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

Last month, we discussed the fact that 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 seeking to avoid forfeiture of insurance coverage not only for allegedly late notice, but also for alleged breaches of other policy conditions. We conclude this discussion herein with a look at the the possible influence of the Gleason ruling in other states, most particularly California and Georgia.

Other States

The Gleason court's reading of the anti-forfeiture statutes also may have an influence beyond Montana. Both California and North Dakota have statutes substantially similar to MCA 28-1-104. See Cal. Civ. Code ' 3275; NDCC ' 32-01-12. Each of these states already has adopted the notice-prejudice rule. See, e.g., Clemmer v. Hartford Ins. Co., 587 P.2d 1098, 1106-07 (Cal. 1978); Finstad v. Steiger Tractor, Inc., 301 N.W.2d 392, 398 (N.D. 1981). Some decisions in these states, however, have applied a no-prejudice rule to the alleged breach of other conditions in insurance contracts, without considering the effect of the anti-forfeiture statutes.

California

For example, courts applying California law have held that a condition in an excess policy requiring payment of the underlying limits results in forfeiture of coverage when the policyholder settles with the primary for less than the primary's full limits, even if the policyholder is willing to make up the difference between the primary settlement and the remainder of the primary limits. See Qualcomm, Inc. v. Certain Underwriters at Lloyd's, London, 73 Cal. Rptr. 3d 770, 785 (Cal. Ct. App. 2008); Intel Corp. v. Am. Guarantee & Liab. Co., 51 A.3d 442, 447-52 (Del. 2012) (applying California law). These cases did not address California's version of the anti-forfeiture statute, which should have led to a different result.

If a loss exceeds the primary limits and the policyholder makes up the difference between the settlement and the remainder of the primary limits, there is no prejudice to the excess insurance company. As a result, the anti-forfeiture statute's language barring forfeiture when there is no uncompensated loss should apply to avoid forfeiture of the excess coverage. See Michael T. Sharkey, “Settlements with Underlying Layers Satisfy Exhaustion Condition in Excess Policies,” 2013 LexisNexis Emerging Issues 7108 (Nov. 2013) (discussing Cal. Civ. Code ' 3275 and its implications for the rule of Qualcomm and Intel).

Georgia

Another example is Georgia, one of the few states that still applies the no-prejudice rule to notice defenses under many types of insurance policies. See, e.g., State Farm Fire & Cas. Co. v. LeBlanc, 494 Fed. Appx. 17, 21-22 (11th Cir. 2012) (applying Georgia law). Georgia also has its own anti-forfeiture statutes. While it does not have a statute echoing MCA 28-1-104, it has statutes similar to MCA ' 28-1-408, expressing disfavor of forfeiture: “Where the rules of construction will allow, equity seeks always to construe conditions subsequent into covenants and to relieve against forfeitures.” Ga. Code Ann. ' 23-1-23. “Time is generally not of the essence of a contract; but, by express stipulation or reasonable construction, it may become so.” Ga. Code Ann. ' 13-2-2(9). Statutes such as these, directing courts to avoid construing contracts wherever possible to avoid reading provisions as requiring forfeiture, should provide policyholders with ammunition to argue that the language of many standard-form insurance policies do not actually make the notice clause into a condition precedent or require forfeiture of coverage for its breach. See, e.g. , Michael T. Sharkey, “Duties in Event of Occurrence: Many Insurance Policies Do Not Prport to Make Notice a Condition Precedent,” Insurance Cov. Law Bulletin (Feb. 2005), http://bit.ly/1M6Sttg.

Conclusion

As described last month and above, in both Greytak and Gleason, the Montana Supreme Court concluded from its survey of its prior decisions on the notice defense that its own case law supported the notice-prejudice rule. Rather than simply relying on these prior decisions, however, the court also analyzed Montana's anti-forfeiture statutes, interpreting them to support the protections of the notice-prejudice rule. In doing so, the court recognized and endorsed the application of Montana's broad statutory directive to avoid forfeitures of contractual benefits when the other party has not suffered uncompensated harm.

Michael T. Sharkey , a member of this newsletter's Board of Editors, is a partner with Perkins Coie LLP, resident in the firm's Washington, DC, office. He represents policyholders in insurance coverage actions nationwide, including NorthWestern Energy, which filed an amicus brief in the Greytak action described in Part One of this article. He can be reached at [email protected]. The opinions expressed in this article are those of the author and not necessarily those of the firm or any of his clients.

