Justifiable Delay of Notice of Claim: Burden of Proof of Prejudice on Insurers

Justifiable Delay of Notice of ClaimIt is well-understood by law practitioners that courts (most, anyway), tend to exercise judicial discretion in rendering their opinions. If a matter can be resolved by answering one simple legal question, then there is no need to address the remaining questions—they are, in essence, rendered moot. In the legal world, however, these unanswered questions may be moot for the instant case, but are expected to recur again. In such a circumstance, a court may very well decide issues that are not critical to the appeal, but tangential and in need of elucidation for the legal community at large.

I recently learned about the Connecticut Supreme Court’s decision in Arrowood Indemnity Co. v. King, 304 Conn. 179, 39A.3d. 712 (2011), in which the Court overruled Aetna Casualty & Surety Co. v. Murphy, 206 Conn. 409, 538 A.2d 219 (1988), to the extent that it allocated the burden to the insured to disprove prejudice to an insurer as a result of the insured’s failure to comply with a notice provision in a homeowners’ liability policy. Now, under Arrowood, the insurer bears the burden of proving, by a preponderance of the evidence, that not only was the notice unreasonably delayed, but that the insurer has been prejudiced by the insured’s failure to comply with a notice provision. Arrowood Indemnity Co. v. King, supra, 304 Conn. 203.

Two questions were put to me by a colleague: (1) “Did the Supreme Court even need to overrule Murphy at this time?” and (2) “Is this a case of Arrowood ‘winning the battle, but losing the war’ for insurers?” This article is my attempt to answer those questions.

Did the Supreme Court Need to Go So Far?

The Arrowood matter had its start in 2002, when Conor McEntee, then 14 years old, suffered severe head injuries in an accident. The accident happened while he was standing on a skateboard being towed by a rope behind an ATV driven by his friend. The ATV belonged to the friend’s parents, Pendleton and Daphne King. The accident occurred off of the Kings’ premises in a residential development on a private dead-end street managed by the development’s homeowners’ association. The two boys’ families were friendly and, for at least a year after the incident, remained social. During that time, the injured boy’s family never mentioned bringing an action. It was only when a letter from the McEntee’s attorney alerted the insureds to the prospect of litigation, that the Kings notified their insurers of the claim.

The insurers, Arrowood Indemnity Company (substituted for the homeowners’ insurer and umbrella insurer)1, brought a declaratory judgment action against the Kings, claiming that they did not have a duty to defend or indemnify. The insureds collectively argued that (1) the accident was not covered because it occurred on a private road and not “on an insured location;” and (2) that the notice of claim was untimely. The United States District Court for the District of Connecticut granted summary judgment in favor of the insurers and the insureds appealed to the Second Circuit.

On appeal, the Second Circuit certified three questions to the Connecticut Supreme Court concerning:

  1. whether a negligent entrustment claim arises where the vehicle was entrusted, where the vehicle was housed, or where the accident took place;
  2. if coverage exists based on where the accident occurred, does a private road in which the insureds had an interest be deemed an “insured location;” and
  3. whether, where a liability policy requires an insured to give notice “as soon as practical,” do social interactions between the insured and the claimant, without reference to the accident justify a delay in giving notice of a potential claim to an insured?

Arrowood Indemnity Co. v. King, 605 F.3d 62, 80 (2010).

The Connecticut Supreme Court, in response to the first two certified questions, held that (1) the relevant location is the site of the accident, not the garage where the ATV was kept or place where the vehicle entrustment took place; Arrowood Indemnity Co. v. King, supra, at 189; and (2) in the absence of a policy provision providing otherwise, a private road located within a residential development owned by the insured’s homeowners’ association is not “premises used . . . in connection with a [residence] under the terms of a homeowner’s insurance policy if the portion of the road is not regularly used by the insured.” Id. at 192. The Supreme Court, therefore, held that there was no coverage under the circumstances. Id. at 197.

