Notifying Your Excess Insurers: Don’t Let an Insurer Gamble with Your Company’s Bottom LineInformed 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.

The Wait for NFIP Reform ContinuesFor the 11th time in the last two years, the House has passed yet another short-term extension of the National Flood Insurance Program (NFIP). The NFIP remains the largest source of flood coverage in the U.S.; this extension through September 30, 2019, ensures that the program does not lapse during hurricane season.

The NFIP makes federally subsidized flood insurance available in special flood hazard areas for participating communities. NFIP policies can be purchased directly from the government or from private insurers through the “Write Your Own” program.  Many commercial policyholders rely on the NFIP to provide primary-level coverage for up to $500,000 for a commercial building, and up to an additional $500,000 for certain types of personal property. These single peril policies cover direct physical damage caused by flood based on the property’s actual cash value. NFIP does not provide business interruption coverage for lost profits due to a shutdown of an insured’s operations.

U.S. Rep. Maxine Waters (D-Calif.), chair of the House Committee on Financial Services, and U.S. Rep. Patrick McHenry (R-N.C.) proposed the most recent extension. They seek additional time to reach a bipartisan compromise that will end the short-term extensions. A bipartisan group of senators also recently wrote a letter to Chairman Mike Crapo (R-Idaho) and Ranking Member Sherrod Brown (D-Ohio) urging the Senate Banking Committee to reauthorize the NFIP and address the issues that have been pushed down the road with every temporary extension.

As now structured, the NFIP cannot cover the cost of flood losses, which have dramatically increased since the early 2000s. Stakeholders acknowledge the necessity of reform, but the timing and scope of that reform requires consensus between the political parties and states with competing interests based on their flood exposure. The clock starts ticking now.

Urgent Considerations with Harvey, Irma, and Maria Suit Limitations Deadlines Approaching Commercial Property and Business Interruption insurance policies customarily include suit limitations clauses to protect the insurer against lawsuits. These clauses may be found buried amid general conditions in the property form or in an endorsement. Their sole purpose is to shorten the otherwise longer statute of limitations and hinder your organization’s ability to challenge your insurance company’s decision not to fully pay your organization’s insured loss. Savvy risk managers, lawyers, and insurance professionals should keep these hidden, sometimes tricky, exclusions top of mind over the summer months as it is the two-year anniversary of the destructive 2017 hurricane season.

1. Suit Limitations Clauses Are Generally Enforceable in Texas, but Puerto Rico and Florida Offer Better Protection for Policyholders

While each U.S. state and territory may apply different rules regarding enforceability of suit limitations clauses, it sometimes comes as an unpleasant surprise to policyholders that most jurisdictions uphold suit limitations clauses. For example, in Texas, suit limitation clauses are enforceable as long as the limitation is not less than two years. If the suit limitations clause is less than two years, the provision is void as a matter of law. Then and only then will a Texas court apply either the longer statutory limitations period for breach of contract (four years from the date of breach) or a two-year contractual limitations clause if the policy contains a “savings clause.”

In Florida, suit limitations clauses are prohibited by statute, however, even if your damaged location was in Florida, you should not assume that Florida law will necessarily apply. Counsel can be helpful in working with your risk management department to determine (i) the correct deadline and (ii) what state’s law will control. Your insurer may argue that Florida law does not apply so that it can attempt to enforce a suit limitations clause. There are still potential risks posed by a suit limitations clause in your insurance policy.

Until recently in Puerto Rico, suit limitations clauses as short as one year were enforced by courts. However, in late 2018, the Puerto Rican legislature retroactively amended the insurance code to allow the informal, extra-judicial tolling of the applicable limitations period through the submission of a written claim. The same law also allowed for appraisal of property losses, which were previously prohibited under Puerto Rican law. The Supreme Court of Puerto Rico recently confirmed that this amendment was retroactively applicable to property damage and business interruption claims from Hurricanes Irma and Maria. Similar to Florida, however, insurers may attempt to circumnavigate favorable Puerto Rican law by seeking to apply the law of a different jurisdiction.

So, while there are potential exceptions, you should treat the suit limitations clause in your insurance policy as an absolute bar to avoid any potential disputes down the line.

2. Calendar the Earliest Possible Suit Limitations Date

While specific policy language can vary significantly depending on your specific policy language, let’s assume your organization’s policy runs two years from the date of loss:

  1. Hurricane Harvey – August 26, 2019 (Texas and Louisiana)
  2. Hurricane Irma – September 9, 2019 (Barbuda, Saint Martin, and Virgin Gorda); September 10, 2019 (Florida, Georgia and South Carolina)
  3. Hurricane Maria – September 19, 2019 (Windward Islands, Dominicana and Guadeloupe); September 20, 2019 (Virgin Island, Puerto Rico, and the Dominican Republic); September 26, 2019 (North Carolina)

3. Use a Tolling Agreement to Protect Your Rights

While suit limitations clauses can be a potential bar, filing a lawsuit in advance of a pending limitations deadline is typically unnecessary. In many jurisdictions, including those affected by Harvey, Irma and Maria, by agreement of both parties they may contractually agree to “toll,” or pause, the applicable limitations period to allow for further negotiations and adjustment.

That said, there are multiple factors to consider before entering into a tolling agreement: (1) length of tolling period; (2) renewal process for extending tolling period; (3) process for terminating tolling agreement if negotiations fail; and (4) which claims will be subject to the tolling agreement (i.e., breach of contract claims only or bad faith claims as well). Additionally, depending on where your organization is located, counsel can be engaged to assist with the analysis of specific laws or procedures that impact the terms and conditions of your tolling agreement. Finally, even in cases where you believe that a suit limitations clause is not an issue, either because the provision may be unenforceable or because of an informal tolling process, seeking a written tolling agreement is preferable to mitigate the risk that a court will apply the law of a different, less favorable jurisdiction.

Suit limitations clauses are a trap for the unwary to limit or bar your organization’s insurance recovery, but by being aware of applicable laws, calendaring pending limitations dates, and protecting your organization’s rights through tolling agreements, policyholders can mitigate the impact of these potentially troublesome provisions.