Cooperative Fire Insurance Assn. v. White Caps, Inc.

Cooperative Fire Insurance Assoc. v. White Caps., Inc.  (96-258); 166 Vt. 355;
694 A.2d 34

[Filed 28-Mar-1997]

[Motion for Reargument Denied 16-Apr-1997]

       NOTICE:  This opinion is subject to motions for reargument under
  V.R.A.P. 40 as well as formal revision before publication in the Vermont
  Reports.  Readers are requested to notify the Reporter of Decisions,
  Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
  any errors in order that corrections may be made before this opinion goes
  to press.





                                 No. 96-258




Cooperative Fire Insurance                        Supreme Court
Association of Vermont
                                                  On Appeal from
     v.                                           Addison Superior Court

White Caps, Inc., City of Burlington              November Term, 1996
and David Stancil


Matthew I. Katz, J.

       Richard P. Foote of Conley & Foote, Middlebury, for
  plaintiff-appellant

       John T. Leddy of McNeil, Leddy & Sheahan, Burlington, for
  defendant-appellee City of Burlington

       John L. Kellner and Kevin E. Brown of Langrock Sperry & Wool,
  Middlebury, for intervenor-appellee Stancil


PRESENT:  Allen, C.J., Gibson, Dooley, Morse and Johnson, JJ.

       MORSE, J.   Traditionally, an insurer was released from its
  contractual obligations if its insured committed an unexcused breach of the
  prompt-notice provisions of the policy, regardless of whether the insurer
  was prejudiced by the delay.  Past decisions of this Court have adhered to
  this rule when the policy plainly makes notice a condition precedent to
  coverage. See Nelson v. Travelers Ins. Co., 113 Vt. 86, 98, 30 A.2d 75, 82
  (1943); Houran v. Preferred Accident Ins. Co., 109 Vt. 258, 272-74, 195 A. 253, 259-60 (1938).  During the past several decades, however, the
  traditional view has been largely supplanted, and a majority of
  jurisdictions now apply the rule that an insurer must prove it was
  prejudiced from the delay

 

  before it may be relieved of its duties.  See generally Annotation, Modern
  Status of Rules Requiring Liability Insurer to Show Prejudice to Escape
  Liability Because of Insured's Failure or Delay in Giving Notice of
  Accident or Claim, or in Forwarding Suit Papers, 32 A.L.R.4th 141, 157-59
  (1984) (collecting cases).  Although this Court has recognized the recent
  trend of decisions, see Putney School, Inc. v. Schaaf, 157 Vt. 396, 405,
  599 A.2d 322, 327 (1991), it has not heretofore had occasion to reexamine
  its earlier holdings.  But cf. Dumont v. Knapp, 131 Vt. 342, 349-50, 306 A.2d 105, 109-10 (1973) (Barney, J. concurring) (urging a "reexamination of
  the holdings of Houran v. Preferred Accident Insurance Co. . . . and Nelson
  v. Travelers Insurance Co.").

       The time has come for Vermont to consider whether the more modern view
  represents the better rule.  We conclude that it does.  Accordingly, we
  hold that an insurer which seeks to be relieved of its obligations under a
  liability insurance policy on the ground that the notice provision was
  breached must prove that the breach resulted in substantial prejudice to
  its position in the underlying action.  It follows that the judgment in
  this case, declaring that the insurer had a continuing duty to defend and
  indemnify its insureds, must be affirmed.

                                  I.  FACTS

       The material facts are undisputed.  In July 1992, intervenor-defendant
  David Stancil slipped and fell outside of the White Caps Restaurant at the
  Burlington Boathouse complex.  The restaurant, owned and operated by
  defendant White Caps, Inc., leased a portion of the Boathouse from
  defendant City of Burlington, and under its lease was required to make the
  City an additional insured under its liability policy.  Two months after
  the incident, Stancil's attorney sent a claim letter to White Caps (with a
  copy to the City), which alleged that the accident was caused by
  "grease-ladened waste water" from the restaurant.  Counsel requested that
  both White Caps and the City refer the claim to their insurance carriers
  and have them contact his office. Although the letter was sent in September
  1992, defendants' insurer, Cooperative Fire Insurance Association of
  Vermont, did not receive notice of the claim until eighteen months later,
  in April

 

  1994.  Defendants offered no excuse or justification for the delay.

       Under a section entitled "Commercial General Liability Conditions,"
  the Cooperative policy required that its insureds provide "prompt written
  notice" of any claim or suit, and "[i]mmediately send . . . copies of any
  demands, notices, summonses or legal papers received in connection with the
  claim or `suit.'"  The "Conditions" section further stated that no suit for
  coverage could be brought on the policy "unless all of its terms have been
  fully complied with."

