Illinois Supreme Court Declines To Adopt "Notice-Prejudice Rule"
June 2006
In Country Mutual
Insurance Co. v. Livorsi Marine, Inc. (May 16, 2006), the Illinois Supreme
Court held that an insurer need not demonstrate it was prejudiced by an insured's
unreasonable and unexplained delay in providing notice of suit to deny coverage
for the claim. The court held that "lack of prejudice may be a factor in determining
the question of whether a reasonable notice was given in a particular case,"
but that lack of prejudice "is not a condition which will dispense with the
requirement" of reasonable notice.
by Kevin
Merriman
Goldberg
Segalla LLP
The insureds brought lawsuits against each other for damages and injunctive
relief for various trademark infringements. Each was insured under commercial
general liability policies issued by Country Mutual. As a condition of coverage,
the policies each contained provisions requiring the insureds to provide notice
of a claim or suit "as soon as practicable." Though there had been telephone
conversations between one of the insureds and Country Mutual about the possibility
of suits, neither party informed Country Mutual of the lawsuits for more than
20 months after they had been filed.
Country Mutual denied coverage for the claims, and sought a declaratory judgment
that it was not obligated to defend or indemnify the parties in connection with
the trademark lawsuits. With respect to late notice, Country Mutual maintained
that the insureds breached the notice condition of their respective policies
by failing to inform Country Mutual of the lawsuits for more than 20 months.
The insureds argued that Country Mutual was required to demonstrate prejudice
to invoke the late notice defense. In this regard, the insureds argued that
because Country Mutual insured both parties, it had a conflict that would have
prevented the insurer from investigating the claim or defending either party.
Since the insurer would have had to pay for independent counsel for both parties
regardless of when it received notice, the timing of notice did not prejudice
the insurer. Country Mutual argued that the proper inquiry was not whether the
insurer was prejudiced, but whether the insureds had given Country Mutual reasonable
notice. Country Mutual argued that prejudice was one of several factors in assessing
the reasonableness of notice, and that such a lengthy delay, without excuse,
was unreasonable as a matter of law.
The Illinois Supreme Court held that the presence or absence of prejudice
to the insurer is but one factor to consider when determining whether a policyholder
has fulfilled policy conditions requiring reasonable notice. The court also
held that once it is determined that the insurer did not receive reasonable
notice of an occurrence or a lawsuit, the policyholder may not recover under
the policy, regardless of whether the lack of reasonable notice prejudiced the
insurer. The court held that this rule applies whether the insured failed to
provide timely notice of the occurrence or the suit.
The court reviewed a number of appellate court decisions, observing that,
when presented with this issue, Illinois courts have examined the circumstances
of the case, including the presence or absence of prejudice, to determine whether
notice was reasonable. The court adhered to its decision in Simmon v. Iowa Mutual Casualty Co., 3 Ill.2d
318 (1954), in which the court noted that, when examining the facts and circumstances
of each case to determine if notice was reasonable:
- lack of prejudice may be a factor in determining the question of whether
a reasonable notice was given in a particular case yet it is not a condition
which will dispense with the requirement.
The court also observed that:
- Other factors in the reasonableness analysis may include the specific
language of the policy's notice provision, the insured's sophistication
in commerce and insurance matters, the insured's awareness of an event which
may trigger insurance coverage, and the insured's diligence in ascertaining
whether policy coverage is available.
In reaching its decision, the court overruled Rice
v. AAA Aerostar, Inc., 294 Ill. App. 3d 801 (1998), in which an Illinois
appellate court had distinguished between notice of an occurrence and notice
of a lawsuit, stating that when notice of a lawsuit was at issue, "the rule
is that the insurer is required to show that it was prejudiced by the insured's
omission or delay in order to escape liability on its policy." The court concluded
that this distinction was unsupported by Illinois precedent, and would "not
permit the anomaly of Rice to supersede decades of case law that accords with
this court's statement in Simmon."
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
to provide legal, accounting, or other professional advice or opinion. If such advice
is needed, consult with your attorney, accountant, or other qualified adviser.