Paid-for coverage can be lost by the insured’s failure to timely comply with all kinds of duties that must be met before the insurer will pay a claim.
A. Notice Requirements
Beyond simply paying premiums, policyholders are generally required to provide notice to the insurer of any accident, discovery, or another occurrence that might give rise to coverage within a set number of days or “as quickly as practical” (i.e., “Now.”). If you are sued or have any reason to believe you will be, insurers demand that you immediately let them know or provide copies of any lawsuit papers to them. Even if you are not sued, any claim or demand-type letter should not be ignored, but rather forwarded to your insurance carrier as required by the notice provisions of the policy. Another duty is to cooperate fully with the insurer in the prosecution of any litigation and to not settle a case without the insurer’s participation or approval.
B. Substantial Compliance
When a notice provision is written into an insurance policy, the policyholder must show “substantial compliance” with the notice provision before the insurer is obligated to pay a claim. Met-Coil Sys. Corp. v. Columbia Cas. Co., 524 N.W.2d 650, 654 (Iowa 1994). The substantial compliance requirement is necessary because the notice provision is “the only avenue by which unjust claims can be successfully denied or defended. Unless given notice within a reasonable time, evidence could be lost and key witnesses never discovered.” Henderson v. Hawkeye-Security Ins. Co., 106 N.W.2d 86, 92 (Iowa 1960). Where the notice provision requires notice to be provided directly to the insurer, notice to an insurance agent does not constitute substantial compliance. Met-Coil, 524 N.W.2d at 656.
If a policyholder cannot show substantial compliance, the policyholder, in order to maintain a lawsuit against the insurer, must show that the failure to comply was excused, or that the requirements of the condition were waived, or that failure to comply was not prejudicial to the insurer. Henderson, 106 N.W.2d at 92. Unless the insured shows such substantial compliance, excuse, waiver, or lack of prejudice to the insurer, courts will presume that the insurer has been unfairly prejudiced and thus will not be required to pay the claim. Id. In other words, your business can lose timely paid insurance coverage simply by failing to cooperate as defined by your policy. The presumption is rebuttable, but unless the presumption is overcome by a satisfactory showing of lack of prejudice, the presumption will defeat the policyholder’s recovery. Met-Coil, 524 N.W.2d at 658.
C. Manifestation Triggers
What happens when an event occurs that would ordinarily trigger coverage, but you as the policyholder don’t know about it? Although there have not been many cases to directly address the question, most courts have implicitly applied a “manifestation trigger.” When a manifestation trigger is in issue, a policyholder typically has no obligation to notify the insurer until the event or problem is discovered, or should reasonably have been discovered. The damage (and thus notice) is then deemed to have occurred at the time it is discovered or should reasonably have been discovered. The latter is always a fighting issue, particularly, in certain contexts, such as with mold. Mold may exist behind walls and cabinets, under floors, above ceilings, or any number of other hidden places. Where there is any type of evidence pointing to mold, courts will usually conclude that the policyholder was put on notice of the problem, even if the full extent of the problem was not apparent, or the risks inherent in mold contamination were not understood at the time the mold first became visible.
D. Don’t Be Like This Policyholder!
The United States Court of Appeals for the Eighth Circuit recently decided an Iowa case involving the exact issues mentioned above-mold contamination and a duty to notify an insurer. In Walnut Grove Partners, L.P. v. Am. Fam. Mut. Ins. Co., 479 F.3d 949 (8th Cir. 2007), the policyholder owned commercial property that it leased to a number of tenants. After multiple water infiltrations over several years, mold developed in the leased space. The policyholder knew of the water infiltrations, and at least was made aware of the problem when one of the tenants sent a letter informing the landlord (policyholder) that some of the tenant’s employees had become ill from exposure to the mold and that it planned on terminating the lease if the problem was not fixed.
The policyholder, rather than taking any kind of action with the tenant’s letter, claimed it was a negotiation technique or request for rent abatement. After sixty days had passed, the tenant informed the policyholder that the premises were untenable, and terminated the lease. Only then did the policyholder make its first claim of loss to the insurer and put the insurer on notice of a claim. A second claim for defense and indemnity was made to the insurer when the then former tenant sued for damages. The insurer concluded that notice was untimely and that it had no duty to defend.
The trial court granted summary judgment in favor of the insurance company. In affirming the trial court, the Eighth Circuit concluded that even viewing the facts most favorably to the policyholder, at least six months elapsed between notice of the mold and the date of the policyholder’s alleged loss. As such, the mold infestation did not constitute a coverable “event” under the policy.
We hope that this information on insurance notification is helpful in your business. As always, if you have any further questions or concerns on any such issues, please do not hesitate to call.