       Based on defendants' failure to provide prompt and immediate notice of
  Stancil's claim, Cooperative filed this action in the Addison Superior
  Court seeking a declaration that its duties to defend and indemnify under
  the policy had been forfeited.  Stancil successfully moved to intervene as
  a party defendant in the action, and then moved for summary judgment. 
  Stancil advanced two arguments in support of the motion: (1) the policy
  failed expressly to make prompt notice a condition precedent to coverage,
  and therefore Cooperative remained bound by the contract unless it could
  demonstrate prejudice from the delay; and (2) even if the policy allowed
  Cooperative to forfeit coverage for the late notice, it must still prove
  that its position had been prejudiced thereby.  Stancil urged the court, in
  this regard, to reexamine Houran and its progeny and reject the rule of
  automatic forfeiture in favor of one requiring the insurer to establish
  prejudice in all cases.

       The trial court ruled in favor of Stancil on the first point, finding
  that the policy language did not clearly and unambiguously make prompt
  notice a condition precedent to coverage, and therefore breach of the
  notice clause did not release Cooperative from its duties absent a showing
  of prejudice.  Its narrow reading of the policy language relieved the court
  of the need to consider the continued viability of Houran.  The court
  further concluded that Cooperative had failed to adduce any evidence that
  its position in the underlying action had been prejudiced by the delay.
  Accordingly, the court entered summary judgment for defendants, declaring
  that Cooperative's duty to defend and indemnify in the underlying action
  remained in force.  This appeal followed.

 

                               II.  DISCUSSION

       Nearly sixty years ago, this Court held in Houran that an insured's
  unexcused breach of a policy provision making prompt notice a condition
  precedent to coverage relieved the insurer of its obligations under the
  policy, without regard to whether it was prejudiced by the late notice.  As
  the Court explained:

    The rule established by the weight of authority is that where, by the
    terms of the insurance contract, a specified notice of accident, given by
    or on behalf of the insured to the insurer, is made a condition precedent
    to liability on the part of the latter, the failure to do so will release
    the insurer from the obligations imposed by the contract, although no
    prejudice may have resulted.

  109 Vt. at 272, 195 A.  at 259.  To constitute a condition precedent, the
  Court further explained, "a specific forfeiture clause is unnecessary . . .
  . It is enough if the policy provides that liability thereunder is `subject
  to the following conditions.'" Id. at 273-74, 195 A.  at 260 (quoting
  Hoffman v. Employer's Liability Assur. Corp., 29 P.2d 557, 560, 562 (Or.
  1934).   Decisions subsequent to Houran have reaffirmed the rule that
  "notice is of the essence of the insurance contract and failure to comply
  with it . . . voids any liability of the company under the policy." Nelson,
  113 Vt. at 98, 30 A.2d  at 82; see also Ziman v. Employers Fire Ins. Co.,
  493 F.2d 196, 199 (2d Cir. 1974) ("[T]he Houran decision . . . establishes
  [that] no showing whatsoever of material harm or prejudice to the insurer
  was required."); Boyer v. American Casualty Co., 332 F.2d 708, 710-11 (2d
  Cir. 1964) (applying Houran to hold that breach of prompt notice provision
  voided policy); Town of Windsor v. Hartford Accident & Indem. Co., 885 F. Supp. 666, 670 (D. Vt. 1995) ("In Vermont, compliance with the notice
  provision of an insurance contract is a condition precedent to establishing
  the liability of the insurer under the policy.").

