Late Notice to Insurance Companies Revisited: Illinois Law Presents Unique Challenges
In this issue of the Litigation & Counseling Alert, we return to the topic of late notice, an important insurance coverage subject that we also addressed in April 2006, March 2007 and July 2007. Late notice continues to vex insureds and policyholders, and the Illinois courts are not making things any easier.
In many states, failure to give timely notice of an occurrence or a lawsuit to a liability insurer is not an absolute bar to coverage. Instead, the insurer must show that it was prejudiced by the late notice. Known as the "notice-prejudice rule," this requirement has prevented many non-Illinois insureds from forfeiting coverage when they failed to give timely notice. Illinois, however, does not follow this rule.
The Lay of the Land in Illinois
The typical general liability insurance policy contains two notice requirements: (1) that the insured must give notice as soon as practicable of an occurrence that may result in a claim and (2) that if a claim is made or a lawsuit is brought against any insured, the insured must notify the insurer as soon as practicable. Modern insurance forms require that these notifications be in writing. Illinois law treats these duties equally, considering them both as "conditions precedent." Therefore, the failure of an insured to satisfy either duty significantly increases the risk of a loss of coverage.
In its 2006 decision in Country Mutual Insurance Company v. Livorsi Marine, Inc., the Illinois Supreme Court clarified the law on this issue, holding that, in Illinois, if an insurer claims that notice was late, the insured bears the burden of showing that it has a reasonable justification or excuse for not giving timely notice. If the insured cannot meet this burden, the insurer is excused of any duty to defend the insured, to reimburse the insured for defense costs, and to indemnify the insured. In other words, if notice is late and the insured cannot justify the delay, insurance coverage will be lost.
Prejudice to the insurer is just one of several factors the court may consider in determining whether the insured's notice was reasonable under the circumstances. Once the court decides that notice was unreasonably and inexcusably late, however, prejudice becomes irrelevant and the insurer will not have to pay.
A Rare Victory for the Insured
Every once in a while, a late-notice case comes along that sides with the insured. In Berglind v. Paintball Business Association—decided in May of 2010 by an Illinois First District Appellate Court—a boy attending a birthday party at a paintball facility was injured when a paintball gun discharged in the facility's lobby, hitting the boy in the eye. Fortunately, a doctor was present and washed out the boy's eye. The facility's owner, who was on-site at the time of the incident, testified in a deposition that he "was totally relieved because everything looked great." According to the owner, the boy was sitting calmly and "there was no damage." He also testified that he knew it was necessary to promptly notify his insurance company of injuries or lawsuits, and that he would have done so if he thought the boy had been injured.
Eight months later, the boy's family sued the facility. During a deposition, the owner testified that he did not remember being served with a lawsuit but that he would have notified his insurer if he had. Because he did not know he'd been sued, he did not hire a lawyer and did not answer the complaint. Several months later, he received notice of a motion for default judgment, which he immediately forwarded to his insurance agent. The agent did not notify the insurer. (The owner later testified that he did not know there was a difference between an insurance agent and an insurance company.) Ultimately, a default judgment was entered against the facility and its owner, which led to an award of more than $6 million in damages. Needless to say, the insurer denied coverage for this claim.
The owner subsequently assigned his insurance claim to the boy's family, which sued the insurer. The insurer's defense was that an 11-month delay in giving notice of the incident was unreasonable under the circumstances. The plaintiffs argued (1) that the facility owner was unsophisticated in commerce and insurance and (2) that the owner reasonably believed that no claim would be made concerning the incident.
The appellate court agreed with the plaintiffs, stating that "a lengthy passage of time in notification is not an absolute bar to a claim of defense or indemnity under an insurance policy, even under the 'as soon as practicable' provision, so long as insured's delay in notifying insurer is justifiable." The court found justification on the two bases raised by the plaintiffs. First, the owner had not finished high school and had held a variety of jobs as a laborer, janitor and construction worker. When asked if he was the "registered agent" for the paintball business, he answered, "I don't understand." The owner testified that when he received letters or other documents that he did not understand, he threw them away or put them in a file. He also said that he paid some of his employees in cash and others by check, and did not think he carried workers' compensation insurance. He testified that there were no state requirements that he was obligated to comply with in running his paintball facility. Although the owner knew that he had insurance and understood that he should notify his insurance company of incidents and lawsuits, he had only given such notice once before in his life. Based on this testimony, the court found the owner to be unsophisticated in matters of business and insurance.
Second, the court considered whether it was reasonable for the owner to determine that no claim would result from the paintball-in-the-eye incident. He witnessed the incident, saw the doctor clean out the eye and believed the boy was fine. The court held that the owner's bad guess did not make it unreasonable.
Finally, the court felt that the owner was diligent about giving notice when he became aware of the motion for default. And, because he gave notice before the hearing on the motion for default judgment, the court could not conclude that prejudice to the insurer had occurred. Accordingly, the court held that the 11-month delay in notifying the insurer was not unreasonable as a matter of law.
Although the outcome in this case was good for the insured, the win was not pretty. The owner did suffer a judgment exceeding $6 million and almost lost his business. The boy and his family (or their lawyers) likely incurred significant out-of-pocket expenses to bring this case, which they lost at the trial court, making a costly appeal necessary. Furthermore, this was an unusual case with a rare combination of facts that worked in the insured's favor.
The lesson, therefore, is to err on the side of caution. When you rely on your own judgment to determine whether a claim will be brought, you engage in very risky risk management. Because we live in litigious times, the prudent course is to assume that every incident—especially if it involves bodily injury or property damage—will result in a claim, and to give prompt notice to your insurer. And, of course, always open and read your mail!