One of the most valuable assets a business owns is its insurance coverage. The goal when purchasing liability insurance—and regularly paying insurance premiums—is to have coverage when, for example, your business is faced with a potentially devastating lawsuit by a third party claiming millions in damages. Simply put, insurance coverage is critical to maintaining a viable enterprise.
Yet having an insurance policy in place, by itself, is not enough. To preserve coverage when faced with a lawsuit, the policyholder must take the step of notifying the insurer. Failure to do so in a timely manner is a frequent subject of expensive and time-consuming litigation between policyholders and their insurers and can result in complete forfeiture of coverage.
Every insurance policy has a notice requirement. The specifics for notifying the insurer of an “occurrence,” “accident,” “claim,” or “loss” can vary widely and depend on the type of policy at issue. The policy may require the policyholder to provide notice within a particular time period—“immediately” upon service of a lawsuit or, more commonly, “as soon as practicable.” The phrase “as soon as practicable” generally has been interpreted by courts as a “reasonableness under the circumstances” test, so whether the policyholder has met the requirement varies depending on the particular facts.
The main purpose of the notice requirement is to give the insurer an opportunity to conduct an investigation of the underlying facts and effectively participate in the defense and resolution of the lawsuit. In many liability policies, the insurer has the right to control the defense. Giving the insurer notice of a suit is essential to the insurer’s ability to exercise this contractual right. Untimely notice can result in prejudice to the insurer, such as loss of an opportunity to (1) interview witnesses while memories are fresh, (2) raise a viable affirmative defense, or (3) negotiate a less expensive settlement. (Liability insurers also typically have the right to select or participate in the selection of defense counsel.)
In the majority of jurisdictions around the country, to avoid coverage based on a policyholder’s late notice, the insurer must prove it was prejudiced. Generally, this is known as the “notice prejudice” rule. In some states, like Tennessee, the burden falls on the policyholder to prove the insurer was not prejudiced. A few jurisdictions around the country (e.g., Alabama) still follow the harsh traditional rule that a policyholder’s failure to comply with a notice requirement can eviscerate any coverage that would have been available otherwise without a showing of prejudice to the insurer. (A choice of law analysis can be critical to the outcome of a dispute with an insurer over coverage. While some policies designate which state’s law will apply, many do not.)
Mississippi follows a “middle ground” approach. As a general rule, to avoid coverage based on late notice, the insurer must show prejudice unless the policy specifies that compliance with the notice requirement is a “condition precedent” to coverage. The “condition precedent” must make clear that coverage will be void if notice is late. If the policy does so, then case law indicates that the harsh traditional rule could apply.
In addition to securing adequate liability coverage, prudent risk management should include an internal practice and procedure for notifying insurers of lawsuits against the company, as required by the particular policy. Complying with the notice requirement is a simple way to protect your business from unnecessary litigation with your insurer and avoid the possible forfeiture of the valuable asset paid for with hard-earned premium dollars.