       The trial court here attempted to distinguish this line of authority
  on the ground that the Cooperative policy language was "substantially
  different" from the policy language in Houran and subsequent decisions. 
  Although the trial court's approach is understandable, given the rather
  drastic consequence of a total forfeiture of coverage, the effort to
  distinguish Houran

 

  is unpersuasive.  A comparison of the Cooperative policy with the policies
  in Houran and other cases reveals no meaningful differences.  See Nelson,
  113 Vt. 98, 30 A.2d  at 82 ("notice shall be given . . . as soon as
  practicable" upon occurrence of accident); Houran, 109 Vt. at 263, 195 A.  at 254 (policy agreement "subject to the following conditions," including
  "notice of accident . . . as soon as is reasonably possible"); Ziman, 493 F.2d  at 198 n.4 ("In the event of an occurrence, written notice . . . shall
  be given . . . as soon as practicable."); Boyer, 332 F.2d  at 710 n.1
  ("Condition[] 9. . . . When an accident or occurrence takes place, written
  notice shall be given . . . as soon as practicable"); Town of Windsor, 885 F. Supp.  at 670 n.5. (notice must be provided immediately after claim was
  made or suit was brought).  Indeed, if anything the Cooperative policy is
  even stronger, expressly prohibiting any suit for coverage under the policy
  "unless all of its terms have been fully complied with." (Emphasis added).

       The fundamental question as to the continuing viability of Houran
  cannot therefore be avoided.  For several reasons, all of which have been
  utilized in varying degrees by the many courts rejecting the traditional
  rule, we conclude that a failure to provide prompt notice should not
  automatically defeat liability insurance coverage regardless of
  circumstances.(FN1)  Insurance

 

  law in Vermont, as in most other states, has evolved substantially from the
  strict contractual approach reflected in the rule that courts should not
  interfere with the parties' presumed freedom to draft whatever agreement
  they desire.  This notion unmistakably informed the opinion in Houran,
  which applied a straightforward contractual analysis to hold that the
  notice clause plainly made time of the essence, "was a term of the contract
  by which the insured and the plaintiff[] . . . were bound, and in the
  absence of compliance therewith, a recovery [wa]s barred."  109 Vt. at 274,
  95 A.  at 260.

       Today it is widely recognized that an insurance contract is generally
  not a freely negotiated agreement; its terms and conditions are generally
  dictated by the insurer, and provisions such as the notice clause at issue
  here are standard terms on which the insured has no effective input. 
  Hence, we routinely construe insurance policies in favor of the insured,
  and in accord with the reasonable expectations of the purchaser.  See
  Putney School, 157 Vt. at 405, 599 A.2d  at 327; Stonewall Ins. Co. v.
  Moorby, 130 Vt. 562, 566-67, 298 A.2d 826, 829 (1972).  While recognizing
  that an insurance policy may reasonably require the insured to promptly
  notify the company in the event of a claim or suit, imposing a forfeiture
  of coverage for a violation of this requirement "falls beyond the
  reasonable expectations of the ordinary insurance consumer."  Jones v.
  Bituminous Casualty Corp., 821 S.W.2d 798, 802 (Ky. 1991).

       In Cooper v. Government Employees Ins. Co., 237 A.2d 870 (N.J. 1968),
  Chief Justice Weintraub, speaking for the New Jersey Supreme Court,
  cogently explained the need for a balancing of interests in this area,
  weighing the purpose of the prompt notice clause against the

 

  contractual penalty for its breach:

     [A]lthough the policy may speak of the notice provision in terms of
     "condition precedent," . . . nonetheless what is involved is a forfeiture,
     for the carrier seeks, on account of a breach of that provision, to deny
     the insured the very thing paid for.  This is not to belittle the need for
     notice of an accident, but rather to put the subject in perspective.  Thus
     viewed, it becomes unreasonable to read the provision unrealistically, or
     to find that the carrier may forfeit the coverage, even though there is no
     likelihood that it was prejudiced by the breach.  To do so would be unfair
     to insureds.

