'Prejudice'

Before an insurer can prevail on a motion for summary judgment regarding late notice, it first must prove that, as a matter of law, notice was “late.” This is not always easy to do.

Whether an insured, in fact, had notice of a potentially covered matter and provided notice to its insurer[s] in a “timely” manner often requires a number of factual considerations. For example, did the right person within the insured organization have sufficient knowledge of an event to trigger notice obligations? Depending upon the notice language in the policy or policies at issue, did the insured wait too long to provide notice to the insurer? Was the information provided by the insured sufficient to satisfy the notice duties? Each of these considerations and potentially others involve facts. For this reason, a number of courts have concluded that the issue of late notice cannot be resolved on summary judgment.

For example, in Cessna Aircraft Co. v. Hartford Accident & Indemnity Co., 900 F. Supp. 1489 (D. Kan. 1995), the court addressed the issue of whether notice was timely. In that action, Hartford filed a late notice motion for summary judgment in an environmental coverage case, arguing that it did not receive notice for several years after Cessna [the insured] learned that its facility was a potential source of groundwater contamination. In denying Hartford's motion, the district court found that even though “a substantial amount of evidence [existed] to indicate that Cessna permitted an unreasonable amount of time to pass” before notifying its insurers, the evidence fell shy of warranting summary judgment as a matter of law:

There are factual disputes as to the full extent of Cessna's knowledge of the nature, causes, and, particularly the extent of the pollution at the various sites that counsel against a finding that Cessna acted unreasonably as a matter of law. Id. at 1515.

Similarly, in MFA Mutual Insurance Co. v. Clark, 79 F.R.D. 227 (E.D. Tenn. 1978), the court addressed a late notice summary judgment motion. In that action, the court denied the motion because, among other reasons:

[t]he time at which the insured(s) became aware, or should have become aware, of facts which would suggest to a reasonably prudent person that the event for which coverage is sought might reasonably be expected to produce a claim against the plaintiff under the policy is a factual issue which cannot be resolved on a motion for summary judgment. Id. at 228.

Thus, in many instances, courts presented with insurer requests that the court resolve the notice issue as a matter of law may not even reach the issue of “actual” and “substantial” prejudice. This is so because the insurer cannot overcome the first hurdle to obtaining summary judgment ' that notice was in fact, “late.” If, however, the “timing” issue can be resolved via summary judgment, an insurer still should have difficulty obtaining summary judgment on its late notice defense.

In many jurisdictions, an insured seeking occurrence-based CGL coverage cannot be deprived of the benefits of its policy as a result of the insured's noncompliance with policy terms, including notice, unless the insurer demonstrates that it suffered both “actual” and “substantial” prejudice. See, e.g., Canron, Inc. v. Fed. Ins. Co., 82 Wash. App. 480, 485, 918 P.2d 937 (Ct. App. 1996); Campbell v. Allstate Ins. Co., 60 Cal. 2d 303, 305-06, 32 Cal. Rptr. 827 (1963); Cessna, 900 F. Supp. at 1515; Best v. W. Am. Ins. Co., 270 S.W.3d 398, 405 (Ky. Ct. App. 2008). Furthermore, in most jurisdictions, “[t]he burden of proof is on the insurer.” See, e.g., Canron, 82 Wash. App. at 485; Best, 270 S.W. 3d at 405. As the court stated in Silicon Valley Bank v. New Hampshire Insurance Co.:

Actual and substantial prejudice is “not shown simply by displaying end results.” Rather, “the probability that such results could or would have been avoided absent the claimed default or error must also be explored.” The burden of showing that a breach of the clause resulted in prejudice is on the insurer. 203 F. Supp. 2d 1152, 1159 (C.D. Cal. 2002) (citation omitted).

