Wyo. Insurers Bound by Notice-Prejudice Rule

(CN) — Answering a question from the Eighth Circuit, the Wyoming Supreme Court ruled that insurance companies can't deny coverage for lack of timely notice unless they can prove they were unfairly prejudiced.

Trucking company Jim Hipner LLC took out a $2 million insurance policy in 2010 with Century Surety Co. to secure a contract with a customer.

One of Hipner's drivers caused a road obstruction that led to a multi-vehicle accident in North Dakota in March 2011, and a police officer on the scene said there were no serious injuries, according to court records.

However, medical records showed that accident victim Huey Brock was unable to move his arms and legs at the hospital and became quadriplegic.

Hipner reported the accident to two of his insurers, but nobody from his company notified Century. He did not learn of Brock's injuries until May 2011, and Century discovered them in September of that year.

Century declined to participate in a settlement of Brock's injury claims "based upon lack of coverage for Jim Hipner LLC under the Century Policy coupled with serious questions regarding liability and damages."

Century filed a federal action to declare that it was not obligated to defend Hipner because his company did not provide written notice of the accident "as soon as practicable."

A federal judge found that policy language to be ambiguous and ruled in Hipner's favor, finding that Century had received timely notice.

Century appealed, prompting the Eighth Circuit to pose a certified question to the Wyoming Supreme Court asking whether "under Wyoming law, an insurer must be prejudiced before being entitled to deny coverage when the insured has failed to give notice 'as soon as practicable.'"

The Wyoming Supreme Court answered yes Wednesday, in an opinion written by Justice Kate M. Fox. She noted that several courts have adopted the rule that an insurer must show prejudice from a lack of notice to deny coverage.

"A second basis for adopting the notice-prejudice rule is the public interest in enforcing insurance contracts to further compensate accident victims, including innocent third parties," the judge wrote.

Another reason for the notice-prejudice rule, Fox wrote, is so that "no undeserved windfalls will be reaped by the insurer."

The judge said a two-step approach is necessary for an insurer's claim of late notice.

"Once it is determined that notice was untimely, a court should then turn to the question of whether the insurer was prejudiced by that delay," she wrote. "If the insurer was prejudiced, then the insurer will be relieved of its obligation to provide coverage."

For that reason, Fox declared void the language in the Century policy that stated that a lack of timely notice "will result in exclusion of coverage whether [Century is] prejudiced or not."

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