Georgia Automobile Law Update

On May 4, 2021, the Georgia Governor signed House Bill 714, substantially modifying O.C.G.A. § 9-11-67.1, the offer of settlement statute, as well as O.C.G.A. § 33-7-11(j), the bad faith provision of the Uninsured Motorist statute. These changes will affect the handling of Georgia automobile accident claims accruing on or after July 1, 2021.

C.G.A. § 9-11-67.1

House Bill 714 revised and provided new requirements under the Georgia Civil Practice Act, O.C.G.A. § 9-11-67.1, relating to requirements regarding settlement offers and agreements for tort claims for personal injury, bodily injury, and death:

C.G.A. § 9-11-67.1(a) – Change in the Application Trigger

The current version of the statute sets forth the requirements of written offers to settle injury or death claims arising from the use of a motor vehicle which were prepared by or with the assistance of an attorney and sent prior to filing suit. The new statute will apply to written offers to settle injury or death claims arising from motor vehicle accidents which were prepared by or with the assistance of an attorney and sent prior to the filing an answer.

C.G.A. § 9-11-67.1(a)(1)(D) – Change Regarding Terms of Release

The current statute requires that the offer to settle state “the type of release, if any, the claimant or claimants will provide to each releasee.”  The new statute requires that the demand state, “For any type of release, whether the release is full or limited and an itemization of what the claimant or claimants will provide to each releasee.”

C.G.A. § 9-11-67.1(a)(2) – New Medical Record Requirement

The new statute adds a brand new requirement that the demand “shall include medical or other records in the offeror’s possession incurred as a result of the subject claim that are sufficient to allow the recipient to evaluate the claim.”

C.G.A. § 9-11-67.1(a)(3) – New Statement of Insurance Requirement

The new statute adds brand new language that a demand “May include a term requiring that in order to settle the claim the recipient shall provide the offeror a statement, under oath, regarding whether all liability and casualty insurance issued by the recipient that provides coverage or that may provide coverage for the claim at issue has been disclosed to the offeror.” [emphasis added].

C.G.A. § 9-11-67.1(b)(1) – New Language Limiting Other Terms

The new statute adds brand new language that provides, “Unless otherwise agreed by both the offeror and the recipients in writing, the terms outlined in subsection (a) of this Code section shall be the only terms which can be included in an offer to settle made under this Code Section.”

C.G.A. § 9-11-67.1(d) – Changes to Language Regarding Right to Seek Clarification of Release

The new statute adds language that makes clear the recipient of the demand has a right to seek clarification regarding “the terms of the release.”  However, it adds the requirement that “An attempt to seek reasonable clarification shall be in writing…” [emphasis added]. Finally, it adds brand new language that provides, “In addition, if a release is not provided with an offer to settle, a recipient’s providing of a proposed release shall not be deemed a counteroffer.”

C.G.A. § 9-11-67.1(e) – New Terms Regarding How Demand Must Be Sent

This Code section already has existing requirements that an offer of settlement be sent via certified mail or statutory overnight delivery, return receipt requested and must reference the Code Section. The new statute adds a brand new requirement that the offer of settlement “shall include an address or a facsimile number or email address to which a written acceptance… may be provided.”

 C.G.A. § 9-11-67.1(g) – Changes to Terms Regarding Delivery of Check

The current statute permits the offeror to require payment within a specified period, but not less than ten days after the written acceptance of the offer to settle.  The new statute changes this to provide that the offeror may not require payment “less than 40 days from the receipt of the offer.”

C.G.A. § 33-7-11(j)

House Bill 714 also revises the “bad faith penalty” as to uninsured motorist carriers found in O.C.G.A. § 33-7-11(j).

The current statute provides that if an uninsured motorist carrier refuses to pay an insured for a covered loss within 60 days after a statutorily compliant demand is made by the insured, and a finding is made that such a refusal was made in bad faith, the “insurer shall be liable to the insured in addition to any recovery under this Code section for not more than 25 percent of the recovery and all reasonable attorney’s fees for the prosecution of the case under this Code section.”

The new statute provides that the “insurer shall be liable to the insured in addition to any recovery under this Code section for not more than 25 percent of the recovery or $25,000.00, whichever is greater, and all reasonable attorney’s fees for the prosecution of the case under this Code section.” [emphasis added].

