Totality of the Circumstances and Late Notice
The defense of late notice to coverage applies differently depending on the jurisdiction. In Illinois, whether a policyholder’s notice to its insurer was timely is determined by the totality of the circumstances. Prejudice is just one of five non-dispositive factors. In a recent case involving an excess insurer, the Seventh Circuit addressed whether the policyholder’s notice under a commercial auto policy was untimely.
In Landmark American Insurance Co. v. Deerfield Construction, Inc., No. 18-2205 (7th Cir. Aug. 12, 2019), an excess insurer was given notice about an accident and lawsuit seven years after it occurred and on the eve of trial. After a verdict in excess of the primary coverage, the excess insurer refused to cover the excess amount based on late notice. The district court granted summary judgment to the insurer. On appeal, the Seventh Circuit affirmed.
In affirming, the circuit court noted that six weeks before trial, the excess insurer found out about the underlying lawsuit from the broker that placed the excess policy on behalf of the policyholder, not from the policyholder. The excess insurer immediately issued a reservation of rights letter to the broker, but did not send the letter to the policyholder. While the excess insurer received regular updates by the time the trial commenced, it kept a low profile and simply advised the primary insurer’s counsel, when asked about settlement, that the primary carrier should settle within its primary limits. After the excess verdict, the excess carrier sought a declaratory judgment based on late notice.
The circuit court described Illinois law has having five non-dispositive factors that courts considered in addressing late notice. The court’s analysis led to its conclusion that few, if any, of these factors favored the policyholder. The excess policy required that the policyholder must give the excess insurer “prompt” notice of any claim. Although this language did not identify a specific time frame for giving notice, the court found it difficult to believe that the Illinois Supreme Court would regard notice that comes along after five to seven years as anywhere close to being either prompt or as soon as practicable. As to prejudice, the court stated that the excess insurer “learned about the underlying suit so late in the game that many potential steps were no longer possible.” The court concluded that “[w]hen considering the totality of the circumstances, at some point common sense comes into play. [The excess insurer] did not receive notice until seven years after [the] accident.” The conclusion, said the court, “is irresistible that [the policyholder’s] notice was untimely and unreasonable as a matter of law.”