Notice and Tender of Defense Under Claims-Made Policies
Notice and Tender of Defense Under Claims-Made Policies
Who can give notice, and does notice alone serve as a tender of the defense?
By David Grossbaum, partner in the law firm of Cetrulo & Capone, LLP, Boston. His practice focuses defense of professional liability claims against lawyers and other professionals, and insurance coverage issues. He is immediate past chair, New England Steering Committee, Professional Liability Underwriting Society, and is chair-elect, ABA Professionals', Officers' and Directors' Liability Committee. The opinions expressed are his own.
It's elemental that a necessary condition for triggering coverage and tendering the defense of a claim under a claims-made policy is the insurer receiving notice of the claim during the policy period. The question that most often arises is whether notice is effective if it's made by the claimant rather than by the insured. The answer seems to be that, in most cases, notice from the claimant will be sufficient to trigger coverage, although it may not be enough to tender the defense.
Who Can Give Notice to Trigger Coverage
Most claims-made policies provide that notice of a claim must come from the named insureds themselves or someone else who comes within the definition of "insured" under the policy. Without notice from someone during the policy period, a claims-made insurer has no obligation to defend or indemnify, even though this may result in a claimant losing the right to policy proceeds. The Home Insurance Company v. Adco Oil Company, 154 F. 3rd 739 (7th Cir. 1998).
In some states the question of whether a claimant can give notice has been decided by statute. For example, in Georgia, Michigan, and New York, the statutes specifically provide that notice can be given by a claimant. See e.g. Ga. Code Ann. §33-7-15 (c); Mich. Comp. Laws Ann. §500.3008; New York Ins. Law, §3420(a)(3).
Nonetheless, in the majority of jurisdictions, the issue isn't decided by statute. Therefore, the first place to look is at the policy itself. Some policies allow notice to be given "by or on behalf of" the insured. This provision may permit notice by a claimant, but one has to wonder whether the claimant can truly give notice "on behalf of" the insured if the insured has no intention of giving notice or is unaware of the claim. See White v. Transit Ins. Co., /i> 402 S.W.2d 212 (Tex. Civ. App. 1966) (notice by claimant wasn't "on behalf of" insured).
Even where the policy specifically states that notice is to be given by the "named insured" or by "an insured", courts have ruled that notice from a claimant is effective to trigger coverage. Under a recent California decision, which isn't officially published, unless it can show prejudice, an insurer who receives notice from a claimant has received proper notice, notwithstanding that the policy language required notice from the "named insured". Short v. Great American Insurance Co., 2001 Westlaw 1264944 (Cal. App. Dist. 2001). The court relied on what it believed to be the "vast majority" of decisions from other jurisdictions that allow a third-party claimant to give effective notice. It mentioned only Alabama and Montana as requiring notice from the insured.
Of course, in a situation where the insured doesn't give notice of the claim to the carrier, it's very likely that the insured isn't dealing with the reality of a claim and isn't cooperating with the insurer. In Short, that was precisely the situation. The insurer had written to the insured at the time it received notice of the claim from the claimant and at the time it received the suit from the claimant, but the insured never responded, even when the insurer sent a lawyer out to the insured's office.
Having decided that the carrier had actual notice of the claim and the suit, the court then applied the "notice-prejudice" rule to determine whether the carrier could truly claim prejudice from the fact that the claimant had given notice rather than the insured. The court readily acknowledged that prejudice isn't an issue in cases where a claims-made insurer received no notice whatsoever during the policy, but said that prejudice was an appropriate consideration where the carrier did receive notice but is complaining that it didn't come from the right person. Naturally, the court could find no prejudice under the notice provisions of the policy because the claimant had provided the carrier with all the information required under the policy.
The court then went on to discuss the question of whether the insured's failure to respond to the carrier's inquiries was a breach of the cooperation clause. The carrier seemed to be in a pretty good position to prove such prejudice from such a breach, considering that the insured refused to communicate with the insurer, the claimant refused the carrier's request not to take a default until there was a determination in the coverage case, the lower court had "suggested" that the carrier couldn't defend the action unless it had the consent of the insured, and the court ruled that the carrier wasn't entitled to take any discovery once the default had been entered and prior to the "prove-up hearing" during which the amount of the default judgment was litigated and entered.