The full bill can be found on the Georgia General Assembly website.

 

Landmark Supreme Court Ruling Delivers on Equal Rights Hopes for LGBTQ Community

On June 15, 2020, in Bostock v. Clayton County, Georgia, 590 U.S. _____ (2020), a decision written by Justice Gorsuch, the Supreme Court ruled in a 6-3 vote that even if Congress did not have discrimination on the basis of sexual orientation or transgender status in mind when it enacted Title VII of the Civil Rights Act of 1964, Title VII’s ban on discrimination protects gay, lesbian, and transgender employees.

The case was originally brought by three separate plaintiffs and was consolidated into one case when it reached the Supreme Court. In each of the cases, the employer did not dispute that they fired their employees for being homosexual or transgender. Rather, they contended that even intentional discrimination against employees based on their homosexual or transgender status is not a basis for Title VII liability. The first case involved a Clayton County, Georgia employee who was fired for conduct “unbecoming” of a county employee when he began participating in a gay recreational softball league. The second involved a skydiving instructor who was fired days after he mentioned to his employer that he was gay. The third case involved a transgender woman who presented as a man when she was hired but was fired after she informed her employer that she planned to “live and work full-time as a woman.” The circuit splits between the Eleventh, Second, and Sixth Circuit that resulted from the three cases set this case up for adjudication with the Supreme Court.

The question on certiorari before the court was “[w]hether discrimination against an employee because of sexual orientation constitutes prohibited employment discrimination ‘because of… sex’ within the meaning of Title VII of the Civil Rights Act of 1964, 42U.S.C. § 2000e-2.” Justice Neil Gorsuch framed the question before the court as a straightforward one: “Today,” he wrote, “we must decide whether an employer can fire someone simply for being homosexual or transgender.” The answer to that question “is clear.” When an employer fires an employee “for being homosexual or transgender,” that employer “fires that person for traits or actions it would not have questioned in members of a different sex. Sex plays a necessary and undisguisable role in the decision, exactly what Title VII forbids.”

Justice Gorsuch wrote that “[Congress] might not have anticipated their work would lead to this particular result.” But, he added “they weren’t thinking about many of the Act’s consequences that have become apparent over the years, including its prohibition against discrimination on the basis of motherhood or its ban on the sexual harassment of male employees.” However, he continued, the “limits of the drafters’ imagination supply no reason to ignore the law’s demands.” When the text of a law and “extratextual considerations” point in different directions, the “written word is the law, and all persons are entitled to its benefits.”

The majority opinion states that sexual orientation and gender identity are “inextricably bound up with sex,” and that discrimination on the basis of sexual orientation or gender identity involves the application of “sex-based rules.” As an example, Justice Gorsuch offers that “an employer that announces it will not employ anyone who is homosexual intends to penalize male employees for being attracted to men and female employees for being attracted to women.” Gorsuch “agree[s] that homosexuality and transgender status are distinct concepts from sex. But, as we’ve seen, discrimination based on homosexuality or transgender status necessarily entails discrimination based on sex; the first cannot happen without the second.”

“As enacted, Title VII prohibits all forms of discrimination because of sex, however they may manifest themselves or whatever other labels might attach to them.” Justice Gorsuch then concludes in the opinion that “[i]n Title VII, Congress adopted broad language making it illegal for an employer to rely on an employee’s sex when deciding to fire that employee. We do not hesitate to recognize today a necessary consequence of that legislative choice: An employer who fires an individual merely for being gay or transgender defies the law.”

Justice Alito, joined by Justice Thomas, wrote a dissent that can be summed up by its first sentence: “[t]here is only one word for what the Court has done today: legislation.” Justice Alito writes that last year, “the House of Representatives passed a bill that would amend Title VII by defining sex discrimination to include both ‘sexual orientation’ and ‘gender identity,’ but the bill has stalled in the Senate.” His dissent is biting against the majority and states that the “brazen abuse of [the Supreme Court’s] authority to interpret statutes is hard to recall.” He calls the majority’s reasoning that the opinion is merely enforcing the terms of the statute “preposterous.” He argues that the question before the court is “not whether discrimination because of sexual orientation or gender identity should be outlawed. The question is whether Congress did that in 1964.” He concludes that “[i]t indisputably did not.”

