Procrastination by the Insured and Notice Requirements: How Late is Too Late For Insurance Coverage?
Most insurance policies require the insured to give notice of an accident, occurrence, or loss within a specified period of time -- usually “as soon as reasonably possible” or “as soon as practicable.” But what does this mean? This article will explore the obligation of the insured to provide timely notice and what needs to be shown in order for insurance coverage to be precluded.
Wisconsin Statutes Notice Provisions
Two statutes related to notice are included in the Wisconsin Statutes, Sections 631.81 and 632.26. These sections govern the notice provisions in Wisconsin insurance policies and establish the rights and duties of the insured and the insurer.
Wisconsin Statutes § 631.81 is entitled “Notice and proof of loss.” Subsection (1) reads:
TIMELINESS OF NOTICE. Provided notice or proof of loss is furnished as soon as reasonably possible and within one year after the time it was required by the policy, failure to furnish such notice or proof within the time required by the policy does not invalidate or reduce a claim unless the insurer is prejudiced thereby and it was reasonably possible to meet the time limit.
Wisconsin Statutes § 632.26 is entitled “Notice provisions.” Subsection (1)(b) provides:
That failure to give any notice required by the policy within the time specified does not invalidate a claim made by the insured if the insured shows that it was not reasonably possible to give notice within the prescribed time and that notice was given as soon as reasonably possible.
Subsection (2) then provides:
EFFECT OF FAILURE TO GIVE NOTICE. Failure to give notice as required by the policy as modified by sub. (1)(b) does not bar liability under the policy if the insurer was not prejudiced by the failure, but the risk of nonpersuation is upon the person claiming there was no prejudice.
The decisions interpreting Wisconsin Statutes § 631.81(1) hold 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 to prove that the insurer was not prejudiced by the untimely notice.”[i] Courts have already examined and struck down the argument that the insurance company should instead carry the burden to prove prejudice because it is in the best position to obtain or possess the evidence germane to this question.[ii]
Prejudice in this context is an 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.[iii] Generally, whether a liability insurer has been prejudiced by late notice is considered a question of fact, but may be determined as a matter of law where there are no disputed facts about (1) when notice was given and, (2) that the time delay was not reasonably necessary under the circumstances.[iv]
Decisions Defining Prejudice Due to Late Notice
In Neff v. Piezina, the Wisconsin Supreme Court examined a late notice claim where there was a time lapse of twenty-three months between when an accident involving an elevator crash occurred and the insured providing notice to his insurer.[v] The Neff court added strength to a late notice defense by holding that the insurer was prejudiced by this untimely notice, even though an investigation of the accident took place by another insurance company six months after the accident.[vi] In making this determination, the court highlighted that insurers want timely notice so they can investigate the circumstances of an accident, contact the witnesses while they are still available and before their recollection of events is forgotten or distorted, and locate unknown witnesses.[vii] The ability to conduct an investigation can be impaired when witnesses are no longer available or when witnesses have become entrenched in a position because they have calculated the legal effect of their answers.[viii]
More recently in Kreckel v. Walbridge Aldinger Co., the Wisconsin Court of Appeals upheld the decision that the insurer had no duty to defend or indemnify an additional insured due to a twenty-six month delay in providing notice of a claim.[ix]
In this case, Walbridge Aldinger Co. was a general contractor and insured by St. Paul; Olympic was a subcontractor and insured by CNA. The contract between Walbridge and Olympic stated that Olympic would add Walbridge as an additional insured onto its liability insurance policy, which was issued by CNA. The plaintiff, an Olympic employee, was injured on the job on September 14, 2000. An action was started against Walbridge on February 5, 2002; on April 6, 2004, St. Paul formally tendered Walbridge’s defense to CNA because Olympic agreed to indemnify Walbridge under the terms of the subcontract.[x] Thus, there was an approximately twenty-six month delay in between the suit being filed and CNA receiving notice of the claim from Walbridge.
The court, relying on Neff v. Pierzina, reiterated that untimely notice may prejudice the insurer in that it cannot seek an immediate determination of coverage, it cannot participate in alternative dispute resolutions efforts, and it cannot select defense counsel and control the defense.[xi] Walbridge argued that CNA was not prejudiced because it received copies of all of the relevant documents since joining the litigation and that Walbridge handled over its own investigation, conducted through discovery, thereby saving the insurance company the time and effort of conducting any further independent investigation of its own.[xii] This argument was readily rejected by the court, which held that the insured did not overcome the presumption of prejudice and had not produced any credible evidence that the insurer would have performed the same investigation, employed the same negotiation strategies, or pursued the same legal strategies as Walbridge did during the first two years of pre-trial litigation.[xiii]
The general theme of these cases show that the courts are willing to place a heavy burden upon the procrastinating insured to prove prejudice when notice is provided after the one year deadline. However, practitioners should be wary of situations where the insured argues against prejudice because the insurer would have “denied coverage anyways.” In some situations, this argument has carried the day and resulted in a finding of no prejudice, thereby invoking the insurance company’s duty to defend and indemnify. For example, in Fireman’s Fund Ins. Co. v. Bradley Corp., the Wisconsin Supreme Court ruled that the insured had met his burden to prove lack of prejudice because the insurance company’s litigation manager testified that he would have denied coverage and a duty to defend on the exact same complaint, even if he had been provided with notice only one month after suit was filed.[xiv] This evidence satisfied the court, which found that there was no prejudice despite the fact that the insured gave notice of the claim almost fifteen months after the lawsuit was brought and only two weeks before a preliminary injunction hearing was scheduled to occur.[xv]
In sum, when faced with a late notice case, it is prudent to examine the coverage defense by establishing when the insured was first aware of the accident, occurrence, or loss and confirming that the delay was not necessary under the circumstances. Coverage counsel should also investigate facts which support a finding of prejudice (e.g. witnesses’ memories have changed, evidence has been altered or destroyed, witnesses have become unavailable, etc.) to be ready to attack the contentions that the insurance company would have “conducted the same investigation”, if one was performed, or “denied coverage anyways.” Although the burden of proof does shift to the procrastinating insured after a one year delay, counsel should be armed and ready to argue that the late notice was prejudicial and insurance coverage shou
[i] Gerrard Realty Corp. v. Am States Ins. Co., 89 Wis. 2d 130, 144-47, 277 N.W.2d 863 (1979).
[ii] Ranes v. American Family Mutual Insurance Co., 212 Wis. 2d 626, 569 N.W.2d 359,362 (Ct. App. 1997).
[iii] Neff v. Pierzina, 2001 WI 95, ¶ 44, 245 Wis. 2d 285, 629 N.W.2d 177.
[iv] RTE Corp. v. Maryland Casualty Co., 74 Wis. 2d 614, 247 N.W.2d 171,179 (1976); Neff, 2001 WI 95 at ¶ 48.
[v] Neff, 2001 WI 95 at ¶ 49.
[vi] Id. ¶¶ 18, 67.
[vii] Id. ¶ 59.
[ix] Kreckel v. Walbridge Aldinger Co., 2006 WI App 168, ¶ 23, 721 N.W.2d 508.
[x] Id. ¶¶ 3, 5.
[xi] Id. ¶ 18.
[xii] Id. ¶ 17.
[xiii] Id. at ¶ 18.
[xiv] Fireman’s Fund Ins. Co. v. Bradley Corp., 2003 WI 33, ¶¶ 62-63, 261 Wis. 2d 4, 660 N.W.2d 666.
[xv] Id. ¶¶ 55, 61.