In moving for summary judgment regarding “prejudice,” insurers seek to convince courts to ignore the extremely high standard that insurers must meet before any such “late notice” can provide a basis to avoid coverage (on summary judgment). However, the cases are legion that hold that whether an insurer has suffered substantial prejudice most frequently involves questions of fact. As a result, even though they continue to try, insurers are hard-pressed to prevail on a late notice defense via summary judgment:

• Belz v. Clarendon America Insurance Co., 158 Cal. App. 4th 615, 65 Cal. Rptr. 3d 864 (2008): Trial court erred in granting summary judgment in favor of insurer even though the insurer was not notified of lawsuit until after entry of insured's default. According to the court, the insurer “did not make a showing that it suffered actual, substantial prejudice.”
• Cessna, 900 F. Supp. at 1516: Late notice motion denied even though the insured did not provide notice for several years after it learned that its facility was a potential source of groundwater contamination.
• Goodstein v. Continental Casualty Co., 509 F.3d 1042 (9th Cir. 2007): The court found no prejudice as a matter of law despite the fact that the insured delayed 12 years before giving notice, during which time the contaminated property was sold by the insured.
• Morales v. National Grange Mutual Insurance Co., 176 N.J. Super. 347, 357, 423 A.2d 325 (1980): The insurer claimed prejudice “as a matter of law” because it did not receive notice until after judgment was entered against insured. The insurer claimed prejudice because it was denied the opportunity to investigate the accident, the reason for the driver's leaving the scene of accident, and the possibility that the plaintiff was totally or partially responsible for accident. The court disagreed, concluding that the “[d]efendant should be considered to have been appreciably prejudiced only upon a showing that a prompt investigation would have yielded material evidence which is no longer obtainable. To avoid liability, the carrier must also show the likelihood that a meritorious defense would have existed.”
• Mutual of Enumclaw Insurance Co. v. USF Insurance Co., 164 Wash. 2d 411, 426-27, 191 P.3d 866 (2008) (en banc): Merely stating the amount of time that has passed between the date an insured was served with a complaint and the date that the insurer was notified of the complaint is not sufficient to establish prejudice ' “[e]ven where an insured breaches a 'prompt notice' provision of an insurance policy, the insurer is not relieved of its duties under the insurance contract unless it can show that the late notice caused it actual and substantial prejudice. ' Whether or not late notice prejudiced an insurer is a question of fact, and it will seldom be decided as a matter of law.”
• Pulse v. Northwest Farm Bureau Insurance Co., 18 Wash. App. 59, 566 P.2d 577 (1977): Motion denied even though the insurer was not notified of the claim until after judgment was entered in the underlying action.
• Weaver Brothers v. Chappel, 684 P.2d 123 (Alaska 1984): The insurer's motion was denied even though the insured did not provide notice until more than six years after the accident. As a result of alleged late notice, the insurer argued that it was prejudiced because it: 1) lost opportunities to negotiate and settle, 2) lost opportunities to investigate, and 3) lost opportunities to defend. Even so, the court concluded that the insurer did not offer evidence to support its prejudice claim.

These cases make clear how extreme the circumstances must be for an insurer to prevail, as a matter of law, on a late notice defense. In fact, the cases where an insurer has succeeded on summary judgment appear to require an insurer to prove that information critical to the insurer's ability to: 1) successfully defend against the litigation, or 2) address coverage issues, has been irrevocably lost.

• Eastern Products Corp. v. Continental Casualty Co., 58 Mass. App. Ct. 16, 787 N.E.2d 1089 (2003): The insureds waited seven years before notifying the insurer of a claim arising out of alleged contamination of real property. The court affirmed summary judgment in favor of the insurer on the grounds that during the time period before it was given notice, the president of the insured (the person likely to have the most knowledge of the cause for contamination at the site), died, and the company destroyed all of its correspondence and business records relating to causes of contamination at the property.
• Board of Education v. TIG Insurance Co., 378 Ill. App. 3d 191, 196, 881 N.E.2d 957 (2007): The insured delayed for eight years in providing notice relating to asbestos claim. During that time, the insured spent millions of dollars removing all asbestos from its schools. In affirming summary judgment granted in favor of the insurer, the court was persuaded by the insurer's claim that “by the time notice was given, it was impossible for [the insurer] to determine its obligation under the policies, for much of the expenditures had occurred years earlier.”
• Jackson v. State Farm Mutual Automobile Insurance Co., 880 So. 2d 336 (Miss. 2004): The court held that summary judgment in favor of the insurer was appropriate where notice was not given until five years after the accident, and the key witness to the accident could not remember important facts and details regarding the claim.
• Key Tronic Corp. v. St. Paul Fire & Marine Insurance Co., 134 Wash. App. 303, 139 P.3d 383 (2006): The insured manufactured and packaged household mop products for Clorox. Products were damaged through the insured's negligence. The insured paid for repackaged products at its own expense and filed a claim with its insurer for loss, including lost income. The court granted summary judgment based on its conclusion that the insurer was denied the ability to examine the alleged damaged items because the products were destroyed prior to the time the insurer received notice of claim.