Justice Kavanaugh writes in a separate dissent that the question before the court was “whether Title VII should be expanded to prohibit employment discrimination because of sexual orientation.” In his opinion, he opines that it is the responsibility of “Congress and the President in the legislative process, not to this Court.” He continued that “the public understandably becomes confused about who the policymakers really are in our system of separated powers, and inevitably becomes cynical” when judges make decisions that appear to the personal preferences rather than based on the law. He concludes by acknowledging “the important victory achieved today by gay and lesbian Americans. Millions of gay and lesbian Americans have worked hard for many decades to achieve equal treatment in fact and in law. They have exhibited extraordinary vision, tenacity, and grit—battling often steep odds in the legislative and judicial arenas, not to mention in their daily lives. They have advanced powerful policy arguments and can take pride in today’s result.”

The ruling in this case is based on statutory interpretation grounds. It makes immediately clear to employers that Title VII prohibits discrimination against job applicants or employees on the basis of sexual orientation or gender identity. Title VII applies to private sector employers with 15 or more employees, as well as public sector employers, e.g., local, state, and federal employers. Title VII does not include private sector employers with less than 15 employees, whereby local or state laws could fill in the gap.

The ruling also addresses the possibility of certain employers claiming an exception to Title VII’s reach if an employer claims that it violates their sincerely held religious belief. Justice Gorsuch notes that the court is “deeply concerned with preserving the promise of the free exercise of religion enshrined in our Constitution; that guarantee lies at the heart of our pluralistic society.” Justice Gorsuch writes that “how these doctrines protecting religious liberty interact with Title VII are questions for future cases.” Notably, there are currently cases pending certiorari to the Supreme Court that may answer this question in the future.

The ruling in Bostock v. Clayton County impacts Title IX of the Education Amendments Act of 1972 protections for transgender students since Title IX cases look to Title VII for guidance. Title IX states: “No person in the United States shall, on the basis of sex, be excluded from participation in, be denied the benefits of, or be subjected to discrimination under any education program or activity receiving Federal financial assistance.” Furthermore, Bostock has implications for transgender individual’s protection under the Affordable Care Act since the ACA looks to Title IX for guidance. It follows that the Supreme Court ruling under Title VII would affect Title IX cases and also cases involving the ACA since all are incorporated by reference. The implications from the Bostock ruling have yet to be seen, but these are a few areas to monitor closely.

South Carolina Supreme Court Rules on Attorney Client Privilege Treatment in Bad Faith Law

The SC Supreme Court recently addressed a novel issue of how attorney-client privilege is treated  with regard to insurance bad faith law.  The issue arose out of a construction defect lawsuit when the Insurer failed to defend its Insured, a contractor.  After settling out of the case personally, the Insured sued the Insurer for bad faith refusal to defend.  In discovery, the Insured sought the Insurer’s claim file including correspondence between the Insurer and its attorneys.  The Insurer claimed privilege over those communications, but the Insured argued that the Insurer’s denial of liability for bad faith and its affirmative defense of “good faith” resulted in waiver of the attorney-client privilege.  The discovery dispute ultimately found its way to the SC Supreme Court.

The Court held that a denial of bad faith and/or the assertion of good faith by an insurer does not, standing alone, place a privileged communication “at issue” such that the attorney-client privilege is automatically waived.  Instead, the Court adopted a middle-ground, case-by-case approach akin to Arizona law.  Per the Court’s holding, a client does not waive the attorney-client privilege simply by bringing or defending a lawsuit; rather, waiver requires the additional interjection of the issue of advice of counsel (either expressly or implicitly) by the client.  In other words, whether or not “advice of counsel” is raised as an affirmative defense, if the client defends based on the affirmative theory that the client’s mental state at the time at issue (such as when the Insurer denied the Insured’s claim) was based on an evaluation of the law and the facts then existing, such would equate to putting the legal evaluation “at issue” and thus result in a waiver of the privilege.

