Late Notice Negates Insurer's Obligation
May 05, 2009
The U.S. District Court for the Northern District of Illinois recently held that an insurer had no obligation to defend or indemnify a city's police department after receiving late notice of a claim, and, moreover, that the insurer was not estopped to raise the late notice defense even though it did not file for a declaratory judgment prior to entry of judgment in the underlying case. American Safety Casualty Insurance Company v. City of Waukegan, 2009 WL 855795 (March 30).
The insurer, Scottsdale Insurance Company, was represented by Meagher & Geer of Scottsdale, Arizona, and Mulherin, Rehfeldt & Varchetto of Wheaton. Scariano, Himes & Petrarca of Chicago represented the insured City of Waukegan Police Department.
Waukegan police officers arrested Alejandro Dominguez in 1989, charged him with aggravated sexual assault and home invasion. Dominguez was convicted, and spent several years in prison. Later, however, a DNA test excluded him as the rapist, and in 2002 his convictions were vacated and he was found not guilty.
In 2004, he brought suit against the Waukegan Police Department in federal court alleging various claims, including false arrest, malicious prosecution, violation of constitutional rights, and intentional infliction of emotional distress. A benefits administrator at the police department received notice in May 2004, researched insurance coverage, and sent various insurance policies to a claims management service, for notice to be given to insurers.
Per the instructions from the police department, the claims management service provided notice to International Special Risk Services, which had not, in fact, issued any law enforcement liability coverage to the police department for the relevant time period. The claims management service then followed up with the broker that had sold insurance policies to the city for the time period in question, Arthur J. Gallagher Risk Management Services.
AJG procured three law enforcement liability policies from Scottsdale on behalf of the city for the period 1988 through 1991, on an occurrence basis, the coverage being conditioned upon Scottsdale receiving prompt notice of any claim. Following the filing of the Dominguez lawsuit, however, neither AJG nor the claims management service informed the city about the Scottsdale policies.
It was not until September 2006 that the city discovered that International did not provide the relevant coverage for the Dominguez lawsuit and that the Scottsdale policies did. The city immediately gave notice to Scottsdale, which was received by the company on Sept. 29, 2006, just four days before the scheduled trial in federal court.
Scottsdale did not appear to defend at the Dominguez trial, but rather issued a reservation of rights letter to the city on October 9, 2006, reserving the company's right to deny coverage based on late notice. On October 17, 2006, the jury found in favor of Dominguez and against Waukegan and a police officer in the amount of $9 million.
In November 2006, Scottsdale advised the city that it was investigating the Dominguez claim, and it filed this declaratory judgment action in January of 2007. Scottsdale subsequently filed a motion for summary judgment.
In an opinion by Judge Virginia M. Kendall, the court granted Scottsdale's motion. After disposing of procedural matters, Kendall focused on three notice-related issues. The first was the timeliness of the notice actually received by Scottsdale. She noted that the city first gave actual notice to Scottsdale some 28 months after the Dominguez suit was filed.
According to Kendall, a lengthy passage of time between when an insured becomes aware of a claim and when it gives the insurer notice is not an absolute bar to coverage if the insured has a justifiable excuse for the delay. She relied on four factors to determine the reasonableness of the notice: the language of the policy, the sophistication of the insured, the insured's notice of the claim, and the insured's diligence.
Scottsdale's policies here required that notice be given immediately of any suit brought against the city. Kendall found, moreover, that Waukegan is a sophisticated insured in the context of a law enforcement liability policy. As for the third factor, the city had notice of the claim more than two years before it notified Scottsdale.
Concerning diligence, Kendall said that the evidence was mixed, with some evidence of the city's diligence in notifying insurers, but that, ultimately, it took the city two years to discover that Scottsdale's law enforcement policies were relevant, therefore indicating a lack of diligence.
In addition to these four factors, Kendall observed that, under Country Mut. Ins. Co. v. Livorsi Marine Inc., 856 N.E.2d 338 (Ill. 2006), prejudice can be a factor bearing on the reasonableness of an insured's notice. She determined that Scottsdale had in fact been prejudiced because it did not receive notice until four days before trial, and thereby had been deprived of its opportunity to investigate the claim and possibly to work out a settlement. Under these circumstances, Waukegan failed to provide a justification for its late notice.
As a second issue, Kendall considered whether notice to AJG could be considered notice to Scottsdale. She noted that Illinois differentiates between insurance brokers and insurance agents, and if AJG is merely a broker, its knowledge is not imputed to Scottsdale.
In determining whether an insurance intermediary is an agent or a broker, Kendall used another four-part test: who calls the intermediary into action, who controls its actions, who pays the intermediary, and whose interests the intermediary represents. Although she said that the evidence upon summary judgment was not sufficient to address all these points, what evidence there was demonstrated that AJG was not an agent of Scottsdale.
Kendall noted, for example, that AJG did not have an exclusive relationship with Scottsdale, for Waukegan had purchased the International policies from AJG as well. The city even acknowledged in its pleadings that it had not given ''actual notice'' to Scottsdale until September 2006. In addition, Kendall took judicial notice of AJG's Web site, which indicated that it is one of the world's largest insurance ''brokerage'' service firms. All this evidence indicated that AJG was acting as a broker and not as an agent.
The third issued addressed by Kendall was whether Scottsdale was estopped from raising the late notice issue. She noted that under Employers Ins. of Wausau v. Ehlco Liquidating Trust, 708 N.E.2d 1122 (Ill. 1999), an insurer taking a non-coverage position must either defend the insured under a reservation of rights, or file a declaratory judgment action, and that it must do so even when the non-coverage position is based on late notice.
The declaratory judgment action, moreover, must be filed in a timely manner, and generally such an action filed after the underlying lawsuit has been resolved is untimely as a matter of law. This is not the case, however, said Kendall, where notice is given so late that the insurer has no opportunity defend or participate in the underlying suit.
Here Waukegan gave Scottsdale notice just four days before the jury trial began, so that Scottsdale had no meaningful opportunity participate in the underlying suit. Under these circumstances, Scottsdale's declaratory judgment action, filed in January 2007, three months after receiving notice of the lawsuit, would be considered timely.
For these reasons, the court granted Scottsdale's summary judgment motion, finding that it had no coverage obligation.