Conclusion

Despite the uphill battle they face, insurers still attempt to convince courts that they can decide the issues of late notice and prejudice as a matter of law. Such motions are most often denied because of triable issues of fact as to whether notice was timely and whether the insurer actually suffered substantial prejudice. Courts should reject efforts by insurers to dilute the standard by arguing that whether the insurer suffered substantial prejudice as a result of late notice can be decided in its favor without a jury's considering the issue.

Linda D. Kornfeld, a member of this newsletter's Board of Editors, is the managing partner of Dickstein Shapiro LLP's Los Angeles office. Cameron H. Faber is counsel in Dickstein Shapiro's Los Angeles office. They represent insureds in complex coverage matters. Kornfeld may be reached at 310-772-8306, and her e-mail address is [email protected]. Faber may be reached at 310-772-8323, and his e-mail address is [email protected].

It is fairly well established in many courts across the United States that “late notice” of a claim under an occurrence-based commercial general liability (“CGL”) policy presents a problem for insureds only when it “actually” and “substantially prejudices” an insurer. Many courts also have held that insurers that seek to rely on a late notice defense may do so only if they themselves can prove the “actual” and “substantial prejudice” they suffered. In light of that standard, insurers appear to face high hurdles if they rely on notice issues to avoid coverage. At the very least, it seems that the question of prejudice is highly factual and thus should be preserved for a jury to decide.

Insurers, however, often seek to avoid jury consideration of the issue. Instead, these insurers file motions for summary judgment on the issues of late notice and substantial prejudice. In their motions, the insurers argue that not only was an insured's notice untimely, but also that the court can rule, as a matter of law, without any consideration of the facts, that the prejudice was “actual” and “substantial.” Courts should not take the bait. The late notice defense is riddled with factual issues: 1) Was the notice in fact “late”? 2) Did the insurer suffer prejudice? 3) Was that prejudice “actual” and “substantial”? Thus, by its nature, the late notice issue in the vast majority of cases should go to the jury. Courts should reject insurer efforts to have the issue decided as a matter of law on summary judgment.

Insurer Summary Judgment Motions Most Often Should Be Denied

Before an insurer can prevail on a motion for summary judgment regarding late notice, it first must prove that, as a matter of law, notice was “late.” This is not always easy to do.

Whether an insured, in fact, had notice of a potentially covered matter and provided notice to its insurer[s] in a “timely” manner often requires a number of factual considerations. For example, did the right person within the insured organization have sufficient knowledge of an event to trigger notice obligations? Depending upon the notice language in the policy or policies at issue, did the insured wait too long to provide notice to the insurer? Was the information provided by the insured sufficient to satisfy the notice duties? Each of these considerations and potentially others involve facts. For this reason, a number of courts have concluded that the issue of late notice cannot be resolved on summary judgment.

For example, in Cessna Aircraft Co. v. Hartford Accident & Indemnity Co. , 900 F. Supp. 1489 (D. Kan. 1995), the court addressed the issue of whether notice was timely. In that action, Hartford filed a late notice motion for summary judgment in an environmental coverage case, arguing that it did not receive notice for several years after Cessna [the insured] learned that its facility was a potential source of groundwater contamination. In denying Hartford's motion, the district court found that even though “a substantial amount of evidence [existed] to indicate that Cessna permitted an unreasonable amount of time to pass” before notifying its insurers, the evidence fell shy of warranting summary judgment as a matter of law:

There are factual disputes as to the full extent of Cessna's knowledge of the nature, causes, and, particularly the extent of the pollution at the various sites that counsel against a finding that Cessna acted unreasonably as a matter of law. Id. at 1515.

