Country Mut. Ins. Co. v. Livorsi Marine
| Decision Date | 30 November 2004 |
| Docket Number | No. 1-03-2832.,No. 1-03-2912.,1-03-2832.,1-03-2912. |
| Citation | 833 N.E.2d 871 |
| Parties | COUNTRY MUTUAL INSURANCE COMPANY, Plaintiff-Appellee, v. LIVORSI MARINE, INC. and Gaffrig Performance Industries, Defendants-Appellants. |
| Court | Illinois Supreme Court |
Stephen G. Kehoe, Law Offices of Stephen G. Kehoe, Chicago, for Appellant Gaffrig Performance Industries, Inc.
Kevin M. Flowers and Mark H. Izraelewicz, Marshall, Gerstein & Borun, LLP, Chicago, for Appellant Livorsi Marine, Inc.
Keith G. Carlson, Carlson Law Offices, Chicago, for Appellee County Mutual Insurance Company.
This insurance coverage case raises a question that has not been squarely answered in this State: When an insured is required by its contract with its insurer to give timely notice of a lawsuit against it, but does not do so and has no excuse for not doing it, does the insurer have to prove prejudice before it can avoid coverage? We conclude this insurer did not have to prove it was prejudiced by an unreasonably late notice of a lawsuit. We affirm the trial court's judgment for the insurer.
Country Mutual Insurance Company (Country Mutual) brought this declaratory judgment action to establish whether the insurance policies it had with Livorsi Marine, Incorporated (Livorsi) and Gaffrig Performance Industries (Gaffrig) required Country Mutual to indemnify and defend them in an underlying trademark dispute.
Both Gaffrig and Livorsi purchased general liability policies from Country Mutual. The policies stated:
The policies' definition of "advertising injury" included injury arising from the "infringement of copyright, title, or slogan." The policies also listed conditions for the coverage, including a duty to notify Country Mutual "as soon as practicable" in the event of an occurrence, offense, claim or suit and to "immediately send" the insurer copies of any demands, notices, summonses, or legal papers in connection with a claim or suit.
On December 1, 1999, Livorsi filed a complaint against Gaffrig for trademark infringement, dilution, and consumer fraud. That same day, Gaffrig filed its countercomplaint against Livorsi alleging trademark infringement and unfair competition. Trial commenced in March 2002.1
On November 20, 2001, Country Mutual filed its complaint for declaratory judgment, alleging its policies with Livorsi and Gaffrig did not provide coverage for the trademark lawsuits for two reasons: (1) the lawsuits did not fall under the definition of "advertising injury"; and (2) both Livorsi and Gaffrig failed to provide timely notice of the lawsuits, thereby breaching a condition of the policies' coverage. The parties stipulated that County Mutual did not receive actual notice of the trademark lawsuits until August 2001, 21 months after the lawsuits were filed.
The trial court entered a declaratory judgment in favor of Country Mutual based on the failure of Livorsi and Gaffrig to provide timely notice of the trademark lawsuits. Whether the claims fell within the coverage of the policies is not an issue in this appeal by Livorsi and Gaffrig.
The issues are framed by the parties' briefs and we will hold the parties to them despite efforts to slip away during oral argument. That means the appellants agree the notice of lawsuit given Country Mutual was unreasonably and inexcusably late. It also means Country Mutual was caught in a conflict of interest because it insured both appellants, leaving it in a position where it could not prove it was prejudiced by the late notice. Where a conflict exists, the insurer must decline to participate in the defense and must pay the costs of independent counsel for the insured.2 Murphy v. Urso, 88 Ill.2d 444, 451-52, 58 Ill.Dec. 828, 430 N.E.2d 1079 (1981).
That leaves us with a single issue, one of law: Given the circumstances presented to us, did Country Mutual have to prove prejudice? Because it is a legal issue, we will approach it on a de novo basis. People v. Johnson, 206 Ill.2d 348, 359, 276 Ill.Dec. 399, 794 N.E.2d 294 (2002).
This is a contract case. The insurance contract controls the insured's duties. Northern Insurance Co. of New York v. City of Chicago, 325 Ill.App.3d 1086, 1091, 259 Ill.Dec. 664, 759 N.E.2d 144 (2001). When the contract includes a provision requiring the insured to notify the insurer of a suit against it, the notice provision is a "condition precedent to the triggering of the insurer's contractual duties." Northbrook Property & Casualty Insurance Co. v. Applied Systems, Inc., 313 Ill.App.3d 457, 464, 246 Ill.Dec. 264, 729 N.E.2d 915 (2000).
When the insured fails to comply with the notice provision, the insurer may be relieved of its duty to defend the insured under the policy. Northern Insurance Co. of New York, 325 Ill.App.3d at 1091, 259 Ill.Dec. 664, 759 N.E.2d 144. In short, "notice provisions are valid prerequisites to coverage and not mere technical requirements which the insured is free to overlook or ignore with impunity." Kerr v. Illinois Central Railroad Co., 283 Ill App.3d 574, 582, 219 Ill.Dec. 81, 670 N.E.2d 759 (1996).
