Atlantic Casualty Insur. Co. v. Greytak, 2015 MT 149 (May 29, 2015) (McGrath, C.J.; Rice, J., concurring; McKinnon, J., concurring) (7-0, certified question answered)
Issue: Whether the notice-prejudice rule applies to insurers in third-party damages claims.
Short Answer: Yes.
Certified question answered
Facts: In March 2010, GTL sued Greytak and Tanglewood (Greytak) for non-payment of an obligation arising from a construction project. GTL was insured by Atlantic Casualty under a CGL policy. In March 2010 Greytak sent a letter to GTL asserting it had grounds for various counterclaims involving construction defects, and in November 2010 filed counterclaims in the state court action.
In April 2011, GTL and Greytak entered a settlement agreement that required GTL to notify Atlantic of Greytak’s counterclaims. GTL and Greytak agreed that if Atlantic did not appear to defend GTL and did not file a declaratory action on coverage, GTL would allow judgment to be entered against it for $624,685.14 plus costs. If Atlantic did appear, Greytak could pursue its claims to judgment, Greytak would look only to Atlantic for recovery, and Greytak would insure that GTL would have no responsibility for any resulting judgment. Finally, the agreement provided that if Atlantic filed a declaratory coverage action, Greytak would defend with the purpose of establishing coverage for GTL.
On May 23, 2011, GTL notified Atlantic of Gereytak’s counterclaims. Greytak separately notified Atlantic in August 2011.
In January 2012, Atlantic sued GTL and Greytak in federal court, seeking a declaration that it was not required to defend GTL or pay any judgment. GTL defaulted and is not participating. Atlantic sought a declaration that it was not required to provide coverage because GTL had not provided timely notice as required by the policy.
Procedural Posture & Holding: The federal court found that Atlantic did not have timely notice and was excused from providing coverage. It further found that Montana law did not require Atlantic to show prejudice from untimely notice. It granted Atlantic’s motion for summary judgment and denied Greytak’s motion. Greytak appealed to the Ninth Circuit, which certified this question to the Montana Supreme Court.
Reasoning: The issue is whether the policy provision requiring GTL to notify Atlantic of a covered event “as soon as practicable” can be invoked to bar coverage without first considering whether a delay in notification caused prejudice to Atlantic. Montana public policy is to strictly construe insurance coverage exclusions to promote the “fundamental protective purpose” of insurance. ¶ 14. The notice-prejudice rule applies whether the claim arises from the insured, Estate of Gleason, or from a third party claiming damages, as here. The Court does not address whether Greytak benefits from the rule, as that issue exceeds the scope of the certified question.
Justice Rice’s Concurrence: Justice Rice concurs in the answer to the certified question, but believes the facts show Atlantic has been prejudiced as matter of law. GTL’s and Greytak’s actions were “sharp practice at best and collusion at worst,” and undoubtedly prejudiced Atlantic. He would hold that Greytak does not receive the benefit of the notice-prejudice rule.
Justice McKinnon’s Concurrence: Justice McKinnon concurs in the answer to the certified question and in Justice Rice’s concurrence. Justice McKinnon would adopt a limited exception to the notice-prejudice rule that prejudice to the insurer will be presumed when the insured does not notify the insurer until after judgment has been entered. “The notice-prejudice rule does not rewrite the insurance contract. It is recognition that in certain situations, strict adherence to terms of the contract would produce an inequitable result and a windfall to the insurer.” ¶ 29.