(Article from Insurance Law Alert, March 2019)
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The Fourth Circuit ruled that an insurer has no indemnity obligation because the policyholder failed to provide timely notice of the underlying claims, resulting in substantial prejudice to the insurer. Founders Ins. Co. v. Richard Ruth’s Bar & Grill LLC, 2019 WL 852137 (4th Cir. Feb. 21, 2019).
The coverage dispute arose out of a September 2012 bar fight that left a patron in a permanent quasi-vegetative state. In November 2012, the injured patron’s attorney sent a notice of representation to the bar, which the bar forwarded to its insurer. In December 2012, the patron sued the bar. In February 2013, a state court entered a default judgment. In May 2013, the bar’s insurer received copies of the underlying summons and complaint. The insurer retained counsel to defend the bar and unsuccessfully sought to set aside the default judgment. A final judgment of $5 million was entered against the bar.
A South Carolina federal district court ruled that the insurer had no duty to indemnify because the bar failed to provide timely notice of the underlying suit. The district court further held that this breach substantially prejudiced the insurer. The Fourth Circuit affirmed.
The policy required the bar to provide notice of any claim or suit “as soon as practicable” and to “immediately send [the insurer] copies of any demands, notices, summons or legal papers.” The Fourth Circuit held that the bar unequivocally breached these provisions, rejecting the contention that it complied with the notice requirement by forwarding the injured patron’s letter of representation. The injured patron, as assignee of the bar’s insurance rights, argued that the letter of representation put the insurer “on notice of a potential claim.” The court disagreed, stating that “[e]ven where an insurer has actual knowledge of a potential claim or occurrence triggering coverage under the policy, the insured is not relieved of his contractual obligation to provide the legal papers to the insurer unless the insurer waives that policy provision.” Finally, the Fourth Circuit held that the insurer was substantially prejudiced by the breach of the notice provision because it was denied the opportunity to investigate the case, defend the suit, or negotiate a settlement.