Fourth Circuit Holds that Insured Must Strictly Comply with Notice Conditions

The U.S. Court of Appeals for the Fourth Circuit, applying South Carolina law, recently held that an insurer had no duty to indemnify its insured for a default judgment on late notice grounds because the court found that the insured’s forwarding to the insurer’s agent of a notice of representation letter by the claimant did not constitute notice to the insurer of a lawsuit later filed by the claimant. Founders Ins. Co. v. Richard Ruth’s Bar & Grill LLC, No. 17-1282, 2019 WL 852137 (4th Cir. Feb. 21, 2019).

In Founders Ins. Co., the claimant’s attorney notified the insured of its intent to file a negligence lawsuit against it for injuries sustained in a bar fight. Before the suit was filed, the insured sent its insurance agent the representation letter and the letter was ultimately forwarded to the insurer’s agent. However, the insured failed to forward the insurer or its own agent a copy of the summons or complaint eventually filed by the claimant. The trial court eventually entered an order of default against the insured after it failed to answer the complaint. After the entry of default, the agent contacted the insurer regarding the notice of representation letter. The insurer obtained a copy of the summons and complaint and then retained counsel to defend the insured and vacate  the default. The plaintiff refused to consent to vacating the default and the trial court denied the insured’s motion to vacate the default. The trial court later entered a $5 million default judgment for the plaintiff against the insured. Subsequently, the insurer filed a declaratory judgment action, seeking a declaration that it owed no duty to indemnify the insured for the default judgment because the insured failed to comply with the policy’s notice condition.

The policy at issue required the insured to notify the insurer “as soon as practicable” if a claim is made or suit is brought against it and separately required the insured to “immediately” send the insurer copies of all legal papers in connection with the claim or suit. The Fourth Circuit rejected the argument that the insured’s forwarding the letter of representation satisfied both of the insured’s notice obligations. The court noted that even where an insurer has actual knowledge of a potential claim, the insured is still obligated to provide all legal papers to the insurer filed in connection with the claim. As such, the Fourth Circuit had no difficulty finding that the insured failed to comply with its notice obligations.

The Fourth Circuit then turned to the second element of a late notice defense—prejudice. The court noted that the insurer did not receive notice of the lawsuit until after the entry of default, which ultimately led to a default judgment. The court emphasized that the default prevented the insurer from properly investigating the case, raising defenses, and negotiating a potential settlement. Accordingly, the Fourth Circuit determined that the insured’s failure to comply with the notice condition prejudiced the insurer.

The significance of the court’s decision lies in its recognition that failure to strictly comply with each notice condition of a policy can preclude coverage even where the insurer may have had notice of a claim or “occurrence.” Further, the decision emphasizes that an insurer can satisfy the prejudice requirement when a default precludes the insurer from adequately defending a lawsuit and a default judgment is later entered.

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