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Insurance law generally imposes on a policyholder the duty to
give timely notice of claims to its insurance company. Sometimes,
because of forgetfulness, ignorance, neglect, or a number of other
reasons, companies fail to immediately give notice of loss and
potential losses to insurers. In those circumstances, insurers
often raise the defense of "late notice." As a result, a
number of courts have devised a "notice prejudice rule"
which limits the use of the late notice defense to situations when
the delayed notice actually caused prejudice to the insurer.
In St. Paul Mercury Insurance Company v. American Bank
Holdings, Inc., the Fourth Circuit, applying Maryland law,
addressed the question of what qualifies as "prejudice."
In that case, American Bank Holdings, Inc., did not provide notice
to its insurer until after a $98.5 million default judgment had
been entered against it in the underlying claim. St. Paul raised
the defense of late notice, argued that it was prejudiced, and
denied coverage.
Although the bank was eventually successful at overturning
the $98.5 million default judgment, it still spent $1.8 million
resisting collection on the judgment and having the judgment set
aside. All of this was because the underlying complaint had been
served on the bank's CFO, who had left employment at the bank.
Another officer later found the complaint and transmitted it to an
outside lawyer, who claims he never received the complaint. This
procedure was described by the district court as "a variety of
screw-ups" such that "significant suit papers that should
have gotten immediate attention didn't." Writing for a
unanimous panel, Judge Niemeyer of the Fourth Circuit explained
that "corporate screw-ups" are not a basis to excuse the
failure to give timely notice to an insurer, if the corporation
expects to be indemnified for the defense of the claim.
"Actual prejudice" was shown in this case by the
insurer, because the bank's failure to give timely notice
prevented the insurer from selected counsel, consulting with
counsel on the defense of the claim, prevented the timely raising
of a personal jurisdiction defense, and prevented the possibility
of settlement discussions with the underlying plaintiff either
prior to the entry of default judgment or prior to the expenditure
of $1.8 million spent to resist and set aside the default judgment.
These were all rights which the insurer has under the insurance
contract, and all rights which it was not able to exercise because
of the bank's failure to give timely notice. As a result,
actual prejudice was shown and St. Paul's declaratory judgment
was granted on the basis that it had no duty to pay for American
Bank's defense costs.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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