What Does Delayed Notice to an Insurer Mean in Illinois?

November 5, 2013

In the vast majority of states, when an insurance company intends to deny a claim by its insured because the insured did not promptly notify the insurance company of a potential tort claim, the insurance company must show that it was prejudiced by the delay in or lack of notice. Illinois is one of only a few states that do not require an insurance company to show prejudice. However, Illinois courts have concluded that a delay in providing notice to its insurer will not automatically amount to prejudice to allow an insurance company to deny coverage, provided that the insured can provide a reason for the delay. While not formally adopting the prejudice requirement of the majority of states, insurers may be paying out on claims that that had previously been able to deny due to breaches of the notice provision in the policies.

Illinois courts have recognized those purchasing insurance vary in their sophistication, level of understanding of policies, and level of understanding of the law.  Further, each situation varies based on the individual facts and circumstances involved.  Recently, a child was injured at a paintball facility and the boy’s father filed a lawsuit. Neither the owner nor the insurance company appeared to defend the lawsuit and the plaintiff filed a motion for default. The owner claimed to have missed the first notice of the lawsuit, but did receive the default notice before a judgment was entered, and then contacted his insurance agent. However, neither informed the insurance company of the lawsuit and a default judgment for $6,615,293 was entered. Once the insurer received notice it denied the claim because the owner did not notify the insurer “as soon as practicable” of the incident. The original plaintiff sued the insurer, arguing that the delay wasn’t a breach, but the trial court disagreed.

Despite this trial court’s determination, the Plaintiff appealed and the higher court ruled that while expected to act diligently, a lengthy passage of time is not an absolute bar to a claim of defense of indemnity.  The court explained that because of the owner’s lack of sophistication in insurance matters, his claim that he did not receive the initial notice, and that he provided notice to his insurance agent as soon as he became aware of the lawsuit, which was before the default judgment was entered, his delay in providing notice to the insurer was not unreasonable.

Taking the delay one step further, the Illinois Supreme Court found that a 27-month delay in providing written notice, where the insured was sophisticated, could also be reasonable under the circumstances. In this case, the insured was a bank that was sued for defamation. The president of the bank met with his insurance agent and told him of the claim during an informal conversation and asked if the bank’s policy would provide coverage. The agent replied “probably not” and the bank proceeded in the lawsuit under that belief. 27 months after the lawsuit was filed, the bank was informed that its policy should cover and gave written notice to the insurer, as required by the policy. The insurer denied the claim because of a delay in written notice.

In finding for the insured, the Court outlined applied five factors to be considered in determining whether notice was given in a reasonable time. These factors involve the language of the policy, the reasonableness of the insured actions in relation to his sophistication, and any prejudice to the insured due to delay. Here, the notice provision required written notice “as soon as practicable” and to” immediately” send copies of court documents. The Court explained that in the context of insurance in Illinois, “immediately” equates to “as soon as practicable”. This was important to the Court because they felt that a reasonable person would not send court documents to its insurer when told by its agent that its policy would not apply. Once the insured was aware it should be covered, it immediately provided written notice to the insurer. Moreover, the Court found that the insurer had actual notice of the claim due to the conversation between the president and his insurance agent.  So, although the insured was sophisticated, the Court determined that the actions taken by the insured were reasonable. Finally, the insurer could not show it was prejudiced given that it obtained actual notice at the outset of the lawsuit. Moreover, the insurer made no attempts to delay the trial during the two months between receiving written notice and the start of trial.

What is clear from these cases is that courts throughout the state will continue to determine the “reasonableness” of delay in providing notice on a case by case basis.  Because the facts of each person’s claim will be unique, it is important to have a clear understanding about your policy before the need arises to file a claim.