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November 2012

Arrowood Indemnity Co. v. King: Connecticut Joins the Majority on Late Notice Claims

With the Connecticut Supreme Court’s decision in Arrowood Indemnity Co. v. King, 304 Conn. 179 (2012), Connecticut has now joined the “overwhelming majority,” (Id. at 203), of jurisdictions that require an insurer to prove that it has been prejudiced by an insured’s late notice of a claim before the insurer may deny coverage based upon a breach of the notice condition of the policy.  This is a substantial departure from the prior Connecticut rule, which required the insured to prove a lack of prejudice.

Nearly 25 years ago, Connecticut moved away from strict enforcement of policy conditions when the Supreme Court issued its decision in Aetna Casualty & Surety Co. v. Murphy, 206 Conn. 409 (1988).  In Murphy, the Court recognized that traditionally, “absent waiver, an unexcused, unreasonable delay in notification constitutes a failure of condition that entirely discharges an insurance carrier from any further liability on its insurance contract.”  Id. at 411-412.  The Murphy Court also recognized, however, that a rigid application of this principle could result in “disproportionate forfeiture” to the insured if the insurer had not been prejudiced by the insured’s late notice.  In other words, the insured might be left entirely without coverage because of a technical breach of the notice provision even where the breach had no negative effect on the insurer’s ability to investigate or otherwise process the claim.

In order to address this potential for disproportionate harm to insureds, while at the same time considering the insurer’s legitimate interest in protecting against stale claims, the Murphy Court attempted to balance the competing interests of  insurer and insured.  The result was a rule dictating that the insured’s failure to give timely notice of a claim would result in a presumption of prejudice to the insurer.  Because the insured was the party seeking relief from its breach, the Court determined that a fair balance required that the insured, in order to obtain coverage, had the burden of overcoming this presumption by proving that the insurer had not suffered prejudice due to the late notice.  Id. at 419-420.

Until recently, the prejudice balancing test crafted by the Murphy Court has been the law in Connecticut with respect to late notice claims.  The rule was even applied by the intermediate appellate court to claims involving an insured’s breach of the duty to cooperate.  See Taricani v. Nationwide Mut. Ins. Co., 77 Conn. App 139,149-150 (2003).  With its decision in Arrowood, however, the Connecticut Supreme Court has reversed the rule in Murphy, even though the notice/prejudice question was not raised by the parties. 

In Arrowood, the Supreme Court was presented with three questions certified by the United States Court of Appeals for the Second Circuit.  The first two questions involved interpretation of certain provisions of a homeowner’s policy not relevant to the question of notice.  The Court answered these questions in a way which indicated the insured was not entitled to coverage.  Because, however, the Second Circuit indicated the Court’s answers to the first two questions might not be dispositive of the entire case, the Supreme Court also answered the third certified question, concerning the insured’s late notice of the claim.

      Specifically, the Court was asked, under Connecticut law,

where a liability insurance policy requires an insured to give notice of a covered claim ‘as soon as practical,’ do social interactions between the insured and the claimant making no reference to an accident claim justify a delay in giving notice of a potential claim to the insurer?

Arrowood, 304 Conn. at 183. 

The facts were that the insureds and potential claimants were neighbors whose children had been involved in an accident involving an ATV and a skateboard.  Following the accident, the children and their families interacted for nearly a year in a way that led the insureds to believe no claim was going to be made.  When a claim was made a year after the accident, the insureds promptly gave notice to the insurer and argued that their interactions with their neighbors over the preceding year constituted a legitimate excuse for failing to give notice earlier.  The Supreme Court rejected this, holding the serious nature of the accident should have put the insureds on notice of their potential liability and that the social interaction between the insureds and the claimants did not justify the insureds’ failure to give prompt notice of the potential claim.  Id. at 200-201. 

Then, although the question of prejudice had not been raised by the Second Circuit and, as the Connecticut Supreme Court acknowledged, determination of whether the insurer suffered prejudice due to late notice was beyond the scope of the certified questions, the Supreme Court nevertheless decided, on its own, to revisit the burden of proof on the issue of prejudice.

After reviewing its analysis in Murphy and restating the bases for its holding there (outlined above), the Court explained that it essentially had changed its mind.  The Court concluded its prior reasoning, while “legally tenable,” was not as consistent with the principles it had sought to achieve in Murphy as was the majority position which requires the insurer to prove prejudice.  Explaining its reasons for rejecting Murphy, the Court stated that “the task of proving a negative is an inherently difficult one, and it may be further complicated by the opposing parties’ interests in concealment.”  Id. at 203.  Further, imposing this difficult task on the insured, “the party least well equipped to know, let alone demonstrate, the effect of delayed disclosure on the investigatory and legal defense capabilities of the insurer,” would reduce the likelihood that the fact finder would ultimately be provided with the facts necessary to make an appropriate prejudice determination.  Id

As a result, the Court concluded the balance it attempted to strike in Murphy between the insured’s interest in avoiding disproportionate forfeiture and the insurer’s interest in protection from stale claims would better be served by a rule, in line with the rule adopted by the “overwhelming majority” of other jurisdictions, that the insurer must prove that it was prejudiced by the insured’s late notice.