The question for today, Dear Readers, is whether a primary carrier has a duty to notify an excess carrier of a loss that could potentially be covered by the excess carrier’s policy.
Of course you know, from our multiple and engaging discussions before, that the terms of the policy are what control the duties, obligations and actions of the insurers and the insured. So we should go straight to the insurance policy to answer today’s question, right? Yes, partly. It never is cut and dried though is it? Like moral relativity, we have legal relativity too. So let’s dig in.
The policy holder has a duty in all insurance contracts to notify the insurer – regardless of what layer it has – of a potential loss. But what if the policyholder drops the ball and fails to provide this notice? Or is bankrupt and no longer in operation? Or has closed shop completely and doesn’t even exist anymore?
An excess policy does not typically have the same requirement for notice as a primary policy. This is because an excess policy usually does not have a direct obligation to defend an insured – a duty which falls to the primary insurer. This “notice duty,” as set out in an excess policy, requires a policyholder to give notice of a claim “when the loss is reasonably likely to involve the excess policy.” There are many versions of this obligation, but all are essentially the same in that notice is not mandatory and it is only necessary if the excess policy limits may be affected.
But does this obligation expressly bind the primary insurance company? No it does not. Any duty of a primary insurer to provide notice to the excess insurer arises only out of a general duty of good faith and fair dealing that courts have read into the relationship between the two insurers when acting as a court of equity.
And as usual with evolving law, several courts have grappled with this issue with differing results. For example in the seminal case Am. Centennial Ins. Co. v. Warner-Lambert Co., 293 N.J. Super. 567, 576, 681 A.2d 1241, 1246 (Ch. Div. 1995), the court there looked to an industry document which was signed by both the primary and excess insurer. That document, “The Guiding Principles for Primary and Excess Insurance Companies,” specifically states that the primary must inform the excess of a claim in certain circumstances.
If at any time, it should reasonably appear that the insured may be exposed beyond the primary limit, the primary insurer shall give prompt written notice to the excess insurer, when known, stating the results of investigation and negotiation, and giving any other information deemed relevant to a determination of the total exposure, and inviting the excess insurer to participate in a common effort to dispose of the claim.
The Warner-Lambert court used these principles to create a new industry standard for notification: a primary insurer must notify the excess when settling a claim – if the excess may also be responsible for coverage. It then found that the primary breached this duty when it failed to provide such notice.
Other courts have not gone so far. For example in Lemuel v. Admiral Ins. Co., 414 F. Supp. 2d 1037, 1057 (M.D. Ala. 2006), aff’d sub nom. Lemuel v. Lifestar Response of Alabama, Inc., No. 06-11155, 2007 WL 57097 (11th Cir. Jan. 9, 2007) the court declined to follow Warner-Lambert. The Lemuel court looked to the terms of both the primary and excess policies. The policy language in that case did not shift the responsibility for notice from the policyholder to the primary carrier. That court focused on the actual policy language only. It declined to hold, in equity, that the burden of notice should be extended to the primary carrier as a matter of fairness.
How would our Midwest courts handle this duty? Most all do recognize an inherent duty of good faith and fair dealing between the primary and the excess insurer. And most all are inclined to look to equity to determine the extent of this good faith obligation. But none have gone so far – yet – to affirmatively place the burden of notice on a primary insurer. Stay tuned!!!
A policyholder always must provide notice to his insurers. This duty is a condition precedent to coverage in all insurance contracts.
However if a primary carrier has knowledge of a possibility of excess coverage, and knowledge that the claim loss could dip into the excess carrier’s limits, it should notify the excess carrier as a matter of precaution. This is a part of the recognized duty of good faith and fair dealing between the carriers.
If the primary carrier is a signatory to the Guidelines, it absolutely must notify any excess carrier. These Guidelines have created an industry standard to which the primary carrier, by being a signatory, has agreed. Failure to follow through, then, may well be considered to be a breach of the industry duty, and in turn would create a liability where none may have affirmatively existed before.
What do you think, Dear Readers? Is this a fair obligation to place on a primary carrier? Send me your feedback!