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Insurance Law

: INSURANCE LAW NOTES

Late Notice Defense Still Requires Actual Prejudice

By Richard T. Victoria

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The requirement that, to avoid coverage, an insurer must demonstrate that it was actually prejudiced as a result of an insured's late notice of a claim has been reaffirmed by the PA Superior Court.

The case of American States Ins. Co. v. Estate of Braheem arises from the death of Mr. Braheem, who was killed as a passenger in a one car accident. Both he and the driver were legally intoxicated at the time of the accident. Braheem's estate collected the full policy limits from the driver and from Braheem's own UIM carrier. Then, more than two years later, the estate made a claim for more than $900,000 in UIM benefits under an American States policy issued to Braheem's step-father with whom Braheem lived.

American States denied coverage, asserting that the estate failed to notify American State of the settlements with the driver's and Braheem's carriers and that the settlement and two year delay had extinguished American States' subrogation rights against the bar that served the driver.

Looking to its August 2006 decision in Nationwide Insurance Company v. Schneider, requiring an insurer to demonstrate prejudice to succeed on a late notice claim, and reminding that a similar prejudice requirement must be met in order to defeat coverage where a policyholder has violated a "consent to settle" provision, the Court held that, where late notice extinguishes an insurer's subrogation right, the prejudice requirement is satisfied.

Nevertheless, the mere presence of a possible subrogation claim alone is not enough. Thus, the Court discussed the viability and value of a potential dram shop claim, but remanded the case for further examination of the viability and value of such a claim under the particular circumstances of the case.

The morals of the story:

As counsel for an injured party, leave no insurance policy unexamined. As the court noted, Braheem's original counsel apparently did not believe that American State's policy was applicable because Braheem was a stepchild of the policyholder, rather than a blood relative. This may have caused the delay resulting in the prejudice claim.

As counsel for the insurer, make sure you establish actual, not theoretical, prejudice, creating a record that demonstrates, as much as possible, a tangible and quantifiable detriment suffered by the insurer.

Full post as published by INSURANCE LAW NOTES on May 09, 2007 (boomark / email).