This article will review key notice issues under occurrence-based policies, underscoring how multifaceted and complex the questions are that can arise when a notice defense is presented. These questions range from what triggers the notice requirement to what the applicable statutory standards are for a notice defense and from how theories of constructive notice apply to whether there are circumstances in which notice will be excused on the basis of excuse or futility. There are many important issues presented in disputes over the application and effect of notice provisions. Further, prejudice issues—probably most commonly the focus of notice discussions— are just one component of the notice defense. Many other threshold questions about notice duties can be equally or more important than prejudice to the resolution of a late notice issue.
As a starting point in reviewing the notice requirement, it is useful to consider the purpose of notice requirements—or, more accurately, the purposes of notice requirements. Notice provisions protect a range of insurer interests. Prompt notice allows the insurer to investigate the claim on a timely basis, to retain counsel and avoid the threat of default or other action that might undermine the defense of the claim, to settle the claim, if appropriate, to take steps to eliminate the risk of similar occurrences, to establish accurate premiums for renewal, to determine appropriate reserves and to prevent fraud. For insurers, educating courts about the significance of each of the purposes underlying the notice provision is a critical first step in litigating a notice defense.
Typically, notice provisions in occurrence-based policies contain two separate and independent duties: first, the duty to provide notice of an accident or occurrence, and second, the duty to provide notice of (or forward suit papers regarding) a claim or suit. The recognition of these two separate duties is important. In addition to the dual notice requirements, it is important to consider how other duties commonly set out in the notice clause—for instance, the duty to cooperate and the duty to avoid voluntary payments—work in tandem with and bolster the notice requirements.
Common law standards for when late notice will bar coverage are highly varied from state to state. Further, in certain jurisdictions, there are statutory provisions, as well as common law decisional authority governing notice requirements. For example, in California, an insurer must promptly and specifically object to late notice or the defense is waived. See Cal. Ins. Code § 554 ("Delay in the presentation to an insurer of notice or proof of loss is waived, if caused by an act of his, or if he omits to make objection promptly and specifically upon that ground."). In Maryland, the insurer must establish by a preponderance of the evidence that improper notice resulted in actual prejudice. See Md. Code Ann., Ins. § 19-110 ("An insurer may disclaim coverage on a liability insurance policy on the ground that the insured . . . breached the policy by . . . not giving the insurer required notice only if the insurer establishes by a preponderance of the evidence that the lack of cooperation or notice has resulted in actual prejudice to the insurer."). Massachusetts requires prejudice for late notice of claims arising out of occurrences taking place after 1977. See Mass. Gen. Laws ch. 175, § 112 ("An insurance company shall not deny insurance coverage to an insured because of failure of an insured to seasonably notify an insurance company of an occurrence, incident, claim or of a suit founded upon an occurrence, incident or claim, which may give rise to liability insured against unless the insurance company has been prejudiced thereby."). And other jurisdictions, including Missouri, Texas and Wisconsin have regulatory or statutory provisions addressing late notice, as well. See, e.g., 20 Mo. Code Regs. § 100-1.020; Wis. Stat. § 632.26(2). Therefore, insurers must carefully ascertain and review the applicable legal standards in evaluating a late notice defense.
Most recently, New York has enacted a statute governing late notice. See N.Y. Ins. Law § 3420. The law makes a number of important changes to the common law standards that have governed the notice defense in New York for decades. Whereas New York common law requires no prejudice to deny coverage for late notice, see Briggs Avenue LLC v. Insurance Corp. of Hannover, 2008 N.Y. Slip Op. 09004, 2008 WL 4934062 (N.Y. Nov. 20, 2008) ("We have long held . . . that an insurer that does not receive timely notice in accordance with a policy provision may disclaim coverage, whether it is prejudiced by the delay or not."), the New York law will prospectively impose a prejudice requirement under policies issued or delivered in New York after the statute's effective date in early 2009. With respect to coverage under policies already in effect, New York is and should remain a no prejudice state. See Briggs, supra.
For future policies, there is a requirement under the New York statute that late notice "materially impair the ability of the insurer to investigate or defend the claim," that is, prejudice the insurer, for coverage to be denied. N.Y. Ins. Law § 3420. There is a burden-shifting provision under which the insurer must demonstrate prejudice from notice less than two years late, and the policyholder must demonstrate the absence of prejudice for notice more than two years late. Also, the statute creates an irrebuttable presumption of prejudice if the insured's liability has been determined or the claim settled. The law separately recognizes claims-made policy forms, and commentators have agreed that no prejudice requirement is created for them. See N.Y. Ins. Law § 3420. However, policyholders may seek to contend that the statute imposes a prejudice requirement on claims-made policies as well, at least for untimely notice of claim that is still made within the policy period or the extended reporting period, if applicable. Once the law takes effect and the first cases under these provisions are filed, there will be important developments in New York interpreting this new notice statute in 2009 and beyond.
