Recent Lowe’s lawsuit is a reminder to notify your insurer

Insurance policies are contracts between the issuing insurer and the insured.  Policies generally have four main components: insuring agreements, exclusions, conditions and definitions. Policyholders should be familiar with all four sections, as any one of them can spell “trouble” for an insured. A recent case involving home improvement retailer Lowe’s brings one common condition of an insurance policy into high focus: the condition to provide timely notice.

Every insurance policy requires the policyholder to notify the insurance company of a claim or lawsuit.  Examples of policy language are provided below:

• Give us prompt notice of the loss or damage. Include a description of the damage  involved. (First Party Property Policy)
• Notify us as soon as possible. (Commercial Crime Policy)
• You must see to it that we are notified as soon as practicable of an occurrence or  offense which may result in a claim. (Commercial General Liability Policy)
• If a claim is made against an Insured, the Insured shall forward as soon as  practicable to the Underwriters written notice of such claim. (Cyber Liability  Policy)

Compliance with the condition to give notice is a requirement before the insurance company is obligated to cover a claim or loss.  Late notice can serve as a defense to coverage, and insurers are quick to invoke the defense to avoid covering a claim.

The recent case of St. Paul Mercury Ins. Co. v. THF Clarksburg Development Two, LLC serves as a stark reminder of the requirement to notify an insurer.  THF was the developer for a new Lowe’s Home Center in West Virginia.  Soon after the store opening, Lowe’s experienced problems with its foundation due to soil settlement issues.  Lowe’s reported the foundation issue to developer THF in 2004; a year later, after conducting its own testing, THF denied there was a problem.  In 2007, Lowe’s filed a lawsuit against THF. At no time in the three years leading up to the lawsuit did THF provide notice to its insurers.

Not surprisingly, the insurers denied coverage for the lawsuit based on the late notice by the developer.  During the time period leading up to the lawsuit, the Statute of Repose had expired.  That made it impossible for to sue the subcontractor who prepared the soil, which prejudiced the insurer’s subrogation rights.  The federal trial and appellate courts agreed that the insurers were prejudiced and did not owe coverage due to the late notice.

Notification in first party insurance scenarios is clearer, as the loss is obvious and the insured wants immediate coverage for the property repairs.  The THF case, however, highlights a common misconception among businesses with third party liability coverage: that a policyholder must only notify the insurer when an actual lawsuit has been filed.  Liability insurance policies (such as CGL and E&O) require notice of any circumstance that may lead to a claim or lawsuit.  The statute of limitation periods are often a year or more before an actual lawsuit must be filed; delaying notification until after a suit is filed may result in a loss of coverage. 

So, what does “as soon as practicable” or “as soon as possible” really mean?  Insurance companies rarely offer a specific time period within a policy; instead, they rely on the aforementioned undefined phrases.  The vagueness of these terms ultimately leads the courts to decide.

While it is obvious to policyholders to provide notice of a monetary demand or lawsuit, because they want the insurer to defend and pay any settlement or judgment, it is often less clear when there has been an incident but nothing immediately comes of it.  This usually requires a more subjective feel by the policyholder as to whether there will be a claim at some point in the future.  Although it seems unreasonable to provide notice to the insurer every time someone complains or is upset, notice to the insurer will always protect the insured’s rights to coverage from a late notice defense.

In order for late notice to bar coverage, the delay must be substantial and material.  There are three factors that bear on the materiality of the delay: (1) the reasonableness of the delayed notice; (2) the amount of prejudice suffered by the insurer as a result of the delay; and (3) the length of time elapsed before notice was given.  The determination of these factors is usually left to a judge or a jury. 

Policyholders must remain vigilant when issues arise and have a protocol in place concerning notification to their insurance company.  Depending on the facts, the insurer may investigate the concern, or it may simply assign a claim number and request to be notified if there are further developments, a demand or, if a lawsuit is filed.  If a policyholder intends to destroy evidence through repairs or disposal, it is critical that the potential claimant and insurance company be notified in order to avoid a claim of prejudice by either one.  Policyholders providing timely notice to their insurer can avoid a costly coverage dispute down the road.

Collin Hite leads the Insurance Recovery Group and the Data Privacy & Security practice at the law firm of Hirschler Fleischer in Richmond. He may be reached at (804)771-9595 or [email protected].