Fighting for Excess Recoveries -- and Winning!

The following series of events is based upon a lawsuit by an employer against its TPA and its XS carrier for denial of excess coverage.

The employer’s XS policy had an SIR of $350,000.00. The excess carrier claimed late notice and violation of the non-cooperation clause as grounds for their denial. Use your own experience with excess policies and denials to see if you can predict the result.

The claimant suffered a work-related injury in April of 1992. Two years later, in May of 1994, he was placed at MMI with 0% permanency rating. A claim for permanent total disability was filed, the adjuster denied the claim, and the claimant’s attorney made a $325,000 settlement demand in July of 1994. Obviously, the adjuster scoffed at the demand and settlement discussions ceased.

After eighteen months of litigation, in January 1996, the defense attorney indicated that the claimant’s PTD claim had merit and made a recommendation for settlement up to $200,000.

In April of 1996, the adjuster notified the excess carrier of their exposure, and this notice was acknowledged by excess in May of 1996.

The excess carrier’s response was that there did not appear to be any indication of excess involvement at that time, and requested immediate notice in the event of any change that would substantially increase the employer's exposure. At mediation a year later in May of 1997, the claimant increased his demand to $600,000. As the adjuster’s settlement authority was limited to $50,000, the case was not settled. The following month the adjuster administratively accepted PTD status and began paying benefits.

The claim remained inactive for approximately two years, and in May of 1999 reserves reached 50% of the employer’s $350,000 SIR. In March of 2002, the adjuster/TPA again reported the claim to excess, just two months short of the 10-year anniversary of the accident. The excess carrier denied the claim, citing late notice and violation of the non-cooperation clause as grounds for their denial.

"Relevant portions” of the policy language required notice of any accident "involving disability for a period of nine months or so”, or as soon as "the loss exceeds, or might in the future, exceed, 50% of the SIR”. There was also a separate provision obligating the insured to allow the excess carrier to participate in the settlement of the claim, and to send any claims information which may be requested.

Following the denial of coverage by the excess carrier, the employer filed a lawsuit against the adjuster’s employer, the TPA, and the excess carrier. The complaint against the TPA cited their alleged "failure to comply with the contractual provisions of the excess policy. The allegations against the excess carrier were lack of justification for their denial, and the employer claimed reimbursement for all benefits, past and future, covered by the excess policy. Was the excess carrier justified in denying coverage? Which party prevailed? Can you identify the legal issues that would control the analysis and final decision?

Think about it for a moment and then continue below for (as Paul Harvey would say…) "the rest of the story!”

The TPA Gets Tough
This dispute is based solely on principles of contract and the resolution is guided by contract law, not workers’ compensation. Under the general rules of contract, the obligation to give notice is considered to be a "condition precedent.” This means that one party must first "give notice” to the other party in order to initiate the other party’s contractual obligation(s). In other words, the policy condition requiring "notice” precedes any obligation of the other party to comply with the terms of the contract.

Failure of a party to comply with this "condition precedent”, i.e. failure to give timely notice, typically justifies the other party's failure to perform its contractual obligations; thus, failure to give timely notice to an excess carrier in accordance with the terms of the policy would conceivably justify the excess carrier’s denial of coverage. Fortunately, or unfortunately, depending on your perspective, it’s not quite that simple.

In Florida, and in most jurisdictions across the country, numerous appellate court decisions have modified this general rule as it applies to the notice provisions in insurance contracts and have established that:

1. A breach of the notice provision creates a presumption of prejudice to the insurer;
2. This presumption may be rebutted by the showing of a lack of prejudice; and,
3. In the absence of prejudice, the excess insurer is not justified in denying indemnification.

Since the purpose of the notice provision in an excess policy is to enable the insurer to evaluate its rights and liabilities, and afford it an opportunity to make a timely investigation, the factual analysis of prejudice focuses upon those issues. Mere speculation will not suffice.

As for the non-cooperation clause, there is no prejudice presumed; in fact, case law is replete with the requirement that:

1. The insurer must prove that the insured failed to cooperate;
2. That the failure was material to a determination of the claim;
3. That the excess carrier exercised due diligence in bringing about the insured’s compliance; and,
4. That the failure to cooperate caused substantial prejudice to the excess carrier.

In this case, the excess insurer argued that it was prejudiced by late notice. The excess carrier also claimed that [it was prejudiced because] settlement negotiations had been conducted prior to receipt of notice.

The excess insurer argued that the adjuster’s second notice (March 2002) was the employer’s first actual compliance with the notice provision, and because it was almost 10 years post-accident, it was surely prejudicial.

The excess carrier also claimed that, during the 10 year period leading up to the March 2002 notice, several of the prompting events [that would require notice] had occurred, including, but not limited to, the payment of PTD benefits and establishment of reserves well in excess of 50% of SIR. The excess carrier claimed that they were prejudiced by their inability to participate in the mediations, or to conduct their own independent investigation of the claim as it progressed.

The case was aggressively litigated for some time before the case ultimately settled at mediation. The excess carrier agreed to pay approximately $600,000 in past due benefits, and to assume responsibility for all future benefits as contemplated by the excess policy. The TPA agreed to contribute $75,000, justified primarily as compensation for costs incurred.

In short, the excess carrier tried to be slick and cover up its own lack of due diligence by making obviously false claims to support their denial of coverage.  THAT'S why they ultimately paid almost the whole thing in the end!

Lessons Learned: The focus in evaluating an excess denial based on late notice is on prejudice. In the absence of prejudice to the excess carrier, the technical failure to comply with the notice or cooperation clause in an excess policy is inconsequential.  Each and every denial should be evaluated thoroughly with those legal principles in mind.

For assistance in evaluating and pursuing denials of coverage by your excess carrier(s), call James W. Greer, CPCU of AE21 Incorporated at (800) 820-4550 or Michael Broussard of Broussard & Cullen, P.A. at (407) 649-8717.

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