Not Better Late Than Never: Illinois Appellate Court Finds in Favor of Insurer on Late Notice Defense

The Illinois Appellate Court, in AMCO Insurance Co. v. Erie Insurance Co., ruled in favor of a CGL insurer based on an additional insured’s violation of the policy’s notice condition. This case represents a significant victory for insurers, which are constantly searching for the enforcement of conditions precedent to coverage.

The Appellate Court held in favor of Erie Insurance Co. based on a late notice defense. As background, on March 15, 2007, Smith filed a negligence action against Hartz Construction Co., KT Richards Construction Co., and G&M Mason Construction Co. arising out of a construction site incident. On April 15, 2008, Smith filed a second amended complaint naming only Hartz, the general contractor, and Cimarron Construction Company, Inc. as defendants. On June 27, 2008, Smith filed a third amended complaint against Hartz, Cimarron, and Van Der Laan Brothers, Inc. (VDL). Notably, Cimarron was insured by AMCO Insurance Company, Hartz was insured by Cincinnati Insurance Company, and VDL was insured by Erie.

On December 2, 2009, Hartz tendered its defense of the Smith lawsuit to Erie as an additional insured under the VDL Policy. Erie accepted Hartz’ tender of defense subject to a reservation of rights. AMCO, which previously had been defending Hartz, ultimately settled with Smith and paid $1 million on behalf of Hartz. AMCO then sued, in pertinent part, Erie, seeking contribution with respect to the settlement it paid on behalf of Hartz. Erie moved for summary judgment, arguing, in pertinent part, that Hartz’ notice of the underlying lawsuit was untimely as a matter of law. The trial court granted Erie’s motion. AMCO appealed.

The Illinois Appellate Court affirmed, finding the reasonableness factors overwhelmingly favored Erie. The Appellate Court specifically concluded as follows: (1) Hartz’ notice to Erie, almost three years after the Smith lawsuit began, was untimely; (2) Hartz was not an unsophisticated additional insured; (3) Hartz was well aware of the Smith lawsuit as early as March 2007; (4) although VDL was not named in the original complaint in the Smith lawsuit, that did not excuse Hartz from determining it could be entitled to coverage as an additional insured under the VDL Policy; and (5) Erie was prejudiced by the delay (even though the court did not seem to require Erie to explain what it would have done differently).

Notably, the Appellate Court found unpersuasive that Erie had actual notice of the underlying action in June 2008. The Appellate Court stated this “did not negate Hartz’s duty to notify Erie of the lawsuit ‘as soon as possible’” and to formally tender the underlying lawsuit to Erie. Indeed, this finding appears to be at odds with Cincinnati Cos. v. West American Insurance Co., 183 Ill. 2d 317, 701 N.E.2d 499 (1998). Nevertheless, the Appellate Court deemed Cincinnati Cos. inapposite to the case at bar because it dealt with an insurer’s duty to defend and not its duty to indemnify, which was at issue here. Yet, the Appellate Court still held that a 16-month delay, i.e., from March 2007 to July 2008, would have been unreasonable. Thus, Hartz materially breached a condition precedent to coverage, which, in turn, negated any obligation Erie might arguably have had to reimburse AMCO.

In sum, the Appellate Court here took a stringent approach to Hartz’ obligations under the policy. For instance, the court found lacking Hartz’ diligence in identifying potential coverage under a policy issued to an unnamed tortfeasor. The court also narrowly applied Illinois’ actual notice rule. Late notice can be a difficult defense to prevail on, even in states like Illinois that do not have a notice-prejudice requirement. This decision should give insurers hope that courts will enforce their policies’ notice conditions, which embody a very valuable right for insurers to investigate and defend claims.