Last month, we discussed the fact that 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 seeking to avoid forfeiture of insurance coverage not only for allegedly late notice, but also for alleged breaches of other policy conditions. We conclude this discussion herein with a look at the the possible influence of the Gleason ruling in other states, most particularly California and Georgia.

Other States

The Gleason court's reading of the anti-forfeiture statutes also may have an influence beyond Montana. Both California and North Dakota have statutes substantially similar to MCA 28-1-104. See Cal. Civ. Code ' 3275; NDCC ' 32-01-12. Each of these states already has adopted the notice-prejudice rule. See, e.g., Clemmer v. Hartford Ins. Co. , 587 P.2d 1098, 1106-07 (Cal. 1978); Finstad v. Steiger Tractor, Inc. , 301 N.W.2d 392, 398 (N.D. 1981). Some decisions in these states, however, have applied a no-prejudice rule to the alleged breach of other conditions in insurance contracts, without considering the effect of the anti-forfeiture statutes.

California

For example, courts applying California law have held that a condition in an excess policy requiring payment of the underlying limits results in forfeiture of coverage when the policyholder settles with the primary for less than the primary's full limits, even if the policyholder is willing to make up the difference between the primary settlement and the remainder of the primary limits. See Qualcomm, Inc. v. Certain Underwriters at Lloyd's, London , 73 Cal. Rptr. 3d 770, 785 (Cal. Ct. App. 2008); Intel Corp. v. Am. Guarantee & Liab. Co. , 51 A.3d 442, 447-52 (Del. 2012) (applying California law). These cases did not address California's version of the anti-forfeiture statute, which should have led to a different result.

If a loss exceeds the primary limits and the policyholder makes up the difference between the settlement and the remainder of the primary limits, there is no prejudice to the excess insurance company. As a result, the anti-forfeiture statute's language barring forfeiture when there is no uncompensated loss should apply to avoid forfeiture of the excess coverage. See Michael T. Sharkey, “Settlements with Underlying Layers Satisfy Exhaustion Condition in Excess Policies,” 2013 LexisNexis Emerging Issues 7108 (Nov. 2013) (discussing Cal. Civ. Code ' 3275 and its implications for the rule of Qualcomm and Intel).

Georgia

Another example is Georgia, one of the few states that still applies the no-prejudice rule to notice defenses under many types of insurance policies. See, e.g., State Farm Fire & Cas. Co. v. LeBlanc , 494 Fed. Appx. 17, 21-22 (11th Cir. 2012) (applying Georgia law). Georgia also has its own anti-forfeiture statutes. While it does not have a statute echoing MCA 28-1-104, it has statutes similar to MCA ' 28-1-408, expressing disfavor of forfeiture: “Where the rules of construction will allow, equity seeks always to construe conditions subsequent into covenants and to relieve against forfeitures.” Ga. Code Ann. ' 23-1-23. “Time is generally not of the essence of a contract; but, by express stipulation or reasonable construction, it may become so.” Ga. Code Ann. ' 13-2-2(9). Statutes such as these, directing courts to avoid construing contracts wherever possible to avoid reading provisions as requiring forfeiture, should provide policyholders with ammunition to argue that the language of many standard-form insurance policies do not actually make the notice clause into a condition precedent or require forfeiture of coverage for its breach. See, e.g. , Michael T. Sharkey, “Duties in Event of Occurrence: Many Insurance Policies Do Not Prport to Make Notice a Condition Precedent,” Insurance Cov. Law Bulletin (Feb. 2005), http://bit.ly/1M6Sttg.

Conclusion

As described last month and above, in both Greytak and Gleason, the Montana Supreme Court concluded from its survey of its prior decisions on the notice defense that its own case law supported the notice-prejudice rule. Rather than simply relying on these prior decisions, however, the court also analyzed Montana's anti-forfeiture statutes, interpreting them to support the protections of the notice-prejudice rule. In doing so, the court recognized and endorsed the application of Montana's broad statutory directive to avoid forfeitures of contractual benefits when the other party has not suffered uncompensated harm.

Michael T. Sharkey , a member of this newsletter's Board of Editors, is a partner with Perkins Coie LLP, resident in the firm's Washington, DC, office. He represents policyholders in insurance coverage actions nationwide, including NorthWestern Energy, which filed an amicus brief in the Greytak action described in Part One of this article. He can be reached at [email protected]. The opinions expressed in this article are those of the author and not necessarily those of the firm or any of his clients.