With that conclusion, one might expect that the matter ended. Indeed, the Second Circuit stated that

The linchpin connecting certified questions 1 and 2 and the judgment appealed from is the district court’s determination that the occurrence did not happen on an “insured location.” Since we believe that construction of this linchpin term by the Connecticut Supreme Court in the context of certified questions 1 and 2 would most probably be dispositive of the appeal, we ask that court to establish under Connecticut insurance law the proper parameters of this policy language.

Arrowood Indemnity Co. v. King, supra, 605 F.3d 80 (emphasis added). Naturally, if there is no coverage, it matters not when the insureds gave notice to their carrier.

Yet, the Supreme Court goes on to state, “[a]lthough we have determined that the accident in this case was not covered by the Kings’ homeowners’ insurance policy, the Second Circuit has indicated that our answers to the first two certified questions may not be dispositive of the entire appeal.” Arrowood Indemnity Co. v. King, supra, at 197-98.

It appears that the Supreme Court addressed the third question based on what may be unfortunate language used by the Second Circuit since the Second Circuit did not state that questions 1 and 2 “would be dispositive,” but rather, would “most probably be dispositive” of the appeal.2 Arrowood Indemnity Co. v. King, supra, 605 F.3d 80. Respectfully, I wonder if the Supreme Court could more properly have interpreted the Second Circuit’s direction to mean that if the Supreme Court found coverage under the circumstances based on its answers to question 1 and 2, then, and only then, did it need to also address question 3. Only if there is a potential for coverage, is notice relevant.

Still, in defense of the Supreme Court, the Second Circuit prefaced its certification referencing a confusing procedural history; see id. at 65-68; and concluding with an open invitation to the Supreme Court to provide guidance “on any state law issues presented by this appeal.” Id. at 80.

Ultimately, the Supreme Court did analyze the third certified question. In this regard, the Second Circuit stated the rule that, under existing Connecticut law, “‘absent waiver, an unexcused, unreasonable delay [by an insured] in notification [of a covered occurrence] constitutes a failure of a condition that entirely discharges an insurance carrier from any further liability on its insurance contract.’ Aetna Casualty & Surety. Co. v. Murphy, 206 Conn. 409, 412 (1988). However, a policyholder who fails to give timely notice of an insurable loss does not forfeit his coverage if he can prove that his delay did not prejudice his insurer.” Id. at 76.

Recognizing that the duty to notify the insurer does not arise until some facts develop which would reasonably lead one to conclude that liability may have been incurred, the Second Circuit sought guidance from the Supreme Court to determine if the continued social interactions between the insureds and the claimants following the incident—interactions that did not include any suggestion that a claim would be made—justified a delay in notice such that3 the insureds still gave notice “as soon as practical” as required under the insurance policy?

Additionally, if the delay was deemed unreasonable, the Second Circuit was not clear as to how to resolve the prejudice question. While the insurer claimed prejudice because it could not inspect the ATV and investigate whether the accident had some cause other than the negligence of the insured, the insureds had submitted counter evidence that the ATV had been sold and resold in the marketplace post-incident without further accident and that the police report noted that it had no “obvious defects.” Id. at 79. Thus, the Second Circuit stated, “[s]ince the insurer bears the burden of establishing lack of prejudice to the insurer under Connecticut law, it is unclear whether the Kings’ submission and the police record create a genuine dispute regarding the lack of prejudice to [Arrowood]. . .” Id.

The Supreme Court handily determined that, under the facts of this case, a reasonable person would have known that “liability may have been incurred.” Arrowood Indemnity Co. v, King, supra, at 198. Specifically, the Court pointed to the “severity and circumstances of the injury.” Id. The accident had involved severe head injury, hospitalization, and temporary coma to a child. Id. at 199. The Court noted, that, moreover, by all appearances the accident was caused by the actions of the insureds’ teenager, not some other unknown cause. Id. Although the social interactions may have made a claim seem less likely, it could not defeat the reasonable conclusion that a claim for damages could possibly arise. Id.

Having determined that the notice was untimely, the Connecticut Supreme Court next addressed whether the insurers were prejudiced by the late notice. Id. at 201. Only then, would the failure to satisfy the condition precedent to coverage be deemed not met.