Ultimately, the court determined that the carrier wasn't entitled to a summary judgment on the coverage issue. The carrier would be entitled to prove at a trial that the amount of the default judgment ($500,000) was more than it would have been required to pay if the insured had cooperated with the carrier and the carrier had been given the opportunity to mount a vigorous defense. This places a heavy burden on the carrier where it has to prove it could have built a successful defense but doesn't have the cooperation of its insured.
Tender of the Defense: Is Notice of a Suit Enough?
The next question is whether notice, without more, automatically requires the carrier to a defend the insured. If notice is received by the carrier and the insured demands a defense, the carrier will undoubtedly be required to provide it. But in situations we're talking about here, namely where the insured hasn't even given notice to the carrier, the insured isn't demanding a defense. This may be because the insured has another carrier that is defending, the insured simply isn't dealing with the claim (as in Short), or the insured doesn't want the carrier to be involved because the insured doesn't believe there is coverage, doesn't want to affect the premiums, or it's judgment-proof and doesn't want the claimant to collect the insurance proceeds.
The Short case doesn't deal with the issue of the insureds' unilateral right to decide that they don't want coverage, even after notice is received by the carrier. An Illinois case has looked at the issue of whether an insurer has a duty to defend its insured when it knows that the insured has been sued but the insured hasn't made a specific demand for a defense. Cincinnati Companies v. West American Insurance Company, 701 NE 2nd 499 (1998). This case involved an insured who had coverage under two different policies but had only tendered the defense to one, unaware that he was an additional insured under a policy issued by another carrier that was participating in the suit for a co-defendant. The insured finally learned of the other policy and tendered the defense. The carrier that had been defending later sued the other insurer to recover the defense costs, and the other carrier defended on the basis that it had no duty to defend prior to the actual tender.
Although the Illinois court recognized its prior decisions holding that the duty to defend only arises after the insured specifically tenders its defense to the insurer (particularly where the insured is "sophisticated"), it found that once a carrier receives actual notice of a suit against its insured (whether the insured is sophisticated or not), this constitutes a tender of the defense to the carrier. The court adopted this rule on the basis that requiring something more than actual notice of a claim or suit could conceivably cause an insured to forego coverage unintentionally and would add an element of "gamesmanship" to the insurer/insured relationship.
Nonetheless, the court was receptive to the argument that insureds ultimately do have the right to tell their insurer not to participate in the case. Consequently, the court ruled that an insurer is relieved of its duty to defend and indemnify if the insured has "knowingly decided against an insurer's involvement."
The Illinois rule is by no means the only view on the issue. There still appear to be cases in other jurisdictions holding that the carrier has no obligation to defend a claim until it receives notice of a claim or suit, and the insured has explicitly requested the carrier's involvement. See e.g. C.J Duffey Paper Co. v. Liberty Mutual Ins. Co., 76 F.3d 177 (8th Cir. 1996) (Minnesota law); Unigard Ins. Co. v. Leven, 983 P.2d 1155 (Wash. App. 1999) (insured must request a defense, but insurer is liable for defense costs unless it can show prejudice from this breach).
In light of the current state of affairs, insurers should be vigilant to assess their obligations when they receive notice of claim or notice of a suit from someone other than their insured. If they mistakenly do nothing, based on their assumption that the notice is ineffective, they may find themselves liable for a default judgment or for defense costs and a judgment.
This article was originally published in the Professional Liability Underwriting Society (PLUS) Journal. It is reprinted here with the permission of PLUS. This article is intended to inform the reader of potential liability exposures for attorneys. This article reflects general principles only and does not render legal advice. Readers should consult legal, financial, insurance and other advisors if they have specific concerns. Neither the Los Angeles County Bar Association, Aon and its affiliates, the author, nor PLUS assumes any responsibility for how the information in this article is applied in practice or for the accuracy and completeness of the information. Reproduction without written permission is prohibited. This article is reprinted with the permission of PLUS and is made available by Aon Direct Insurance Administrators, administrators of the LACBA Sponsored Aon Insurance Solutions Program, to the Los Angeles County Bar Association.
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