Lead Opinion
delivered the Opinion of the Court.
¶1 This matter comes to the Court pursuant to M. R. App. P. 15 on a question of Montana law certified by the United States Court of Appeals for the Ninth Circuit:
Whether, in a case involving a claim of damages by a third party, an insurer who does not receive timely notice according to the terms of an insurance policy must demonstrate prejudice from the lack of notice to avoid defense and indemnification of the insured.
This Court accepted the certified question by Order of July 8,2014, and the parties and several amid curiae have filed briefs.
¶2 We answer the question: yes.
BACKGROUND
¶3 According to facts supplied by the Court of Appeals, this case originally arose from a civil action filed in the Montana Third Judicial District Court. In March 2010 GTL filed suit against Greytak and Tanglewood (hereafter, Greytak) for non-payment of an obligation arising from a construction project. GTL was insured by Atlantic Casualty under a commercial general liability policy. In March 2010 Greytak sent a letter to GTL asserting that it had grounds for various counterclaims involving construction defects, and in November 2010 Greytak filed counterclaims against GTL in the state court action.
¶4 In April 2011 GTL and Greytak entered a settlement agreement that required GTL to notify Atlantic of Greytak’s counterclaims. GTL and Greytak also agreed that if Atlantic did not appear to defend the case and did not file a declaratory action on the coverage issue, GTL would allow judgment to be entered against it and in favor of Greytak for $624,685.14 plus costs. If Atlantic did appear to defend, Greytak
¶5 On January 23, 2012, Atlantic sued GTL and Greytak in the United States District Court for the District of Montana, seeking a declaration that it was not required to defend GTL from Greytak’s counterclaims or to pay any judgment. GTL defaulted and is not participating in the case. Atlantic’s policy issued to GTL stated that the insured “must see to it that we are notified as soon as practicable of an ‘occurrence’ or an offense which may result in a claim... if a claim is made or ‘suit’ is brought against any insured, you must notify us as soon as practicable. You must see to it that we receive written notice of the claim or ‘suit’ as soon as practicable.” Atlantic sought a declaration that it was not required to provide cоverage of Greytak’s counterclaims because GTL had not provided timely notice as required by the policy language.
¶6 The United States District Court granted Atlantic’s motion for summary judgment and denied Greytak’s motion for summary judgment. The District Court found that Atlantic did not have timely notice of Greytak’s claims against GTL and therefore was excused from providing coverage under the policy. The United States District Court found that Montana law did not require Atlantic to demonstrate that it was prejudiced by GTL’s failure to provide timely noticе of Greytak’s counterclaims. Greytak appealed to the United States Court of Appeals for the Ninth Circuit.
DISCUSSION
¶7 In the declaratory judgment action, the United States District Court concluded that Atlantic had no duty to defend or indemnify GTL on Greytak’s claims because GTL’s notice of the claim to Atlantic was untimely. The District Court found that Atlantic’s Commercial General Liability policy was clear in its requirement that GTL provide timely (“as soon as practicable”) notice of the Greytak counterclaims. The District Court, relying on Steadele v. Colony Insurance,
¶8 The issue presented by the certified question is whether Montana law applies the “notice-prejudice” rule to the insurance policy that Atlantic issued to GTL; specifically, whether the policy provision requiring GTL to notify the insurer of a covered event “as soon as practicable” can be invoked to bar coverage without a consideration of whether a delay in notification caused prejudice to Atlantic.
¶9 Several cases havе considered the status of the notice-prejudice rule under Montana law. In State Farm Mutual Ins. Co. v. Murnion,
¶10 In Steadele this Court considered application of the notice-prejudice rule, but without expressly using that term in the analysis. In that case, homeowners sued a contractor over defects in their home and in December 2008 took a default judgment when the defendant failed to appear. Colony insured the defendant but never received notice of the controversy or the lawsuit until several months after judgment of $1.8 million had been entered against its insured. Colony denied the plaintiff homeowners’ demand to pay the default judgment because it had nоt received timely notice of the claim from its insured. The homeowners sued, and the district court granted summary judgment to Colony based upon the late notice. On appeal Colony argued that the failure to provide notice until after judgment was entered against its insured was a material breach of the insurance contract that caused Colony severe prejudice and therefore terminated its obligation under the policy.
