Chapter 10 Notice/late Notice

• Library: The Handbook on Additional Insureds (ABA) (2018 Ed.)

CHAPTER 10 Notice/Late Notice

Thomas S. Schaufelberger and William C. Baton

The inclusion of "additional insureds" within those covered under insurance policies adds some complexity to traditional coverage analyses. This is particularly true with respect to the reporting and notice obligations under liability insurance policies. This chapter will address some of the more commonly faced issues that arise with additional insureds in this context.

Under virtually any type of liability policy, an obligation exists to provide notice to the insurer of an event that may implicate a coverage obligation. Given that an insurer's coverage obligations usually pertain to both the defense of a claim and indemnity, it is not difficult to understand the underpinnings of these notice obligations. However, the scope of the notice obligation will be determined based on the construct of any relevant language used in the insurance contract. Moreover, the effect of particular language may vary from jurisdiction to jurisdiction.

Certain types of CGL policies and most types of professional liability [Errors and Omissions] policies are what are known as claims-made policies. In essence, this means that the coverage-triggering event is the assertion of a claim against the insured. The important event, again, is the claim, irrespective of when the events that gave rise to the claim took place.¹ Conversely, occurrence-based policies provide coverage based upon when the event giving rise to coverage—the accident or the injury—took place, irrespective of when the resultant claim may be made. Notice requirements under each of these policies are, of course, very different.

I. Claims-Made Notice

The obligation to provide notice under a claims-made policy is triggered, in general, by the insured's receipt of a claim. While definitions vary, the term "claim" is often defined to involve a written demand naming the insured and alleging a wrongful act; examples may be a letter, a complaint formally instituting a lawsuit, or written notice of certain regulatory proceedings.

Once an insured receives a claim, it must be reported to the insurer during the policy period or during a short period thereafter.² The existence and reporting of a claim during the policy period is generally seen as a material part of the coverage agreement as opposed to a condition precedent of coverage.³ Therefore, if a claim is not made against the insured and reported to the insurer under such a policy, coverage may be forfeited without further analysis.⁴

II. Occurrence-Based Notice

One of the most rapidly changing areas of the law of notice involves the provision of notice under occurrence-based policies and, particularly, the circumstances under which failure to provide such notice will serve to forfeit coverage. Unlike claims-made policies, notice under occurrence-based policies is simply a condition of coverage, and the failure to provide prompt notice, without more, will generally not serve to forfeit coverage.

Generally, notice of an occurrence must be provided as soon as practicable after the insured has become aware of an occurrence likely to generate a claim by a third party. Whereas the time frame for providing such notice is generally not precisely specified in the policy, many courts have required notice of the occurrence to be provided within a matter of months after the accident or event occurred. Perhaps more significant, however, are the consequences of the failure to provide timely notice.

Traditionally, a majority of jurisdictions applied the condition strictly; the failure to provide timely notice would result in a forfeiture of coverage irrespective of any resultant harm to the third-party claimant or insured, or of the lack of any prejudice to the insurer. Over time, however, the pendulum has swung—either through changes in the common law or the enactment of legislation⁵—to require that "prejudice" result before an insurer can avoid its coverage obligations based upon late notice.

These concepts—complicated enough in the normal sense—become even more complicated in the context of an additional insured, who is often a stranger to the policy in question.

III. Notice Duties of the Additional Insured

Even though this subject, and how an entity becomes an additional insured, is addressed in greater detail in other chapters,⁶ a brief overview will provide context for the following discussion. Generally, in certain industries, it is necessary to provide various undertakings to entities with whom an insured deals in a commercial setting. These undertakings may take various forms including indemnity agreements, agreements to provide proof of insurance, and agreements to make the other party an additional insured under a policy covering the insured. Additional insured status may be created by a specifically underwritten endorsement, but it is often provided to a stranger to the insurance contract. Accordingly, the notice requirements applicable to additional insureds, who may be strangers to the insurance contract, must be viewed in a slightly different context. Unless otherwise provided in the policy, anyone may give notice of an occurrence or a claim on behalf of an additional insured, so long as the notice is sufficient and timely.⁷ Under certain circumstances, even an injured third party may provide notice of an occurrence to an insurer.⁸

What constitutes sufficiency and timeliness of notice is often established by the policy language. In other words, the policy generally sets forth the insured's notice-related duties. For example, it is not uncommon for an occurrence-based policy to require written notification, and the provision of details such as the time, location and circumstances of the occurrence and the names and addresses of potential witnesses and injured parties "as soon as practicable."⁹ Courts have generally held that what is reasonable and practicable notice to the insurer is a question of fact.¹⁰ However, if the facts are undisputed, some courts have found that timeliness is a question of law for the court to decide.¹¹ The purpose of such notice requirements is to provide the insurer with sufficient facts to investigate the occurrence and to conduct an analysis to enable the insurer to promptly determine and communicate its coverage position to the insured.

Likewise, claims-made policies often require notice within the policy period and the immediate forwarding of copies of any demands, notices, summonses or legal papers received in connection with the claim or suit. Failure to abide by any of these requirements could be viewed as a breach of the insurance contract, which could result in a denial of coverage for the additional insured. Such notice requirements are no different for an additional insured than for a named insured.

The notice requirements for occurrence-based and claims-made policies generally involve different sets of duties. For example, the notice requirement for claims-made policies is generally not dependent upon the underlying event or act having occurred during the policy period. As long as a claim is made against the insured during the policy period, regardless of whether the accident or occurrence took place during that period, the insurer will provide coverage, subject to the terms of the policy. In other words, once the claim is made, the duty to report is triggered. Occurrence-based policies, however, are conceptually different.

Occurrence-based policies have a different triggering mechanism than do claims-made policies. The notice obligation may also differ, such that an insured might not be required to report an occurrence promptly because of a good faith belief that no claim will be made.¹² Further, an additional insured might not immediately provide notice to the insurer if the additional insured is unaware of its status as such.¹³ While the failure to provide notice of an occurrence under these scenarios is fraught with peril for the insured (or additional insured), there is no bright line indicating when a court will deem the notice under occurrence-based policies to be timely or late.

The duty to provide notice for a claims-made policy is somewhat clearer. Furthermore, most jurisdictions now require that, before an insurer can successfully disclaim for late notice under an occurrence-based policy, the insurer must show that it was prejudiced by the delay.¹⁴ The courts, however, generally do not consider the issue of prejudice in construing whether notice was timely under claims-made policies.¹⁵ The reason for not applying the prejudice rule for claims-made policies is that, because the claim must be made during the policy period, allowing a delay in notice based upon a lack of prejudice would essentially extend the coverage beyond the period for which coverage was bargained for and paid.¹⁶

IV. Receipt of Notice

A. Who Must Receive Notice?

Who actually receives notice of an insured loss or claim is also important because generally the insurer must receive "actual notice." Just like a named insured, an additional insured's notice to an agent of the insurer will generally suffice. Care must be taken, however, to be certain that the party being notified is the party to whom notice is to be provided as set forth in the insurance contract, or at least a legally recognized agent of the insurer. For example, notice to an insurance broker is generally not considered to constitute notice to the insurer because an insurance broker is generally considered to be an agent of the insured, not the insurer.¹⁷ There are exceptions to that general rule, such as where the broker creates a "special relationship" with the customer.¹⁸ But overall, a broker is not considered to be an agent of the insurer. Likewise, courts have held that notice to an insurance adjuster does not constitute notice to the insurer.¹⁹

In certain circumstances, the named insured's notice to the insurer may be deemed to constitute sufficient notice on behalf...