In re: Mt. Hawley Ins. Co., Op. No. 27892 (S.C. Sup. Ct., June 12, 2019)

The CLM and Business Insurance’s 2018 Claims College Recap

This was the seventh year The Council of Litigation Management’s Claims College occurred in Baltimore, Maryland.  The College has eleven specialty schools, and students have the ability to earn their CCP (Certified Claims Professional) designation, ACP (Advanced Claims Professional) designation, or a Certificate in Mediation, Extra-Contractual Claims or Leadership depending on the classes they take.  I was excited to return to the faculty for the School of Casualty and to join the Executive Council for the School of Leadership.  This was the seventh year The Council of Litigation Management’s Claims College occurred in Baltimore, Maryland.  The College has eleven specialty schools, and students have the ability to earn their CCP (Certified Claims Professional) designation, ACP (Advanced Claims Professional) designation, or a Certificate in Mediation, Extra-Contractual Claims or Leadership depending on the classes they take.  I was excited to return to the faculty for the School of Casualty and to join the Executive Council for the School of Leadership.

This was the School of Leadership’s second year at Claims College.  The eight classes presented assist students with understanding different types of leadership theories.  They also provide direction and guidance for leadership development.  It was an honor to work with the talented Deans of this school and the other Executive Council members to expand on the classes presented last year.

As a faculty member for the School of Casualty, I returned to teach a Level 2 course titled “Case Resolution:  Development of a Negotiation Strategy.”  Our goal for this class is to make it as interactive as possible to allow students to apply their own style to various negotiation scenarios.  Besides discussing the principles of negotiation, we also try to assist in the creation of a negotiation strategy and how to overcome an impasse or difficult adversary.  Every year, the students in this class amaze me with their presentations for each negotiation exercise we present to them.

Claims College is one of the most rewarding educational experiences I engage in each year. This college is where I get to teach with some of the industry’s top professionals, and meet with future leaders participating in the classes presented.  I am already looking forward to next year.

Insurance Carrier gets Popped in Bad Faith Action

In case you missed it, Judge Roger Young just found in favor of the plaintiffs to the tune of $21,746,022.87 – and that does NOT include punitive damages.  The plaintiffs include the developers of a condominium as well as the individual condo owners and the homeowners association.  They filed a declaratory judgment, breach of contract and bad faith action against an insurance carrier, after the carrier denied defenses in underlying water intrusion and construction defects complaints filed by the homeowners association and individual unit owners.  Judge Young found that the four requirements of the insurance agreement for each of the policy years had been met and that the exclusions cited were ambiguous and, therefore, must be construed in favor of the insured.  Thus, the insurance carrier owed a duty to defend and indemnify its insured.  Interestingly, the court took issue with the content of the denial letter in much the same way as we recently saw in the Heritage v. Harleysville case.  The punitive damages hearing is set to occur at a later date and it remains to be seen if this decision will be appealed.

Stay tuned for an update, after the upcoming punitive damages hearing.

New Jersey Opinion Focuses on the “Nature and Scope” of Damage to Determine Trigger for Coverage

Recently, a New Jersey appeals court ruled that insurance coverage for construction defect liability claims extends until the nature and the scope of the property damage becomes apparent. Thus, a new grey area has been created for insurers to assess time on risk. The result of the opinion leads one to believe that insurer will more likely than not lose on summary judgment as to “trigger” because the court seemingly requires a rigorous and fact-intensive analysis of when the “last pull” of the trigger occurs.

The underlying matter involved a condominium building that was built between November 2005 and April 2008. As early as February 2008, homeowners noticed water damage in their windows, ceilings and other portions of the units. In May 2010 the unit owners hired an expert to perform a moisture survey of the development and he identified 111 spots of moisture damaged areas that need to be removed and replaced. The unit owners alleged the HVAC contractor was to blame for the moisture intrusion at the project.

Selective issued an “occurrence based” general liability policy that covered bodily injury and property damage taking place during the policy period of June 2009 through June 2012 for the HVAC contractor. Selective disclaimed coverage on the grounds the alleged property damage had occurred prior to the inception of its policy because the homeowners were aware of the problems in 2008. The trial court agreed with Selective and found that the continuous trigger applied to the claims against the HVAC contractor, but still held that Selective had no coverage obligations because the damage had in fact manifested before June 2009.

