Excess Insurers Prejudiced When There is No Notice of Underlying Suit

When an excess insurer is not given notice of a lawsuit with potential excess exposure, the opportunity to participate in mediation is an important right. Where the excess insurer is deprived of this opportunity, it may be prejudiced as a matter of law.

In Berkeley Regional Ins. Co. v. Philadelphia Indem. Ins. Co., 690 F.3d.342 (5th Cir.. 2012) (interpreting Texas law), the Court addressed the obligation to notify an excess insurer of a pending lawsuit.

In Berkeley Regional, the underlying liability case involved a 2004 slip-and-fall accident where a dentist was injured on the premises of the insured Towers of Town Lake Condominiums (“Towers”). Towers was insured for primary liability coverage with Nautilus Insurance Company with a $1,000,000 per occurrence limit and excess/umbrella coverage through Philadelphia Indemnity Insurance Company with a $20,000,000 policy limit in excess of the primary coverage.

The slip-and-fall lawsuit was submitted to Towers for a defense. The dentist’s injuries were substantial because she was unable to continue practicing as a dentist as a result of her injuries.

During the prosecution of the court case the expert witnesses had concluded that the dentist’s damages ranged between $800,000 and $1,250,000. Liability was contested. During the processing of the tort case the dentist made various settlement demands with the initial demand being $800,000.

At mediation, the dentist’s bottom offer was $215,000 while Towers’/Nautilus’ top offer was $150,000. The case did not settle and went to trial. A jury award was entered in the amount of $1,654,663.50. That judgment amount incorporated the jury verdict plus post judgment interest and cost.

On the day of the verdict, Towers demanded that Philadelphia pay the amount in excess of the primary coverage. Philadelphia asserted that the first time it had notice of the suit (or claim) was following the verdict when the demand to pay the excess was made by Towers. Thereafter Nautilus filed an appeal on behalf of Towers that was unsuccessful. In order to avoid execution of the judgment during the appeal, Nautilus posted a supersedeas bond. Nautilus obtained a supersedeas bond from Berkeley, its sister company. When the appeal efforts were exhausted, Nautilus paid what it concluded it owed under its primary policy and the bonding company paid the remaining balance of $709,738.89 after Philadelphia denied responsibility.

Through a series of complex assignments, Berkeley owned whatever rights the dentist, Towers, and Nautilus had against Philadelphia.

On appeal, the issue was whether the failure to give Philadelphia notice prior to the jury verdict forfeited coverage that otherwise it would have owed. Philadelphia argued that its policy required prompt notice of any occurrence involving permanent disabilities or any incurred exposure of $500,000 or above. The Philadelphia policy provided that when Philadelphia believed a claim might exceed the underlying insurance it had the right to join with the insured and the underlying primary insurer in the investigation, settlement and defense of all claims and suits in connection with the subject occurrence. Philadelphia argued that the circumstances surrounding the underlying litigation triggered the notice requirement of its policy and the lack of notice prior to the adverse jury verdict caused prejudice thereby precluding coverage.

The Fifth Circuit Court began its analysis by noting that “[w]hen an insurer must prove it was prejudiced by the insured’s failure to comply with the notice provisions, the recognized purposes of the notice requirements form the boundaries of the insurer’s argument that it was prejudiced; a showing of prejudice generally requires a showing that one of the recognized purposes has been impaired.” 690 F.3d at 348 (citing Blanton v. Vesta Lloyds Ins. Co., 185 S.W.3d 607, 612 (Tex. App.-Dallas 2006), no pet.)

The Court then noted that one of the purposes of the notice requirement is to afford the insurer, inter alia, the rights to join in the investigation, to settle a case or claim, and to interpose and control the defense which were valuable rights that if deprived, might prejudice the insurer.

The Court went on to note that whereas certain contractual obligations in the insurance policy protect the insured such as the duty to defend and the duty to indemnify, other obligations also protected the insurer.

