IT’S A WHOPPER! NEW “BIG FISH” NEBRASKA INSURANCE RULING

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BIG FISH

In Nebraska, an insurance company is not liable for defense costs as a matter of law where defense and settlement of the claim concluded before the policyholder notified the insurer.  

Well, Dear Readers, you must be thinking  “Duh!”  Of course an insurance company should not have to pay the claim if the policyholder defended and settled the suit on its own without notifying the insurer.  Why is this one of your “Big Fish” rulings, Anne Marie?

 This issue has not been so cut and dried in the general case law, with a split among jurisdictions.  The Nebraska Supreme Court had not yet spoken definitively as to whether defense costs were due to a policyholder when it had declined to meet a voluntary consent provision.  The case of Rent-a-Roofer v. Farm Bureau Prop. & Cas., 291 Neb. 786 (2015) was a case of first impression here.  So we must examine it, Dear Readers, as one of our “Big Fish” rulings in order to keep you abreast of all that is new in Nebraska insurance law.  Let’s dive in!

There, a third party sued Rent-a- Roofer for faulty roof installation.  Rent-a- Roofer tendered the first claim to its insurer, Farm Bureau.   Farm Bureau denied coverage.  Rent-a- Roofer defended the claim on its own and paid a settlement.  A third party sued Rent-a- Roofer a second time for another faulty roof installation.  Recalling the insurer’s initial denial of the same type of claim, Rent-a- Roofer hired its own counsel and defended the second suit.  Rent-a- Roofer settled that claim, too, after mediation.  Rent-a- Roofer then notified Farm Bureau about the second claim and demanded defense costs, indemnity and insurance coverage.

When Farm Bureau again denied the second claim, Rent-a- Roofer filed suit.  It argued that Farm Bureau owed coverage under the policy terms.  The trial court granted Farm Bureau’s motion for  summary judgment.  The lower court found that the “notice” provision of the policy barred coverage.  It also found that the “consent to settlement” provision also barred coverage too.  Rent-a- Roofer appealed.

The Nebraska Supreme Court found this was a case of first impression.  The Court had previously determined that a “failure to notify” provision in a policy is binding only if the insurer can show that it was actually prejudiced by the late notification.  However it had never determined whether a “failure to consent to settlement” provision also requires a showing of prejudice before an insurer can decline coverage.  Id., at 790.

Can this be determined as a matter of law?  Or does the insurer need to offer proof that it not only was prejudiced, but that the prejudice was material and definitive?  Rent-a- Roofer argued that summary judgment was premature.  A trial should be had.  Farm Bureau needed to prove material prejudice.

The Supreme Court reviewed the purpose behind the consent provision in a policy.  It is to allow the insurer to avoid liability and protect its interests by timely investigating the incident and participating in the defense and settlement of the claim.  Id., at 795. To achieve that purpose, the Court found that it was proper to maintain the prejudicial showing requirement when an insurer seeks to avoid its obligation to pay under the policy for a breach of the voluntary payments clause.  Id.

In this case, however, a conclusion can easily be reached.   Rent-a- Roofer not only defended without notice, but it also settled the second claim without notice.

“We conclude that prejudice may be shown as a matter of law where the insured’s settlement deprived the insurer of the opportunity to protect its interests in litigation or participate in the settlement discussions….. (A)t the time the insured entered into an enforceable settlement agreement, it was too late for Farm Bureau to act to protect its interests. There was nothing left for Farm Bureau to do but issue a check.  An insurer cannot fail for defending a suit that it has no knowledge of.  In this case, we conclude that this complete denial of Farm Bureau’s opportunity to engage in the defense, take part in settlement discussions, or consent to the settlement agreement was prejudicial as a matter of law…”

Id., at 796 (emphasis added).

Rent-a-Roofer argued that it justifiably moved ahead on the second suit without notice because Farm Bureau had denied a prior, identical type of claim.  But the Court rejected this excuse.  “Where the two claims against the insured are so different as to involve different parties, different complaints, and different occurrences, the insured must give notice to its insurer on both claims.  The insurer does not waive notice by denying coverage over a prior, wholly different claim. ”  Id., at 797.

TAKEAWAY

If you want coverage, always put your insurance company on notice of a claim.  Never settle without its permission unless and until you get a determination on coverage by a declaratory judgment decision before paying the underlying claim.  I recommend asking.  The insurer can refuse, waive or not respond.  But at least you have fulfilled your “notice” and your “consent to settle” requirements in the policy. 

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