THE BOTTOM LINE:
The policyholder has a duty to provide notice under the terms of the contract.
The primary insurer has a duty under guidelines adopted by the industry.
A standard form excess insurance contract contains a clause requiring the policyholder to notify the insurer of a loss.
While the policyholder’s duty may be excused – a topic for another blog post – courts have generally held that this notice is a condition precedent to coverage. The duty is not as strong toward an excess insurer as with a primary one. An excess insurer is usually hard pressed to show a true prejudice for not knowing about the case since it does not usually undertake the defense. See, e.g. Trustees of U. Of Penn v. Lexington Ins. Co., 815 F.2d 890, 898 (3d Cir. 1987) (“Unlike primary insurers, excess insurers have no right to control a lawsuit and thus have less need for early notice.”). Nonetheless most courts do find that the duty is contractual, and it is owed.
Another, lesser known duty, is imposed by the insurance industry itself. The industry requires the primary insurer to notify the excess carrier of a claim that may impose upon the excess carrier’s coverage obligations.
In 1974, the Claims Executive Council of the American Insurance Association and the American Mutual Insurance Alliance, together with some unaffiliated insurers, adopted guidelines for handling cases between a primary and an excess insurer called the Guiding Principles for Primary and Excess Insurance Companies. See, P. Margarick, Excess Liability (1976).
Several courts have found that these Guidelines set forth a standard to which the primary insurer must comply. See, e.g. Pasker v. Harleysville Mut. Ins. Co., 469 A.2d 41 (N.J. Super. Ct. App. Div. 1983) (holding the court should consider the insurance industry’s promulgated guiding principles when fashioning a remedy for a situation described therein); and Am. Centennial Ins. Co. v. Warner-Lambert Co., 681 A.2d 1241, 1245–47 (N.J. Super. Ct. Law Div. 1995) (“The Guiding Principles can be used to establish the standard of care which a primary insurer must use when settling a claim where an excess insurer may also ultimately be responsible for coverage.”).
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