The HVAC contractor appealed and argued, “the end date for the continuous trigger doesn’t occur until an expert report or some other proof definitively establishes that the policyholder’s faulty work caused the alleged damage.” The court disagreed and stated that “an attribution analysis could be highly fact-dependent, and difficult to resolve when an insured makes a request for defense and indemnification after being named in a complaint.” In sum, HVAC contractor argued that the trigger began when the expert analysis was performed in 2010. Conversely, Selective argued that , based on the hearsay statements of the homeowners, the triggering event occurred in 2008. The appellate court found that information about the building defects was or reasonably could have been revealed at any time between the time of the unit owners’ complaints until the start of Selective’ s policy in June 2009 and the case should be reopened to allow for discovery to explore the critical factual issues outlined in the opinion regarding the discovery of the damage.

The ruling muddies the water as to triggering events and the parties have been ordered to complete more discovery to determine when the essential manifestation occurred in this instance. For insurers in this jurisdiction, this means they will need to pursue discovery as to the nature and scope of the damage to attempt demonstrate when the last trigger pull occurred if they are seeking to avoid providing coverage. Conversely, insureds will likely attempt to undercut this evidence as inadmissible or too vague to warrant a “trigger pull.” Those who represent insureds in this jurisdiction may find this case inconsistent with spirit of the New Jersey Supreme Court’s landmark 1994 ruling in Owens-Illinois Inc. v. United Insurance Co., which applied the continuous trigger in a dispute over coverage for asbestos-related bodily injury claims to maximize coverage.

This case is Air Master & Cooling Inc. v. Selective Insurance Co., case number A-5415-15T3, in the Superior Court of the State of New Jersey, Appellate Division. Our office intends to follow this case and will update with a blog post regarding significant decisions.

2017 The CLM’s Claims College Recap

This was my third year teaching at The CLM’s Claims College in Baltimore, MD.  The Claims College first occurred in 2012 with some of the industry’s best professionals enlisted to create and teach courses.   Back then, there were courses in three schools; however, this has now expanded to a total of eight three-level specialty schools and three one-level schools.  Each level consists of pre-course reading materials, in-class instruction, group projects and an exam.

Students complete classes to earn their CCP (Certified Claims Professional) designation, ACP (Advanced Claims Professional) designation, and/or a Certificate in Mediation, Extra-Contractual Claims or Leadership depending on the classes they take.  Since its inception, hundreds of students have attended Claims College and earned the designations above.  This year, I was asked to serve as a faculty member for the School of Casualty and the School of Leadership.

As a member of the faculty for the School of Casualty, I was able to teach a Level 2 course titled “Case Resolution:  Development of a Negotiation Strategy.”  This course was designed to allow the students to take a disciplined approach to negotiation.  The course allowed the students to use the methods of principled negotiations and apply them to their own style.  The class is very interactive and the students were very creative in how they handled each scenario.

This was the School of Leadership’s inaugural year at Claims College. The CLM created it to “provide a comprehensive review of leadership theories and styles as well as practical information for leadership development.”  I was honored to be asked to help create and then teach “Leading Through Change and Adversity” with the goal of introducing skills leaders need to lead Claims Resolution professionals through change.  It was a pleasure to work with each of the students during class, and proctor the oral presentation and exam at the end of all the courses.

I really look forward to and enjoy being part of The CLM’s Claims College.  Each year, I have the opportunity to teach and work with amazing leaders in the industry.  I have met some amazing people in Baltimore, and I look forward to continuing to assist with the college in the future.

London Calling

No stranger to hurricanes, South Carolinians remember Hurricane Hugo which, in 1989, devastated the low country. An interesting side effect of that storm was the boom of rebuilding and the migration of contractors from various parts of the country who came to help in the rebuilding and remained thereafter. Given that hurricane season officially opened June 1, the recent opinion from the Southern District of New York is an interesting reminder that storms may come and storms may go, but the policies which cover storm damage can have unintended consequences requiring years of litigation.

At issue is an ongoing dispute between Infrassure Ltd. and First Mutual Transportation Association over $20 million in coverage for the 2012 Hurricane Sandy damage. First Mutual is appealing the lower court’s decision to deny their bid to compel arbitration in London. First Mutual argues that the contract includes a “London Arbitration Clause” provision which should govern resolution. Infrassure has argued that an endorsement to the agreement entitled, “London Arbitration and Governing Law (UK and Bermuda Insurers Only)” limits the “London Arbitration Clause”. First Mutual has rebutted this arguing that the endorsement falls under the definition of a “title” which, pursuant to the “Titles Clause”, is merely for convenience and not intended to limit or affect the provisions to which they relate. And so on and so forth.

