If an insured give notice of claim to its insurer during the policy period but seven months after a lawsuit is filed, has it provided notice “as soon as practicable” as required under the policy? Not according to a May 25, 2017 decision by the Eighth Circuit. The appellate court, applying Minnesota law, affirmed the district court’s holding that the provision of notice during the policy period but seven months after the lawsuit was filed against the insured did not satisfy the policy’s “as soon as practicable” notice requirement. While the Eighth Circuit’s ruling is consistent with the rulings of other courts on this issue, I still have concerns, as noted below. The Eighth Circuit’s opinion in the case can be found here.
In January 2014, a former employee of Food Market Merchandising, Inc. sued the company for unpaid commissions. In June 2014, the court granted partial summary judgment for the employee, awarding twice the unpaid commissions and attorney’s fees. The award was not reduced to judgment at that time and the parties ultimately settled two years later.
In August 2014, during the policy period, Food Market provided notice of claim with regard to the former employee’s lawsuit to its management liability insurer. In September 2014, the insurer tentatively denied coverage. In June 2015, Food market filed an action against its insurer seeking a judicial declaration of coverage and also asserting claims for breach of contract and bad faith. The parties filed cross motions for summary judgment.
The notice provisions in the relevant coverage section of Food Market’s management liability policy provide that “The Insureds shall, as a condition precedent to their rights to payment under this Coverage Section only, give the Insurer written notice of Claim as soon as practicable, but in no event later than sixty (60) days after the end of the Policy Period.”
The district court granted summary judgment for the insurer, finding “no genuine issues that [Food Market] failed to notify Scottsdale of the [employee] Litigation as soon as practicable. Because timely notice is a condition precedent to payment under the Policy, [the insurer’s] duty to defend/indemnify was never triggered, and [the insurer] is entitled to judgment as a matter of law.” Food Market appealed.
The May 25, 2017 Appellate Opinion
In a May 25, 2017 opinion written by Judge William Duane Benton, a unanimous three-judge panel of the Eighth Circuit affirmed the District Court’s decision.
The appellate court said that while under Minnesota law the question of whether or not notice was given as soon as practicable is a fact-dependent question, a court may grant summary judgment where there is not genuine issue of material fact. In this case, the court said, there was no genuine issue of fact as “Food Market presented no evidence that providing notice over seven months after [the employee] sued was ‘as soon as practicable.’”
The appellate court cited with approval from the district court’s opinion, in which the district court judge noted that during the seven month interim, Food Market had taken a number of actions, including hiring counsel, litigating the case, and negotiating with the claimant, all without notifying the insurer. “Nowhere,” the district court said (as quoted by the appellate court) “does it identify facts from which a reasonable factfinder could conclude it provided notice to [the insurer] ‘as soon as practicable.’”
Food Market tried to argue that the district court had failed to consider whether the delay in providing notice had inhibited the insurer’s ability to investigate the claim or whether any facts in the underlying claim changed from when the insured knew of the claim to when the insurer was provided with notice. These considerations, the appellate court said, “address whether the delay prejudiced [the insurer], a showing that both parties admit is not required where, as here, notice is a condition precedent to coverage” (citing Minnesota law).
A material dispute of fact, the appellate court said, might be present where an insured offers some plausible reason for delay; however, by contrast to cases on which Food Market sought to rely, “the district court found Food Market offered no reasons for delay,” and thus, the appellate court concluded, the district court “properly found no genuine issue of material fact about the timeliness of notice.”
The appellate court also rejected Food Market’s argument that the notice provision’s “as soon as practicable language” is ambiguous.
Regular readers know that late notice issues are a particular concern of mine. There are (at least) two reasons why late notice cases bother me. One is that it just rubs me the wrong way that a mere procedural miscue can produce a forfeiture of coverage. All too often in late notice cases it feels to me as if a mere foot-fault is determining the outcome of the entire match, particularly where, as here, considerations of whether or not the procedural shortcoming prejudiced the insurer are considered.
