Late Notice to Insurer Leaves Little Defense Over Duty to Defend

By Don R. Sampen, published, Chicago Daily Law Bulletin
[January 23, 2018]

The 7th U.S. Circuit Court of Appeals, construing Illinois law, recently held that an insured’s 21-month delay in notifying its auto insurer of an accident involving what appeared to be a relatively minor injury was unreasonable.

The case is State Auto Property & Casualty Insurance Co. v. Brumit Services, 2017 U.S. App. Lexis 24920 (Dec. 11, 2017).

The insurer, State Auto, was represented by Pretzel & Stouffer Chtd. The Law Offices of Stephen C. Buser of downstate Columbia, Ill., represented the insured, Brumit Services.

Brumit Services’ owner, Carl Brumit, accidentally struck a 68-year-old woman with his truck’s tailgate when backing out of a parking space in a gas station. The woman fell, suffering scrapes and bruises, was treated by an emergency medical team, declined a trip to the hospital and drove herself home. Brumit himself was unaware that he had hit anyone until so informed by a bystander, but he then returned to the scene and called for an ambulance.

Brumit believed the incident so minor that he did not report it to his insurer, State Auto. Twenty-one months later, however, in June 2015, he was served with a lawsuit brought by the woman claiming in excess of $50,000 in damages. At that point, he notified State Auto.

State Auto provided coverage for the Brumit Services vehicle.

As with most policies, however, the State Auto policy required “prompt notice of the accident.” State Auto thus brought this suit seeking a declaratory judgment that it had no duty to defend due to late notice. On cross-motions for summary judgment, the U.S. District Court entered judgment for Brumit Services, and State Auto brought this appeal.

Analysis

In an opinion by Judge Daniel A. Manion, the 7th Circuit reversed. He initially noted the Illinois Supreme Court’s repeated holdings that notice provisions in insurance policies are reasonable and constitute conditions precedent to an insurer’s contractual duties. He then turned to West American Insurance Co. v. Yorkville National Bank, 238 Ill.2d 177 (2010), which, in turn, relied on Country Mutual Insurance Co. v. Livorsi Marine Inc., 222 Ill.2d 303 (2006), for a listing of the factors the Illinois Supreme Court requires to be considered in determining the reasonableness of an insured’s notice.

The first factor is the terms of the policy. In this case, according to Manion, the terms of the State Auto policy were clear: The company had no duty to defend an insured unless the insured provided “prompt notice.” While the district court here quoted language from Barrington Consolidated High School v. Yorkville National Bank, 238 Ill.2d 177 (2010), to the effect that the notice provision does not require that every accident be reported, Manion said the district court construed that case out of context.

Under Barrington Consolidated, the only cases that need not be reported are those that a reasonable person has no basis to believe would give rise to a claim. That was not the situation here.

The second factor is the insured’s sophistication. Brumit here was a high school graduate with two years of college courses, eight years of work experience elsewhere and four years of operating his own business with two employees.

Manion found him to be the type of person who should be expected to possess a better-than-average understanding of commerce and insurance and more sophisticated than the majority of drivers on Illinois roads.

Illinois law, moreover, according to Manion, draws a distinction between auto policies and other types of insurance, such as homeowners’ insurance, which may require greater expertise. By contrast, not much expertise is required to interpret a basic automobile insurance policy.

A third factor is the insured’s awareness that a claim might be filed. Manion disagreed with the district court that the incident involving Brumit was so trivial that it furnished no reasonable ground for him to believe that a claim might arise. To the contrary, Manion believed that Brumit was sophisticated enough to understand that a claim might follow after he knocked a woman to the ground with his truck.

Brumit, moreover, made no attempt to follow up with his victim to ask her if she intended to file a claim. Manion cited Kerr v. Illinois Central Railroad Co., 283 Ill.App.3d 574 (1996), for the proposition that “an insured cannot simply roll the dice with the insurer’s funds, hiding behind the statistical probabilities it has assigned to the case outcome.” Rather, the burden for an insured to give notice is slight, whereas the repercussions of late notice to the insurer can be substantial.

The fourth factor is the insured’s diligence in ascertaining whether the accident would be covered. And here, Manion said, Brumit could have been more diligent by calling his insurance agent to determine whether the accident should have been reported.

The final factor is any prejudice that State Auto may have suffered by virtue of the delay. While Brumit Services argued that early notification would have made no difference, Manion disagreed. He observed that, in a case involving latent injury such as this one, State Auto might have been able to discover a pre-existing medical condition.

It might also have been able to contact the victim to determine her willingness to settle, an opportunity of which the insurer was denied. According to Manion, State Auto therefore was prejudiced.

Based on its analysis of these factors, the 7th Circuit reversed the district court, finding that State Auto had no duty to defend Brumit Services.

Key point

An insurer’s denial of coverage based on late notice of an occurrence requires an analysis of the policy notice language, the insured’s sophistication, the insured’s awareness of a potential for a claim, the insured’s diligence in determining whether the accident would be covered and any prejudice to the insurer arising from the late notice.