¶11 This Court noted that exclusions from insurance coverage are to be narrowly and strictly construed because they are “contrary to the fundamental protective purpose of an insurance policy,” and that policies are to be construed in favor of the insured and in favor of providing coverage. Steadele, ¶¶ 18-19; see also § 28-1-408, MCA, providing that a condition that results in a forfeiture is to be strictly interpreted against the party for whose benefit it was created. This Court also noted that the purpose of the notification requirement was to provide the insurer with the opportunity to “defend its interests and tо prevent or mitigate adverse judgments.” We cited older cases that held that notification is a condition precedent to coverage and that failure of notification will result in a bar to recovery from the insurer. Steadele, ¶¶ 21-22. Ultimately we determined that because Colony did not receive notice until after a judgment was entered against its insured, the failure to give notice was not de minimis, and Colony was “prejudiced in that it was deprived of the ability to investigate, to locate witnesses, to appoint counsel, to engage in discovery, to negotiate a settlement and to develop a trial strategy.” Steadele, ¶¶ 28-29.
¶12 Steadele should not be read to renounce the notice-prejudice rule. While the opinion did not expressly reference the rule, this Court upheld summary judgment for the insurer based in part upon our conclusion that the insurer had been prejudiced by the failure of notice and therefore was not required to provide coverage. We pointed to this
¶13 A majority of the states have adopted the notice-prejudice rule in insurance coverage disputes, requiring that the insurer demonstrate that it was materially prejudiced by not having received prompt notice or notice as soon as practicable of an event that could trigger coverage. See Prince George’s County v. Local Govt. Ins. Trust,
¶14 The public policy of Montana is to narrowly and strictly construe insurance coverage exclusions in order to promote the “fundamental protective purpose” of insurance. Steadele, ¶ 18; Newman, ¶ 35. An insured’s technical or illusory failure to comply with obligations of a policy will not automatically terminate coverage, and an insurer who does not receive timely notice required by the terms of an insurance policy must demonstrate prejudice from that lack of notice in order to avoid the obligation to provide defense and indemnification of the insured. This rule applies whether the claim arises from the insured as in Gleason or from a third party claiming damages as in the present case. The purpose of the notice-prejudice rule is to protect the insured or those claiming through the insured from a loss of insurance coverage over a technical violation of the policy when that violation is of no prejudicial consequence to the insurer. Nothing in Steadele should be construed to provide for any contrary rule. At the same time, a policy may include notice requirements, and an insured who fails to provide required notice to the insurer does so at his or her peril. If the insurer is able to show prejudice arising from the lack of notice, the insured may not be covered by the policy, as in Steadele.
¶15 Most of Atlantic’s arguments were directed to the merits of a prejudice inquiry, whiсh is outside the scope of the certified question and which we decline to address.
¶16 The Court of Appeals certified the question:
Whether, in a case involving a claim of damages by a third parly,*338 an insurer who does not receive timely notice according to the terms of an insurance policy must demonstrate prejudice from the lack of notice to avoid defense and indemnification of the insured.
Our answer is: Yes, an insurer who does not receive timely notice according to the terms of an insurance policy must demonstrate prejudice from the lack of notice to avoid defense and indemnification of tiie insured.
Notes
It is clear from the policy language that it does not impose a specific time within which the insured must provide notice to the insurer.
Concurrence Opinion
specially concurring.
¶17 I concur in the Court’s decision, as far as it goes. However, I believe that the facts set forth in the Certification Order also clearly establish that Atlantic has been prejudiced as a matter of law and that, under application of the principle we have adopted as the notice-prеjudice rule, Greytak is entitled to no relief under the policy, as we held under similar circumstances in Steadele. The parties’ briefs contain arguments regarding prejudice. In response to the Certified Question, I would address the prejudice issue, reformulating the question if necessary.
