the policies to provide notice will continue to do so on behalf of its former subsidiary or the entity receiving liabilities post-closing.  Such a provision may be more palatable if the former subsidiary or successor entity agrees to bear the costs of notice.  Additionally, the transaction documents could provide that the former subsidiary or successor entity is empowered to act on behalf of the seller to give notice after the transaction closes.  It may also be useful to inform insurers of the transaction and the new notice protocol, to ensure that the insurers cannot contend later, albeit with little or no justification, that they were unaware of the significance of the notice they received.