Notice and Cooperation
Almost all liability insurance policies contain provisions requiring an insured to cooperate in the defense of claims and to provide prompt notice to the carrier of any claim or suit paper that may be filed. Often carriers, especially when faced with extra-contractual liability, will point to these provisions in an attempt to escape coverage obligations under the policy.
Thankfully, most courts require the carrier to demonstrate both a breach of the notice or cooperation provisions and that the carrier suffered material prejudice as a result of that breach before coverage is forfeited.
However, when a carrier meets this burden, the already injured claimant is often once again hurt through no fault of their own.
McCullen v. Federated Mutual Insurance Co.
Case No.: 1422-CC01219
Background and Underlying Lawsuit
The above action sprung from a products liability and failure to warn lawsuit involving the sale of a motorcycle by Shernaman Enterprises, Inc. (Shernaman) to Daniel McCullen.
After McCullen suffered serious injuries while operating the motorcycle, he filed suit in St. Louis County Circuit Court against Shernaman in September 2011 with Shernaman being served on October 21, 2011. The lawsuit was forwarded to an officer of Shernaman in October 2011 but Shernaman’s insurer, Federated Mutual, was not provided notice of the suit until January 6, 2014.
Upon learning of the suit, Federated Mutual initially undertook to defend Shernaman without issuing a reservation of rights letter and on January 16, 2014 filed briefing on behalf of Shernaman in opposition to a Motion for Default Judgment that had been set for oral argument on January 24. Federated Mutual sent a formal reservation of rights letter, although the sufficiency of which is challenged, to Shernaman on January 23 citing lack of timely notice as a reason indemnity might not be provided.
At the default hearing on January 24, the St. Louis County Court in denying Shernaman and Federated Mutual’s request to file an Answer out of time, announced that “liability is done” and set the case for a hearing on damages.
Prior to the damage hearing and after Federated Mutual declined to withdraw its reservation of rights, Shernaman rejected Federated Mutual’s defense and entered into a §537.065 agreement with McCullen on February 1, 2014. In accordance with the terms of the .065 agreement a bench trial was held as to damages, with the Court entering a Judgment in the amount of $11,031,096 in favor of McCullen.
After the underlying judgment became final, McCullen filed the present equitable garnishment action in an effort to collect the proceeds of two insurance policies issued by Federated Mutual which insured the liability of Shernaman in an effort to satisfy his judgment. Federated answered and denied any indemnity obligation as a result of Shernaman’s failure to provide notice of the underlying lawsuit as required under the policies.
Eventually the equitable garnishment claim proceeded to a bench trial after motions for summary judgment filed by McCullen and Federated Mutual were denied.
On January 20, 2016, the St. Louis City Circuit Court entered its Findings of Fact, Conclusions of Law and Judgment finding that the policies issued by Federated Mutual provided no coverage to satisfy the underlying judgment. In doing so the Court seemed to find that as a result of Shernaman not providing notice of the underlying lawsuit, Federated Mutual suffered prejudice by not being afforded the opportunity to challenge Shernaman’s liability to McCullen.
Currently McCullen has filed a motion for a new trial with the ultimate resolution of the case likely yet to come. However, the Circuit Court’s judgment demonstrates the havoc cooperation and notice provisions can wreck on claimants’ attempts to garnish policies; the claimant often coming up empty handed. Although the claimant has little control over the insured’s decision to tender or cooperate with the carrier, the importance of tendering the lawsuit and cooperating with the carrier at the earliest opportunity on behalf of the insured is of the utmost importance.
The best practice for counsel for the insured is to tender to all known carriers at every juncture, at least until an unequivocal denial is obtained.