Late Notice Under Claims-Made Policy Torpedoes Claim

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A recent ruling by a North Carolina federal district court highlights the different treatment the courts give to the late notice defense under a claims-made liability insurance policy versus an occurrence-based policy. The insurer has a clearer opportunity under claims-made policies to defeat coverage when the insured’s notice of a claim is late. The United States District Court for the Eastern District of North Carolina in the case of John Hiester Chrysler Jeep LLC v. Greenwich Ins. Co., 2017 WL 6210897 (E.D.N.C. December 8, 2017), rejected the policyholder’s argument that prejudice must be shown by the insurer under a claims-made policy before coverage can be avoided due to late notice.

What happened in John Hiester is a lesson for all coverage counsel. Claims-made policies are different; they contain traps for the unwary, one of which is notice. In John Hiester, the claims-made policies at issue were two similar employment practices liability (“EPLI”) policies. 

An employee of one insured car dealership, Hiester Automotive Group, Inc., filed an EEOC claim in April 2015 (“Harris Claim”). The applicable EPLI policy period was November 29, 2014 to November 29, 2015 (“Harris Policy”). An employee of another insured car dealership, John Hiester Chrysler Jeep LLC, filed an EEOC claim in June 2015 (“Davis Claim”). That insured’s applicable EPLI policy period was February 8, 2015 to February 8, 2016 (“Davis Policy”). In other words, each claim came within the coverage period of each policy. For reasons not evident in the opinion, the insureds failed to report either claim until June 9, 2016. Greenwich denied the claims, following which the insureds filed this declaratory judgment action. The case is before the court on Greenwich’s motion for summary judgment.

Each EPLI policy stated: “Coverage shall apply to any Claim made against the Insured committed prior to the expiration date of this Policy, provided that the Claim is first made during the Policy Period (or Extended Reporting Period, if applicable) and written notice of said Claim is reported to the Insurer pursuant to Section VII of this Policy.” Section VII states “as a condition precedent to coverage under this Policy,” the insured must “give the Insurer written notice as soon as practicable BUT IN NO EVENT LATER THAN SIXTY (60) DAYS AFTER EXPIRATION OF THE POLICY PERIOD ... of any Claim first made during the Policy Period (or Extended Reporting Period, if applicable).” In other words, the Harris Policy required the Harris Claim to be reported to Greenwich no later than January 28, 2016, and the Davis Policy required the Davis Claim to be reported to Greenwich no later than April 8, 2016.

Because neither claim was timely reported, the insureds turned to arguments that under North Carolina law, Greenwich must prove it was materially prejudiced by the late notice before it could avoid coverage. To support their arguments, the insureds cited  law on late notice under occurrence-based policies. Specifically, they argued in assessing whether an insurer may be relieved of its obligation to indemnify due to its insured’s asserted failure to comply with a policy requirement, notice of loss be given to the insurer “as soon as practicable,” North Carolina utilizes the following test: (1) whether there was a delay in notifying the insurer of a covered loss, (2) if such notice was delayed, whether the insured acted in good faith with respect to the delay, and (3) if the insured acted in good faith, whether the insurer was nevertheless materially prejudiced by the delay.

The court rejected that argument, finding instead the EPLI policies “require[d] 1) that a claim occur during the policy period; and 2) that notice be given as soon as practicable but in no event later than 60 days after expiration of the policy period.” Pursuant to the claims-made policies at issue, Greenwich was not required to show it was prejudiced by late notice. Additional arguments by the insureds, such as wavier and estoppel met a similar fate; the court granted Greenwich’s motion for summary judgment.

Coverage practitioners take note:. insureds can overcome a late notice defense under occurrence-based policies because insurers have difficulty establishing prejudice resulting from late notice. Late notice under claims-made policies is much different, however. It is a bright line defense that does not require insurers to prove prejudice, thus favoring insurers.

Jim Bryan is the leader of Nexsen Pruet's Torts, Insurance and Products group, and is based in the firm's Greensboro office. His litigation practice concentrates on insurance coverage/bad faith, trucking industry defense, commercial disputes, lender liability, premises liability, environmental disputes and fiduciary trust litigation.