Case Law Update: Insurance - Untimely Notice

WDC Journal Edition: December 2001
By: Civil Trial Counsel of Wisconsin

Neff v. Pierzina
___ Wis.2d ___ 629 N.W.2d 177 (2001)
Decided July 3, 2001

American Family Insurance Company denied coverage for David Schiesl based on his failure to provide prompt notice of an accident. The supreme court upheld the trial court's decision to deny coverage in this case using a "clearly erroneous" standard of review. The supreme court found the trial court's ruling that Schiesl failed to give timely notice was supported by the facts and upheld the trial court's decision that Schiesl had not overcome the presumption that American Family was prejudiced by the delay.

Anton Johnson operated a business called "T.J. Doc's" with the assistance of Schiesl. Schiesl was an independent contractor who received a percent of the commissions. T.J. Doc's rented the second floor of a barn from James Pierzina. The barn had a homemade elevator that enabled persons to go to the second floor. The plaintiffs, Randy and Rhonda Neff, were visiting when Schiesl took them up the elevator to look at the second floor of the barn. He had received instructions not to take anyone on the elevator. When the elevator was within an inch of reaching the second floor, the cable broke and it fell to the ground injuring Rhonda Neff.

Schiesl had liability coverage from his renter's policy with American Family Insurance Company. Johnson had liability coverage through a policy he purchased from West Central Mutual Insurance and Pierzina had liability coverage from Wilson Mutual Insurance Company. Six months after the accident, Johnson's insurer sent an adjuster to investigate the accident. He interviewed all three men individually. He took pictures of the scene of the accident, including the area of the elevator and the elevator itself. However, he did not go to the second floor. In the witness interviews he did not delve very deep into the facts surrounding the business relationship between Schiesl and Johnson.

The Neffs commenced suit a little over a year after the accident. They named Pierzina, Johnson and their insurers. Five months later, Schiesl was subpoenaed for a deposition. He did not have counsel when he arrived and the attorneys present agreed to delay his deposition until he had a chance to hire an attorney. Three months later, the Neffs filed an amended complaint and named Schiesl as a defendant. Johnson's insurer hired an attorney for Schiesl but reserved its coverage defenses. Two months later, Johnson's insurer determined that Schiesl had coverage through American Family and the Neffs amended their complaint and named American Family as a defendant.

American Family raised two coverage issues. First, they asserted that Schiesl's failure to provide timely notice was prejudicial. Second, American Family claimed the business pursuits exclusion in the renter's policy precluded coverage. The trial court found that the act of taking the Neffs into the elevator fell within the exception to the business pursuits exclusion because Schiesl was not conducting business when he showed the barn to the Neffs. However, the trial court also found that Schiesl had failed to give American Family timely notice and American Family was prejudiced by Schiesl's failure to do so.

The supreme court noted the insurer has the burden to show that the notice was not timely. The time lapse in this case was twenty-three months. Schiesl claimed he did not realize he needed to report this incident because he considered himself a victim of the accident and once he was named as a defendant, he believed he was insured by T.J. Doc's insurance policy. The trial court found that Schiesl should have known "that he might have some trouble" as a result of the accident. Schiesl knew he was not supposed to take anyone up in the elevator and he alone was operating the elevator with the Neffs aboard. As a result, the trial court found that Schiesl failed to provide timely notice of the claim. The supreme court determined this finding was not clearly erroneous.

With regard to the issue of prejudice, the supreme court noted that decisions interpreting the prejudice requirement for a failure to give timely notice provide that "when the insured fails to give notice within one year after the time required by the policy, there is a 'rebuttable presumption of prejudice and the burden of proof shifts to the claimant.'" See Gerrard Realty Corporation v. American States Insurance Company, 89 Wis.2d 130, 146-147, 277 N.W.2d 863 (1979).

According to the supreme court, "prejudice to the insurer in this context is a serious impairment of the insurer's ability to investigate, evaluate, or settle a claim, determine coverage, or present an effective defense, resulting from the unexcused failure of the insured to provide timely notice." American Family claimed prejudice by arguing that the adjuster for Johnson's insurer did not delve deeply enough into the facts relevant to Schiesl's liability or the factors necessary to determine whether American Family's exclusions were applicable. American Family argued the adjuster did not ask Pierzina or Johnson about the rules regarding the use of the elevator, did not go to the second floor of the barn and was unable to determine why the cable broke. In addition, American Family argued once the adjuster determined that Schiesl was not an employee of T.J. Doc's or Johnson, he had no reason to probe further into the details of the accident because his insurance company did not provide coverage to Schiesl if there was no employer-employee relationship. As a result, the supreme court found that the trial court's decision was not "clearly erroneous."