Early Is On Time, and Late Loses Coverage: The Seventh Circuit Explains the Importance of Communication to Insurers

In virtually every environment, communication is important. However, in the insurance world, it is critical: it may determine whether your company has coverage. In a recent decision, the United States Seventh Circuit Court of Appeals, the federal appeals court covering Illinois, Indiana, and Wisconsin, reiterated the importance of notice to your insurer – even if neither you nor the insurer believes the loss will be covered.

In 2008, a construction company’s employee was involved in an automobile accident with another individual. The company had a $1 million commercial automobile insurance policy with its insurer (the “Primary Insurer”). It obtained this policy though its insurance broker (the “Broker”). The Broker also helped the company obtain an excess insurance policy from another insurer (the “Excess Insurer”). The Excess Insurer’s policy covered loss greater than $1 million, and up to $10 million. After the accident, the company notified the Primary Insurer and the Broker, but did not notify the Excess Insurer.

The individual filed a personal injury lawsuit in Illinois federal court against the company and its employee (collectively, the “Company”). The Primary Insurer assumed defense and hired an attorney to represent the Company. Although the lawsuit proceeded, the Excess Insurer was not notified. The Primary Insurer evaluated the lawsuit within its own policy limits, believing that the Company’s loss exposure was under $1 million. To no surprise, the individual disagreed. In 2013, the individual made a $1.25 million demand for settlement. While this amount would have triggered excess coverage, the Excess Insurer was not notified.

In 2014 – approximately six years after the accident and six weeks before trial – the Excess Insurer was finally notified of the lawsuit by the Broker. The Excess Insurer evaluated the lawsuit as valued between $500,000 and $750,000. After this evaluation, Excess Insurer did not provide input towards the Primary Insurer’s trial strategy. In 2015, a $2.3 million verdict was entered for the individual. After trial, the Excess Insurer reserved its rights to deny coverage because of the late notice it was provided.

Eventually, the Excess Insurer filed a lawsuit, seeking a declaration that it did not have to cover the Company’s loss because of the untimely notice. The district court agreed with the Excess Insurer, concluding that the loss was not covered. The Company appealed to the Seventh Circuit.

On appeal, the Seventh Circuit focused on one issue: was the Company’s notice to the Excess Insurer timely? Under Illinois law, when determining whether notice was timely, five factors are considered. First, the specific language of the policy. While the policy did not provide a specific time frame for notice, the six-year delay weighed towards denying coverage. Second, whether the insured was sophisticated in commerce and insurance matters. The Seventh Circuit noted that the Company had over fifty employees and even had counsel – these facts pointed in the Excess Insurer’s favor. Third, the insured’s awareness of an event that may trigger coverage. Here, the Seventh Circuit noted the individual’s $1.25 million demand. While the Company disagreed with this evaluation, which was over $1 million, this demand put it on notice of the need for potential excess coverage. Fourth, the insured’s diligence in seeing if coverage was available. Here, the Company did not act as a reasonably prudent company would, given the potential of a jury verdict. And fifth, whether the insurer was prejudiced. Even though the Excess Insurer did not provide advice after receiving notice, the Seventh Circuit said at the worst, it “slightly favored” the Excess Insurer. Each factor leaned in favor of the Excess Insurer and therefore the Company’s notice was “untimely and unreasonable.”

The Company made three final attempts to justify its delay. The Seventh Circuit denied each, explaining (1) the Excess Insurer’s minimal participation after receiving notice does not prevent it from asserting the late notice defense; (2) only performing “traditional brokerage activities,” the Broker was not the apparent agent of the Excess Insurer; and (3) the Broker did not have a duty to notify the Company and could not be held liable. The Seventh Circuit affirmed the district court’s decision.

In closing, the Seventh Circuit provided a lesson for all insureds: notify your insurers as soon as practicable. Prior to and during litigation, evaluate your possible exposure. Throughout your case, consider the worst possible outcome. Accounting for all outcomes – not just the result you prefer – will help determine whether your insurer should be put on notice. In the end, safe is better than sorry.

This article, "Early Is On Time, and Late Loses Coverage: The Seventh Circuit Explains the Importance of Communication to Insurers," was published in the Bradley Construction and Procurement Law Newsletter for the first quarter of 2020.