MT Court: Companies Must Show Prejudice to Avoid Coverage Based on Late Notice

In two recent decisions, the Montana Supreme Court held that an insurance company seeking to deny coverage on the grounds of a policyholder's untimely notice must establish that it was prejudiced by the timing of notice. Atlantic Cas. Ins. Co. v. Greytak, ___ P.3d ___, 2015 WL 3444507, at *2-*4 (Mont. May 29, 2015); Estate of Gleason v. Cent. United Life Ins. Co. , __ P.3d __, 2014 WL 8863145, at *4-*7 (Mont. May 20, 2015). In reaching these results, the court held that Montana's broad anti-forfeiture statutes support this notice-prejudice rule. The court's reliance on these statutes ' which are similar to statutes found in several other states ' may support policyholders in the future who are seeking to avoid forfeiture of insurance coverage not only for allegedly late notice, but also for alleged breaches of other policy conditions.

Atlantic Cas. Ins. Co. v. Greytak

In Greytak, the Montana Supreme Court accepted a certified question from the United States Court of Appeals for the Ninth Circuit:

Whether, in a case involving a claim of damages by a third party, an insurer who does not receive timely notice according to the terms of an insurance policy must demonstrate prejudice from the lack of notice to avoid defense and indemnification of the insured.

2015 WL 3444507, at *1.

In this case, the underlying claimant in a construction defect action was pursuing the policyholder's coverage under an arrangement it had made with the policyholder. Id. The federal district court granted summary judgment to the insurance company on the grounds that the insurance company did not receive timely notice of the claimant's underlying claims. Id. at *2. In doing so, the district court held “that Montana law did not require [the insuranc company] to demonstrate that it was prejudiced by [the policyholder's] failure to provide timely notice of [the claimant's] counterclaims.” Id. On appeal, the Ninth Circuit certified to the Montana Supreme Court the question of whether Montana law required a showing of prejudice for a late notice defense to succeed.

In holding that Montana law requires a showing of prejudice, the Montana Supreme Court surveyed its prior case law on notice defenses, concluding that “this Court has adopted the notice-prejudice rule in several insurance dispute contexts, most recently in Estate of Gleason .” Id. at *3 (internal citation omitted). The court also noted that “[a] majority of the states have adopted the notice-prejudice rule in insurance coverage disputes.” Id. at *3.

In discussing its prior notice decisions, the Greytak court also cited MCA ' 28-1-408. Id. at *3. This statute provides that “[a] condition involving a forfeiture must be strictly interpreted against the party for whose benefit it is created.” MCA ' 28-1-408. Relying on this statute and its prior case law as establishing a Montana public policy of construing insurance policy exclusions narrowly to promote the “fundamental protective purpose of insurance,” the court adopted the notice-prejudice rule:

An insured's technical or illusory failure to comply with obligations of a policy will not automatically terminate coverage, and an insurer who does not receive timely notice required by the terms of an insurance policy must demonstrate prejudice from that lack of notice in order to avoid the obligation to provide defense and indemnification of the insured. ' The purpose of the notice-prejudice rule is to protect the insured or those claiming through the insured from a loss of insurance coverage over a technical violation of the policy when that violation is of no prejudicial consequence to the insurer. ' At the same time, a policy may include notice requirements, and an insured who fails to provide required notice to the insurer does so at his or her peril. If the insurer is able to show prejudice arising from the lack of notice, the insured may not be covered by the policy

Greytak at *4.

Estate of Gleason v. Cent. United Life Ins. Co.

The result in Greytak was anticipated by the decision in Gleason, handed down nine days earlier. In Gleason, the policyholder had purchased a cancer benefit insurance policy in 1990, but had not provided notice or made a claim under the policy while undergoing treatment for cancer from 2002 until her death in 2010. 2014 WL 8863145, at *1. After her death, the representatives of her estate submitted a notice of claim to the insurance company. Id. The insurance company, relying on a provision in the policy requiring claims to be filed within one year plus 90 days of the date of claim, denied coverage for those costs incurred more than one year and 90 days before this first submission of a claim. Id.

In subsequent litigation between the insurance company and the representatives, the insurance company admitted that it had suffered no prejudice from the delay in notice. Id. The trial court applied the notice-prejudice rule and held that the absence of prejudice defeated the insurance company's notice defense for the untimely filed claims. Id. The insurance company appealed the holding that it was required to show prejudice to succeed on its notice defense. Id. at *3.

