The conditions can be a particularly dangerous part of an insurance policy: they are often overlooked until it’s too late and an otherwise covered claim is rejected because of a condition violation. When a claim arises, the policyholder has a troublesome or even devastating loss on its hands. A building has been lost in a fire, a bodily injury suit has been filed, or the policyholder discovered that a trusted employee has been stealing company funds for years. Navigating the fine print of an insurance policy is the last thing on the policyholder’s mind.
The good news is that, while condition violations can have a preclusive effect on an insurance claim, in most circumstances they do not. Below, we discuss five conditions that policyholders should be familiar with, including tips on best practices to avoid issues with conditions.
As policyholder lawyers, we cannot stress enough the importance of getting notice out to all potentially-applicable insurers as soon as possible. Policyholders may not recover amounts incurred prior to giving notice. And, depending on the applicable state law, late notice can bar coverage entirely.
Almost all policies require that the policyholder send notice “promptly,” “as soon as practicable” or “immediately.” Generally, these terms mean within a reasonable time after a policyholder discovers facts resulting in a potential occurrence. Whether notice is “reasonable” is a question of fact – there are no bright-line rules.1 Depending on the specific facts, a court may find notice years after the occurrence reasonable or notice very shortly after the occurrence unreasonable. The only universal guideposts are that a policyholder should provide notice (i) as early as possible, (ii) to all known, potentially applicable insurers, including primary, umbrella, and excess insurers, and (iii) to include policies under which the policyholder may be an additional insured.
If a court determines that notice is “late,” – that is, not given within a reasonable time, – the consequences vary. In most jurisdictions, including Ohio, unless the insurer was actually prejudiced by late notice, the claim will not be barred.2 What is actual prejudice is a question of fact. Most often, the policyholder has defended itself, and nothing would have changed had the insurer been notified sooner.
While late notice may not bar coverage, however, the policyholder may have a difficult time recovering costs incurred prior to notice, also called “pre-tender costs.” Notably, in some jurisdictions if earlier notice would have been futile or if notice was late because, despite diligently searching, the policyholder was not aware of the existence of the coverage sooner, pre-tender costs may be recovered.3
On the other hand, some jurisdictions do not apply a prejudice standard to late notice issues – rather, coverage is barred if a court determines that notice was unreasonably late. New York is a notable example.4
The best practice to avoid notice issues is to notify all applicable insurers as early as possible – preferably prior to incurring any costs. Even if notice is late, all is not lost; in most jurisdictions the claim will not be barred and should not serve as a basis for a claim denial. Seek guidance from a coverage attorney to help navigate late notice issues.
Another condition that often causes trouble for policyholders is the duty to cooperate. A typical provision might provide:
• You must cooperate with us in the investigation or settlement of the claim or defense against the suit.
• The insured must cooperate with the insurer in all matters pertaining to this Coverage Section as stated in its terms and conditions.
• The insured shall cooperate with the company and, upon the company’s request, shall attend hearings and trials, and shall assist in effecting settlements, securing and giving evidence, obtaining the attendance of witnesses and in the conduct of suits.
While this condition seems straightforward, and often is, insurers frequently raise violation of this duty as a coverage defense. This condition often arises under liability policies where the insurer is not actively defending a third-party claim against a policyholder, but rather is conducting a particularly lengthy investigation or where the policy is subject to a large retention or deductible. Insurers who raise this condition as a defense may assert that the policyholder failed to provide sufficient responses to its requests for information or failed to advise it of settlement discussions, mediations or other important case developments.
Policyholders do have a duty to cooperate and absolutely should cooperate with an insurer’s reasonable, good faith requests. The insurer needs to have copies of the underlying claim file and invoices for payment, for example. Requests that are unreasonable are another matter. For example, the policyholder should not have to repeatedly provide multiple versions of voluminous claim information to the insurer each time a new adjuster appears on the file. Policyholders should not have to turn over proprietary business information that is wholly unrelated to the claim. Indeed, such facts can lead to allegations of bad faith claims handling conduct.5
Like notice, while this condition certainly can be an issue, it is only detrimental if the insurer can establish that it was actually prejudiced by the policyholder’s alleged failure to cooperate. Further, it is important to remember that an insurer cannot rely on a violation of a policy condition to deny coverage if it has breached the duty to defend or has otherwise denied coverage. In other words, if an insurer has refused to defend you or has denied your claim, it waives its right to rely on policy conditions, including the cooperation condition.
3. Consent and Voluntary Payments
The next commonly-raised condition is consent. The consent condition comes in various forms, but generally states that insurers do not have to pay what the policy refers to as “voluntary payments” (i.e., payments for which the policyholder has not obtained the insurer’s consent). This condition is raised in various contexts, such as when a policyholder pays certain costs prior to notice or settlements when the insurer was not involved. Consent issues also arise in the context of environmental cleanup administrative actions when a policyholder enters into consent agreements without the insurer’s input. While this condition can be concerning and is frequently asserted by insurers as a bar to coverage, it rarely is.
First, such payments are often not truly “voluntary.” For example, insurers argue that amounts paid by policyholders to investigate and cleanup a superfund site in an EPA CERCLA action are “voluntary” because they are incurred pursuant to a “consent” agreement to investigate and study the issue. Any policyholder who has been through this experience, however, will tell you their actions were anything but “voluntary” – they really have no choice in the matter. Non-compliance with “consent” decrees subjects policyholders to onerous penalties and fines. This is why nearly all courts that have addressed this matter have rejected the insurers’ argument in this regard.6
Second, like the cooperation condition, an insurer can only defeat coverage if it can show prejudice.7 And prejudice is rare.