Whether governed by statute or common law, there are some basic, threshold questions about how the notice requirement works. When must notice be given? Or, stated differently, what is the trigger for giving notice, and what are the standards for when notice is late? Under widely used policy terms, notice of occurrence is required "as soon as practicable" or "as soon as reasonably possible." The test for when notice of an occurrence is required is essentially whether a reasonable person would anticipate a claim as a result of the occurrence or accident. E.g., Utica Mut. Ins. Co. v. Fireman's Fund Ins. Cos., 748 F.2d 118, 121 (2d Cir. 1984). This "triggers" the notice of occurrence requirement. On the other hand, occurrence-based policies commonly state that notice of suit (or forwarding suit papers) must be done "promptly" or "immediately."
Policyholders have tried to weaken the duty to provide notice as soon as practicable, creating the law of "excuse." There are many situations in which policyholders claim late notice should be excused, including, inter alia, where the insured did not believe the accident would result in a claim, where the insured did not believe any claim would be covered by the policy, where the insured believed there was an insufficient nexus between its actions and the injury, where the insured believed the injured party had already been compensated by others and where the insured believed it was not liable for the injury. Courts have met these "excuses" with varying levels of acceptance, depending on factors such as the sophistication of the insured, the extent of investigation of the incident and the like. Many courts agree that they must first consider excuses to decide whether notice is "late" and then consider the consequences of late notice, if shown under the circumstances. These arguments, if and when accepted by courts, essentially evade the policy terms. Policyholders argue that notice is a "mere technicality," and that insurers should not be relieved of their coverage obligations on the grounds of a technicality. In response, it is critical for insurers asserting a late notice defense to articulate and to educate courts about the important purposes underlying the notice requirement.
A further effort to evade strict notice obligations comes through arguments that it was appropriate not to provide notice to the insurer because doing so would have been "futile." Futility arguments—that is, the claim that notice would be futile because it was obvious that the insurer would deny coverage in any event—are most commonly asserted in the multiple claim or mass tort context. See, e.g., Ogden Corp. v. Travelers Indemnity Co., 739 F. Supp. 796, 803 (S.D.N.Y. 1989), aff'd, 924 F.2d 39 (2d Cir. 1991). For instance, if the policyholder has submitted prior claims and received identical disclaimer letters in response to each suit, must it really continue to submit each future suit? In evaluating these contentions, courts may look not only to legal precedent but also to practical considerations: What did the insurer actually do when it belatedly received the claim—did it object to late notice and seek to investigate, or take no action at all? To avert futility arguments, insurers must have good claim-handling practices in place, especially where large numbers of similar or related claims are submitted by a single policyholder. Although futility arguments can be viewed as another form of policyholder excuse for late notice, they are unique in that they focus on the conduct of the insurer, not simply the circumstances, beliefs or expectations of the insured.
Constructive notice cases—i.e., cases in which the insurer may have learned of an accident or occurrence, or of a claim or suit, other than by direct notice from the policyholder—are another setting where courts sometimes have been convinced that some knowledge orpresumed knowledge of an occurrence or claim is "good enough," even though the policy terms have not been complied with by the policyholder. Compare City of N.Y. v. Cont'l Cas. Co., 805 N.Y.S.2d 391, 394 (App. Div. 2005) (holding that an insurer cannot disclaim additional insured's claim based on late notice where insurer "was given timely notice of the occurrence by [the named insured] and was defending named insured when additional insured was named as defendant) with Unigard Ins. Co. v. Leven, 97 Wash. App. 417, 427, 983 P.2d 1155, 1160 (1999) (stating that an insurer's actual knowledge of a third-party's claims did not constitute notice: "The insured must affirmatively inform the insurer that its participation is desired"). Allegations of constructive notice arise in a variety of circumstances, including when notice is given by a claimant rather than the insured, when notice is given to a broker or agent rather than directly to the insurer, when notice is given to an affiliate of the insurer, or when an insurer allegedly is "on notice" of a claim due to knowledge obtained from some source other than the policyholder. Most courts approach constructive notice arguments with some skepticism. Interestingly, in recent complex cases, courts seem even less willing to accept constructive notice concepts than in prior case law. This may not simply reflect strict enforcement of the notice terms protecting insurers, however. There are also policyholder theories about coverage rights, such as the selective tender doctrine, that are fundamentally at odds with constructive notice concepts. How can notice and a duty to act on the part of the insurer be assumed without a request for a defense from the policyholder, if the policyholder reserves the option of trying to "select" which insurers to involve and which it does not wish to act on its behalf? This tension may have been behind the recent Texas Supreme Court ruling in National Union Fire Insurance Co. v. Crocker, 246 S.W.3d 603 (Tex. 2008), in which a nursing home's notification of suit did not constitute constructive notice of the suit against an employee defendant who was an additional insured under the policy. In Crocker, the Texas high court stated that "[i]nsurers owe no duty to provide an unsought, uninvited, unrequested, unsolicited defense" and "decline[d] to impose an extra-contractual duty on liability insurers that would force them to keep track of potential litigants who may or may not be additional insureds, may or may not be entitled to coverage, and may or may not expect a defense to a claim." Id. at 610.
