Insured’s Settlement Prejudiced Insurer as a Matter of Law, Nebraska Supreme Court Holds

The Supreme Court of Nebraska, in a case of first impression, has ruled that an insurance company must show prejudice to prevail on a defense based on an insured’s violation of the voluntary payment provision in a commercial general liability insurance policy – and that prejudice was shown as a matter of law where the insured’s settlement deprived the insurer of the opportunity to protect its interest in the litigation or participate in settlement discussions.

The Case

Rent-A-Roofer, Inc., doing business as A-J Roofing & Waterproofing, settled a lawsuit without notifying its insurer – Farm Bureau Property & Casualty Insurance Company – of the lawsuit. After settlement, Rent-A-Roofer sought coverage from Farm Bureau.

Farm Bureau declined coverage because Rent-A-Roofer had failed to meet the voluntary payments provisions of its insurance policy.

The trial court ruled in favor of the insurer, and Rent-A-Roofer appealed to the Nebraska Supreme Court.
The Nebraska Supreme Court’s Decision

The Nebraska Supreme Court affirmed.

In its decision, the court observed that to prevail on a late notice defense, a liability insurer had to show that it had been prejudiced.

The court had not previously addressed whether the breach of a voluntary payments provision also amounted to a material breach of an insurance contract, or whether the additional element of prejudice had to be shown before the insurer could prove a material breach and avoid liability.

It pointed out that the purpose of a voluntary payments provision was to ensure that an insurer had an opportunity to protect its interests. Given the similarity in purpose between notice provisions and voluntary payments provisions, the court ruled it was “proper to maintain the prejudice requirement” when an insurer sought to avoid coverage for breach of a voluntary payments provision.

It then held as a matter of law that an insurer was not liable for defense costs where defense of a claim concluded before the insured notified the insurer and after the parties had entered into the final settlement agreement. In the court’s view, this “complete lack of an opportunity to engage in the defense” was “prejudicial to the insurer.”

In this case, the court concluded that the “complete denial” of Farm Bureau’s opportunity to engage in the defense, take part in settlement discussions, or consent to the settlement agreement, “was prejudicial as a matter of law to Farm Bureau.” As a result, Farm Bureau was not liable for Rent-A-Roofer’s defense costs.

The case is Rent-A-Roofer, Inc. v. Farm Bureau Property & Cas. Ins. Co., 869 N.W.2d 99 (Neb. 2015).