A lot of attention has been given to the late notice defense … lately. New York’s governor just signed a bill and the high courts of New York and Texas are expected to issue decisions on notice issues.  With the signing of Bill A11541, in New York, liability insurers will be prohibited from disclaiming coverage based on an insured’s untimely notice of a claim before demonstrating that it has been prejudiced in its ability to investigate or defend the claim.

Until now, the burden of proof rested on the insured to show that it was not reasonably possible to have given notice within the time required under a policy and that notice was provided as soon as was reasonably possible; insurers were not required to show any prejudice as a result of the late notice in order to disclaim coverage.

The new law shifts the burden of proof to the insurer to demonstrate prejudice if notice is provided within two years of the time required under the policy. However, if notice is given more than two years after the policy’s deadline, the insured must show that the insurer has not been prejudiced. For further discussion of the bill, check out the recent posting by Wiley Rein’s Laura Foggan and Benjamin Theisman.

In the judicial arena, the New York Court of Appeals in March accepted a case concerning an insured’s five year delay in notifying its excess insurer of an accident. Oral argument in Sorbara Contruction Corp. v. AIU Insurance Co. is scheduled for Sept. 3. The intermediate appeals court in that case remarked that while a reasonable belief in non-liability may excuse the failure to provide timely notice, the insured in this case did not undertake any estimation of its potential liability despite a pending lawsuit and third-party lawsuit so there was no basis for a good-faith belief in its non-liability. The court also noted that an insured's own duty to notify an excess insurer is not negated by the insurer's actual knowledge acquired from another source.

In Texas, the Supreme Court heard oral argument on April 1 in XL Specialty Ins. Co. v. Financial Indus. Corp. (No. 07-1059) and Prodigy Communications Corp. v. Agricultural Excess & Surplus Insurance Co. (No. 06-0598). 

In XL Specialty, the Fifth Circuit U.S. Court of Appeals certified to the Supreme Court of Texas the following question: Must an insurer show prejudice to deny payment on a claims-made policy, when the denial is based upon the insured's breach of the policy's prompt-notice provision, but the notice is nevertheless given within the policy's coverage period?Prodigy deals with a claims-made policy D&O policy. The plaintiff is the successor to the named insured on the policy. A suit was filed against the predecessor, but the predecessor didn’t give notice of the lawsuit until a year after being served. Coverage was denied based on late notice. A Texas trial court and appellate court ruled that notice was not given "as soon as practicable" as required by the policy, and that the insurers were not required to show they had been prejudiced by the untimely notice. The plaintiff petitioned the high court, urging it to declare that prejudice is required in order to prevail on a late notice defense under a claims made policy.

On January 11, 2008, the Supreme Court of Texas issued an opinion on notice in PAJ, Inc. v. Hanover Insurance Co. (2008 Tex. LEXIS 8), holding that an insured’s failure to notify its insurer of a claim or suit does not defeat coverage if the insurer was not prejudiced by the delay. The policy in PAJ was an occurrence-based policy. The insurance law center featured expert commentary by coverage attorney Lee Shidlofsky on the PAJ case in February 2008.

Which one will rule first? Texas ... or New York? Either way, it will be an interesting addition to the national discourse on notice issues.