In my experience, there are three main reasons why companies delay in giving notice to their carriers of potentially covered claims. First, the underlying suit is an “oddball,” such as an intellectual property claim, that the risk manager thinks isn’t covered. Second, the company is worried that its premiums will rise. Third, the person responsible for reporting (and following up on) claims is very busy, and the problem drifts to the bottom of the pile.
Commercial insurance claims are complicated enough. The last thing you want to do is give the carrier an unexpected gift, namely, another possible ground upon which to deny coverage. Late notice qualifies as such a gift.
The recent Second Circuit decision affirming the trial court in Rockland Exposition, Inc. v. Great American Ins. Co., No. 10-4276-cv, seems to have involved some or all of the three reasons I listed above. (The trial court decision is reported at 746 F. Supp. 2d 528, 2010 U.S. Dist. LEXIS 103267.) I should note that the Rockland case was decided under New York’s old, draconian late notice law (under which even very brief delays in giving notice can result in a forfeiture of coverage, regardless of whether the carrier was actually prejudiced). In July 2008, N.Y. Ins. Law §3420 was amended to prohibit insurance companies from denying claims as untimely unless the policyholder’s failure to provide timely notice actually prejudiced the insurance company. The amendment applies only to policies sold after January 17, 2009, so if you’re dealing with a delayed-manifestation claim of some type under New York law, you may still have to wrestle with the old requirements.
Most states (including New Jersey) follow the “prejudice” rule with respect to occurrence-based policies, meaning that the insurance company has to show it was harmed by the late notice before it can be relieved of its coverage obligations. The Reminger law firm, based in Ohio and Kentucky, has compiled a helpful chart showing which states follow the “prejudice” rule and which do not.
And now, back to Rockland. The case involved an underlying trademark infringement suit against the policyholder in federal court in New Jersey, relating to competing trade shows (note Reason No. 1 for not giving notice, above). The policy required written notice of claim to the carrier “as soon as practicable.” The policyholder delayed almost three months in giving written notice to the carrier, and the appeals court held that coverage was precluded because of the delay.
The excuses given by the policyholder for providing late notice (each rejected by the court) were as follows:
1. Only a month after receiving the summons and complaint, the policyholder told its broker (orally) about the suit. Not good enough, said the trial court (affirmed by the Second Circuit): "An insurance broker is the agent of the insured, not the insurance company, and notice to an insurance broker, absent exceptional circumstances, is not notice to the insurer.” The court added: “Where, as here, an insurance policy requires written notice of a claim, oral notice is of no legal significance.”
2. The policyholder argued that oral notice to an “agent” of the carrier was sufficient, because the policy contained an endorsement reading: "Notice given by or on behalf of the insured, or written notice by or on behalf of the injured person or any other claimant, to any agent of ours in New York State, with particulars sufficient to identify the insured, shall be considered to be notice to us." The policyholder contended that because the first clause omitted the word “written,” written notice was not required. The trial court disagreed, writing: “Here, it is difficult to believe that by adding provision 2.e -- the main goal of which was obviously to allow notice to agents, as an alternative to notice to the insurer -- the Parties also intended to surreptitiously repeal two explicit provisions requiring written notice.” Not that this would have mattered, because the court also concluded that there was no evidence that the broker (Marshall & Sterling) was an agent of the carrier. There was, for example, no written agency agreement.
3. The policyholder argued that it delayed in giving notice because it did not realize that it had insurance coverage for intellectual property lawsuits. The trial court again disagreed, stating: “Where coverage is unclear, reasonable insurance-holders give notice.”
Even if you’re in a state that requires the carrier to show prejudice, late notice is an expensive battle that you don’t want to fight. Give notice early and often, and strictly follow the policy requirements when doing so. If you ask your broker to give notice, make the request in writing and make sure you get a copy of the actual notice letter.