  Id. at 873-74; accord Jones, 821 S.W. 2d at 802-03; Johnson Controls Inc.
  v. Bowes, 409 N.E.2d 185, 187 (Mass. 1980); Brakeman v. Potomac Ins. Co.,
  371 A.2d 193, 196 (Pa. 1977). Writing nearly a quarter century ago, Justice
  Barney of this Court echoed the call for a reasonable balance, in which the
  penalty for a late notice of claim would not be allowed to "outrun" its
  consequences:

    At the very least, it would seem that the measure of loss of insurance
    coverage ought not to outrun the demonstrated prejudice to the insurer,
    rather than leaving it as an all or nothing proposition as it now is.  The
    present penalty now so far outreaches the purposes of the provision as to
    leave insureds subject to the withdrawal of protection for trivial reasons. 
    This is an invidious kind of forfeiture that can be damaging to both an
    unwary insured and an innocent injured.

  Dumont, 131 Vt. at 350, 306 A.2d  at 110 (Barney, J. concurring); see also
  Aetna Casualty & Surety Co. v. Murphy, 538 A.2d 219, 223 (Conn. 1988) ("[A]
  proper balance between the interests of the insurer and the insured
  requires a factual inquiry into whether  . . . an insurer has been
  prejudiced by its insured's delay in giving notice.").

       The purpose of a policy provision requiring notice of an accident,
  claim, or suit "is to allow the insurer to form an intelligent estimate of
  its rights and liabilities, to afford it an opportunity for investigation,
  and to prevent fraud and imposition upon it."  Stonewall, 130 Vt. at 567,
  298 A.2d  at 829.   Prompt notice enables an insurance company to make a
  "seasonable investigation of the facts relating to liability," Bayer &
  Mingolla Constr. Co. v. Deschenes, 205 N.E.2d 208, 212 (Mass. 1965), and
  thus

     protects the insurance company from fraudulent claims, as well as
     invalid claims

 

     made in good faith, by allowing the insurance company to gain early
     control of the proceedings. . . . 
     [A] reasonable notice clause is designed to protect the insurance
     company from being placed in a substantially less favorable position than
     it would have been in had timely notice been provided . . . . In short, the
     function of a notice requirement is to protect the insurance company's
     interests from being prejudiced.

  Brakeman, 371 A.2d  at 197 (emphasis added).

       It follows that in cases where a late notice does not harm the
  insurer's interests, the reason for the notice clause has not been
  undermined.  A strict forfeiture of coverage in these circumstances would
  thus "outreach[] the purposes of the provision" and constitute "an
  invidious . . . forfeiture . . . damaging to both an unwary insured and an
  innocent injured."  Dumont, 131 Vt. at 350, 306 A.2d  at 110 (Barney, J.
  concurring).  Properly understood and applied, the notice clause should not
  function as "a technical escape-hatch by which to deny coverage in the
  absence of prejudice," Miller v. Marcantel, 221 So. 2d 557, 559 (La. Ct.
  App. 1969), but rather as an early warning mechanism to benefit both
  insurer and insured.

       We conclude, therefore, that the modern rule represents the better
  reasoned approach. The contract of insurance "not being a truly consensual
  arrangement," Cooper, 237 A.2d  at 874, and the penalty being a matter of
  forfeiture, we think it appropriate to abandon the strict contract analysis
  of Houran.  We hold, instead, that an insurer may not forfeit its insured's
  protection unless it demonstrates that the notice provision was breached,
  and that it "suffered substantial prejudice from the delay in notice." 
  Jones, 821 S.W.2d  at 803.  This is consistent not only with the modern
  trend among jurisdictions, see Annotation, supra, 32 A.L.R.4th at 145, but
  also with the current Vermont rule governing an insured's breach of the
  standard covenant of cooperation. See American Fidelity Co. v. Kerr, 138
  Vt. 359, 362, 416 A.2d 163, 165 (1980) (insurer "has the burden to show the
  lack of cooperation of its insured . . . and the actual prejudice resulting
  therefrom").  Apart from the practical difficulty of requiring the insured
  to prove a negative (the absence of prejudice), the carrier is in a "far
  superior position to be knowledgeable about the facts which establish
  whether prejudice exists."  Jones, 821 S.W.2d  at 803; see also Weaver

 

