Informed insureds know the importance of notifying their primary insurer of an occurrence or a claim. But notice to the primary layer often does not suffice. If the plaintiff’s demand exceeds the limits in the primary insurance policy, an insured should notify the umbrella or excess insurer (and possibly further up the tower than just the first excess layer depending upon the circumstances). And even if the demand doesn’t exceed the primary limits, an insured may need to notify umbrella or excess insurers if certain thresholds are met. An insured’s assessment of potential liability and damages could also require notice above the primary layer – even if the primary insurer defends the case and assesses it as without merit. Don’t be the insured in Landmark American Insurance Company v. Deerfield Construction, where a primary insurer’s gambling spirit led to notice seven years late, on the eve of trial, and cost an insured more than a million dollars. The insured, Deerfield Construction, and not the excess insurer, Landmark, absorbed the loss above the $1 million primary layer in in a decision affirming summary judgment in Landmark’s favor.
To reach its conclusion, the appellate court applied Illinois’ five-factor test, which considers the policy language, the insured’s sophistication in commerce and insurance, the insured’s awareness of a triggering event, the insured’s diligence in ascertaining coverage, and prejudice to the insurer. In siding with Landmark, the court also considered the total picture:
When considering the totality of the circumstances, at some point common sense comes into play. Landmark did not receive notice until seven years after [the] accident. This was not a case of a slowly developing tort, where the parties could identify the genesis of the injury only years after the harmful activity occurred. This was an automobile accident. Deerfield could have emailed, mailed a letter, or perhaps just have called Landmark to tell it about the accident as soon as it occurred . . . or it could have taken any of those steps when it was served with [the underlying] lawsuit. But it did not. The conclusion is irresistible that Deerfield’s notice was untimely and unreasonable as a matter of law.
In language that every insured hopes never to see, the court concludes that “some cases are not close, and this is one of them. Waiting five to seven years before telling an insurance company that its policy may be implicated in a suit is too long.”
So how does an insured avoid this situation? First, know your notice obligations under your primary, umbrella, and excess layer policies. And then comply with them. But what if the primary insurer believes the case can resolve within the primary limits, as did the primary insurer here? The primary insurer, American States, assumed Deerfield’s defense, and assessed the case as lacking merit. Even when the underlying plaintiff made an excess limits demand of $1.25 million, sufficient to reach Landmark’s policy, neither American States nor Deerfield notified Landmark. Landmark learned about the case only six weeks before trial, and Landmark’s monitoring of the settlement negotiations and subsequent trial did not remedy that late notice. So if the primary insurer and even its counsel dismiss a case as non-meritorious, carefully consider the impact on your company’s finances before deferring notice. The court recognized American States’ “gambler’s spirit,” but the primary insurer gambled with Deerfield’s bottom line, not its own. The court also rejected Deerfield’s efforts to recover from American States, the broker, and defense counsel, leaving those disputes for another court and another day. And even if Deerfield recovers some portion of its loss from one or more of those entities, the cost and time involved will erode the value recovered. So, in most circumstances (granted not all), prompt and generous notice is the safest path forward for an insured. Don’t gamble with notice, or your company could be the one to pay.