As an example, insureds are required to notify the insurer of claims and lawsuits prior to any settlement or judgment. This protects the insurer’s right to participate in the underlying liability litigation in order to preserve the opportunity to minimize its losses. Notice requirements thus afford valuable rights to the insurer. Although primary and excess insurers have different responsibilities and may not suffer prejudice in all the circumstances where a primary insurer would, excess insurers nevertheless have a contract with the insured and are entitled to rely upon the contract notice provisions.

The Court in Berkley Regional noted that defining the contours of prejudice from a breach of a notice requirement is not always easy.

At one end of the spectrum, where the insurer receives no notice until after the case was “over,” notice is clearly too late and the insurer is prejudiced. 690 F.3d at 350 (citing Maryland Cas. Co. v. American Home Assur. Co., 277 S.W.3d 107, 117 (Tex. App.-Houston 1st Dist. 2009), petition dismissed, (concluding that insurer had established, as a matter of law, that is was prejudiced because “notice—provided only after the claims had been settled—was so late that it wholly deprived [the insurer] of its ability to defend the lawsuit.”)).

At the same side of the spectrum were those cases where the insurer first received notification of the suit after a default judgment had been entered and therefore prejudice existed as a matter of law. Id. (citing Liberty Mut. Ins. Co. v. Cruz, 883 S.W.2d 164, 166 (Tex. 1993), per curiam, (“[A]n insurer that is not notified of suit against its insured until a default judgment has become final…is prejudiced as a matter of law.”)). However, the Court noted that determining whether prejudice arises from a tardy notice presents a different inquiry and analysis than cases involving whether prejudice arises from a complete lack of notice. Although a wholly lacking notice may support a finding of prejudice as a matter of law, mere late notice may not. See National Union Fire Ins. Co. v. Crocker, 246 S.W.3d 603, 609 (Texas 2008). Learning about a case before verdict—even when it is already well “down the road”—does not necessarily mean that the insurer was prejudiced as a matter of law.

Analyzing the facts before it, the Court in Berkeley Regional concluded that Philadelphia had been prejudiced by late notice. The Court noted that Philadelphia “lost the ability to do any investigation or conduct its own analysis of the case, as well as the ability to ‘join in’ Nautilus’ evaluation of the case.” Significantly, “Philadelphia lost a seat at the mediation table. Mediation, by nature, is a dynamic process, and for that very reason, parties are expected (and usually ordered) to appear ready to negotiate and ‘with full’ settlement authority.”

The Court in Berkeley Regional acknowledged that it could not fully know what effect, if any, Philadelphia’s participation would have had in the mediation process—i.e., convincing Nautilus to take the dentist’s offer of $215,000 and/or convincing the dentist to come down further or accept Nautilus’ offer of $150,000 or perhaps Philadelphia’s dropping down to pay the $65,000 difference between the parties’ offers. What was clear to the Court was that those rights were lost leaving Philadelphia holding the bag for more than $700,000 in excess of its liability.

The Court in Berkeley Regional also noted that once a jury verdict is entered which dwarfs the settlement demand that had previously been made, the settlement in litigation posture of the case changes.

The Court rejected Berkeley’s argument that Philadelphia could have participated in the appeal process. The Court noted that Berkeley’s argument “rings hollow when one reviews the standards of review applicable to the appellate issues presented in the underlying case. The cows had long since left the barn when Philadelphia was invited to close the barn door.”

As proof of prejudice, the Court accepted the Affidavit of a Philadelphia claims representative stating:

Philadelphia was deprived of the opportunity to investigate the accident, to contribute to the development of a defense strategy, to participate in the lawsuit, to evaluate the settlement demands, to accept or reject any of the settlement demands, or to otherwise represent its interests during the pendency of the underlying litigation… Philadelphia would’ve exercised these rights had it been given the opportunity by being put on notice.

Under the circumstances, in light of (1) this affidavit, (2) the fact that significant settlement demands and a mediation occurred without Philadelphia’s knowledge, and (3) the rendering of a jury verdict before notice was given, we conclude that Philadelphia has presented sufficient facts in support of its position that it suffered prejudice to avoid summary judgment.

The Court reversed the grant of summary judgment in favor of Berkeley and remanded for further proceedings.