¶18 The Certification Order explains that the directive to give notice to the insurer
This notice is in plain English; it is simple, clear, unambiguous and easy to understand. It sets forth [GTL’s] duty to notify [Atlantic] ‘as soon as practicable’ of an occurrence, an offense which may result in a claim, or if suit is brought against [GTL]. This notice provision was intended to provide [Atlantic] the opportunity to defend its interests and to prevent or mitigate adverse judgments.
Steadele, ¶ 21. We also reasoned in Steadele that "this is not a case where the insured failed to notify its carrier by a few days or where the failure to notify was de minimis. Rather, here, MCHC failed to notify Colony for months after having been served with thе Steadeles’ summons and complaint.” Steadele, ¶ 29. Despite the same simple, clear, easy to understand, “in plain English” notice provision that was at issue in Steadele, GTL failed to notify Atlantic of the claim — for a period of time longer than the delay involved in Steadele. Even giving
¶20 Greytak attempts to shift the blame to Atlantic, arguing that Atlantic’s delay in commencing a declaratory action was not “a reasonable time in which to take action, and as such Greytak was entitled to enforce the settlement agreement,” and any prejudice against Atlantic was therefore rendered irrelevant. Greytak calculates this “delay” from GTL’s May 23, 2011, letter, which it offers as satisfying the notice requirement under the Atlantic policy. Greytak overlooks that this letter did not disclose that an agreеment had been reached that released GTL fiom its contractual obligations, did not provide the settlement agreement or settlement documents, and did not advise that a trigger for entry of a $624,000judgment against the insured had been created by the settlement. Unsurprising, Atlantic’s requests for cooperation in the investigation of the matter were thereafter rebuffed by GTL and its counsel, who were then surreptitiously operating under their settlement agreement with Greytak. These events simply farther prejudiced Atlantic and justified the “delay” of which it is accused by Greytak.
¶21 We have adopted the notice-prejudice rule “in order to promote the ‘fundamental protective purpose’ of insurance,” so that “[a]n insured’s technical or illusory failure to comply with obligations of a policy will not automatically terminate coverage....” Opinion, ¶ 14. As the Court explains, the purpose of the notice-prejudice rule is to protect the insured from loss of insurance coverage over a technical violation of the рolicy when that violation is of no prejudicial consequence to the insurer. Opinion, ¶ 14. The rule is not intended to provide claimants and insureds a litigation Petri dish in which to grow stipulated judgments in the dark while the insured is relieved of its contractual obligations to involve the insurer. The rule does not abrogate the
¶22 I would further hold that Greytak does not receive the benefit of the rule.
The Certification Order actually states that notice was to be given to the “insured,” which is an error. The provision cited from the policy at issue in Steadele, like the one here, required that notice be given to the “insurer.”
Concurrence Opinion
specially concurring.
¶23 As I set forth in my concurrence and dissent in Estate of Gleason v. Central United Life Insurance,
¶24 I concur in the Court’s answer to the certified question as framed. I also concur in Justice Rice’s assessment that under the circumstances presented here, Atlantic has been prejudiced as a matter of law. During the course of litigation between GTL and Greytak, Greytak represented to the District Court that it was entitled to judgment in the amount of $624,685.14, pursuant to the settlement agreement. GTL did not respond, and judgment was entered (though subsequently set aside following amotion by Atlantic). Accordingly, like Justice Rice, I would hold that Atlantic was prejudiced as a matter of law. I would go further, however, and not limit application of this holding to the case at hand. As I stated in Gleason, ¶ 108 (McKinnon, J., concurring and dissenting), I would adopt a limited exception to the notice-prejudice rule providing that prejudice to the insurer will be presumed as a matter of law when an insured fails to notify the insurer of a pending lawsuit until after judgment has been entered.
