8TH CIRCUIT REJECTS “GOTCHA” POLICY CLAUSES.
In the new case of Century Surety Co. v. Jim Hipner LLC, et al, No. 15-2120 (8th Cir. Nov. 23, 2016) the insurer denied a policyholder’s claim due to late notice. The 8th Circuit panel chastised the insurer for its denial, stating that the insurance company was trying to have it both ways.
What does this mean? Well, Dear Readers, let’s dive in and break it down. This is an important rule in insurance coverage law for all of us to know.
Jim Hipner LLC is a trucking company. It purchased a $2 million dollar umbrella policy from Century. One of Hipner’s drivers caused a multi car accident in North Dakota. According to the police reports, the parties had minor injuries. Hipner immediately notified his primary insurer, Great West, but failed to notify the umbrella carrier, Century. Great West began an investigation the day of the accident. One of the accident victims later became a quadriplegic, suffering significant injuries.
Century discovered the accident four months after it occurred. The claim notice was accidental. It occurred when Hipner tried to renew its Century policy and disclosed the prior accident on the application form. After its discovery of the occurrence Century chose not to investigate the claim, relying instead upon Great West’s work. Century later found fault with the initial investigation. Century believed that it was not thorough enough for its rigid standards.
Century received a demand for settlement that was within its policy limits. The claim for losses was significant due to the life care plan for the quadriplegic victim of the accident. Century denied the claim and filed a declaratory judgment action in federal court. Century argued that Hipner’s late (and inadvertent) notice barred any recovery under the umbrella policy. The federal district court granted Hipner summary judgment and Century appealed.
Remember, Dear Readers, our first rule in insurance coverage law? Go to the policy language to determine coverage. If the language is unambiguous as written, and it bars the present claim, then judgment shall be granted to the insurer.
So what did the Century policy say? An insured must provide notice of a claim “as soon as practicable.” The 8th Circuit determined (on a de novo review) that this phrase was unambiguous. It means “within a reasonable time.” Hipner thought he had satisfied his obligation under the policy by providing notice to the primary insurer only at the time of the accident. The Court rejected that explanation. Notice was indeed late.
Are we done now with this lesson Ms. O’Brien? No, Dear Readers you are not.
Late notice under a policy is not an automatic bar to coverage. This is the majority rule. Instead, an insurer must prove that it was “prejudiced by the delay in receiving notice of the accident.” This Century could not do.
Century was unable to show “how the four month delay in receiving notice actually prevented it from taking any meaningful investigatory steps that it would have done had there been no delay.” Id., slip op. at 9 (emphasis added).
If Century believed that something was missing after receiving the investigative materials (from Great West), it could have launched its own investigation or followed up with Great West’s investigation, but it chose not to.
Rather Century laid low here, doubling down on its late notice language. While doing so, Century made no attempt to ascertain what information it needed in order to make a determination of coverage. It had the chance before the claim was stale – yet it rested on the policy language alone to bar coverage. For that reason, the Circuit found, “Century suffered no prejudice.” Id. at 10. Century posed its own obstacles – not the policyholder. Quoting the district court, the 8th Circuit stated:
Century Surety cannot postpone its independent investigation based on its reliance on Great West’s investigation and then later submit Great West’s investigation was incompetent and that too much time elapsed for Century Surety to perform and investigation. Century Surety cannot have it both ways.
Coverage affirmed. Score? Insurer: 0 Policyholder: 1
An insurance company cannot use the late notice clause in its policy to bar a claim unless:
- its hands are clean, and
- it actually suffered a measurable prejudice due to the lateness of the claim.
There is no gotcha clause in insurance policies in the 8th Circuit. Although the “prejudice” rule is not written in the policy language, it is presumed. This is also the majority rule.