By Barbara Jones
The Indiana Supreme Court established a bright-line test for an insurer’s obligation to defend in Dreaded, Inc. v. St. Paul Guardian Insurance Co., 904 N.E.2d 1267, 1273 (Ind. 2009), holding that “an insurer cannot defend a claim of which it has no knowledge.” Thus, Dreaded’s three-year delay in providing notice to its insurer about an Indiana Department of Environmental Management demand that the insured investigate soil contamination at a former business site relieved the insurer of the obligation to reimburse defense and environmental investigation costs incurred by the policyholder without the insurer’s consent and before the insurer was notified about the claim. The Supreme Court held that the insurer’s duty to defend did not arise until it received notice of the claim and “prejudice is an irrelevant consideration.” Id.
In that case, the policyholder failed to notify its insurer for more than three years about the IDEM claim and sought to recover its pre-tender costs from the insurer. Once it received notice, St. Paul agreed to defend the policyholder from that point forward but expressly reserved the right to reimburse Dreaded for defense costs incurred pre-tender. The policyholder filed suit seeking a declaration that St. Paul had a duty to defend the entire claim, including the costs incurred before notice. Both parties filed summary judgment and the trial court granted St. Paul’s motion, concluding that a policyholder has a duty to tender claims in order to trigger an insurer’s duty to defend, a showing of prejudice to the insurer is not required, and even if prejudice was required, Dreaded’s three-year delay was unreasonable as a matter of law and gave rise to a presumption of prejudice to the insurer. Dreaded appealed.
The Court of Appeals reversed, finding that the presumption of prejudice was rebuttable and that Dreaded had designated sufficient evidence to raise a fact question whether St. Paul had been prejudiced by the delay. St. Paul petitioned for transfer to the Indiana Supreme Court, which the court granted. The court ultimately held that, under the facts of the case, prejudice was irrelevant and St. Paul had no duty to defend until notified about the claim (a condition precedent to coverage). Id. n.1.
Recently, a policyholder brought suit attempting to revisit the issue of whether an insurer owes for pre-tender defense and indemnity costs. In Travelers Insurance Companies v. Maplehurst Farms, Inc., No. 49A04-1006-PL-394, Aug. 24, 2011 (reh’g pending). The Indiana Court of Appeals rejected the policyholder’s request to distinguish the Indiana Supreme Court’s Dreaded decision. Maplehurst has requested reconsideration on rehearing and a petition for transfer to the Indiana Supreme Court is likely.
Maplehurst argued that the facts of this case are distinguishable in that the insurer in Dreaded did not attempt to avoid its coverage obligation altogether. Instead, St. Paul accepted the defense for post-tender costs and expenses and disclaimed coverage only for pre-tender fees and expenses. Another distinguishing feature was that Dreaded involved only pre-tender defense costs and environmental site investigation costs, while in Maplehurst, the policyholder also sought indemnity costs for a settlement agreement that it entered into before it gave notice to its insurers. In addition, Maplehurst attempted to distinguish the facts in Dreaded with a contention that the delay in notifying the insurer should have been “legally excused” because the policyholder had difficulty locating its insurance policies and that the insurer could not establish prejudice by the policyholder’s delay.
In a split opinion, the court rejected the policyholder’s arguments and found that Travelers had no duty to defend until it was notified about the IDEM claim and, furthermore, owed no duty to indemnify Maplehurst for the settlement that occurred before notice was given to the insurer.
The facts in Maplehurst, as discussed in the Court of Appeals opinion, are that Maplehurst owned and operated a dairy in Indianapolis from the 1930s to the late 1990s. An underground storage tank had been installed on the site and was used to store heating oil from the 1950s until the 1970s. In 1997, Maplehurst sold the site to Dean Foods, which continued to operate the business for several years. Dean Foods subsequently conveyed the property to a third party. Sometime in early 2000, a release of petroleum from the UST was discovered on the dairy site. Dean reported the leak to IDEM. In 2002, IDEM sent Maplehurst a letter demanding that it investigate and remediate the petroleum release. In September 2002, Maplehurst submitted a proposed corrective action plan to IDEM for remediation of this site. In the meantime, Dean Foods had already incurred substantial costs to respond to the release and demanded that Maplehurst reimburse it for those costs. Thereafter, Maplehurst negotiated a settlement agreement with Dean Foods in which Maplehurst agreed to pay $170,000 for remediation expenses that Dean Foods incurred.
On May 30, 2003, Maplehurst gave notice of the release from the UST to its insurance broker. On June 17, 2004, Travelers was copied on a letter to Maplehurst’s counsel to another insurer that notified Travelers for the first time that Maplehurst had received a demand from Dean Foods and, in fact, had settled the claim on Dec. 27, 2002. None of Maplehurst’s insurers had been made aware of the petroleum leak at an earlier time, and none of the insurers had any input, approval or participation in Maplehurst’s decision to enter into a settlement agreement with Dean Foods. Ultimately, Travelers denied coverage for the underlying IDEM claim because Travelers failed to receive timely notice, and on other grounds not at issue in the appeal.