Now addressing prejudice, the Supreme Court stated that its “determination of whether prejudice occurred in the present case is beyond the scope of the certified question.” Id. at 201. From this writer’s perspective this too seems contrary to the Second Circuit’s directive. Certainly, the numbered list of certified questions set forth by the Second Circuit does not specifically speak to the prejudice to the insurer requirement. See Arrowood Indemnity Co. v. King, supra, 605 F.3d 80. Still, as noted above, the Second Circuit was seeking clarification on that very point. The Second Circuit further explained that “certified questions may be expanded to cover any further pertinent questions of Connecticut law that the Supreme Court deems appropriate to answer in connection with these issues. Id. at 80.

Once the Supreme Court set to evaluate the third certified question about justifiable delay and determined that the delay was not reasonable, it had to further elucidate the prejudice prong. The Court set forth reasoning, often recognized by coverage practitioners, that it is near impossible for an insured to prove a negative—that the insurer was not prejudiced. Certainly, the insured is in the best position to offer proof as to harm it may or may not suffer as a consequence of a notice delay. As such, the Court went on to “take this opportunity to revisit the allocation of the burden of proof under Connecticut law.” Arrowood Indemnity Co. v. King, supra, at 201.

Perhaps, the Supreme Court was well aware that it need not delve into the third certified question. Perhaps it was exercising caution in light of the complicated procedural background and multiple policies at issue. Perhaps, it was waiting for the appropriate case in which it could take the opportunity to overrule the burden of proof previously set in Aetna Casualty v. Murphy, supra 206 Conn. 409. Likely, we will never know.

What Are the Costs of the Reallocated Burden of Proof?

Now that the burden is differently allocated, has the insurance industry lost some ground? Won the battle of Arrowood, but lost the “war” of coverage defense. This writer does not think so. Practically speaking, where a delay in notice is an issue, the insurer does have within its arsenal (to stay with the war theme) a plethora of defenses at its disposal. It knows what kind of investigations could have been done, but can no longer be done, and what kind of proofs are lost with the passage of time that can no longer be recovered. This coverage attorney says, “Kudos to Arrowood and their counsel!” and thanks to the Supreme Court for clearing up an otherwise murky question that could get even seasoned counsel to question, “Who’s got the burden of proof again?”

As noted above, the Connecticut Supreme Court decided the certified questions favorably to the insurers. There was no coverage given the location of the accident site. Nevertheless, the Court proceeded to analyze a third question regarding whether the social interactions between the two families made the delay in providing notice reasonable and took the opportunity to reallocate the burden of proof regarding prejudice from the insured to the insurer. In so doing, it seems the decision was well within the Court’s judicial bounds albeit a boost for plaintiff’s coverage counsel, certainly not a significant setback for insurers.

— Karey P. Pond


1. The excess carrier, Nation Surety Corporation, was brought into the action by way of a third-party complaint.

2. Interestingly, stating that not all matters may be resolved by questions 1 and 2, the Supreme Court refers to the existence of three separate insurance contracts and that in its opinion, it is referring only to the terms of a singular homeowners’ policy. Arrowood Indemnity Co. v. King, 304 Conn. 179, 183 n.1, 39A.3d. 712 (2011). However, nothing in the Second Circuit opinion nor the Supreme Court opinion reveals any substantive differences in the policies which would affect the third certified question. Both the homeowners’ policy and the umbrella policy provided that an insured would give notice “as soon as practical.” Arrowood Indemnity Co. v. King, 605 F.3d 62, 66, (2010). The excess coverage policy provided it would provide excess coverage, but only if the underlying carriers did not successfuly disclaim coverage.

3. The insureds visited with the Kings at their residence as guests and did not give any indication whatsoever that a lawsuit was forthcoming. Arrowood Indemnity Co. v. King, supra, 304 Conn. 185. Within days of receiving a letter from the Kings’ counsel indicating an intent to sue, the Kings notified their carrier. Id.