Insured’s Late Notice Dooms One Insurer’s Claim against Another

An appellate court in Illinois, affirming a trial court’s decision, has ruled that an insurer could not recover a settlement payment from another insurer, where the insured failed to timely notify the insurer of the underlying action.

The Case

Kevin Smith filed a negligence action alleging that he was injured at a construction site while working for a subcontractor on the project. Smith sued the general contractor, a carpentry subcontractor, and a concrete subcontractor.

At the time, the general contractor had a general liability policy with Cincinnati Insurance Company; the carpentry subcontractor had both a primary general liability policy and an umbrella policy with AMCO Insurance Company; and the concrete subcontractor had a general liability policy with Erie Insurance Exchange. The general contractor was an additional insured under the AMCO policy issued to the carpentry subcontractor, and also had a certificate of insurance indicating that it was covered under the Erie policy issued to the concrete subcontractor.

On May 7, 2008, the general contractor tendered its defense of the Smith action to AMCO, who accepted under a reservation of rights.

Then, on December 2, 2009, the general contractor tendered its defense of the Smith action to Erie in a letter to the concrete subcontractor’s defense counsel. In the letter, the general contractor stated that it was an additional insured under the Erie policy; that it was being defended under a reservation of rights by the carpentry subcontractor’s insurer (AMCO); and that it was also requesting defense and indemnity from Erie. Erie accepted the general contractor’s defense subject to a reservation of rights.

On March 25, 2011, AMCO settled the action with Smith for $1,450,000: $1 million on behalf of the general contractor and $450,000 on behalf of the carpentry subcontractor. Of the $1 million settlement amount paid on behalf of the general contractor, AMCO allocated $550,000 to be paid under AMCO’s primary policy and $450,000 to be paid under the AMCO umbrella policy. The settlement agreement also contained an assignment of rights by the general contractor and carpentry subcontractor to AMCO for any claims they may have against Cincinnati and Erie.

Erie eventually settled the Smith action on behalf of the concrete subcontractor for $5,000, but did not reimburse AMCO for any portion of the settlement amount that AMCO had paid on behalf of the general contractor.

On December 2, 2011, AMCO sought a declaratory judgment against Erie and contribution for the $1 million settlement amount it paid on behalf of the general contractor.

The Erie policy required notice “as soon as practicable.”  The trial court decided that the general contractor’s notice to Erie was untimely as a matter of law. AMCO appealed, arguing that the general contractor’s notice of the Smith action to Erie had been reasonable and timely under the circumstances and that Erie had received actual notice of the Smith action within a reasonable time.

The Appellate Court’s Decision

The appellate court affirmed.

In its decision, the appellate court observed that the general contractor had tendered a formal notice of the Smith action to Erie for coverage almost three years after the initial filing of Smith’s action against the general contractor. The delay of almost three years, the appellate court ruled, “could not realistically” be deemed an “immediate” submission of the complaint to Erie. Thus, the appellate court declared, the notice provision in the Erie policy was violated as a result of the general contractor’s failure to immediately send Erie copies of any demands, notices, summonses, or legal papers it received in connection with the Smith action.

The appellate court also decided that the general contractor’s delay in tendering its defense of the Smith action to Erie after a delay of almost three years was “untimely as a matter of law.”

Moreover, it continued, the general contractor’s duty to notify Erie of the lawsuit “as soon as practicable” was not negated by the fact that Erie “undoubtedly knew” about the Smith action more than a year before it had received the notice from the general contractor.

The appellate court also found that the general contractor possessed a “high degree of sophistication” in matters of commerce and insurance; that the general contractor had known of Smith’s action more than two years before it had notified Erie; and that Erie had been prejudiced by the general contractor’s delay in giving notice to Erie. Accordingly, the appellate court concluded that the general contractor’s delay in notifying Erie of the Smith action had been unreasonable.

Therefore, because the general contractor’s untimely notice barred coverage under the Erie policy, the appellate court ruled that AMCO was not entitled to seek contribution from Erie for the $1 million that AMCO had paid in settling the Smith action against the general contractor.

The case is AMCO Ins. Co. v. Erie Ins. Exchange, No. 1-14-2660 (Ill. Ct. App. Feb. 16, 2016).