¶25 We stray from those principles of contract and equity that supported our initial adoption of the notice-prejudice rule when we conclude that an insurer must demonstrate prejudice even after judgment against the insured has been entered. Such a conclusion is not supportable where the insurer has been deprived of all opportunity to defend, and the equitаble reasons supporting a notice-prejudice rule are nonexistent. The mere entry of the adverse judgment is actual prejudice to the insurer. I would therefore hold, as a significant number of courts in other states have, that as a matter of law the insurer has been prejudiced where it has been deprived of all opportunity to defend. In those cases where an insured fails to notify
¶26 The reasoning behind thе inapplicability of the notice-prejudice rule in such circumstances is that the insured has presented the insurer with a fait accompli by delaying notice until after judgment. The delay renders completely ineffective the purpose of the contractual notice requirement, as the insurer cannot exercise any of its rights to investigate, defend, control, or settle the suit. Where the insurer has not been notified of a pending claim until after judgment, it is deprived of the benefit of a material term of the contract, and thereby prеjudiced because it is not able to investigate the allegations, locate witnesses, appoint counsel of its choice, negotiate a settlement, or develop its own trial strategy.
¶27 There are a substantial number of cases from courts around the country that hold prejudice exists as a matter of law where an insurer has not been notified prior to settlement of a claim. See Allstate Ins. Co. v. Occidental Intl., Inc.,
¶28 The failure here consists of a total, absolute, and final failure to give notice, a failure completely fatal to the insurer and in undoubted breach of the insurance contract. Here, by its failure to comply with the conditions of the policy, Greytak has deprived Atlantic of all opportunity to defend against the claim, and thus presents the insurer with a fait accompli in the form of a judgment obtained in a suit in the defense of which the insurer has been deprived of all effective part. It is frankly difficult to imagine how Atlantic could have suffered greater prejudice from the clear breach of its contractual right to prompt
¶29 The notice-prejudice rule is an equitable remedy that allows an insured to escape the harsh outcome of a complete forfeiture of coverage, for which consideration has been paid, where there has been no prejudice to the insurer. The notice-prejudice rule does not rewrite the insurance contract. It is recognition that in certain situations, strict adherence to terms of the contract would produce an inequitable result and a windfall to the insurer. Our consideration of the equities is heightened given the unequal bargaining position of the parties to an insurance contract, which is not a negotiated agreement. Where, as here, GTL and Greytak have secretly negotiаted a settlement and attempted to have judgment entered in order to avail themselves of favorable UTPA jurisprudence from this Court, the equitable purposes of the notice-prejudice rule do not exist. Instead, the notice-prejudice rule serves to unfairly disadvantage a party in the litigation of their contractual rights.
¶30 As set forth in the special concurrence of Justice Rice, “GTL’s violation was not ‘technical.’ It was contrived in order to prejudice Atlantic, which it clearly did.” Opinion, ¶ 21 (Rice, J., speсially concurring). Here, Greytak sued GTL without notice to Atlantic, engaged in litigation for a year or longer without notice to Atlantic, excluded Atlantic from mediation and any negotiation regarding the claims, settled claims secretly upon terms that impeded Atlantic’s investigation and defense, and manipulated circumstances to build a claim of bad faith against Atlantic.
¶31 I would hold that, as a matter of law, Greytak cannot avail itself of the notice-prejudice rule. In those cases where an insured fails to notify the insurer of a pending lawsuit against him until after settlement of their claim, I would hold that prejudice exists as a matter of law.
As I state in Gleason, ¶ 114 (McKinnon, J., concurring and dissenting), I would impose a requirement that the insured, for the period of delay beyond the limits of timeliness, show that he or she was acting in good faith and that the delay was not purposeful. Equity dictates that a bad-faith delay in notifying an insurer, even though no material prejudice results, should be considered when deciding whether the policy should be enforced. Here, it is unlikely that Greytak could withstand such a factual inquiry. Moreover, such an inquiry would be unnecessary if this Court were to adopt an exception to the notice-prejudice rule where a judgment has been entered.