On March 27, 2012, the Connecticut Supreme Court issued a decision in Arrowood Indemnity Co. v. King, 304 Conn. 179 (2012), which now places the burden on insurers to prove, by a preponderance of the evidence, that they were prejudiced by late notice of claims under insurance policies in order to deny coverage on that ground.
In doing so, the Connecticut Supreme Court overruled its decision in Aetna Casualty & Surety Co. v. Murphy, 206 Conn. 409 (1988), which for 24 years required policyholders to demonstrate a lack of prejudice in order to avoid denial of their claims on the ground of late notice.
The Arrowood litigation arose out of an incident involving the insureds’ son, who was driving an all-terrain vehicle and towing his friend on a skateboard when the friend fell and suffered severe injuries. Following the incident, the insured family and the friend’s family continued to socialize, and the friend’s family never mentioned the possibility that they might bring a lawsuit. As a result, the insured family did not report the incident to their insurers until more than a year later, when they first received a letter from an attorney representing the friend’s family advising of a potential lawsuit.
At that time, the insurers filed a declaratory judgment action in federal District Court in Connecticut, alleging that this incident was not covered under their insurance policies and that notice of the claim was untimely. After the District Court granted summary judgment in favor of the insurers, the insured family appealed to the U.S. Court of Appeals for the Second Circuit. The Second Circuit then certified several questions to the Supreme Court of Connecticut, including whether the insureds’ delayed notice was justified under the circumstances.
The Connecticut Supreme Court noted that the policy required the insured to give notice “as soon as practical,” meaning “as soon as can reasonably be expected under the circumstances.” The Court explained that this duty to give notice arises when the facts “suggest to a person of ordinary and reasonable prudence that liability may have been incurred” and that this duty is satisfied “if notice is given within a reasonable time after the situation so assumes an aspect suggestive of a possible claim for damages.”
The Court further explained that the insureds’ subjective assessment of how likely it was that a claim would be brought, based here on their social interaction with the claimant, does not justify a delay in notice. As a result, the Court concluded that the insureds’ notice was untimely in this case.
The Court then stated that, where notice is untimely, it is necessary to consider whether the insurer was prejudiced by the late notice. The Court also stated that while a determination of whether prejudice occurred in this case was beyond the scope of the certified question, it nonetheless was taking this opportunity to “revisit the allocation of the burden of proof under Connecticut law” and, in doing so, it overruled Murphy to the extent that case allocated the burden to the insured to disprove prejudice.
The Court explained that, historically, absent waiver, an unexcused and unreasonable delay in providing notice constituted a failure of a condition under the insurance contract which entirely discharged the insurer from its obligations. In Murphy, however, the Court recognized that rigid application of this rule without assessing whether the insurer suffered any prejudice as a result of the late notice would likely yield a disproportionate forfeiture of rights. Thus, the Court in Murphy ruled that an insured may continue to pursue insurance coverage if the insured could prove that the insurer was not prejudiced by the timing of the notice.
Pursuant to Arrowood, the burden of proof is now on the insurer. The Court acknowledged that requiring an insured to prove a negative – i.e., the lack of prejudice – is an inherently difficult task that may be further complicated by the opposing party’s interest in concealment. The Court further reasoned that the insured is the party least equipped to know, let alone prove, the effect of delayed notice on the insurer’s investigatory and legal defense capabilities. As a result, imposing on the insured the difficult task of proving a lack of prejudice reduces the likelihood that the trial courts will have sufficient information to determine whether prejudice has resulted from the delayed notice.
The Court concluded that this new rule placing the burden of proof on the insurer will incentivize insurers to put forth evidence of any prejudice resulting from delayed notice and, thus, will allow the courts to reach informed decisions regarding the existence of any prejudice.
In adopting this new rule, Connecticut joins the overwhelming majority of states that require insurers to prove that they were prejudiced by late notice of claims in order to deny coverage on that ground. This new rule will certainly incentivize insurers to put forth evidence of any prejudice suffered by delayed notice.
While it remains to be seen what type of evidence will be required by the trial courts, by shifting the burden of proof to the insurer, the state Supreme Court has enabled the trial courts to base their decisions regarding claims of prejudice on more complete factual records and has afforded greater protection to policyholders in Connecticut. •