On May 29, 2015, the Montana Supreme Court affirmed the application of the notice-prejudice rule in cases of third-party claims for damages. Atlantic Casualty Ins. Co. v. Greytak, 2015 MT 149, OP 14-0412 (Mt. 2015). The rule requires the insurer to establish prejudice as a condition to denying coverage when an insured fails to provide timely notice of a claim.
This case arose from a lawsuit initiated by GTL, Inc. against John P. Greytak and Tanglewood Investors Limited Partnership (collectively, Greytak), based on Greytak’s failure to pay GTL for obligations arising from a construction project. In response, Greytak filed construction defect counterclaims against GTL. Greytak and GTL later entered into a settlement agreement whereby GTL would notify its insurer, Atlantic Casualty Insurance Company (Atlantic), of Greytak’s claims. According to the agreement, if Atlantic did not defend GTL or initiate a declaratory judgment action regarding coverage, then GTL would allow a $624,685.14 judgment to be entered against it and Greytak would pursue Atlantic only for recovery of the judgment. GTL notified Atlantic of Greytak’s counterclaims approximately one month after the settlement agreement with Greytak and approximately one year after GTL first received notice of Greytak’s potential counterclaims.
Atlantic initiated an action in the U.S. District Court for the District of Montana seeking a declaration as to whether it was required to defend or indemnify GTL. The District Court granted Atlantic’s motion for summary judgment and found that (a) Atlantic did not receive timely notice of Greytak’s claims against GTL and (b) Montana law did not mandate Atlantic to demonstrate prejudice from GTL’s untimely notice. Greytak subsequently appealed to the U.S. Court of Appeals for the Ninth Circuit, which certified the question regarding the application of the notice-prejudice rule in the third-party liability context to the Montana Supreme Court.
Montana Supreme Court Decision
The Supreme Court followed the majority of jurisdictions, and its own ruling issued a week earlier when it adopted the notice-prejudice rule in the first-party context, and held that prejudice must be demonstrated to deny coverage when an insured provides untimely notice of a claim. The Court reasoned that the purpose of the notification requirement was to provide the insurer with the opportunity to “defend its interest and to prevent or mitigate adverse judgments.” Additionally, the Court noted that Montana public policy required a narrow and strict interpretation of insurance coverage exclusions to accomplish the “fundamental protective purpose” of insurance.
Despite discussing the rationale of the rule, which includes mitigating adverse judgments, the Court declined to address the merits of the insurer’s claims of prejudice, reasoning that such determination was outside the scope of the certified question. Significantly, however, two justices issued separate specially concurring opinions, which effectively concluded that when an insurer receives notice of a claim almost a year after the insured engaged in litigation, executed a settlement agreement without the insurer’s knowledge, and deprived the insurer of any opportunity to defend its interest and to prevent or mitigate adverse judgments, prejudice is presumed as a matter of law. Moreover, in her special concurrence, Justice Laurie McKinnon proposed a limited exception to the notice-prejudice rule to provide that prejudice to the insurer would be presumed as a matter of law when an insured failed to notify the insurer of a pending lawsuit until after judgment has been entered.
Implications of the Decision
As a result of the Montana Supreme Court’s holding, Montana courts affirmatively join the majority of jurisdictions that similarly hold that the notice provision of an insurance policy is essentially ineffective to deny coverage for late notice of a claim, unless the insurer can demonstrate that it was prejudiced by the untimely notice. Notwithstanding and based on the Supreme Court’s analysis, if the insurer can establish that it was deprived of the opportunity to defend its interest and to prevent or mitigate adverse judgments or that the delay was not merely technical, then there is sufficient basis to deny coverage.
The Court did not specifically state whether its holding was limited to occurrence-based policies, but quoted the “as soon as practicable” notice language from the typical commercial general liability policy, and footnoted that this language did not impose a specific time within which the insured must provide notice. Thus, whether the Court would impose the notice-prejudice rule to claims made and reported policies is an open question under Montana law, but given the Court’s footnote, it appears it would likely join the majority of jurisdictions that do not require an insurer to demonstrate prejudice resulting from late notice under a claims made and reported policy.