Given the myriad of decisions that extol the binding nature of notice provisions in insurance contracts, what is the basis, then, for an argument that the insurer must prove prejudice — unreasonable delay in notice or not? The decisions in this area are plentiful, but categorization is elusive. There is too much spillage.
When an insurance policy requires the insured to notify the insurer of an occurrence or lawsuit "as soon as practicable," as did the policy in this case, the test is whether notice was given within a reasonable time. Northern Insurance Co. of New York, 325 Ill.App.3d at 1091, 259 Ill.Dec. 664, 759 N.E.2d 144. We need not stop in this case to determine whether the delays in the insureds' notices were reasonable. They agree they were not. This case turns on whether the insurance company's failure to prove the unreasonably late notice caused it prejudice bars a denial of coverage.
It is fairly clear that prejudice to the insurer is a factor to consider with other factors when the issue is whether notice of an occurrence was reasonable. Zurich Insurance Co. v. Walsh Construction Co. of Illinois, Inc., 352 Ill.App.3d 504, 511, 287 Ill.Dec. 834, 816 N.E.2d 801 (2004); Household International, Inc. v. Liberty Mutual Insurance Co., 321 Ill.App.3d 859, 869, 255 Ill.Dec. 221, 749 N.E.2d 1 (2001); American Country Insurance Co. v. Bruhn, 289 Ill.App.3d 241, 247, 224 Ill.Dec. 805, 682 N.E.2d 366 (1997); American States Insurance Co. v. National Cycle, Inc., 260 Ill.App.3d 299, 311, 197 Ill.Dec. 833, 631 N.E.2d 1292 (1994).
The reasonable notice of occurrence provision provides the insurance company an opportunity to investigate the accident and protect itself against unjustified claims. American Country Insurance Co. v. Efficient Construction Corp., 225 Ill.App.3d 177, 181, 167 Ill.Dec. 458, 587 N.E.2d 1073 (1992). Reasonable notice gives the insurer an opportunity to gather and preserve possible evidence. Bruhn, 289 Ill.App.3d at 247, 224 Ill.Dec. 805, 682 N.E.2d 366.
Saying that prejudice is a factor to consider in occurrence notice cases is not the same as saying the insurer cannot deny coverage unless it proves prejudice. Some courts hold the insurance company does not have to prove it was prejudiced by the lack of reasonable occurrence notice before it can validly deny coverage. Bruhn, 289 Ill.App.3d at 247, 224 Ill.Dec. 805, 682 N.E.2d 366; General Casualty Co. of Illinois v. Juhl, 283 Ill.App.3d 376, 382, 218 Ill.Dec. 685, 669 N.E.2d 1211 (1996); American States Insurance Co., 260 Ill.App.3d at 311, 197 Ill.Dec. 833, 631 N.E.2d 1292.
Other courts have held lack of prejudice to the insurer is a factor to be considered only where the insured has a good excuse for the late notice or where the delay was relatively brief. Montgomery Ward & Co., Inc. v. Home Insurance Co., 324 Ill.App.3d 441, 449, 257 Ill.Dec. 373, 753 N.E.2d 999 (2001); Fletcher v. Palos Community Consolidated School District No. 118, 164 Ill.App.3d 921, 928, 115 Ill.Dec. 838, 518 N.E.2d 363 (1987).
But this is not a notice of occurrence case. It is a notice of lawsuit case. "A notice of suit requirement in a policy serves the purpose of enabling the insurer to conduct a timely and thorough investigation of the insured's claim * * *, as well as to locate and participate in the defense of the insured." Northbrook, 313 Ill.App.3d at 465, 246 Ill.Dec. 264, 729 N.E.2d 915. Unreasonably late notice denies the insurer an opportunity to assess the loss and thereby protect its interests. Kerr, 283 Ill.App.3d at 585, 219 Ill.Dec. 81, 670 N.E.2d 759.
Here, the appellants say the insurer's inability to prove prejudice, due to its conflict of interest, prohibits a denial of coverage. The insurer, in turn, contends that under the circumstances of this case a lack of prejudice is irrelevant.
Some Illinois decisions do say prejudice is required in all cases where the insurer claims late notice of a lawsuit. The first case to say it is Rice v. AAA Aerostar, Inc., 294 Ill.App.3d 801, 229 Ill.Dec. 20, 690 N.E.2d 1067 (1998).
Rice is the standard-bearer for the must-prove-prejudice contenders. It also is the first Illinois decision to hold a different rule applies to notice of lawsuit cases.
In Rice, the defendant's insurer, State Farm, was notified that the plaintiff slipped and fell in a parking lot owned by defendant, but never received written notice of a personal injury lawsuit filed by p...
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