Failure to Give Prompt Notice of Claim: What Are the Consequences?

March 5, 2014

A liability policy generally requires the insured to give prompt notice of a claim to the insurance carrier. Not only is the notification provision a part of virtually every liability policy, there is a Wisconsin Statute that addresses the issue of notice. Section 631.81, Wis. Stats. is entitled “Notice and Proof of Loss,” and provides in relevant part:

(1) TIMELINESS OF NOTICE. Provided notice or proof of loss is furnished as soon as reasonably possible and within one year after the time it was required by the policy, failure to furnish such notice or proof within the time required by the policy does not invalidate or reduce a claim unless the insurer is prejudiced thereby and it was reasonably possible to meet the time limit. (Emphasis Added.)

Notice is given if notice is sent by first class mail, postage prepaid and directed to the carrier.

The statute indicates notice or proof of loss is to be given to the carrier “…as soon as reasonably possible and within one year after the time it was required by the policy.” The statute goes on to indicate the failure to give the requisite notice or proof within the time required in the policy does not invalidate the claim unless the carrier “…is prejudiced thereby and it was reasonably possible to meet the time limit.” Licensed intermediaries, at some point in time in their careers, have probably encountered a situation where an insured has, for whatever reason, failed to give what the intermediaries would consider to be “prompt notice” to the carrier. Concern then arises as to whether or not the carrier is going to deny the claim. The resolution of this concern is dependent in part, upon whether or not the carrier is “prejudiced” by the lack of timely notice. What constitutes “prejudice” in this context?

A recent decision of the Wisconsin Court of Appeals sheds some light. In the case before it, a practicing attorney and his spouse also owned a real estate investment company. That company sold a parcel of real estate to two individuals. The attorney prepared a land contract for the sale, and had the buyers execute a “waiver of conflict of interest,” agreeing the attorney had advised them to retain separate counsel for purposes of representing them in connection with the purchase of the property. The waiver continued to the effect that the buyers waived their right to obtain such an independent attorney. Subsequently, the buyers became dissatisfied with the attorney’s representation of their interests and retained independent counsel. The new counsel wrote a letter dated December 23, 2009, setting forth the reasons for the buyers’ dissatisfaction and demanding the attorney pay the buyers a specified sum of money. The attorney in question then retained his own counsel to represent him in the buyers’ claim.

The Wisconsin Lawyers Mutual Insurance Company (the “Company”) had issued a professional liability policy to the seller/practicing attorney, which had a term beginning on April 1, 2009 and expiring on April 1, 2010. It was during this period of time the practicing attorney received the December 23, 2009 demand for payment of a specified sum of money. On March 2, 2012, the buyers commenced suit against the attorney. On March 9, 2011, some 11 months after the policy expired, the carrier received a copy of the buyers’ claim under letter dated December 23, 2009. The carrier acknowledged receipt of the summons and complaint; and advised it would defend the insured under a reservation of rights. The carrier intervened in the buyers’ lawsuit, and moved for summary judgment arguing the buyers’ claim was not covered under the particular policy because the claim had not been timely reported. The circuit court ruled in favor of the carrier finding the December 23, 2009 letter specifically constituted a claim and the insured did not timely notify the carrier of that claim. The circuit court reached this conclusion without addressing the issue of prejudice. The court simply noted the notice was not timely. An appeal was taken.

On appeal, the Wisconsin Court of Appeals reversed. Although the notice was not timely, the carrier had failed to demonstrate it was “prejudiced” by the untimely notice. In reaching this conclusion, the court noted the following:

  • The statute does not differentiate between claims made policies or occurrence policies. Notice must be given in accordance with the policy terms and the statute.
  • The failure to give notice as required by the policy does not bar liability of the carrier under the policy if the carrier is not prejudiced. Under the statute there is a “presumption of no prejudice” if the notice is given within one year of the time set forth in the policy. If no notice is given as required under the policy, the burden is upon the insured to show there is no prejudice to the carrier. Generally, whether a carrier has been prejudiced by untimely notice is a question of fact. Court decisions have indicated a carrier is prejudiced by late notice when it is denied the opportunity to have input into how the underlying claim is being defended. The carrier is also prejudiced if its ability to investigate, evaluate and defend the claim has been impaired by late notice.
  • Based upon the undisputed facts of the case, the court concluded the carrier was “not prejudiced” by the insured’s untimely notice of the buyers’ claim. The carrier simply has not submitted any evidence to rebut the prima facie showing there was no prejudice. The carrier did not put forth any facts that would indicate the carrier was hindered in its ability to investigate, evaluate or settle the claim or otherwise present an effective defense on the merits. The carrier had previously argued it was “prejudiced” by the “mere potential of coverage” (i.e., having to pay the claim). That is not the kind of “prejudice” that is contemplated in the statute. Indeed, no facts were presented to show the carrier was not in the same position it would have been with respect to the underlying claim, if timely notice had been given.

The foregoing case presents a situation where, simply through a failure of proof, a carrier was required to provide coverage for a loss that had not been timely reported. Insureds, as well as intermediaries, should not construe this case as meaning that untimely notice does not relieve the carrier from defending or providing coverage for the claim. All this case stands for is the carrier failed to demonstrate by requisite proof that it had been “prejudiced.” Timely notice is still essential.

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