There is another, more important reason that late notice cases bother me, and that is the simple fact that late notice happens. Policyholders caught up in their business operations or focused on the merits of a dispute that has arisen do not always think of their insurance right away. The people in the organization that know about the claim are not always the people in the organization that know about the insurance. Late notice happens for many reasons or for no reason at all. The fact that late notice is such a regularly occurring phenomenon is yet another reason why it bothers me that mere delayed notice can cause a forfeiture of coverage. As an industry we really ought to take this basic fact into account in the way we apply and enforce our policies. I know for sure that tomorrow or the next day or next week, I will be dealing with yet another late notice situation. It is just a basic fact of life, so why can’t we as an industry do a better job dealing with it
I will stipulate that this case may be less sympathetic than some other late notice cases that come along. First of all, I concede that courts’ rulings on the “as soon as practicable” issue are generally consistent with the lower court and appellate court’s conclusion here. In a recent post (here), I discussed a case in which several successive New Jersey courts concluded that a policyholder’s provision of notice during the policy period but six months after service of the complaint did not satisfy the policy’s “as soon as practicable” requirement.
I also recognize that given during the seven month interval here, a number of things happened in the underlying claim that might arguably constitute prejudice to the insurer. The court in the underlying claim granted a motion for partial summary judgment and awarded damages. The policyholder and the claimant engaged in settlement discussions. It could well be the case that the insurer could have shown prejudice, if that had been required.
However, a showing of prejudice was not required. Courts in many jurisdictions have held that even if otherwise generally applicable in other circumstances, the notice prejudice rule does not apply to claims made policies. Here, the court said that under Minnesota law, the notice prejudice rule does not apply if timely provision of notice is a condition precedent to coverage. So, while I recognize that the insurer here might well have had grounds from which to argue that its interests were prejudiced as result of the delay, the court never reached this issue because it concluded it didn’t have to. This notion that the notice prejudice rule doesn’t apply to claims made policies is one of the contributing factors in my general gripe about late notice cases; the late provision of notice can cause a forfeiture of coverage even if the late provision of notice had no effect on the insurer’s interests.
This particular concern is one of the reasons why I am in favor of incorporating notice prejudice language directly into the policy. For example, the policy could include language along these lines:
If the Insured fails to provide notice of such Claim to the Insurer as required under this Section, the Insurer shall not be entitled to deny coverage for the Claim based solely upon late notice unless the Insurer can demonstrate that its interests were materially prejudiced by reason of such late notice.
With the inclusion of this language, the insurer would at least have to show that the late provision of notice caused a prejudice to the interests of the insurer before trying to make the late notice work a forfeiture of coverage.
There is another part of the court’s analysis here that bothers me. That is that the court never stopped to analyze what the phrase “as soon as practicable” might mean. For me, it is very important that the policy does NOT say “as soon as possible” or “as soon as practical,” it says “as soon as practicable,” and the use of the word “practicable” is important. This wording is meant to be a flexible standard, not meant to be rigid or hard-and-fast. It is a wording that in fact is generally viewed as policyholder-friendly and designed to cut the policyholder some slack. It is not as if the policyholder delayed for two years, or failed to give notice across policy periods – it provided notice that to my mind in the grand scheme of things and in light of what can and sometimes does happen was relatively quick.
One final point is worth emphasizing here, and that is the fact that the policyholder provided notice of claim during the policy period. No doubt, the insurer’s late notice position was valid, as it was upheld by both the district court and the appellate court. But just the same, I would have hoped that the fact that the policyholder provided notice of claim during the policy period would have been a consideration that the insurer took into account in the decision of whether or not to assert late notice as a defense to coverage.
All of that said, it is true that under the policy the provision of notice of claim is a “condition precedent” to coverage. As I have noted elsewhere, policyholders as well as insurers have duties under the insurance policy. Policyholders should be diligent both in protecting their interests and in fulfilling their duties under their policies. But in simple recognition that the delayed provision of notice is a regular occurrence, the inclusion in the policy of the kind of “prejudice required” language that I discussed above would ensure that the policy’s notice provisions are not enforced in a way that works a hardship on the policyholders and could help to ensure that the notice provisions are enforced consistently with the balance of the equities.