Late Notice (IL Fed)

Insurance broker did not have apparent authority to accept notice on behalf of insurer – notice deemed untimely

An Illinois federal court, applying Illinois law, held that due to the insured’s failure to provide prompt notice, the insurer was not liable to pay any part of a $2.3M judgment.  The court found that notice to the insured’s insurance broker was not sufficient.

After an adverse jury verdict in a personal injury lawsuit, a state court entered judgment against Deerfield Construction, Inc. (“Deerfield”).  Deerfield’s excess insurer, Landmark American Insurance Company (“Landmark”), brought an action against Deerfield seeking a declaratory judgment that Deerfield was not entitled to insurance coverage for the state court judgment under the Landmark excess policy due to Deerfield’s failure to provide timely notice.

Laurus Strategies (“Laurus”), an insurance consultant who is Deerfield’s insurance broker, and Arthur J. Gallagher Risk Management Services, Inc. (“AJG”), another insurance broker that Laurus introduced to Deerfield, procured for Deerfield a commercial automobile policy from American States with coverage limits of $1M and an excess policy from Landmark with coverage limits of $10M.  Both the American States and Landmark insurance policies required Deerfield to give “prompt” notice to the insurer of any “accident,” “suit,” “claim,” or “loss,” and to “immediately” send the insurer copies of any documents concerning a claim or lawsuit.

On January 16, 2008, an employee of Deerfield was involved in a car accident.  Soon after the accident, Deerfield, through Laurus, notified American States and AJG of the accident.  Deerfield believed that “notice to AJG constituted notice to Landmark,” but Landmark did not actually receive notice of the accident at that time.  On December 22, 2009, a state court lawsuit was filed against Deerfield related to the accident.  As soon as it was served, Deerfield notified Laurus.  Sometime between December 30, 2009 and January 19, 2010, Deerfield notified American States of the lawsuit.  On December 5, 2014, while the lawsuit was pending, AJG directly notified Landmark.  On January 16, 2015, the jury entered a verdict against Deerfield.  On January 29, 2015, Landmark notified Deerfield that it reserved its rights to deny coverage under the excess policy.

The main issue before the court was whether AJG had “apparent authority” to accept notice of claims on Landmark’s behalf.  Under Illinois law, “[a]pparent authority is that authority which a reasonably prudent person would naturally suppose the agent to possess, given the words or conduct of the principal.”  To establish apparent authority, “the principal must do something to lead the third party to believe that the agent is authorized to act on its behalf.”  The court found that there was “no evidence that Deerfield acted in reliance upon the conduct of Landmark or AJG, as opposed to Laurus, and that the record was absent of any evidence showing that Deerfield’s blind reliance on Laurus was consistent with “ordinary care and prudence.’”

Deerfield also argued that even if AJG was not Landmark’s apparent agent, the notice of the accident and lawsuit was nonetheless reasonable under Illinois law.  Under Illinois law, “prompt” notice is interpreted to mean notice within a “reasonable time.”  The court held that notice approximately five years after the lawsuit was filed was unreasonable as a matter of law.  The court was not convinced that Deerfield was only required to provide notice to Landmark once it became aware that the lawsuit would implicate the Landmark excess policy due to the fact that the express language of the policy required “prompt” notice without leaving room for the insured’s discretion.

The court also disagreed with Deerfield’s argument that Landmark should be estopped from denying coverage because Landmark participated in settlement negotiations and in the defense of the lawsuit. The court held that Deerfield did not “‘identify clear, concise, and unequivocal evidence’ that Landmark’s defense of the lawsuit induced Deerfield to ‘surrender control of its own defense.’” Landmark American Ins. Co. v. Deerfield Construction, Inc., No. 15 C 1785 (N.D. Ill.  May 3, 2018).