Following its recent decision to deny coverage based on an insured’s failure to timely notify its carrier (see post dated March 7, 2016), the Fourth Circuit again came to the rescue of St. Paul Mercury Insurance Company, affirming the district court’s decision that found an insured’s own “internal corporate screw-ups” could not justify the failure to timely notify the carrier of a pending lawsuit.
Plaintiff Amiel Cueto, a disbarred lawyer and convicted felon, filed suit against American Bank Holdings, Inc. (“ABHI”) and ten other defendants alleging they fraudulently failed to fund his $8 million sale of real property. ABHI failed to timely answer the complaint, and Cueto was able to obtain a default judgment in the amount of $7.3M in compensatory damages, $66.5M in punitive damages and $24.6M in attorneys fees ($98M total!).
ABHI eventually was able to get this default judgment overturned, but it took $1.8M in defense costs to do it. ABHI sought reimbursement of these costs from its insurer St. Paul Mercury Insurance, who denied coverage based upon ABHI’s failure to timely notify it of the lawsuit.
The lawsuit was served on ABHI on June 18, 2008, through its registered agent CT Corporation. CT Corp transmitted the suit papers to ABHI’s office, addressed to its CFO, in accordance with its standing instruction. As of that time, the CFO had left ABHI. Another officer of ABHI came across the suit papers and forwarded them to its local counsel in July 2008; but that lawyer claimed he never received the documents.
ABHI did not act on the lawsuit until February 2009, when Cueto attempted to collect on the default judgment. ABHI then notified St. Paul for the first time about the lawsuit. St. Paul formally denied coverage on April 15, 2009, based on a lack of timely notice.
Prior to notifying St. Paul, ABHI had already hired attorneys to attempt to unwind the default judgment. Ultimately, those attorneys were successful, but were paid $1.8M, which ABHI argued should be reimbursed under its policy with St. Paul.
The Fourth Circuit held that “the defining characteristic of the notice obligation is notice given ‘as soon as practicable.’” Under the facts of this case, considering more than six months had passed since proper service, no one could credibly argue the “as soon as practicable” obligation had been achieved.
Under Maryland law, even if notice is not provided as soon as practicable, the insurer must still establish that the lack of notice resulted in “actual prejudice.”
The Court indicated that ABHI’s late notice denied the insurer “the opportunity to participate in the selection of counsel, to speak with counsel, … to discuss credible defense strategies, … to consider the possibility of settlement negotiations prior to the default judgment and prior to the expenditure of $1.8M incurred by ABHI to vacate it.” In other words, St. Paul was denied the opportunity to properly defend the case in a timely fashion.
When late notice precludes an insurer from exercising meaningful contractual rights provided to it by its policy, this amounts to actual prejudice suffered by the insurer.
As a result, due to those internal corporate screw-ups, ABHI was left paying $1.8M in attorneys fees to overturn a judgment in a lawsuit it deemed “frivolous, if not fraudulent.”
This case is another hard lesson for insureds: failing to follow the terms of an insurance policy can be an expensive mistake.
The case is St. Paul Mercury Ins. Co. v. American Bank Holdings, Inc., No. 15-559 (4th Cir. April 14, 2016). If you would like a copy of this case or would like to discuss it further, please do not hesitate to contact us.