Giving prompt notice to your insurance company is critically important to preserve coverage. Insurance policies require policyholders to give insurers prompt notice of claims and potential claims, and may even provide a specific number of days within which to give notice. But notice is often delayed for good reason—sometimes the urgency of other business intervenes, or it may not immediately occur to a policyholder that a claim could be covered.
In some states, late notice laws can be harsh, resulting in forfeiture of coverage, but in others, an insured may still be able to salvage coverage. These four arguments could be considered to excuse late notice.
1. The insurer was not “prejudiced” by any notice delay. Notice provisions in insurance policies serve many purposes, including allowing insurers to investigate the facts of the claim and defend the policyholder in lawsuits alleging covered claims. When notice is late, these opportunities for the insurer to act may be lost. In many states, however, the law states that an insurer may not escape liability based on late notice unless the insurer was prejudiced by any delay. This “no harm, no foul” rule takes many forms, from presuming prejudice and requiring the policyholder to rebut the presumption to requiring the insurer to affirmatively prove prejudice resulting from any delay before it may disclaim liability.
Insurers often claim that witnesses’ fading memories are evidence of prejudice. A policyholder can counter this assertion by showing, for example, that witnesses were questioned by others and no important details were lost over time. A policyholder may also show that questioning witnesses was not possible during the time in question, such as in cases where pending law enforcement investigations preclude examining witnesses until given clearance by the authorities.
The opportunity to defend a policyholder in a covered lawsuit is another example of prejudice often cited by insurers. Unless the insurer shows that it could have achieved a better result in the underlying case, this should not be sufficient to demonstrate that late notice prejudiced the insurance company.
2. Giving notice would have been a “futile” act. Another possible way to excuse late notice is for the policyholder to assert that giving notice earlier would have been futile. The law generally does not require a person to perform a useless act. So, for instance, if the policyholder can show that the insurer would have denied coverage in any event and earlier notice would not have changed that, late notice may be excused.
To the extent that the insurer asserts that it would have taken specific actions in response to a claim, it also may be useful to get the insurance company’s claim manuals and its history handling similar claims. For example, in the 1980s and 1990s, many claim manuals instructed handlers to deny coverage for environmental claims based on the “pollution exclusion.” Thus, environmental claims were denied rather quickly, without gathering additional documents, interviewing witnesses, or performing any other investigative steps.
In such cases, it arguably does not matter when the insurer received notice because the result would have been the same—a swift denial of coverage with little or no investigation of the claim. In some states, late notice may be excused if earlier notice would have resulted in the same outcome.
3. The insurer had “constructive” notice of the claim. It also may be possible to argue that, because the insurer had “constructive” notice of the claim, the notice was not actually late. This argument most often is asserted where a policyholder gave information regarding a claim to its insurance broker and relied on the broker to give notice to any responsible insurers.
A policyholder would need evidence that the broker signed an agency contract with the insurer in order to make this argument. Such contracts are common among insurers and brokers as they allow the brokers to place coverage with each insurer and they set forth the terms of the placement, such as the amount of compensation the broker receives. Be sure to check applicable laws regarding the agency issue as there is significant variation in state law regarding whether and for what purposes a broker acts as an agent of the insurer.
4. Notice was timely under the circumstances. Finally, a policyholder may assert that notice was timely under the circumstances of the case. This argument is intensely fact-based and generally can be used where the policy requires notice “as soon as practicable” or “promptly” after the policyholder learns of a claim or potential claim. A reasonable belief that there is no coverage—especially if encouraged by the insurer or its agents—may excuse late notice. Similarly, in the case of excess insurance, late notice may be excused if, under the circumstances, the policyholder reasonably believed that the claim would not reach the excess layer of coverage. Late notice may be excused where the policyholder had a reasonable belief that it was not liable in connection with the claim at issue.
Ordinarily it is the policyholder’s burden to show that, under the circumstances, notice should be considered timely. Questions regarding whether the policyholder’s belief was “reasonable” are usually left to the factfinder. Thus, it stands to reason that even if your notice of a claim is arguably late, you need to examine the applicable law and facts to determine whether coverage should nonetheless be provided.
Joseph Saka, counsel with Lowenstein Sandler, assisted with this article.