One of the perennial issues in insurance coverage is what happens if a policyholder provides notice to its insurance company late – in the case of liability coverage, that usually means after the underlying case has been litigated for a long time, and sometimes gone to verdict, or been settled. Most states have adopted the “notice-prejudice” rule for those situations. The basic concept is this: if the insurance company wants to get completely off the hook for any obligation to pay defense costs or indemnity, based on language in the policy obligating the policyholder to provide notice “as soon as practicable” or similar, the insurance company has to show that it suffered in some way by the late notice, e.g. that it could have negotiated a better deal, litigated the case differently, paid less for defense costs.
Montana’s lead case on this subject, according to the Ninth Circuit, contains language that both suggests that notice-prejudice is the standard and also that timely notice is a condition precedent to coverage, meaning that late notice bars coverage with no showing of prejudice needed. The case, Atlantic Casualty v. Greytak, appears to have been a fairly typical construction defect suit at the outset, but with a twist: the insurance company was not notified until almost a year after the defect claims were made and after the parties had entered into a covenant-judgment type lawsuit. Those are not very sympathetic facts on which to argue for the notice-prejudice rule. It will be interesting to see if Montana’s Supreme Court takes the case.