In a new decision the Montana Supreme Court has confirmed that in order to avoid its coverage obligations based on a technical defense such as late notice, a liability insurer must show that it suffered "prejudice." The case is a good illustration of courts' general skepticism toward "technical" coverage defenses asserted by insurers, but also of how the details of any particular lawsuit -- or settlement -- can complicate the coverage analysis. (I first wrote about this case in July of last year).
The decision in Atlantic Casualty v. Greytak essentially restores the status quo about the "notice-prejudice rule" in Montana. Under the notice-prejudice rule the insurer must show that its ability to defend the case and prevent a large judgment against the insured was materially harmed by the late notice. The trial court in the Greytak case decided that a 2011 decision from the Montana Supreme court, Steadele v. Colony Insurance had overturned Montana law adopting the rule, making the prompt notice provision in a standard liability policies a "condition of forfeiture," meaning that the insurance company did not need to prove prejudice. On appeal, the Ninth Circuit certified that narrow legal question to the Montana Supreme Court.
In Greytak the insured was sued for negligence leading to property damage. The claimant and the insured entered into an agreement whereby the insured would tender the claim to its liability carrier, and if the insurer did not pick up the defense or file a declaratory judgment action the claimant could enter a stipulated judgment against the insured, but agree to only pursue collection from the insured's insurance. The insured tendered the claim and the carrier did not pick up, whereupon a stipulated judgment was entered in state court. (The facts are disputed about whether the claimant was actually entitled to file the stipulated judgment, because the insurer had filed a declaratory judgment lawsuit before the state-court judgment). The state-court judgment was set aside and the coverage action proceeded.
The Montana court clarified that Steadele did not reverse the law on the "notice-prejudice rule," pointing out that in Steadele the Court had found that the insurer was prejudiced as a matter of law, because the insured had stipulated to a monetary judgment before the insurer was given any notification. In Greytak, by contrast, the parties' agreement allowed the insurer the chance to step in and defend, which it did not do.
The "notice-prejudice rule" is clearly established as the law in Oregon (Lusch v. Aetna), Washington (Canron v. Federal Insurance), and Alaska (Weaver Bros. v. Chappel).
Interestingly, all of the Montana justices agreed about the notice-prejudice rule, but there were two dissenting opinions. The dissents argued that the court should have gone beyond the narrow question certified by the Ninth Circuit to find that the insurer was prejudiced as a matter of law by the insured's and the claimant's conduct. The insurer's briefs on appeal argued strenuously that it had indeed been prejudiced because the insured failed to cooperate with it after it attempted to appoint defense counsel, and because the claimant had filed the state-court judgment in violation of the settlement agreement. The Montana Supreme Court's majority elected not to go beyond the certified question, however, leaving the issue of actual prejudice up to the federal trial court to resolve. In light of what the trial court did below, I would say that things don't look good for the claimant on that score.