As did the Greytak court, the Gleason court surveyed the prior Montana case law on the late notice defense, concluding that: “[t]hose cases demonstrate our longstanding inclination to require an insurer to establish prejudice by late notice of a claim before we will enforce the coinciding exclusion.” Id. at *4. In addition to case law, the Gleason court also quoted and relied on Montana's anti-forfeiture statutes as supporting the notice-prejudice rule:

Additionally, the notice-prejudice rule accords with Montana' s established anti-forfeiture laws. Section 28-1-408, MCA, provides that a contract provision involving a forfeiture 'must be strictly interpreted against the party for whose benefit it is created.' Section 28-1-104, MCA, provides that a party in danger of forfeiting the benefits of a contract due to a failure to comply with a provision in the contract 'may be relieved from the obligation upon making full compensation to the other party, except in case of a grossly negligent, willful, or fraudulent breach of duty.'

Id. at *5 (quoting MCA ” 28-1-408 and 28-1-104).

The Gleason court identified these statutes as one of the key reasons for adopting the notice-prejudice rule:

Our willingness to adopt the notice-prejudice rule stems not only from public policy concerns, but from anti-forfeiture protection principles codified by the Montana Legislature, and from equitable principles established in contract law. In adopting the rule, we join a vast majority of states that have done the same.

Id. at *7.

The court described in detail how MCA ' 28-1-104 in particular calls for the same result as the notice-prejudice rule:

The statute prevents forfeiture where the party failing to comply with a contract provision can fully compensate the other party for any injury caused by the failure. It follows that if the aggrieved party does not suffer injury, no compensation is required to avoid forfeiture except in the case of a grossly negligent, willful, or fraudulent breach of duty, which is not alleged here.

Thus, in situations where the aggrieved party is not injured by the other party's failure to comply with a notice provision, the protections provided by the notice-prejudice rule mirror those protections enumerated in our anti-forfeiture statutes. Under the statutes, a party who fails to comply with a time-limit provision may avoid forfeiture without compensating the other party unless that other party is injured by the failure. Likewise, under the notice-prejudice rule, an insured who fails to comply with a notice provision may avoid having coverage defeated unless the insurer is prejudiced by the failure.

Id . at *5.

Indeed, the court described the notice-prejudice rule as simply an application of the anti-forfeiture statute to a particular fact situation:

In a practical sense, the notice-prejudice rule could be viewed as an application of the anti-forfeiture statute to situations where the potential injury to the aggrieved party ' prejudice ' cannot be cured by compensation, and thus forfeiture may be avoided only in the absence of injury.

Id.

Conclusion

The Montana Supreme Court's express adoption of the notice-prejudice rule provides significant protection to policyholders in itself. The court's reliance on, and broad reading of, the anti-forfeiture statutes as calling for a showing of prejudice before the breach of a notice condition can defeat coverage also may be important for disputes over other insurance policy conditions as well. The language of the anti-forfeiture statutes is not limited to notice provisions; instead it applies broadly to “the terms of an obligation,” which can arise from “the contract of the parties.” MCA ” 28-1-104; 28-1-102(1). Indeed, the Gleason court expressly described the notice-prejudice rule as the application of MCA ' 28-1-104 to one particular situation. See 2014 WL 8863145. As a result, the Gleason court's analysis of the protections provided by the anti-forfeiture statutes may provide a basis for policyholders to invoke those protections when insurance companies deny coverage based on alleged violations of insurance policy conditions other than the notice provision.

For example, a Montana federal court has predicted that Montana law does not require any showing of prejudice for an insurance company's defense based on a policyholder's violation of a voluntary payment provision. See Mont. Petroleum Tank Release Comp. Bd. v. Am. States Ins. Co., No. ADV-2003-88, 2007 Mont. Dist. LEXIS 42, *10-*12 (D. Mont. Feb. 22, 2007). In that case, the Montana Petroleum Tank Release Board sought recovery as a subrogee under the policyholder's liability insurance policies, after paying the policyholder's liability for removal of leaking underground tanks. Id. at *1-*2. These costs had been incurred prior to any consultation with the insurance companies, and the insurance companies argued that coverage was barred under policy conditions stating that: “[n]o insureds will, except at their cost, voluntarily make a payment, assume any obligation, or incur any expense, other than first aid, without our consent.” Id. at *2, *11.

The federal court stated that it was “unaware of any Montana decision that requires a showing of prejudice to avoid liability under the voluntary payment provision,” and held that no such showing was required. Id. at *12. This result is difficult to square with the Gleason court's broad reading of the Montana anti-forfeiture statutes as requiring a showing of prejudice for the breach of a contractual obligation, which calls into question the accuracy of the federal court's prediction of Montana law on this issue.

Next month, we discuss the Gleason ruling's influence in other states.

Michael T. Sharke, a member of this newsletter's Board of Editors, is a partner with Perkins Coie LLP. The opinions expressed in this article are those of the author and not necessarily those of the firm or any of its clients.