Maplehurst filed suit against Travelers and other insurers to recover its pre-tender defense and site investigation expenses and indemnity costs for the settlement with Dean Foods. All of these costs were incurred by Maplehurst before notice to any of the insurers.
Following a hearing, the trial court granted Maplehurst’s motion for summary judgment finding that Travelers breached its duty to defend. The trial court distinguished the Indiana Supreme Court’s decision in Dreaded, reasoning that the Dreaded holding did not apply because Travelers, unlike the insurer in Dreaded, had refused to defend Maplehurst when it was notified about the claim. The trial court also determined that the delayed tender might be “legally excused” in certain circumstances such as when an insured has lost its insurance policy. The trial court further determined that Travelers was estopped from asserting its contractual defenses because it had breached its contract with Maplehurst by rejecting the defense when notified and for its delay in responding to its policyholder. Therefore, the trial court determined that Maplehurst could recover its pre-tender defense costs and indemnity costs for the settlement with Dean Foods, and also prejudgment interest. Travelers appealed.
The Court of Appeals reversed, finding that the insured was not entitled to recover pre-notice costs. The court noted that an insurer’s duties under the policy do not arise unless and until an insurer has knowledge of the claim (citing Dreaded at 1273). The court held that because all the costs and expenditures at issue in the appeal were incurred by Maplehurst before it notified Travelers of the claim, those costs could not be recovered.
The court also held that where an insured enters into a settlement agreement without the insurer’s consent – in violation of the voluntary payment provision – prejudice is irrelevant and that indemnity obligation cannot be recovered from the insurer. The court held that the trial court’s order directing Travelers to reimburse Maplehurst for the pre-notice, pre-tender costs is contrary to the fundamental holding in Dreaded that such costs cannot be recovered. The Court of Appeals noted that prejudice could be potentially relevant as to an insurer’s post-notice obligations but were irrelevant until an insurer has knowledge of the claim (citing Dreaded at 1273).
Moreover, the court rejected Maplehurst’s argument that its delay in giving notice should be “legally excused.” Maplehurst pointed out that its former chairman testified that he diligently searched for insurance policies after learning of the claim. However, the process was slow because Maplehurst had wound up its business operations in 1997 and the past president and risk manager had died before the claim arose. In essence, Maplehurst argued that its delay in giving notice should be legally excused because it could not find its agents, insurers or policies. The Maplehurst majority held that such difficulties did not “legally excuse” a three-year delay in providing notice to the insurer. Furthermore, the court stated that although the court had determined that an insurer has a limited duty to provide its insured with a copy of the policy upon request after a loss (citing Auto Owners Insurance Co. v. Hughes, 943 N.E.2d 432 (Ind. Ct. App. 2011)), a policyholder’s inability to locate its policy – through no fault of the insurer – does not legally excuse a delay in providing notice to the insurer.
The majority opinion was authored by Judge John G. Baker, with Judge Cale Bradford concurring. Judge Melissa May dissented, rejecting the majority’s premise that “reasonableness” is no longer a consideration in late-notice disputes. May observed that it did not appear that a “reasonableness” argument was made by the insurer in Dreaded and that nothing in the Indiana Supreme Court’s decision indicated that the court was overruling Miller v. Dilts, 463 N.E.2d 257 (Ind. 1984) (requiring a consideration of whether the insurer has been prejudiced by the delayed notice). May also noted that nothing in the Dreaded decision indicated that the insured offered an explanation for its delay in giving notice since there was no argument in Dreaded concerning that issue. May cited to the Indiana Supreme Court’s discussion concerning what the case was not about. (Dreaded did not contend that its failure to give notice was legally excused. 904 N.E.2d at 1272-1273.)
With respect to the Supreme Court’s citation to a legal excuse argument, the Dreaded court cited to the 7th Circuit Court decision in Commercial Underwriters Insurance Company v. Aires Environmental Services LTD., 259 F.3d 792 (2001) (Illinois law). Aires did not involve circumstances where the insured provided notice years after the claim while incurring significant legal fees, costs and entering into a settlement agreement. Instead, the facts are that the insured in that case gave notice to its insurer as soon as a claim was made and suit filed against it even though it had knowledge that an accident had occurred and suit had been filed against a different party. The plaintiff in that case did not add Aires as a party for nearly two years after the original suit was filed. There is nothing in that case discussing the failure of a policyholder to locate its insurance policies as grounds to excuse a condition precedent and an unreasonable delay in providing notice.
It remains to be seen whether this is an issue that the Indiana Supreme Court will revisit if a petition for transfer is filed in the future.•
Barbara Jones is a partner in the Indianapolis firm of Cantrell Strenski & Mehringer and is a member of the Defense Trial Counsel of Indiana. The opinions in this article are those of the author.