Move to Force Coverage From Excess Insurer Goes Nowhere

September 27, 2019 / Writing and Speaking

By Don R. Sampen, published, Chicago Daily Law Bulletin September 23, 2019

The 7th U.S. Circuit Court of Appeals recently held that late notice to an excess insurer relieved the insurer of any obligation to indemnify the insured.

The insurer in Landmark American Insurance Co. v. Deerfield Construction Inc., 2019 U.S. App. Lexis 23962 (7th Cir. Aug. 12, 2019), was represented by Traub Lieberman Straus & Shrewsberry. Momkus LLC in Lisle represented the insured, Deerfield. Walker Wilcox Matousek LLP represented Deerfield’s broker, Arthur J. Gallagher Risk Management Services Inc., a third-party defendant.

Deerfield’s employee was involved in an automobile accident in 2008, as a result of which Deerfield and its employee became subject to some 11 years of litigation. American States Insurance Co. provided primary coverage, up to a $1 million limit. Deerfield’s broker, Gallagher, also procured excess coverage for Deerfield through Landmark with a $10 million limit.

In April 2013, more than a year before trial, the claimant made a $1.25 million settlement demand, which would have triggered Landmark’s policy, but no one notified Landmark about the litigation. American States countered with a $75,000 offer, which was rejected.

In late 2014, about six weeks before trial, Landmark finally found out about the lawsuit from Gallagher. Its claims adjuster valued the case at an upper limit of $750,000. Landmark at that time issued a reservation of rights letter to Gallagher, set up a $1 reserve to keep the file open and began receiving litigation reports.

Although the parties to the underlying case came close to executing a high-low agreement within the American States limit, they never signed the deal and the jury returned a verdict of about $2.3 million. Landmark then notified Deerfield that it was reserving its rights to deny coverage based on late notice.

It followed with this declaratory action, seeking a determination that it had no coverage obligation because of late notice. Deerfield responded with a third-party complaint against Gallagher and others. The U.S. District Court granted summary judgment for Landmark and dismissed Deerfield’s claim against Gallagher. It also declined to exercise jurisdiction over the remaining third-party claims. Deerfield took this appeal.

Late notice

In an opinion by Chief Judge Diane P. Wood, the 7th U.S. Circuit Court of Appeals affirmed. She observed that, in Illinois, late notice depends on the totality of circumstances. Specific factors to be considered include policy language, the insured’s sophistication, the insured’s awareness of an event triggering coverage, the insured’s diligence in determining whether coverage is available and prejudice to the insurer.

Most of these factors, Wood said, favored Landmark. The policy language, for example, required “prompt” notice. Wood said that notifying Landmark five to seven years after the accident was not prompt.

As to the second factor, Deerfield argued that it was not sophisticated because it never had an excess insurance claim before. But Wood said the company had 50 employees and was savvy enough to have excess coverage in the first place. So this factor favored Landmark as well.

On the third factor, Wood said Deerfield was aware that the underlying claim could trigger the excess policy, particularly once the claimant made a $1.25 million demand in April 2013. Deerfield argued that its attorney never advised it of the demand, but Wood found that the attorney’s knowledge had to be imputed to Deerfield.

Deerfield argued that the fourth factor — its awareness of the availability of coverage — favored it because it dealt through brokers and attorneys, all persons who were more knowledgeable than it about insurance matters. But all those persons, and Deerfield itself, according to Wood, believed that the Landmark policy would provide coverage if a sufficiently high verdict were returned. So Deerfield could not be excused from notifying Landmark.

Finally, as to prejudice, Wood acknowledged that this factor cut both ways. On the one hand, Landmark conceded that it had no criticism of how the underlying case was handled. On the other, Landmark learned about the case so late in the litigation that it may have thought that the costs of any change in strategy would outweigh the benefits. Wood said this factor was either a tie or slightly favored Landmark.

Estoppel, brokerage issues

Deerfield also raised an estoppel argument, contending that Landmark’s failure to reserve based on late notice until after the jury returned a verdict should estop it from denying coverage.

Wood rejected the argument. She noted initially that Landmark never undertook the defense of Deerfield. Thus, estoppel could not have arisen under the case law requiring an insurer to assert its reservation prior to defending.

As for general equitable estoppel, Wood found that Landmark never made a misrepresentation concerning its intention to stand on its policy language. Rather, it always acted consistently with its belief that the claim should be covered by the American States policy. Deerfield, therefore, could not demonstrate a reliance on Landmark’s actions to the detriment of Deerfield.

Deerfield further contended that Gallagher served as Landmark’s agent and, hence, that the notice of the litigation Deerfield provided to Gallagher should be imputed to Landmark. Wood found, however, that Gallagher, a broker, consistently served as Deerfield’s agent, not Landmark’s.

Nor could Gallagher, as agent and broker of Deerfield, be liable for a breach of fiduciary duty or negligence for failure to notify Landmark. The Illinois Insurance Placement Liability Act (735 ILCS 5/2-2201) relieves a broker of a fiduciary duty in most instances, except when dealing with the misappropriation of funds.

And Deerfield, according to Wood, identified no Illinois cases establishing that a broker has the obligation to give notice of a claim to an excess insurer on behalf of the insured.

The court, therefore, affirmed the summary judgment in favor of Landmark based on late notice and affirmed the dismissal as to Gallagher.

Key points

  • Late notice as to an excess insurer involves consideration of the same factors applicable to other insurers.
  • Estoppel to deny coverage based on late notice will not apply to an excess insurer that has not agreed to defend the insured, unless the insured is able to demonstrate, among other facts, a misrepresentation and a reliance by the insured to its detriment.
  • A broker serving as agent to the insured has no duty to give notice of a claim to an excess insurer, under either fiduciary or negligence theories of liability.
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