In two recent decisions, the Montana Supreme Court held that an insurance company seeking to deny coverage on the grounds of a policyholder's untimely notice must establish that it was prejudiced by the timing of notice. Atlantic Cas. Ins. Co. v. Greytak , ___ P.3d ___, 2015 WL 3444507, at *2-*4 (Mont. May 29, 2015); Estate of Gleason v. Cent. United Life Ins. Co. , __ P.3d __, 2014 WL 8863145, at *4-*7 (Mont. May 20, 2015). In reaching these results, the court held that Montana's broad anti-forfeiture statutes support this notice-prejudice rule. The court's reliance on these statutes ' which are similar to statutes found in several other states ' may support policyholders in the future who are seeking to avoid forfeiture of insurance coverage not only for allegedly late notice, but also for alleged breaches of other policy conditions.

Atlantic Cas. Ins. Co. v. Greytak

In Greytak, the Montana Supreme Court accepted a certified question from the United States Court of Appeals for the Ninth Circuit:

Whether, in a case involving a claim of damages by a third party, an insurer who does not receive timely notice according to the terms of an insurance policy must demonstrate prejudice from the lack of notice to avoid defense and indemnification of the insured.

2015 WL 3444507, at *1.

In this case, the underlying claimant in a construction defect action was pursuing the policyholder's coverage under an arrangement it had made with the policyholder. Id. The federal district court granted summary judgment to the insurance company on the grounds that the insurance company did not receive timely notice of the claimant's underlying claims. Id. at *2. In doing so, the district court held “that Montana law did not require [the insuranc company] to demonstrate that it was prejudiced by [the policyholder's] failure to provide timely notice of [the claimant's] counterclaims.” Id. On appeal, the Ninth Circuit certified to the Montana Supreme Court the question of whether Montana law required a showing of prejudice for a late notice defense to succeed.

In holding that Montana law requires a showing of prejudice, the Montana Supreme Court surveyed its prior case law on notice defenses, concluding that “this Court has adopted the notice-prejudice rule in several insurance dispute contexts, most recently in Estate of Gleason .” Id. at *3 (internal citation omitted). The court also noted that “[a] majority of the states have adopted the notice-prejudice rule in insurance coverage disputes.” Id. at *3.

In discussing its prior notice decisions, the Greytak court also cited MCA ' 28-1-408. Id. at *3. This statute provides that “[a] condition involving a forfeiture must be strictly interpreted against the party for whose benefit it is created.” MCA ' 28-1-408. Relying on this statute and its prior case law as establishing a Montana public policy of construing insurance policy exclusions narrowly to promote the “fundamental protective purpose of insurance,” the court adopted the notice-prejudice rule:

An insured's technical or illusory failure to comply with obligations of a policy will not automatically terminate coverage, and an insurer who does not receive timely notice required by the terms of an insurance policy must demonstrate prejudice from that lack of notice in order to avoid the obligation to provide defense and indemnification of the insured. ' The purpose of the notice-prejudice rule is to protect the insured or those claiming through the insured from a loss of insurance coverage over a technical violation of the policy when that violation is of no prejudicial consequence to the insurer. ' At the same time, a policy may include notice requirements, and an insured who fails to provide required notice to the insurer does so at his or her peril. If the insurer is able to show prejudice arising from the lack of notice, the insured may not be covered by the policy

Greytak at *4.

Estate of Gleason v. Cent. United Life Ins. Co.

The result in Greytak was anticipated by the decision in Gleason, handed down nine days earlier. In Gleason, the policyholder had purchased a cancer benefit insurance policy in 1990, but had not provided notice or made a claim under the policy while undergoing treatment for cancer from 2002 until her death in 2010. 2014 WL 8863145, at *1. After her death, the representatives of her estate submitted a notice of claim to the insurance company. Id. The insurance company, relying on a provision in the policy requiring claims to be filed within one year plus 90 days of the date of claim, denied coverage for those costs incurred more than one year and 90 days before this first submission of a claim. Id.

In subsequent litigation between the insurance company and the representatives, the insurance company admitted that it had suffered no prejudice from the delay in notice. Id. The trial court applied the notice-prejudice rule and held that the absence of prejudice defeated the insurance company's notice defense for the untimely filed claims. Id. The insurance company appealed the holding that it was required to show prejudice to succeed on its notice defense. Id. at *3.