Similarly, in MFA Mutual Insurance Co. v. Clark , 79 F.R.D. 227 (E.D. Tenn. 1978), the court addressed a late notice summary judgment motion. In that action, the court denied the motion because, among other reasons:

[t]he time at which the insured(s) became aware, or should have become aware, of facts which would suggest to a reasonably prudent person that the event for which coverage is sought might reasonably be expected to produce a claim against the plaintiff under the policy is a factual issue which cannot be resolved on a motion for summary judgment. Id. at 228.

Thus, in many instances, courts presented with insurer requests that the court resolve the notice issue as a matter of law may not even reach the issue of “actual” and “substantial” prejudice. This is so because the insurer cannot overcome the first hurdle to obtaining summary judgment ' that notice was in fact, “late.” If, however, the “timing” issue can be resolved via summary judgment, an insurer still should have difficulty obtaining summary judgment on its late notice defense.

In many jurisdictions, an insured seeking occurrence-based CGL coverage cannot be deprived of the benefits of its policy as a result of the insured's noncompliance with policy terms, including notice, unless the insurer demonstrates that it suffered both “actual” and “substantial” prejudice. See, e.g., Canron, Inc. v. Fed. Ins. Co., 82 Wash. App. 480, 485, 918 P.2d 937 (Ct. App. 1996); Campbell v. Allstate Ins. Co., 60 Cal. 2d 303, 305-06, 32 Cal. Rptr. 827 (1963); Cessna, 900 F. Supp. at 1515; Best v. W. Am. Ins. Co., 270 S.W.3d 398, 405 (Ky. Ct. App. 2008). Furthermore, in most jurisdictions, “[t]he burden of proof is on the insurer.” See, e.g., Canron, 82 Wash. App. at 485; Best, 270 S.W. 3d at 405. As the court stated in Silicon Valley Bank v. New Hampshire Insurance Co.:

Actual and substantial prejudice is “not shown simply by displaying end results.” Rather, “the probability that such results could or would have been avoided absent the claimed default or error must also be explored.” The burden of showing that a breach of the clause resulted in prejudice is on the insurer. 203 F. Supp. 2d 1152, 1159 (C.D. Cal. 2002) (citation omitted).

In moving for summary judgment regarding “prejudice,” insurers seek to convince courts to ignore the extremely high standard that insurers must meet before any such “late notice” can provide a basis to avoid coverage (on summary judgment). However, the cases are legion that hold that whether an insurer has suffered substantial prejudice most frequently involves questions of fact. As a result, even though they continue to try, insurers are hard-pressed to prevail on a late notice defense via summary judgment:

• Belz v. Clarendon America Insurance Co. , 158 Cal. App. 4th 615, 65 Cal. Rptr. 3d 864 (2008): Trial court erred in granting summary judgment in favor of insurer even though the insurer was not notified of lawsuit until after entry of insured's default. According to the court, the insurer “did not make a showing that it suffered actual, substantial prejudice.”
• Cessna, 900 F. Supp. at 1516: Late notice motion denied even though the insured did not provide notice for several years after it learned that its facility was a potential source of groundwater contamination.
• Goodstein v. Continental Casualty Co. , 509 F.3d 1042 (9th Cir. 2007): The court found no prejudice as a matter of law despite the fact that the insured delayed 12 years before giving notice, during which time the contaminated property was sold by the insured.
• Morales v. National Grange Mutual Insurance Co. , 176 N.J. Super. 347, 357, 423 A.2d 325 (1980): The insurer claimed prejudice “as a matter of law” because it did not receive notice until after judgment was entered against insured. The insurer claimed prejudice because it was denied the opportunity to investigate the accident, the reason for the driver's leaving the scene of accident, and the possibility that the plaintiff was totally or partially responsible for accident. The court disagreed, concluding that the “[d]efendant should be considered to have been appreciably prejudiced only upon a showing that a prompt investigation would have yielded material evidence which is no longer obtainable. To avoid liability, the carrier must also show the likelihood that a meritorious defense would have existed.”
• Mutual of Enumclaw Insurance Co. v. USF Insurance Co. , 164 Wash. 2d 411, 426-27, 191 P.3d 866 (2008) (en banc): Merely stating the amount of time that has passed between the date an insured was served with a complaint and the date that the insurer was notified of the complaint is not sufficient to establish prejudice ' “[e]ven where an insured breaches a 'prompt notice' provision of an insurance policy, the insurer is not relieved of its duties under the insurance contract unless it can show that the late notice caused it actual and substantial prejudice. ' Whether or not late notice prejudiced an insurer is a question of fact, and it will seldom be decided as a matter of law.”
• Pulse v. Northwest Farm Bureau Insurance Co. , 18 Wash. App. 59, 566 P.2d 577 (1977): Motion denied even though the insurer was not notified of the claim until after judgment was entered in the underlying action.
• Weaver Brothers v. Chappel , 684 P.2d 123 (Alaska 1984): The insurer's motion was denied even though the insured did not provide notice until more than six years after the accident. As a result of alleged late notice, the insurer argued that it was prejudiced because it: 1) lost opportunities to negotiate and settle, 2) lost opportunities to investigate, and 3) lost opportunities to defend. Even so, the court concluded that the insurer did not offer evidence to support its prejudice claim.