  Bros., Inc. v. Chappel, 684 P.2d 123, 126 (Alaska 1984) ("Information
  regarding prejudice is generally more readily available to the insurer than
  the insured."); Lindus v. Northern Ins. Co., 438 P.2d 311, 315 (Ariz. 1968)
  ("[T]he burden of proving prejudice is on the insurance company.");
  Campbell v. Allstate Ins. Co., 384 P.2d 155, 157 (Cal. 1963) ("Although it
  may be difficult for an insurer to prove prejudice in some situations, it
  ordinarily would be at least as difficult for the injured person to prove a
  lack of prejudice, which involves proof of a negative."); State Farm Mut.
  Auto. Ins. Co. v. Johnson, 320 A.2d 345, 347 n.3 (Del. 1974) ("It seems
  both more practical and more equitable to require the insurer to establish
  prejudice."); Brakeman, 371 A.2d  at 198 ("[I]t is more equitable to place
  the burden of showing prejudice on the insurance company.").(FN2)

       Although the existence of prejudice to an insurer from a delayed
  notice is generally considered a question for the trier of fact, Jones, 821 S.W.2d  at 803; Oullette v. Maine Bonding & Casualty Co., 495 A.2d 1232, 1235 (Me. 1985), the trial court granted summary judgment for defendants on
  the ground that Cooperative had failed to adduce any evidence that its
  position in defending the underlying claim had been prejudiced by the
  delay.  See Jones, 821 S.W.2d  at 803 ("The issue [of prejudice] is ripe for
  summary judgment . . . where the proof is conclusive, or there has been a
  failure of proof, on this subject.").  The evidence offered by Cooperative
  in this regard consisted of the deposition testimony of Whitecaps' two
  principals, John Rock and Christina Czechut.  Rock testified that he had no
  knowledge of the condition of the walkway outside the restaurant and knew
  of no one who might have greater knowledge other than Ms. Czechut.  In her
  letter to Cooperative's agent in April 1994 (some eighteen months after the

 

  incident), Czechut had described the events following the accident in some
  detail.  In her deposition testimony, she stated that she had not
  personally witnessed the accident and could not recall who told her about
  it.

       Cooperative claims that the inability of either Czechut or Rock to
  provide further details demonstrates that the eighteen-month delay hindered
  its ability to investigate and defend the underlying claim, and
  specifically impeded its ability to take timely statements from other
  possible witnesses.  Cooperative did not assert, however, that it had made
  any investigative effort to identify potential witnesses to the accident,
  that any particular witness was unavailable or had suffered memory loss,
  that any evidence had been lost or was unavailable, or that it had actually
  made any significant investigation of the incident following notice of the
  claim.  As the trial court noted, Czechut's letter to Cooperative's agent
  had provided a fair amount of detail concerning the incident, yet
  Cooperative offered no evidence that it had attempted to follow up any of
  the information provided.

       "An insurer cannot assert prejudice with regard to its ability to
  conduct an investigation that it never even tried to conduct."  General
  Accident Ins. Co. v. Scott, 669 A.2d 773, 780 (Md. Ct. Spec. App. 1996);
  see also Country Mut. Ins. Co. v. Kuzmickas, 276 N.E.2d 357, 360 (Ill. App.
  Ct. 1971) (insurer could not claim prejudice from late notice of claim
  where there was no evidence it had conducted any investigation after
  receiving notice).  As the trial court here observed, "When faced with a
  claim for coverage, it is not sufficient for the carrier to merely sit back
  and engage in cursory investigation, seeking excuses for lack of
  information. Without any showing on the record of a bona fide attempt to
  investigate, how can the court conclude there is a concrete showing of
  prejudice[?]"

       We agree.  The evidence offered by Cooperative was insufficient as a
  matter of law to raise a genuine dispute as to whether it had suffered
  actual prejudice.  Accordingly, we conclude that the trial court did not
  err in granting summary judgment to defendants.  See Baldwin v.

 

  Upper Valley Servs., Inc., 162 Vt. 51, 55, 644 A.2d 316, 318 (1994)
  (summary judgment is appropriate where there is no genuine issue of
  material fact and the moving party it entitled to judgment as a matter of
  law).

