DE court applying WI law finds no late notice prejudice when insurer consistently denies coverage.

The Superior Court of Delaware, applying Wisconsin law, held that Travelers Indemnity Company (“Travelers”) has a duty to defend CNH Industrial America LLC (“CNH”).  The duty to defend was not affected by the insured’s alleged untimely notice, because according to the court, Travelers was not prejudiced because it had consistently denied coverage.  Travelers also did not follow the standard practice established in Wisconsin for when an insurer challenges the defense obligation.

CNH filed a declaratory relief and breach of contract case against several insurance companies, including Travelers, stemming from a dispute for coverage for underlying asbestos-related lawsuits.  The coverage dispute between the parties generated “aggressive litigation, including a motion practice that can only be characterized as extreme.”  CNH moved for partial summary judgment on Traveler’s duty to defend in October 2014 asking the court to hold Travelers must provide CNH with a defense for the underlying lawsuits.   During oral argument on that motion the court ruled that: (1) Wisconsin law applies to the policies and (2) CNH was the policies’ proper assignee under 1994 reorganization agreements.   After additional motion practice and a status conference the court was faced with CNH’s Supplemental Brief in Support of its Motion for Summary Judgment.

According to the Delaware court, in a situation where an insurer questions its duty to defend, the standard practice in Wisconsin is for the insurer to defend the policyholder subject to a reservation of rights or the insurer is to intervene in the underlying lawsuit and request a bifurcated trial on the issue of coverage moving to stay liability proceedings until the coverage matter is resolved.   If the insurer uses one of these procedures, the insurer “runs no risk of breaching its duty to defend.”   An insurer cannot deny defense coverage when the issue is “fairly debatable without breaching its duty to the insured.”   Further, under Wisconsin law, breaching its duty to defend “may result in the insurer’s waiving it [sic] right to assert coverage defenses.”

In response to CNH’s motion for summary judgment, Travelers made three arguments as to why it did not have a duty to defend CNH.  First, it claimed a 1980s Claims Handling Agreement entered into by Travelers and CNH’s corporate predecessor, Case, bars coverage.  Under the Agreement, Case was able to manage lawsuits filed against it relating to certain specific insurance policies.  The court held that Travelers’ argument failed because the agreement does not relate to the policies at issue before the court and the agreement is not a broad hold harmless and indemnity agreement.

Next, Travelers contended that its efforts to investigate CNH’s successor-in-interest status fulfilled its duty to defend.  The court found that instead of following the common practice under Wisconsin law for contesting a coverage obligation, Travelers consistently issued “full reservation of rights” letters which inappropriately shifted the defense burden from the insurer to the insured.   Moreover, the court noted that the whole practice of requesting information from CNH “seems extremely futile” because Travelers had already taken the position that the anti-assignment provisions of the relevant policies barred coverage for CNH.

Lastly, Travelers argued that it was prejudiced by CNH’s failure to comply with the notice and cooperation provisions of its policy.   Travelers contended that CNH did not provide notice for more than thirty days after service of the underlying complaint and therefore Travelers was prejudiced because it could not participate in a defense or settlement, or investigate claims.  The Delaware court had previously ruled that CNH was required to give Travelers “notice of an occurrence ‘as soon as practicable;’ and if a claim is made or a suit is brought against the insured (CNH), the insured (CNH) must ‘immediately’ forward to the insurer (Travelers) every demand, notice, summons or other process received by the insured (CNH).” Under Wisconsin law, “if an insurer consistently maintains no coverage existed, and the timing of notice would not have changed the insurer’s decision to deny its duty to defend, then the insurer is not prejudiced.”  The court ruled that because Travelers had consistently denied coverage, CNH’s alleged untimely notice was not prejudicial to Travelers.  Therefore, the court held that Traveler’s waived its right to enforce notice and cooperation provisions.

Travelers additionally argued that it has no liability to CNH for reimbursement of defense costs because CNH’s payments of settlements exhausted Traveler’s duty.  Under Wisconsin law, “an insurer’s obligations are fully discharged after it pays the maximum amount under the policy.”  The court ruled that Traveler’s duty to defend terminates only after Travelers, not CNH, exhausts its applicable limits of liability. CNH Indus. Am. LLC v. American Cas. Co. of Reading PA, No. N12C-07-108 EMD CCLD (Del. Super. Ct. Aug. 19, 2016).