These cases make clear how extreme the circumstances must be for an insurer to prevail, as a matter of law, on a late notice defense. In fact, the cases where an insurer has succeeded on summary judgment appear to require an insurer to prove that information critical to the insurer's ability to: 1) successfully defend against the litigation, or 2) address coverage issues, has been irrevocably lost.

• Eastern Products Corp. v. Continental Casualty Co. , 58 Mass. App. Ct. 16, 787 N.E.2d 1089 (2003): The insureds waited seven years before notifying the insurer of a claim arising out of alleged contamination of real property. The court affirmed summary judgment in favor of the insurer on the grounds that during the time period before it was given notice, the president of the insured (the person likely to have the most knowledge of the cause for contamination at the site), died, and the company destroyed all of its correspondence and business records relating to causes of contamination at the property.
• Board of Education v. TIG Insurance Co. , 378 Ill. App. 3d 191, 196, 881 N.E.2d 957 (2007): The insured delayed for eight years in providing notice relating to asbestos claim. During that time, the insured spent millions of dollars removing all asbestos from its schools. In affirming summary judgment granted in favor of the insurer, the court was persuaded by the insurer's claim that “by the time notice was given, it was impossible for [the insurer] to determine its obligation under the policies, for much of the expenditures had occurred years earlier.”
• Jackson v. State Farm Mutual Automobile Insurance Co. , 880 So. 2d 336 (Miss. 2004): The court held that summary judgment in favor of the insurer was appropriate where notice was not given until five years after the accident, and the key witness to the accident could not remember important facts and details regarding the claim.
• Key Tronic Corp. v. St. Paul Fire & Marine Insurance Co. , 134 Wash. App. 303, 139 P.3d 383 (2006): The insured manufactured and packaged household mop products for Clorox. Products were damaged through the insured's negligence. The insured paid for repackaged products at its own expense and filed a claim with its insurer for loss, including lost income. The court granted summary judgment based on its conclusion that the insurer was denied the ability to examine the alleged damaged items because the products were destroyed prior to the time the insurer received notice of claim.

Conclusion

Despite the uphill battle they face, insurers still attempt to convince courts that they can decide the issues of late notice and prejudice as a matter of law. Such motions are most often denied because of triable issues of fact as to whether notice was timely and whether the insurer actually suffered substantial prejudice. Courts should reject efforts by insurers to dilute the standard by arguing that whether the insurer suffered substantial prejudice as a result of late notice can be decided in its favor without a jury's considering the issue.

Linda D. Kornfeld, a member of this newsletter's Board of Editors, is the managing partner of Dickstein Shapiro LLP's Los Angeles office. Cameron H. Faber is counsel in Dickstein Shapiro's Los Angeles office. They represent insureds in complex coverage matters. Kornfeld may be reached at 310-772-8306, and her e-mail address is [email protected]. Faber may be reached at 310-772-8323, and his e-mail address is [email protected].