Of course, policyholders also seek to evade the consequences of late notice by asking courts (and legislatures) to impose a prejudice requirement, prohibiting insurers from denying coverage due to the breach of the notice condition unless the insurer has been prejudiced. Despite the prominence of prejudice arguments and developments such as the recent New York legislation, there remain some jurisdictions, such as the District of Columbia, Virginia, Alabama, Georgia and Nevada, where no prejudice requirement has been imposed on insurers asserting a late notice defense. See, e.g., State Farm Fire & Cas. Co. v. Walton, 244 Va. 498, 505, 423 S.E.2d 188, 191-92 (1992) (holding that a "delay of over two years in complying with the provisions of the policy's listed duties after loss is, as a matter of law, such a substantial and material violation of State Farm's notice requirement that it need not show that it was prejudiced by the delayed notice"); Greycoat Hanover F St. Ltd. P'ship v. Liberty Mut. Ins. Co., 657 A.2d 764, 768 (D.C. 1995) (stating that no prejudice is required, as "where compliance with notice provisions is a contractual precondition to coverage, a failure timely to notify releases the insurer from liability"); Haston v. Transam. Ins. Servs., 662 So. 2d 1138, 1141 (Ala. 1995) (concluding that when "there is no reasonable excuse offered for a delay in giving notice," the delay is "unreasonable as a matter of law"); Granite State Ins. Co. v. Nord Bitumi U.S., Inc., 262 Ga. 502, 504, 422 S.E.2d 191, 194 (1992) (holding that a "breach [of the notice provision] relieved [the insurer] of its obligation to defend that suit and of its liability for any judgment resulting from that suit"); and Las Vegas Star Taxi, Inc. v. St. Paul Fire & Marine Ins. Co., 102 Nev. 11, 14, 714 P.2d 562, 564 (1986) (adopting a no prejudice requirement and stating that to require proof of prejudice "emasculates both the letter and spirit of the insurance contract"). Of course, many jurisdictions have adopted some type of prejudice standard. However, in jurisdictions that do consider prejudice, the question for insurers is not simply whether there is a prejudice requirement or not, but instead it is how prejudice comes into play in a particular state's application of notice provisions. Prejudice may just be one consideration in the court's deliberations, or it may be presumed under specified circumstances. Even when a prejudice element is recognized in late notice law, therefore, there are many cases in which summary judgment for the insurer may still be possible. A full discussion of the prejudice issue is beyond the scope of this article (which focuses on other notice questions), but it is important to recognize that, like so many other notice issues, the prejudice debate is a multifaceted and complicated one.
Finally, a late notice defense presents a further question: What are the consequences if notice is late? The straightforward answer is that, because late notice is a breach of a condition precedent to coverage, the consequence of that breach of contract should be that there is no obligation on the part of the insurer to afford coverage. Often, this is precisely the conclusion that courts reach. However, there is another, lesser consequence that is sometimes imposed, namely the absence of coverage for pre-tender defense costs. In jurisdictions that fail to give full effect to notice provisions, recognition that at least pre-tender costs are not covered—or a ruling that there is no duty to pay pre-tender costs without a broader showing of prejudice—can have significant financial consequences for a complex claim. However, some courts may justify not fully enforcing notice provisions with the belief that they are treating the insurer equitably by simply denying coverage for pre-tender costs. When arguing about the absence of any duty to pay pre-tender costs, therefore, insurers must be careful to make clear that this a starting point in determining the consequences of late notice, and cannot be substituted for the appropriate final remedy of a finding of no coverage at all.
Late notice remains an important defense for insurers, even as policyholders succeed in tilting courts toward imposing a prejudice requirement. There is enough variation in how prejudice is considered for late notice to remain a viable defense in many instances. However, beyond prejudice, there are many other issues posed by notice defenses. Insurers must be fully aware of, and fully prepared to address, issues such as excuse and futility, and theories such as constructive notice or substantial compliance, to successfully mount a notice defense today.