Why it matters

Even though an underground salt mine waited too long to notify its insurer about water intrusion and resulting damage, the Tenth Circuit Court of Appeals said that coverage might still be available. Such a delay would only relieve the insurer of coverage if substantial prejudice occurred as a result, the federal appellate panel ruled. However, Lexington Insurance Company was unable to document how it would have handled the investigation or remediation process any differently or altered its underwriting process if the salt mine had given timely notice. The court reversed summary judgment in Lexington’s favor and remanded the case for a coverage determination.

Detailed Discussion

In January 2008, employees at an underground salt mine in Kansas noticed an inflow of water. Fearing dissolution of the salt or structural issues, Lyons Salt Company tried to figure out the source of the problem and determine a solution.

In April 2010, Lyons attributed the water flow to an improperly sealed oil well and characterized the mine’s future as “dire.” Lyons then notified insurer Lexington Insurance Company in July 2010 of the water problems.

Lexington discovered that in the preceding two years, Lyons had already spent more than $2.5 million to try to find and fix the problem; the total proof of loss was for $7.5 million, which included remediation measures taken by Lyons prior to notifying Lexington of the water intrusion.

Arguing that Lyons had sat on its claim, Lexington declined to pay. A federal district court granted summary judgment in the insurer’s favor when the salt mine sought a declaratory judgment to recognize coverage for the damage and related expenses.

But even assuming that the policyholder waited too long, Lexington failed to establish substantial prejudice, the Tenth Circuit concluded, reversing the lower court.

Under Kansas law, an insurer can show prejudice by presenting evidence that its ability to investigate a claim has been lost, by demonstrating that “it would have handled some aspect of the investigation, discovery or defense differently and that with this change, [the insurer] likely could have either defeated the underlying claims or settled the underlying claims for a lower sum than what the insureds settled.”

Lexington proffered three areas of prejudice: it lost the opportunity to independently investigate the water inflow; it lost the opportunity to provide input on how to resolve the water inflow problem; and it suffered underwriting prejudice.

The federal appellate panel shot down all three arguments. The insurer conducted its own independent investigation after it learned of the water problems, the court noted, and a contention that witnesses’ memories are “not as fresh” did not explain how the investigation had (possibly) been impeded.

At a deposition, Lexington’s own corporate representative responded to the question of whether the insurer’s investigation was hampered with “How could I know?” This rhetorical question summarized the insurer’s position, the court said.

As for prejudice in the remediation of the water problems, Lexington failed to “present evidence on how [its] input would have affected the remedial efforts,” the panel wrote. And the insurer provided no evidence that it would have done anything differently – like cancellation, non-renewal, or amendment of Lyons’ policies – had the salt mine provided timely notice of the inflow.

To read the decision in B.S.C. Holding, Inc. v. Lexington Ins. Co., click here.