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North Carolina Appellate Court Sustains Late Notice Defense

August 18, 2008

A North Carolina Court of Appeals has ruled that a professional liability policy provided no coverage for an underlying lawsuit that was not reported to the insurer during the policy period or sixty days thereafter as required by the notice provisions in the policy. Eagle Engineering, Inc. v. Continental Cas. Co., No. COA07-1537, --- S.E.2d ----, 2008 WL 2966501 (N.C. Ct. App. Aug. 5, 2008).  In doing so, the court held that prejudice was irrelevant to the insurer’s late notice defense. 

The policyholder purchased a professional liability policy from the insurer for the policy period of December 1, 2001 through December 1, 2004.  After purchasing coverage elsewhere for the year 2005, the policyholder again purchased coverage from the insurer for the period from January 4, 2006 to January 4, 2007.  The policies’ coverage agreement provided, in part, that “[a] claim arising out of a wrongful act . . . must be first made during the policy year or any applicable extended reporting period.”  The policies also required that the policyholder “promptly notify [the insurer of a claim] in writing . . . within a policy year or within 60 days after its expiration or termination.”     

In the underlying litigation, a residential home builder asserted counterclaims against the policyholder in March 2004 that were amended in August 2004.  The builder alleged that the policyholder had improperly performed professional services in one of the builder’s residential developments, causing property damage. 

The policyholder listed the underlying litigation as a pending lawsuit on its application for the 2006 policy year and requested coverage in November 2005.  The insurer declined, asserting that coverage had not been triggered because it had not received notice of the suit during a policy year.  After settling the counterclaims in the underlying lawsuit, the policyholder sued the insurer for breach of contract.  The trial court granted the insurer’s motion for summary judgment on the basis of late notice. 

On appeal, the court concluded that the policies “require[] [the policyholder’s] claim to have both arisen during a covered policy term and to be reported within a covered policy term or within 60 days thereafter.”  The court noted that the claim was first reported to the insurer in November 2005, outside of the December 1, 2001 to December 1, 2004 policy period and the following 60 day period.  Accordingly, the court ruled that the first policy did not provide coverage for the claim.  The court also held that “prejudice is irrelevant [to the insurer’s late notice defense] in light of the fact that the parties have a plain unambiguous contract setting out the terms of the agreement on this issue.”  With respect to the second policy, the court determined that there was no coverage because the claim arose in 2004, prior to the 2006 policy term. 


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