By James W. Bryan

A recent ruling by the federal district court in Raleigh, NC highlights the different treatment the courts give to the late notice defense under a claims-made liability insurance policy versus an occurrence-based policy.  The insurer has a clearer opportunity under claims-made policies to defeat coverage when the insured’s notice of a claim is late. The United States District Court for the Eastern District of North Carolina in the case of John Hiester Chrysler Jeep LLC v. Greenwich Ins. Co., 2017 WL 6210897 (E.D.N.C. December 8, 2017), rejected the policyholder’s argument that prejudice must be shown by the insurer under a claims-made policy before coverage can be avoided due to late notice.

What happened in John Hiester is a lesson for all coverage lawyers. Claims-made policies are different.  They contain traps for the unwary.  One such trap is notice.  In John Hiester, the claims-made policies at issue were two similar employment practices liability (“EPLI”) policies.

An employee of one insured car dealership, Hiester Automotive Group, Inc., filed an EEOC claim in April 2015 (“Harris Claim”), and the EPLI policy was for the period November 29, 2014 to November 29, 2015 (“Harris Policy”).  Also an employee of another insured car dealership, John Hiester Chrysler Jeep LLC, filed an EEOC claim in June 2015 (“Davis Claim”), and that insured’s EPLI policy was for the period February 8, 2015 to February 8, 2016 (“Davis Policy”).  In other words, each claim came within the coverage period of each policy.  But for reasons not evident in the opinion, the insureds waited too long to report the claims to the insurer, Greenwich Ins. Co.  Both claims were reported to Greenwich on June 9, 2016.  Greenwich denied the claims, and the insureds filed this declaratory judgment action. District Court Judge Louise W. Flanagan was assigned the case.

Each EPLI policy stated: “Coverage shall apply to any Claim made against the Insured committed prior to the expiration date of this Policy, provided that the Claim is first made during the Policy Period (or Extended Reporting Period, if applicable) and written notice of said Claim is reported to the Insurer pursuant to Section VII of this Policy.”  Section VII states “as a condition precedent to coverage under this Policy,” the insured must “give the Insurer written notice as soon as practicable BUT IN NO EVENT LATER THAN SIXTY (60) DAYS AFTER EXPIRATION OF THE POLICY PERIOD … of any Claim first made during the Policy Period (or Extended Reporting Period, if applicable).”  In other words, the Harris Policy required the Harris Claim to be reported to Greenwich no later than January 28, 2016, and the Davis Policy required the Davis Claim to be reported to Greenwich no later than April 8, 2016.

But the claims were both reported in June 2016 and were thus outside the reporting period.  Therefore, the insureds argued that under North Carolina law, Greenwich must prove it was materially prejudiced by the late notice before it could avoid coverage.  To support their argument, the insureds cited the law on late notice under occurrence policies.  Specifically, in assessing whether an insurer may be relieved of its obligation to indemnify due to its insured’s asserted failure to comply with a policy requirement that notice of loss be given to the insurer “as soon as practicable,” North Carolina utilizes the following test: (1) whether there was a delay in notifying the insurer of a covered loss, (2) if such notice was delayed, whether the insured acted in good faith with respect to the delay, and (3) if the insured acted in good faith, whether the insurer was nevertheless materially prejudiced by the delay. John Hiester, at *3 n. 2, citing Great Am. Ins. Co. v. C.G. Tate Constr. Co., 303 N.C. 387 (1981); Great Am. Ins. Co. v. C.G. Tate Constr. Co., 315 N.C. 714 (1986).

However, the John Hiester court held that the insureds are incorrect that the above test in the Great American decisions applies in this case.  To the contrary, the EPLI policies “require 1) that a claim occur during the policy period; and 2) that notice be given as soon as practicable but in no event later than 60 days after expiration of the policy period.” John Hiester, at *3.  The policy at issue in the Great American decisions, however, was not a “claims made and reported” policy, meaning the policy did not require the claim or notice to occur during the policy period, instead it only required that notice be given “as soon as practicable.” Id.  Therefore, the court held that Greenwich did not need to show it was prejudiced by the late notice. Id.

The insureds tried other arguments such as waiver and estoppel to salvage their claims but to no avail.  Judge Flanagan entered summary judgment in favor of Greenwich.

Coverage practitioners should take note of this case.  Policyholder counsel can usually defeat the late notice defense under occurrence-based policies because insurers have a tough time proving they have been materially prejudiced by the late notice.  But late notice under claims-made policies is much different.  It is a bright line defense and insurers don’t have to prove prejudice.  The end result usually favors the insurer and has the word “prejudice” in it — dismissal with prejudice.