As did the Greytak court, the Gleason court surveyed the prior Montana case law on the late notice defense, concluding that: “[t]hose cases demonstrate our longstanding inclination to require an insurer to establish prejudice by late notice of a claim before we will enforce the coinciding exclusion.” Id. at *4. In addition to case law, the Gleason court also quoted and relied on Montana's anti-forfeiture statutes as supporting the notice-prejudice rule:

Additionally, the notice-prejudice rule accords with Montana' s established anti-forfeiture laws. Section 28-1-408, MCA, provides that a contract provision involving a forfeiture 'must be strictly interpreted against the party for whose benefit it is created.' Section 28-1-104, MCA, provides that a party in danger of forfeiting the benefits of a contract due to a failure to comply with a provision in the contract 'may be relieved from the obligation upon making full compensation to the other party, except in case of a grossly negligent, willful, or fraudulent breach of duty.'

Id. at *5 (quoting MCA ” 28-1-408 and 28-1-104).

The Gleason court identified these statutes as one of the key reasons for adopting the notice-prejudice rule:

Our willingness to adopt the notice-prejudice rule stems not only from public policy concerns, but from anti-forfeiture protection principles codified by the Montana Legislature, and from equitable principles established in contract law. In adopting the rule, we join a vast majority of states that have done the same.

Id. at *7.

The court described in detail how MCA ' 28-1-104 in particular calls for the same result as the notice-prejudice rule:

The statute prevents forfeiture where the party failing to comply with a contract provision can fully compensate the other party for any injury caused by the failure. It follows that if the aggrieved party does not suffer injury, no compensation is required to avoid forfeiture except in the case of a grossly negligent, willful, or fraudulent breach of duty, which is not alleged here.

Thus, in situations where the aggrieved party is not injured by the other party's failure to comply with a notice provision, the protections provided by the notice-prejudice rule mirror those protections enumerated in our anti-forfeiture statutes. Under the statutes, a party who fails to comply with a time-limit provision may avoid forfeiture without compensating the other party unless that other party is injured by the failure. Likewise, under the notice-prejudice rule, an insured who fails to comply with a notice provision may avoid having coverage defeated unless the insurer is prejudiced by the failure.

Id . at *5.

Indeed, the court described the notice-prejudice rule as simply an application of the anti-forfeiture statute to a particular fact situation:

In a practical sense, the notice-prejudice rule could be viewed as an application of the anti-forfeiture statute to situations where the potential injury to the aggrieved party ' prejudice ' cannot be cured by compensation, and thus forfeiture may be avoided only in the absence of injury.

Id.

Conclusion

The Montana Supreme Court's express adoption of the notice-prejudice rule provides significant protection to policyholders in itself. The court's reliance on, and broad reading of, the anti-forfeiture statutes as calling for a showing of prejudice before the breach of a notice condition can defeat coverage also may be important for disputes over other insurance policy conditions as well. The language of the anti-forfeiture statutes is not limited to notice provisions; instead it applies broadly to “the terms of an obligation,” which can arise from “the contract of the parties.” MCA ” 28-1-104; 28-1-102(1). Indeed, the Gleason court expressly described the notice-prejudice rule as the application of MCA ' 28-1-104 to one particular situation. See 2014 WL 8863145. As a result, the Gleason court's analysis of the protections provided by the anti-forfeiture statutes may provide a basis for policyholders to invoke those protections when insurance companies deny coverage based on alleged violations of insurance policy conditions other than the notice provision.

For example, a Montana federal court has predicted that Montana law does not require any showing of prejudice for an insurance company's defense based on a policyholder's violation of a voluntary payment provision. See Mont. Petroleum Tank Release Comp. Bd. v. Am. States Ins. Co., No. ADV-2003-88, 2007 Mont. Dist. LEXIS 42, *10-*12 (D. Mont. Feb. 22, 2007). In that case, the Montana Petroleum Tank Release Board sought recovery as a subrogee under the policyholder's liability insurance policies, after paying the policyholder's liability for removal of leaking underground tanks. Id. at *1-*2. These costs had been incurred prior to any consultation with the insurance companies, and the insurance companies argued that coverage was barred under policy conditions stating that: “[n]o insureds will, except at their cost, voluntarily make a payment, assume any obligation, or incur any expense, other than first aid, without our consent.” Id. at *2, *11.

The federal court stated that it was “unaware of any Montana decision that requires a showing of prejudice to avoid liability under the voluntary payment provision,” and held that no such showing was required. Id. at *12. This result is difficult to square with the Gleason court's broad reading of the Montana anti-forfeiture statutes as requiring a showing of prejudice for the breach of a contractual obligation, which calls into question the accuracy of the federal court's prediction of Montana law on this issue.

Next month, we discuss the Gleason ruling's influence in other states.

Michael T. Sharke, a member of this newsletter's Board of Editors, is a partner with Perkins Coie LLP. The opinions expressed in this article are those of the author and not necessarily those of the firm or any of its clients.