Insurer Prejudiced by Insured Failure to Timely Notify Has No Duty to Defend

 

In Guaranty Bank v. Chubb Corp., 2008 WL 2764631 [C.A.7 (Wis.)], Midwest Guaranty Bank sued “Guaranty Bank” for alleged violation's of Michigan's unfair competition law and for infringing the plaintiff's trademark by announcing its intent to enter the same geographic market with such a similar name. Midwest's suit was filed toward the end of November 2002, and in June of the following year the district court in Michigan issued a preliminary injunction forbidding Guaranty Bank to use its name in conjunction with the sale of banking and related financial services in southern Michigan .

 

Guaranty Bank sought coverage from Chubb under a Great Northern CGL policy that covered injury “caused by an offense of infringing, in that particular part of your advertisement about your goods, products or services upon their registered collective mark, registered service mark or other registered trade.”

Great Northern refused to defend the bank against the suit by Midwest Guaranty Bank.

 

Two and a half months later, Guaranty Bank settled Midwest's suit. Besides having to pay Midwest the amount of the settlement, Guaranty Bank incurred some $150,000 in attorneys' fees, almost 90 percent of them before tendering the defense of the suit to Great Northern. Midwest's suit against Great Northern sought both the attorneys' fees and the amount of the settlement, the latter on the theory that by failing to defend, Great Northern should be estopped from denying coverage. Great Northern's refusal, the bank argued, was a breach of the duty to defend created by the policy

 

The policy at issue required the insured to notify the insurer “immediately” of a claim for which a defense was sought. Guaranty Bank, however, had waited more than six months to notify Great Northern of Midwest Guaranty Bank's suit. According to the court, Wisconsin law provided that “if the insured shows that it was not reasonably possible to give the notice within the prescribed time and that notice was given as soon as reasonably possible,” the failure to give notice within the time limit fixed by the policy did not invalidate the insured's claim.

 

The Seventh Circuit Court of Appeals held that Great Northern's duties under the policy were terminated due to prejudice to the insurer by Guaranty Bank's failure to notify of the underlying suit as soon as reasonably possible, and  any damages caused by the insured's alleged infringement of trademark were not advertising injuries covered under the policy.

 

The District Court had granted summary judgment to Great Northern based upon the Wisconsin statute that placed the burden of disproving prejudice on a policyholder where notice is delayed by more than a year. In this case, Guaranty Bank did not give notice for over a year, during which time a preliminary injunction had been entered against the insured.

 

The Seventh Circuit Court noted, moreover, that even if this burden shifting had not occurred, prejudice likely existed in this case owing to the momentum that the plaintiff's claims had received as the result of the injunctive remedy as well as the inability of Great Northern to engage the case earlier and undertake a defense or otherwise attempt to resolve it.

 

Since the plaintiff's claim was for the infringement of an unregistered trademark and as Midwest Guaranty Bank was not claiming such an infringement, the court ruled that Great Northern would not have had a duty to defend.

 

In its decision, the court pointed out that although the Wisconsin legislature and Supreme Court tended to display lenity toward insureds that missed notice deadlines in their insurance policies, that lenity was designed for the protection of individuals rather than substantial commercial enterprises. According to the court, an individual hit with a lawsuit for the first time may be confused about how to proceed, but when a sophisticated business failed to give timely notice of suit to its insurance company, the likeliest reason was not confusion but that the business thought its exposure trivial and feared that bringing the insurance company into the picture would result in higher premiums when it bought its next policy. A sophisticated insured might also delay notifying its insurance company in order to keep control of the defense, spending generously for counsel on the insurer's dime even though the insurer might be able to defend the suit more cheaply.

 

The court further explained that many courts nowadays relaxed the rule of contra proferentum (the rule that ambiguities in a written contract were to be resolved against the party that drafted the contract), even in insurance contracts, when the parties are commercially sophisticated