How this issue would play out in South Carolina courts remains to be seen. However, South Carolina does have a few unique statutory features which could lead to some interesting arguments. First, the South Carolina Uniform Arbitration Act mandates, “Notice that a contract is subject to arbitration pursuant to this chapter shall be typed in underlined capital letters, or rubber-stamped prominently, on the first page of the contract…” Failure to abide by these notice provisions eviscerates the compelling party’s ability to force arbitration. But, the parties to a contract are free to agree that South Carolina state law or a specific set of arbitration rules and procedures will apply to an arbitration agreement. Munoz v. Green Tree Fin. Corp., 343 S.C. 531, 539, 542 S.E.2d 360, 363 (2001). However, to the extent South Carolina state law may invalidate the arbitration agreement, that state law is preempted if the arbitration agreement is valid under The Federal Arbitration Act (“FAA”). Soil Remediation Co. v. Nu-Way Envtl., Inc., 323 S.C. 454, 459, 476 S.E.2d 149, 152 (1996). The Federal Arbitration Act (“FAA”) applies in federal or state court to any arbitration agreement regarding a transaction that in fact involves interstate commerce, regardless of whether or not the parties contemplated an interstate transaction. Munoz, 343 S.C. at 538, 542 S.E.2d at 363. Thus, a well drafted choice of law clause might be read by a Judge to allow a party to enforce an arbitration provision wherein the Notice provisions under the South Carolina Uniform Arbitration Act were not followed. Suffice it to say that all South Carolinian coverage attorneys would agree that we would prefer not to have a hurricane hit our home state but that if such an event were to occur, there would be a lot to litigate.

“Internal Corporate Screw-Ups” No Excuse; 4th Circuit Denies Coverage after Insured Gives Late Notice to Carrier

Following its recent decision to deny coverage based on an insured’s failure to timely notify its carrier (see post dated March 7, 2016), the Fourth Circuit again came to the rescue of St. Paul Mercury Insurance Company, affirming the district court’s decision that found an insured’s own “internal corporate screw-ups” could not justify the failure to timely notify the carrier of a pending lawsuit.

Plaintiff Amiel Cueto, a disbarred lawyer and convicted felon, filed suit against American Bank Holdings, Inc. (“ABHI”) and ten other defendants alleging they fraudulently failed to fund his $8 million sale of real property. ABHI failed to timely answer the complaint, and Cueto was able to obtain a default judgment in the amount of $7.3M in compensatory damages, $66.5M in punitive damages and $24.6M in attorneys fees ($98M total!).

ABHI eventually was able to get this default judgment overturned, but it took $1.8M in defense costs to do it. ABHI sought reimbursement of these costs from its insurer St. Paul Mercury Insurance, who denied coverage based upon ABHI’s failure to timely notify it of the lawsuit.

The lawsuit was served on ABHI on June 18, 2008, through its registered agent CT Corporation. CT Corp transmitted the suit papers to ABHI’s office, addressed to its CFO, in accordance with its standing instruction. As of that time, the CFO had left ABHI. Another officer of ABHI came across the suit papers and forwarded them to its local counsel in July 2008; but that lawyer claimed he never received the documents.

ABHI did not act on the lawsuit until February 2009, when Cueto attempted to collect on the default judgment. ABHI then notified St. Paul for the first time about the lawsuit. St. Paul formally denied coverage on April 15, 2009, based on a lack of timely notice.

Prior to notifying St. Paul, ABHI had already hired attorneys to attempt to unwind the default judgment. Ultimately, those attorneys were successful, but were paid $1.8M, which ABHI argued should be reimbursed under its policy with St. Paul.

The Fourth Circuit held that “the defining characteristic of the notice obligation is notice given ‘as soon as practicable.’” Under the facts of this case, considering more than six months had passed since proper service, no one could credibly argue the “as soon as practicable” obligation had been achieved.

Under Maryland law, even if notice is not provided as soon as practicable, the insurer must still establish that the lack of notice resulted in “actual prejudice.”