Further, an insurer that has failed to defend or has denied coverage waives its right to rely on conditions (particularly true as it relates to the consent condition): an insurer that has abandoned its policyholder cannot then complain that the policyholder failed to seek its consent prior to paying a settlement.8 Instead, the insurer is obliged to indemnify the policyholder for any reasonable settlement, which is defined to include any settlement that is not fraudulent.
As it relates to the consent condition, the best defense is a good offense: a policyholder that keeps its insurer up to date regarding the status and key developments of its claim, even if the insurer is not defending, can generally avoid running afoul of this condition.
4. Loss Payable/Attachment
Umbrella and excess coverage is critically important where the claim at issue may exceed the primary policy’s limit, particularly where the underlying claims are mass tort liabilities. Policyholders may think that because the primary insurer is defending and/or paid its portion of indemnity, the transition to excess coverage will be smooth. More often than not, however, policyholders are surprised to find themselves battling with their umbrella and excess insurers. A common dispute arises from the loss payable/attachment provision that can be found as a condition set forth in most umbrella and excess policies:
• Liability under this policy with respect to any occurrence shall not attach unless and until the insured, or the insured’s underlying insurers, shall have paid the amount of underlying limits on account of such occurrence.
• Liability of the company with respect to any one occurrence shall not attach unless and until the insured, the company on behalf of the insured, or the insured’s underlying insurer, has paid the amount of retained limit.
This condition gives rise to several questions: Does the policy attach only after the primary limits are actually paid, or when the liability is simply incurred? Does it matter who pays – the insured or the primary insurer? What if the primary insurer is insolvent? What if there’s a gap between the settlement amount paid by the primary insurer and primary limit? An entire paper could be devoted to these issues, which is beyond the scope of this article. However, three things bear mentioning here.
First, the seminal case regarding whether a settlement for less than policy limits may properly exhaust a policy is Zeig v. Massachusetts Bonding & Ins. Co., 23 F.2d 665 (2nd Cir. 1928). There, the excess insurer contended the below-limits settlement with the primary insurer prevented the underlying policy from exhausting as defined in the excess policy, effectively eliminating coverage. The court rejected this argument, holding that the insurer “had no rational interest in whether the insured collected the full amount of the primary policies, so long as it was only called upon to pay such portion of the loss as was in excess of the limits of those policies.” Many jurisdictions follow the rationale set forth in Zeig and hold that it does not matter who, how, or how much is paid to exhaust the primary policy: the excess insurer is still obliged to cover the loss exceeding the underlying limit.9 But some jurisdictions have reached a different result.10
Second, generally speaking, the fact that a primary insurer is insolvent is insufficient to require an umbrella or excess insurer to 'drop down' and defend an insured.11 However, courts have required this of excess and umbrella insurers where the specific policy language at issue expressly requires it, or if the court finds the language to be ambiguous and construes it against the insurer. The outcome of these decisions depends on the policy language describing the attachment points and requirements for proper exhaustion.12 Nonetheless, many courts refuse to require excess insurers to 'drop down,' even where primary insurers are insolvent, frequently noting the low premiums charged for the higher layers of coverage.
Finally, even once triggered, excess/umbrella insurers may challenge the reasonableness and proper application of a primary insurer’s payments. The court in Matter of Viking Pump, Inc., 52 N.E.3d 1144 (N.Y. 2016) addressed this argument, for example. The court found that testimony regarding the defense strategy and the reasonableness of the underlying asbestos claims’ settlements, and compliance with the governing trigger of coverage, was sufficient to meet the burden. On the other hand, courts will not deem an underlying policy exhausted when the underlying insurer has merely “burned” its limits. Excess/umbrella insurers also may argue that the primary policy limits are not properly exhausted if the claim payments were allocated unreasonably or contrary to the governing law. However, if the primary insurers’ allocation is objectively reasonable, an excess/umbrella insurer should not be permitted to retroactively re-allocate claims and dictate what allocation method the primary insurers should have used.
Coverage issues involving umbrella and excess policies are among the most complex in insurance law and often require guidance from experienced coverage counsel. A practical takeaway, however, is to ensure that any excess and umbrella insurers whose policies may be triggered by the underlying claims are involved early and notified of key developments in the case. If all players are involved early, future transition issues may be easier.
5. Contractual Limitations
Last but not least, one condition that tends to creep up on policyholders limits the time period for filing a coverage lawsuit condition – Legal Action Against Us:
• The insured may not bring any legal action against the insurer involving loss unless the insured has complied with all terms of this Coverage Section and unless brought within two (2) years from the date of the loss.
• If any limitation in this Condition is prohibited by law, such limitation is amended so as to equal the minimum period of limitation provided by such law.
• This condition can be problematic under certain circumstances.
First, despite challenges by policyholders, contractual limitations periods are generally enforceable, even if the period is one or two years.13 However, there may be a waiver of a contractual time limitation provision by the insurance company in certain cases. Second, this condition can catch policyholders off guard based on what event triggers the limitations period: the date of loss or the date the claim was denied.14
The key take away is to review your policy shortly after your loss to determine if it contains a limitations period and, if so, what event starts the clock. Further, if the deadline is approaching and the insurer hasn’t provided a coverage determination or if the claim is in dispute, the policyholder should obtain a written extension of the policy’s limitations period for filing suit. Extensions are commonly provided in these cases.
In sum, while conditions can be technical and should be treated with care from the start, condition violations should not always result in denied claims. When it comes to conditions, most often the best defense is a good offense.