       Affirmed.


                              FOR THE COURT:



                              _______________________________________
                              Associate Justice




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                                  Footnotes



FN1.  As noted, a significant number of cases in other jurisdictions
  have held that an insurer must demonstrate prejudice from a late notice in
  order to escape liability.  See Weaver Bros., Inc. v. Chappel, 684 P.2d 123, 125 (Alaska 1984); Lindus v. Northern Ins. Co., 438 P.2d 311, 315
  (Ariz. 1968); Campbell v. Allstate Ins. Co., 384 P.2d 155, 156 (Cal. 1963);
  Aetna Casualty and Surety Co. v. Murphy, 538 A.2d 219, 223-24 (Conn. 1988);
  State Farm Mut. Ins. Co. v. Johnson, 320 A.2d 345, 347 (Del. 1974); Jones
  v. Bituminous Casualty Corp., 821 S.W.2d 798, 802-803 (Ky. 1991); Barnes v.
  Lumbermen's Mut. Casualty Co., 308 So. 2d 326, 328 (La. Ct. App. 1975);
  Oulette v. Maine Bonding & Casualty Co., 495 A.2d 1232, 1234-35 (Me. 1985);
  General Accident Ins. Co. v. Scott, 669 A.2d 773, 778 (Md. App. 1996);
  Johnson Controls, Inc. v. Bowes, 409 N.E.2d 185, 188 (Mass. 1980); Wendel
  v. Swanberg, 185 N.W.2d 348, 353 (Mich. 1971); Reliance Ins. Co. v. St.
  Paul Ins. Co., 239 N.W.2d 922, 925 (Minn. 1976); MFA Mutual Ins. Co. v.
  Sailors, 141 N.W.2d 846, 849 (Neb. 1966); Cooper v. Government Employees
  Ins. Co., 237 A.2d 870, 873-74 (N.J. 1968); Foundation Reserve Ins. Co. v.
  Esquibel, 607 P.2d 1150, 1152 (N.M. 1980); Great American Ins. Co. v. C.G.
  Tate Const., 279 S.E.2d 769, 775 (N.C. 1981); Finstad v. Steiger Tractor,
  Inc., 301 N.W.2d 392, 398 (N.D. 1981); Independent Sch. Dist. No. 1 v.
  Jackson, 608 P.2d 1153, 155 (Okla. 1980); Lusch v. Aetna Casualty & Surety
  Co., 538 P.2d 902, 904 (Or. 1975); Brakeman v. Potomac Ins. Co., 371 A.2d 193, 198 (Pa. 1977); Pennsylvania Gen. Ins. Co. v. Becton, 475 A.2d 1032,
  1035 (R.I. 1984); Factory Mut. Liab. Ins. Co. v. Kennedy, 182 S.E.2d 727,
  729-30 (S.C. 1971); Pulse v. Northwest Farm Bureau Ins. Co., 566 P.2d 577,
  579 (Wash. Ct. App. 1977); State Auto. Mut. Ins. Co. v. Youler, 396 S.E.2d 737, 744 (W.Va. 1990); Dietz v. Hardware Dealers Mut. Fire Ins. Co., 276 N.W.2d 808, 812 (Wis. 1979).

       Some jurisdictions, however, continue to enforce prompt notice
  provisions strictly.  See State Farm Mut. Auto. Ins. Co. v. Burgess, 474 So. 2d 634, 636 (Ala. 1985); Marez v. Dairyland Ins. Co., 638 P.2d 286, 290
  (Colo. 1981); State Farm Mut. Auto. Ins. Co. v. Porter, 272 S.E.2d 196, 199
  (Va. 1980).

FN2.  We are not presented here with the question whether the rule
  should be different when the case involves a "claims made" policy, as some
  courts have held, and therefore express no opinion on this subject.  See
  Esmailzadeh v. Johnson and Speakman, 869 F.2d 422, 424 (8th Cir. 1989);
  Continental Casualty Co. v. Maxwell, 799 S.W.2d 882, 887 (Mo. Ct. App.
  1991); Zuckerman v. National Union Fire Ins. Co, 495 A.2d 395, 406 (N.J.
  1985).