Montana Joins Majority of Courts Holding That Insurers Must Establish Prejudice to Disclaim Coverage Based on an Insured’s Late Notice
Joining a majority of states that have addressed the issue, the Montana Supreme Court recently held that “an insurer who does not receive timely notice required by the terms of an insurance policy must demonstrate prejudice from the lack of notice in order to avoid the obligation to provide defense and indemnification of the insured.” The case, Atlantic Casualty Insurance Co. v. Greytak, involved a policyholder that provided notice to its insurer over a year after receiving a letter notifying the policyholder of potential claims against it.
A federal district court found in favor of the insurer, concluding that timely notice was a condition precedent to coverage and, thus, the insurer was not required to show that it was prejudiced by the insured’s untimely notice. On appeal, the Ninth Circuit certified a question to the Montana Supreme Court, asking whether Montana law applies the “notice-prejudice” rule in a case involving a claim of damages by a third party, and, specifically, whether a policy provision requiring the insured to provide notice “as soon as practicable” can be invoked to bar coverage without consideration of whether the insurer was prejudiced by late notice.
The Montana Supreme Court found in the affirmative, holding that the notice-prejudice rule requires the insurer to show that it was prejudiced by the insured’s late notice, whether the claim arose from the policyholder, as the Montana high court had previously held in another case, or the claim arose from a third party claiming damages, as was the case in Greytak. The court noted that a majority of the states applied the notice-prejudice rule. It also cited public policy reasons for its holding, reasoning that “[t]he public policy of Montana is to narrowly and strictly construe insurance coverage exclusions in order to promote the ‘fundamental protective purpose’ of insurance.” The purpose of the rule, according to the court, was to protect the policyholder, or third parties seeking damages from the insurer for harm purportedly caused by the policyholder, from losing insurance coverage “over a technical violation of the policy” when that violation was of “no prejudicial consequence” to the insurance company.
While this is the correct result, in our opinion, it does not mean that a policy’s notice provisions may be overlooked. Quite the opposite. An insured should provide notice when a claim might reasonably implicate coverage. In fact, in Greytak, two justices of Montana’s high court penned concurrences agreeing with the court’s answer to the certified question, but opining that the insurance company in this instance could show that it had been prejudiced by the timing of the notice and should be relieved of its obligation to provide coverage. As the majority itself stated, “an insured who fails to provide required notice to the insurer does so at his or her peril.”