Circuit Reverses Summary Judgment in Favor of Insurer Where It Failed to Prove Prejudice from Late Notice

The U.S. Court of Appeals for the Tenth Circuit, reversing a trial court’s decision, has decided that an insurance carrier was not entitled to summary judgment in a coverage case for late notice where it had not demonstrated that it had been prejudiced.

The Case

In January 2008, employees of the Lyons Salt Company detected an inflow of water in an underground salt mine that the company owned and feared dissolution of the salt or structural problems. As a result, Lyons and its sole shareholder, B.S.C. Holding, Inc., tried to determine the cause and to devise a solution.

In April 2010, Lyons and B.S.C. attributed the inflow to an improperly sealed oil well and regarded the future of the mine as “dire.”

In July 2010, they notified their insurance carrier of the water inflow. The insureds’ ultimate proof of loss was for $7.5 million, which included remediation measures that they had undertaken before they had notified their insurer of the inflow.

The insurer denied the claim and Lyons and B.S.C. sued for a declaratory judgment recognizing coverage for the damage and related expenses. The insurer moved for summary judgment, arguing that the insureds had taken too long to provide notice.

The district court agreed and granted summary judgment to the insurer, and Lyons and B.S.C. appealed to the U.S. Court of Appeals for the Tenth Circuit.

The Circuit Court’s Decision

The circuit court reversed.                                                       

It explained that, under applicable Kansas law, if the insureds had waited too long to notify their insurer, the delay only would relieve the insurer from providing coverage “if it proved substantial prejudice.” It then found that the insurer had not demonstrated that it had been prejudiced by late notice.

The circuit court first rejected the insurer’s argument that it had been prejudiced because it had lost the opportunity to investigate before the insureds began remediation. The circuit court pointed out that the insurer had “independently inspected the mine” but found that it had not demonstrated how its investigation had been hampered by the delay.

The Tenth Circuit was not persuaded by the insurer’s contention that witnesses’ memories were “not as fresh” because of the delay, noting that the insurer did not identify the witnesses whose memories dimmed or explain how stale memories had impeded its investigation.

Next, the circuit court rejected the insurer’s contention that it had been prejudiced because it could not offer input to the insureds in their remediation efforts, explaining that the insurer had not presented evidence on how this input would have affected the remedial efforts.

Finally, the Tenth Circuit also rejected “underwriting prejudice,” finding that there was no evidence that the insurer would have cancelled, non-renewed, or amended policies had it been provided with timely notice.

Accordingly, the circuit court reversed the district court’s decision and remanded with instructions to vacate the summary judgment award to the insurer.

The case is B.S.C. Holding, Inc. v. Lexington Ins. Co., No. 13-3142 (10th Cir. March 11, 2014).