The Court indicated that ABHI’s late notice denied the insurer “the opportunity to participate in the selection of counsel, to speak with counsel, … to discuss credible defense strategies, … to consider[] the possibility of settlement negotiations prior to the default judgment and prior to the expenditure of $1.8M incurred by ABHI to vacate it.” In other words, St. Paul was denied the opportunity to properly defend the case in a timely fashion.

When late notice precludes an insurer from exercising meaningful contractual rights provided to it by its policy, this amounts to actual prejudice suffered by the insurer.

As a result, due to those internal corporate screw-ups, ABHI was left paying $1.8M in attorneys fees to overturn a judgment in a lawsuit it deemed “frivolous, if not fraudulent.”

This case is another hard lesson for insureds: failing to follow the terms of an insurance policy can be an expensive mistake.

The case is St. Paul Mercury Ins. Co. v. American Bank Holdings, Inc., No. 15-559 (4th Cir. April 14, 2016). If you would like a copy of this case or would like to discuss it further, please do not hesitate to contact us.

Fourth Circuit Denies Coverage when Developer Failed to Timely Notify Insurer

The Fourth Circuit recently ruled against the Insured in a construction defect action as to coverage when the Insured failed to timely notify its insurance companies of a potential claim. The court ruled the Insured was not covered under its two insurance policies (St. Paul Mercury Insurance Co. and National Surety Corp.) because it delayed giving notice to the insurance companies, depriving them of the opportunity to pursue claims against the subcontractors involved in the project.

THF Clarksburg Development Two LLC (“THF”) entered into two agreements in 2002 with Lowe’s Home Centers, Inc. (“Lowe’s”) for over $4,000,000 to develop a large track of land in Clarksburg, West Virginia, including the preparation of a building pad area where a Lowe’s store could be built. THF subcontracted with CTL Engineering (“CTL”) to build the pad and provide geotechnical engineering certification that would support the construction of the Lowe’s store. CLT delivered the certified building pad to THF on April 9, 2002 and THF delivered it to Lowe’s on April 15, 2002.
Lowe’s built the store, but during the one-year inspection Lowe’s discovered a settlement problem that would likely cause worsening foundation failure and continued wall movement. Lowe’s notified THF of the issue on April 20, 2003. THF then notified CLT of the problem and hired them again to determine the cause of the settlement. CLT investigated and determined the problem was unrelated to the construction of the building pad and was likely caused by an external force. THF sent the findings to Lowe’s on March 20, 2005.

After eight months without a response from Lowe’s, THF sent another letter saying it presumed Lowe’s lack of response meant Lowe’s was in agreement with the findings in the report. After almost two years had passed, Lowe’s sent a letter to THF stating the delay in response was due to its own engineers investigating the issues. Lowe’s engineers ultimately determined the soil failures were a latent defect to which THF’s extended warranty applied and subsequently put THF on notice of the claims. On April 26, 2012, over nine years since becoming aware of the issue, Lowe’s filed suit.
In June 2012, THF notified its insurers St. Paul Mercury Insurance Co. and National Surety Corp. about the lawsuit and two years later, in 2014, the Insurers moved for a declaratory judgment seeking a determination by the court regarding of the existence of coverage. The Northern District of West Virginia determined THF was not entitled to coverage due to its delay in notifying the insurers of the potential claims.

The court determined the delay in notice prejudiced the insurers as a matter of law because West Virginia’s 10-year statute of repose would bar the insurers from asserting claims against the subcontractors. The court upheld the district court’s ruling in favor of St. Paul Mercury Insurance Co. and National Surety Corp. and against THF.

This case is a hard lesson of which developers, builders, design professionals, and contractors should take note. Whenever there is the existence of even a potential claim, the insurance carrier must be notified as soon as possible to avoid prejudice to the carrier. Even if the claims appear to be unrelated to a construction entity’s scope of work, allowing the Insurer to have the relevant information to determine liability could have a huge impact on the Insured as in the instant case. Finally, this case reinforces the ever-present need by attorneys and insurance carriers to determine relevant dates during construction and delivery to avoid issues related to statute of limitation and statute of repose in construction defect cases.

This case is St. Paul Mercury Ins. Co. v. THF Clarksburg Dev. Two, LLC, No. 15-1453, 2016 WL 715007 (4th Cir. Feb. 23, 2016). Please contact us if you would like a copy of the case or have any questions.