Courts are reminding us that deadlines are deadlines
[A] court found that the policy’s prejudice provision was superseded
by the policy’s “hard cutoff” for submitting claims—90 days after the expiration date … .
By Joseph S. Harrington, CPCU
If you bought liability insurance and you have a claim or anything that resembles a claim, why wouldn’t you report it to the insurer right away? Pride? Complacency? Fear of a nonrenewal or premium hike?
Whatever the reason, there are plenty of examples of liability claims or potential claims being reported well after the fact. As a result, we see an unending stream of litigation over the question whether such delays “prejudice” an insurer’s ability to defend a claim, thus potentially voiding coverage under a policy.
In 2019, Rough Notes posted a “Coverage Concerns” describing how the trend among jurisdictions seemed to be favoring insureds when it came to the question of prejudice. At the time, more than 40 states had adopted the doctrine that late notice, on its own, would not justify a denial of coverage; the insurer had to demonstrate that the delay had compromised its ability to manage the claim.
The post noted that the trend was more pronounced in occurrence-based liability coverage than in claims-made coverage. At the time, 17 states excepted claims-made policies from the “actual prejudice” standard, which could be regarded as defeating the purpose of claims-made coverage.
Claims-made rulings
Fast forward to 2024, and we find three courts in rapid succession ruling that liability insurers could deny coverage for late notice under claims-made policies without having to demonstrate that the delay prejudiced claim defense.
Two of the rulings came days apart in September in two federal courts.
In one, a U.S. court in New York (applying Michigan law) ruled that no coverage was required under an errors and omissions policy following a late notice of loss.[1] This was striking because the policy explicitly stated that failure to provide notice of a claim within a specified period “shall not invalidate coverage of any claim, unless the failure to provide timely notice has prejudiced” the insurer’s response (emphasis added).
In that case, the court found that the policy’s prejudice provision was superseded by the policy’s “hard cutoff” for submitting claims—90 days after the expiration date, a common length of extended reporting periods under claims-made policies. (The claim had been submitted more than three years after the expiration date. Also, the court opined that the delay in reporting would have prejudiced the insurer’s response, had it been necessary to establish that.)
Two days later, a U.S. court in Massachusetts—applying that state’s law—upheld a denial of coverage for a professional liability claim against a real estate attorney.[2] In that case, the court held that only occurrence-based policies were subject to the state’s “notice-prejudice” rule that requires carriers to demonstrate that a late notice compromised claim defense.
Innocent third parties
Now, “occurrence-based” and “claims-made” refer to coverage triggers, and one could theoretically buy one or the other trigger for the same type of liability coverage.
As a practical matter, however, occurrence-based coverage is commonly used for general liability risks: bodily injury, property damage, and personal/advertising injury, including those arising from autos and employment. Claims-made coverage is the rule for professional (E&O), managerial (D&O), and other specialized exposures.
There’s an implicit logic to this distinction. Occurrence-based coverage generally responds to damage and injury to third parties, with an emphasis on prompt and full compensation. Claims-made coverage generally applies to disputes between willing parties who know each other, with an emphasis on facilitating settlement between them.
This aside provides some background for our third ruling by the South Carolina Supreme Court in a case alleging bodily injury by asbestos.[3] The defendant corporation and certain of its insurers handled defense and settlement on their own, and notified another participating insurer of the case a year after the suit was filed. That insurer denied defense costs coverage on the basis of late notice and was sued by the corporation.
South Carolina’s high court ruled that a policy provision requiring timely notice was a “material concern” and could be invoked to deny coverage. The only way around that would be if an innocent third party were left with no compensation; in that case, the insurer could be subject to the state’s “notice-prejudice rule.”
As it turns out, the injured claimant had been compensated in the settlement of the underlying suit. Since the claim had been managed and the third party’s interests addressed, the notice-prejudice rule did not apply.
Yet still, the insurer sued by the corporation was found liable for a share of the defense costs. How so? Since other insurers had managed the defense, the state supreme court found that the defendant insurer had not been deprived of the “reasonably expected” benefit of timely notice; i.e., the ability to defend the claim.
Yeah. It’s a lot to wrap your head around. Tell your clients to make it simple for themselves: If they have even a hint of a claim, let the insurer know.
The author
<I>Joseph S. Harrington, CPCU, is an independent business writer specializing in property and casualty insurance coverages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P&C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services.<I>
[1] Atos Syntel Inc. v. Ironshore Indem. Inc., 2024 WL 4227709 (S.D.N.Y. Sept. 17, 2024)
[2] Stormo v. State Nat’l Ins. Co., 2024 WL 4234670 (1st Cir. Sept. 19, 2024)
[3] Covil Corporation v. Pennsylvania National Mutual Casualty Insurance Company, Supreme Court of South Carolina, Appellate Case No. 2022-000366, Decided: July 24, 2024
