Montana Case on Late Notice Calls Into Doubt Technical Coverage Defenses

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.

Montana Decision Has Lessons for Drafting Indemnity Provisions

A new decision from the District of Montana, WBI Energy Transmission v. Colony Insurance, illustrates the dangers of a vaguely-worded additional insured requirement in a contract.  In WBI a pipeline worker employed by a mid-tier contractor, "Pro Pipe" was injured; after collecting from worker's comp, he sued both the owner (WBI) and the sub-contractor.  The owner tendered to Pro Pipe's carriers as an additional insured ("AI") on Pro Pipe's general liability policies, which contained a blanket AI endorsement (in other words, the endorsement provided AI coverage to the extent required in any contract that Pro Pipe entered into).  The liability carriers contended that WBI was not an additional insured because the underlying contract was ambiguous about whether Pro Pipe was required to add WBI as an AI.  The contract stated that Pro Pipe was obligated to "maintain . . . minimum insurance coverage[] . . . to protect [WBI] against liability in connection with Pro Pipe's work." (emphasis added).  

The District Court held that that language -- in combination with the fact that Pro Pipe believed it was required to provide AI coverage, and had given WBI a certificate to that effect -- was not ambiguous, and that WBI was an additional insured.  The court's decision is cleanly-reasoned and worth reviewing.  But the larger lesson is that such problems can be avoided by careful contract drafting and occasionally having a lawyer experienced in insurance issues review form contracts and insurance requirements to make sure that the language matches the expectations in then event that something goes wrong.

Ninth Circuit Certifies Notice-Prejudice Question to Montana Supremes

One of the perennial issues in insurance coverage is what happens if a policyholder provides notice to its insurance company late - in the case of liability coverage, that usually means after the underlying case has been litigated for a long time, and sometimes gone to verdict, or been settled.  Most states have adopted the "notice-prejudice" rule for those situations.  The basic concept is this: if the insurance company wants to get completely off the hook for any obligation to pay defense costs or indemnity, based on language in the policy obligating the policyholder to provide notice "as soon as practicable" or similar, the insurance company has to show that it suffered in some way by the late notice, e.g. that it could have negotiated a better deal, litigated the case differently, paid less for defense costs.

Montana's lead case on this subject, according to the Ninth Circuit, contains language that both suggests that notice-prejudice is the standard and also that timely notice is a condition precedent to coverage, meaning that late notice bars coverage with no showing of prejudice needed.  The case, Atlantic Casualty v. Greytak, appears to have been  a fairly typical construction defect suit at the outset, but with a twist: the insurance company was not notified until almost a year after the defect claims were made and after the parties had entered into a covenant-judgment type lawsuit.  Those are not very sympathetic facts on which to argue for the notice-prejudice rule.  It will be interesting to see if Montana's Supreme Court takes the case.

Duty to Cooperate Alive and Well in Oregon

Insurers are celebrating the new decision from Oregon's federal district court in the long-running Charter Oak et al. v. Interstate Mechanical et al. case finding that the policyholder lost all coverage by breaching the duty to cooperate.  In my view, this is a bad-facts-make-bad-law situation involving a fact pattern not likely to be repeated, that will unduly encourage out-of-state insurer lawyers to take an aggressive position in coverage disputes.  In this case the developer and the general contractor on a project in Montana were owned by the same person, and were therefore aligned as opponents in the defect litigation in that state.  The carrier agreed to defend the contractor (as an additional insured) in the underlying case.  The problem was that (according to the decision, at least) they failed to maintain even the appearance of an arms-length relationship in concocting the damages being sought from the contractor, including having the insurance defense lawyer for the contractor submit a declaration from the developer's damages expert using the defense lawyer's letterhead.  Those kind of bad facts make it difficult to survive the "smell test" that all judges employ, no matter what the legal standard is.

The notable points in the decision are these: a prediction that Oregon courts would find that a court can find an insurer to have been prejudiced by a lack of cooperation even before the underlying case is over; and a finding that an insured's giving notice of an intent to stipulate to a judgment needs to be roughly contemporary with the settlement itself - it is not enough to have warned the carrier earlier in the litigation that the insured was contemplating such a move.  While one can take issue with both propositions (and I do), it is somewhat easy to understand how those calls came down when you go back to the "smell test" problem.  And like it or not, these holdings demonstrate why competent policyholder counsel need to keep up to date on developments from every jurisdiction considering new points of Oregon coverage law.