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INCONTESTABILTY CLAUSE IN LIFE INSURANCE POLICY RENEWED UPON POLICY REINSTATEMENT

INSURER LIABLE FOR PRE-TENDER DEFENSE FEES AND PREJUDGMENT INTEREST

I recently wrote an article published in the Connecticut Law Tribune about the Massachusetts Supreme Court’s decision in Boyle v. Zurich American Ins. Co., 36 N.E.3d 1229 (Mass. 2015), in which the Court held Zurich Insurance Company liable for a default judgment entered against its insured notwithstanding that the insured failed to notify the insurer of the lawsuit.  Although the insurance company was notified of the incident giving rise to the lawsuit shortly after the incident occurred, it was not notified of the lawsuit against its insured until the plaintiff’s attorney in the lawsuit notified the insurer of a default judgment entered against the insured and an upcoming hearing in damages.  The court held that the insured’s failure to notify the insurer of the lawsuit did not relieve the insurer of its defense obligations upon learning of the lawsuit when the insurer did not prove it was prejudiced by the insured’s inaction.  As a result, the insurer was held liable for the full amount of damages rendered against the insured in excess of the policy limits for its breach of the duty to defend.    You may read the Connecticut Law Tribune article discussing the Boyle case here.  

A Connecticut federal court recently relied upon the prejudice requirement established by Boyle to hold an insurer responsible under Massachusetts law for defense fees an insured incurred during two years of litigation before the insured tendered the claim to the insurer and requested the insurance company to defend the litigation.  Like the insurer in Boyle, the insurer’s failure to prove it suffered prejudice resulting from the insured’s failure to comply with a notice provision of the insurance policy obligated the insurer to pay the defense costs.   You can read the court’s decision in Dominion Energy, Inc. v. Zurich American Ins. Co., 2016 WL 1032711 (D.Conn. Mar. 15, 2016) here.

Under an agreement between Dominion and Alstom Power, Inc., Alstom was required to defend Dominion for claims arising from Alstom’s work at certain Dominion facilities. To satisfy its defense and indemnity obligations, Alstom purchased a commercial general liability policy from Zurich Insurance Company under which Dominion was named as an additional insured.  The policy required the insured to notify the insurance company “as soon as practicable” of an occurrence or offense which may result in a claim and to notify the insurer “as soon as practicable” if a claim was made or a lawsuit was filed against any insured.

One month after an explosion occurred at a Dominion facility serviced by Alstom that resulted in the deaths of three individuals and alleged injury of two others, Alstom’s third-party claims administrator notified Zurich that Dominion was a client of Alstom and that the incident could involve the Zurich policy. A wrongful death lawsuit was filed in May, 2009 against Dominion, Alstom and other defendants.  Zurich received notification of the lawsuit in July, 2009, apparently from Alstom’s claims administrator.  In April 2011, two years after the lawsuit was filed, Dominion requested Zurich to defend it in the lawsuit. 

After Zurich refused Dominion’s request for a defense under the policy, Dominion filed a lawsuit to establish Zurich’s duty to defend Dominion and to recover damages for Zurich’s breach of its duty to defend, including the attorney fees Dominion incurred during the two years of litigation before Dominion requested Zurich to defend it in the litigation. Zurich filed a motion for summary judgment contending that it was not liable for any defense fees incurred before Dominion requested Zurich to defend Dominion in 2011.  The court rejected Zurich’s claim and held that, under Massachusetts law, an insurer must defend an insured on a covered claim notwithstanding an insured’s failure to notify the insurer of the lawsuit unless the insured’s failure to comply with the notice provision of the policy prejudiced the insurer by depriving it of an opportunity to mount an effective defense.  The fact that the insurance company was promptly notified of the incident which gave rise to the lawsuit and that it had actual notice of the lawsuit filed against a party it insured was material to the court’s holding.  Additionally, the insurer offered no evidence or argument that it was prejudiced by the insured’s failure to tender the defense of the case to the insurer until two years after the litigation was filed.  As a result, Zurich was liable for the defense costs Dominion incurred during the two years before it requested a defense from Zurich.  The court had previously ruled that Zurich was liable for prejudgment interest on any costs incurred by Dominion before it requested the insurer to defend it. 

The outcome of the Dominion case may have been different if Zurich had not been notified that a lawsuit had been filed.  The Dominion case serves as a reminder to corporate and individual policyholders of the importance of promptly notifying all insurers who may provide coverage for an incident upon the happening of an incident which may give rise to a claim.  Policyholders also should promptly notify the insurer of any lawsuit filed against the insured and request the insurer to defend the claim when the lawsuit is filed.  Under Boyle and Dominion, however, an insurer may not be relieved of its defense obligations in Massachusetts merely because an insured does not provide notice of a lawsuit or request the insurer to defend the litigation.  To be relieved of its defense obligations when an insured fails to notify the insurer of the lawsuit, the insurer must prove it was prejudiced by the insured's inaction. 

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