Fourth Circuit Upholds Summary Judgment for Insurer Based on Late Notice Because Insurer Suffered Actual Prejudice Due to Default Judgment

The United States Court of Appeals for the Fourth Circuit, applying Maryland law, has affirmed the entry of summary judgment in favor of an insurer where it received late notice of a suit in which the underlying court had entered default judgment against the insured, finding that the insurer was actually prejudiced by the delay. St. Paul Mercury Ins. Co. v. Am. Bank Holdings, Inc., 2016 WL 1459517 (4th Cir. Apr. 14, 2016).

The insured, a bank, was served with a complaint and summons for an action in Illinois state court, but because of an internal oversight, the insured did not timely respond to the summons. The Illinois court entered a default judgment against the insured for $98.5 million. Eight months after the bank was served with the summons, the plaintiff in the state court action began to attempt to collect the default judgment in Maryland, where the insured was based, and the insured notified its insurer of the lawsuit. The insurer denied coverage due to late notice. The plaintiff in the state court action offered to settle the suit for an amount within policy limits, and the insured provided the insurer with a settlement demand. The insurer reiterated its denial of coverage. The insured ultimately was able to have the default judgment vacated and the suit dismissed, but incurred significant defense costs in doing so.

The insurer filed suit, seeking a declaration that it had no duty to pay for the insured’s defense costs in the state court action to have the default judgment vacated and further defend that action. The insurer and insured filed cross-motions for summary judgment, and the Maryland district court entered summary judgment for the insurer. The district court concluded that because the insured did not provide the insurer with notice “as soon as practicable” as required by the terms of the policy and because the late notice caused the insurer prejudice, the insurer properly denied coverage.

The Fourth Circuit affirmed. First, the court rejected the insured’s argument that notice was timely because it was not obligated to notify the insurer until it had actual knowledge of the underlying suit. The court determined that the plain language of the notice obligation did not require that the insured have actual notice; instead, the insured was obligated to provide notice of a claim as soon as practicable. Because the policy defined “claim” to mean a proceeding commenced by the service of a complaint, the court held that the requirement to give notice was triggered by service of a complaint. The court also held that even if actual notice were required, the insured had actual notice when the complaint was served on one of its agents. The court also rejected the insured’s argument that the language “as soon as practicable, but in no event later than . . . sixty days after expiration of the Policy Year” set two alternative deadlines for notice. The court determined that this language sets “as soon as practicable” as the only deadline and further provides that notice may never be later than sixty days after expiration.

Next, the Fourth Circuit further agreed with the district court that the insurer suffered actual prejudice because of the delay, reasoning that the insurer was precluded from exercising essentially all of its rights under the policy to participate in the defense, to advance credible defense strategies before the default judgment was entered, to participate in the selection of counsel, and to possibly negotiate a settlement with the plaintiff prior to incurring substantial costs to vacate the judgment. In this regard, the court stated that, “[w]hen a late notice precludes an insurer from exercising meaningful contractual rights provided to it by the policy—in this case, all the contractual rights—we agree with the district court that the insurer has suffered actual prejudice.”

The court also rejected the insured’s argument that the insurer waived or was estopped from asserting its late notice defense based on a telephone conversation during which the insurer’s claim examiner allegedly told the insured’s general counsel that coverage existed for the action. The court noted that there was no evidence that the insured had changed its position based upon this conversation, and the insurer repeatedly asserted that it retained the right to raise any coverage issues and assert appropriate defenses. Thus, the Fourth Circuit held that it could not find an actual intention on the part of the insurer to relinquish an existing right as required under Maryland law.

Finally, the court determined that the insurer did not act in bad faith in denying coverage because the insured could not satisfy the statutory requirement that there be a finding in favor of the insured that coverage actually existed.

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