The Role Of Liability Insurance Policy Notice Conditions In Product Liability Claims

I. Introduction1

There is no special magic to the application of liability insurance policy notice provisions to product liability claims. In a product liability claim, like all other liability insurance claims, notice is an important component of the insurance contract. An insured's notice typically initiates the claims handling process. The notice provision specifies when an insured must inform its insurer of a claim. In general, the purpose of a notice provision is to provide the insurer with the opportunity to conduct a timely investigation and to prevent fraudulent claims. It is important for insureds to recognize that the notice requirement is not the beginning of an adversarial relationship. To the contrary, prompt and effective notice is intended to be the first step in a cooperative exchange of information consistent with the terms and provisions of the insurance contract.

Insurers frequently contend that the failure of their insureds to provide timely notice results in forfeiture of coverage. However, the effect of late notice varies from jurisdiction to jurisdiction. For example, some states provide that an insurer cannot rely on a late notice defense to avoid coverage unless the insurer can prove that the insured's untimely notice prejudiced the insurer.

This paper discusses the fundamentals of liability insurance policy notice provisions, the question of when an insured's notice obligation generally arises, and the consequences of late notice.

II. Notice Conditions In Liability Insurance Policies

Historically, primary liability insurance policies typically contained notice provisions similar to the following:

Insured's Duties in the Event of Occurrence, Claim or Suit.

(a) In the event of an occurrence, written notice containing particulars sufficient to identify the insured and also reasonably obtainable information with respect to the time, place and circumstances thereof and the names and addresses of the injured and of available witnesses shall be given by or for the insured to the Company or any of its authorized agents as soon as practicable.

(b) If claim is made or suit is brought against the insured, the insured shall immediately forward to the Company every demand, notice, summons or other process received by him or his representative.

(c) The insured shall cooperate with the Company and, upon the Company's request assist in making settlements, in the conduct of suits and in enforcing any right of contribution or indemnity against any person or organization who may be liable to the insured because of injury or damage with respect to which insurance is afforded under this policy; and the insured shall attend hearings and trials and assist in securing and giving evidence and obtaining the attendance of witnesses. The insured shall not, except at his own cost, voluntarily make any payment, assume any obligation or incur any expense other than for first aid to others at the time of accident.

More recent variations of primary liability coverage contain notice provisions consistent with the following policy language:

Duties In The Event Of Occurrence, Offense, Claim Or Suit

1. You must see to it that we are notified as soon as practicable of an "occurrence" which may result in a claim. To the extent possible, Notice should include:

   (1) How, when and where the "occurrence" or offense took place;

   (2) The names and addresses of any injured persons and witnesses; and

   (3) The nature and location of any injury or damage arising out of the "occurrence" or offense.

2. If a claim is made or "suit" is brought against any insured, you must:

   (1) Immediately record the specifics of the claim or "suit" and the date received; and

   (2) 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.

3. You and any other involved insured must:

   (1) Immediately send us copies of any demands, notices, summonses or legal papers received in connection with the claim or "suit";

   (2) Authorize us to obtain, records and other information;

   (3) Cooperate with us in the investigation or settlement of the claim or defense against the "suit"; and

   (4) Assist us, upon our request, in the enforcement of any right against any person or organization which may be liable to the insured because of injury or damage to which this insurance may also apply.

4. No insured will, except at that insured's own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.

   For larger risks, insureds commonly purchase excess or umbrella liability insurance. These types of policies often contain different notice provisions than the primary policies issued to insureds. Excess insurance notice provisions commonly include language such as:

   Whenever the Insured has information from which the Insured may reasonably conclude that an occurrence covered hereunder involves injuries or damages which, in the event that the Insured should be held liable, is likely to involve this Policy, notice shall be sent to the company as soon as practicable, provided, however, that failure to give notice of any occurrence which at the time of its happening did not appear to involve this Policy but which, at a later date, would appear to give rise to claims hereunder, shall not prejudice such claims.

   Thus, a significant factor in evaluating when notice should be given to an excess insurer is whether the occurrence has the potential to involve damages in an amount sufficient to reach the excess insurance policy layer of coverage.

   III. The Role Of Notice Requirements In Liability Policies

   The purpose of a notice requirement is to provide insurers with an adequate opportunity to: (1) investigate claims brought against their policyholders, (2) to prevent fraudulent claims, and (3) to determine their rights and liabilities before they are obligated to pay a claim. Couch on Insurance 3d, 186:14.

   The requirement of timely notice of an accident gives the insurer an opportunity to make a timely and adequate investigation of all the circumstances. This concept of timeliness has been widely addressed. For example, the Tennessee Supreme Court observed in Alcazar v. Hayes, 982 S.W.2d 845, 849 (TN 1998), that:

   An adequate investigation often cannot be made where notice is long delayed, because of the possible removal or lapse of memory on the part of witnesses, the loss of opportunity for examination of the physical surroundings and making photographs thereof for use at the trial, and the possible operation of fraud, collusion, or cupidity. Such a requirement tends to protect the insurer against fraudulent claims, and also against invalid claims made in good faith. If the insurer is given the opportunity for a timely...