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Insurers needed actual notice to trigger duty to defend claim

By PAUL THARP, Staff Writer

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North Carolina has joined a majority of jurisdictions that require a policyholder to provide actual notice to an insurer of a claim before a duty to defend arises.

Winston-Salem attorney Garth Gersten described the March 15 ruling by the Court of Appeals as “important both for insurance companies and policyholders because it emphasizes that policyholders need to provide notice of claims as soon as possible to their carriers. Notice is not a luxury; it is sound risk management.”

Gersten represented Travelers Property & Casualty Company of America, Travelers Indemnity Company and United States Fidelity & Guaranty Company in the case of Kubit v. MAG Mutual Insurance (Lawyers Weekly No. 11-07-0273, 41 pp.).

Because the policyholders in Kubit could not prove that their delay in giving notice to Travelers was made in good faith, the court concluded that Travelers did not have a duty to defend them or indemnify them for the costs of their defense.

Gersten said Travelers has a pending contribution claim against other carriers in Cumberland County for costs it incurred in providing a defense for the policyholders.

The ruling followed a lawsuit brought by a surgeon at Cape Fear Valley Medical Center against individual anesthesiologists employed by Cumberland Anesthesia. The surgeon, Wayne Welsher, alleged that the anesthesiologists filed “patently erroneous and hostile” and “false and malicious” complaints about him in an effort to have him removed from the hospital.

After Welsher voluntarily dismissed his action, the anesthesiologists brought suit against a number of insurers, alleging that they failed to provide a defense or indemnify them for defense costs they incurred defending against Welsher’s suit.

The insurers – MAG Mutual, Cincinnati, American and Travelers – filed motions for summary judgment, and the trial court entered summary judgment in their favor.

The anesthesiologists appealed.


Pretender defense costs at issue

Gersten said that once Travelers received notice of Welsher’s claim against Cumberland and the anesthesiologists, it provided a defense. But by that time Cumberland and the anesthesiologists had incurred defense costs exceeding $200,000, he said.

 “The issue of pretender defense costs has been discussed for a long time, and I have always advised policyholder clients to tender claims as soon as they come in,” Gersten said. “I have argued on behalf of insurance companies that there is generally no excuse for not providing notice of a claim on liability policies.”

He said that informed risk management emphasizes that there should be a partnership between policyholders and insurers in defending claims.

“It’s easy to pick up the phone or to send an e-mail,” Gersten said. “Just do it.”

In determining whether the anesthesiologists’ delay in providing notice to Travelers relieved Travelers of its duty to defend or indemnify, the Court of Appeals applied a three-pronged test from the N.C. Supreme Court’s opinion in Great American Insurance Co. v. C. G. Tate Construction Co., 315 N.C. 714 (1986).

Charlotte attorney L.D. Simmons II, who represents policyholders but was not involved in the case, told Lawyers Weekly that North Carolina’s three-pronged test is unique because “the insured can win on either the first, second or third prong.

“Here, the court found that because the insured did not offer any good-faith basis for delay – the second prong – it did not even consider the third prong of the analysis – whether the insurer was prejudiced by the delay,” Simmons said.

He said it was not clear what evidence the insured would have to proffer to demonstrate that its delay was not in bad faith, “but the court focused on that issue and penalized the policyholder for its failure to come up with some reason for the delay.”

Simmons noted that no North Carolina appellate court had directly addressed the issue of pretender defense costs. He said the better reasoned, “modern” rule “is that an insured is entitled to recover costs incurred prior to providing notice to the insurer if the delay in notifying the insurer did not cause any prejudice to the insurer’s rights.”

He said that the U.S. District Court for the Western District of Tennessee explained that the Tennessee Supreme Court had “adopted the modern trend and held that in order for forfeiture of an insurance policy to result from an insured’s breach of a notice provision, prejudice to the insurer must be shown.” Smith & Nephew, Inc. v. Federal Ins. Co., 2005 WL 3434819 (W.D. Tenn. 2005).

Florida and Pennsylvania also require a showing of prejudice due to a violation of a policy’s notice requirement in order to relieve an insurer of its contractual duty to defend, Simmons said.

Defense attorneys may be well-advised, based on Kubit, to ask clients whether insurance policies may cover alleged acts and whether carriers have been given notice of a claim.

Not only that, Simmons added, the Court of Appeals held in Kubit that notice to an insurance carrier’s agent was not sufficient in the circumstances presented in the case.

“When a policyholder provides notice to an insurer, it should always take steps to make sure that notice goes to the right place,” he said. “In most cases, the insurance policy indicates where and how the insured should provide notice. If the policyholder is going to rely on a broker or agent, the policyholder should monitor the agent to make sure the notice gets to the right place, and gets there in a timely fashion.”

Attorneys for the other carriers in the case did not return Lawyers Weekly’s calls for comment before deadline. An attorney representing the anesthesiologists declined to comment for this story.


Opinion Brief


Case name: Kubit v. MAG Mutual Insurance

Court: N.C. Court of Appeals

Judges: Judge Martha Geer; Judges Linda S. Stephens and Ann Marie Calabria, concurring

Date: March 15, 2011

Plaintiff-appellants’ attorney: Theodore B. Smyth of Smyth & Cioffi (Raleigh)

Defendant-appellees’ attorneys: J. Donald Cowan Jr. and Stephen C. Keadey, both of Ellis & Winters (Raleigh) for MAG Mutual Ins. Co.; Susan K. Burkhart of Cranfill Sumner & Hartzog (Raleigh) for Cincinnati Ins. Co.; Garth A. Gersten of Womble Carlyle Sandridge & Rice (Winston-Salem) for Travelers Property & Casualty Company of America, Travelers Indemnity Company and United States Fidelity & Guaranty Company; Daniel C. Marks of Moreau & Marks (Charlotte) for American Economy Insurance Company and American States Insurance Company

Issue: Does an insurer have a duty to defend a claim for which notice of the claim provided by the policyholder was delayed?

Holding: In a matter of first impression in North Carolina, the appeals court held that the duty to defend arises when an insurer receives actual notice of the underlying action.

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