Five Year Delay Defeats Notice-Prejudice Rule
An insured with both primary and excess coverages, as a general practice, should report to the excess insurer any loss where at least half of the primary limit is exposed by a third party claim. Failure to do so can be exceedingly expensive and defeat the wisdom of buying excess coverages.
In Landmark American Insurance Company v. Deerfield Construction, Inc., and Shawn Graff v. Arthur J. Gallagher Risk Management Services, Inc., No. 18-2205, United States Court of Appeals For the Seventh Circuit (August 12, 2019) Deerfield’s employee, Graff, had an automobile accident with Keeping.
Deerfield had a primary commercial automobile insurance policy through American that covered it for up to $1 million in liability. Deerfield’s broker, Gallagher, also helped Deerfield obtain an excess insurance policy from Landmark, to kick in after Deerfield’s liability exceeded $1 million. After Graff’s accident, Deerfield informed American and Gallagher. No one notified Landmark, even after Keeping filed suit.
American assumed the defense and hired attorney Olmstead. American never offered the full policy value to settle the suit.
In 2014, weeks before trial, Landmark learned about Keeping’s lawsuit. Its claims adjuster evaluated the case at $500,000-$750,000. Before trial, Landmark was receiving regular updates as a passive bystander. Before the verdict was announced, American assumed that the jury had sided with the defense and did not resume settlement negotiations. Deerfield did not know about the negotiations, although Olmstead was involved. Landmark knew and advised that American should settle within the primary policy limit. The jury reached a verdict that remitted to $2.3 million.
After the verdict Landmark sought a declaratory judgment that it did not have to cover the loss. Summary judgment was granted for Landmark, holding that Deerfield’s notice was unreasonably late as a matter of law and they appealed to the Seventh Circuit.
American States relied entirely on its own evaluation of Keeping’s lawsuit, which it thought lacked any merit. Throughout five years of pre-trial proceedings, it never offered the full $1 million value of the policy to settle the suit. Indeed, it was not until the trial was almost over and jury deliberations began that it even came close. In April 2013, more than a year before trial, Keeping made a $1.25 million demand to settle the lawsuit. This demand was high enough to trigger Deerfield’s excess insurance coverage, but still no one notified Landmark about the pending case. Instead, American States counter-offered with $75,000.
The district court granted summary judgment for Landmark, holding that Deerfield’s notice was unreasonably late as a matter of law.
Under Illinois law whether an insured’s notice to its insurer was timely is determined by the totality of the circumstances. The Supreme Court of Illinois has identified five non-dispositive factors to aid in this inquiry:
- the specific language of the policy’s notice provision;
- the insured’s sophistication in commerce and insurance matters;
- the insured’s awareness of an event that may trigger insurance coverage;
- the insured’s diligence in ascertaining whether policy coverage is available; and
- prejudice to the insurer. [W. Am. Ins. Co. v. Yorkville Nat. Bank, 238 Ill. 2d 177, 185-86 (2010).]
The language of Landmark’s policy states that the insured must give “prompt” notice.
Illinois courts consider whether the insurer was prejudiced by the insured’s late notice. The Supreme Court of Illinois has stated multiple times that the presence or absence of prejudice to the insurer is one factor to consider when determining whether a policyholder has fulfilled any policy condition requiring reasonable notice. While the lack of prejudice does not doom an insurer’s case, it is a relevant consideration.
Landmark learned about the underlying suit so late in the game that many potential steps were no longer possible. When considering the totality of the circumstances, at some point the court concluded that common sense comes into play.
Landmark did not receive notice until seven years after Graff and Keeping’s accident. This was not a case of a slowly developing tort, where the parties could identify the genesis of the injury only years after the harmful activity occurred. This was an automobile accident. Deerfield could have emailed, mailed a letter, or perhaps just have called Landmark to tell it about the accident as soon as it occurred (just as it did for American States), or it could have taken any of those steps when it was served with Keeping’s lawsuit. But it did not. The Seventh Circuit found it irresistible that Deerfield’s notice was untimely and unreasonable as a matter of law.
The tasks that Gallagher performed for Landmark, such as sending bills and collecting payments, fall into the bucket of traditional brokerage activities. Indeed, Andrew Hulett, who helped Deerfield get the Landmark policy, called this set-up the industry standard.
Deerfield’s negligence claim against Gallagher similarly fails. Deerfield has identified no Illinois cases establishing that insurance brokers have a duty to deliver notice of claims on behalf of an insured, and so its negligence claim fails.
Some cases are not close, and to the Seventh Circuit this is one of them. Waiting five to seven years before telling an insurance company that its policy may be implicated in a suit is too long.
This is a case where the primary insurer failed in its obligation to its insured and the excess insurer. Failing to advise the excess of its exposure was, perhaps, due to its evaluation that the plaintiff’s case was not viable. It was probably surprised by the $2.3 million dollar verdict and tried to make the extra $1.3 million become the obligation of the excess and failed because five to seven years is just too late. Both the primary insurer and defense counsel should have advised Landmark. Why they did not is understandable if they truly believed there was no excess exposure. Landmark did not receive the notice it had bargained for and the full policy limit became the obligation of the primary and the insured.
© 2019 – Barry Zalma
This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and email@example.com.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 51 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.
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