In BSC Holding, Inc. et al. v. Lexington Ins. Co., — Fed.Appx. –, 2014 WL 929194 (10th Cir., March 11, 2014), the Tenth Circuit recently underscored how difficult it can be for an insurer to demonstrate prejudice as a result of late notice. The District of Kansas had granted summary judgment to Lexington, but the Court of Appeals reversed and sent the matter back to the lower court, holding that “substantial prejudice” had not been shown despite the fact that the policyholder had waited two-and-one-half years to notify the carrier and had spent $2.5 million dollars before doing so.
Lyons Salt Company owned a salt mine in Kansas. In January 2008, mine workers detected an inflow of water into the mine, and the insured set out to determine the cause and to devise a solution. In April 2010, following an extensive investigation by geotechnical experts and engineers, the inflow was attributed to an improperly sealed oil well that was deforming overlying shale formations. The experts told Lyons that the situation was “dire” and that a quick remedy was required, and the insured immediately set about constructing a specially-designed concrete bulkhead to seal off part of the mine.
Lyons notified Lexington of the water inflow in July 2010, after it had already spent $2.5 million on the problem. The insured sought coverage under six Lexington policies of “all risk” property insurance issued between March 2004 and April 2010. Suit was filed in the Spring of 2011 after Lexington refused to commit to reimbursement. The sworn statement in proof of loss that Lyons submitted in December of 2010 sought $7.5 million, and the policyholder was estimating that the total cost of investigating and fixing the intrusion would top $11 million as of last year.
In the trial court, Lexington argued that it had suffered prejudice, and the District of Kansas agreed, granting the insurer’s motion for summary judgment. On appeal, the Tenth Circuit assumed “that [Lyons] waited too long to notify Lexington,” but Judge Robert E. Bacharach nonetheless reversed, holding that Lexington had failed to show substantial prejudice.
Under Kansas law, an insurer can show prejudice by “presenting evidence that (1) its ability to investigate the claim has been lost; or (2) opportunities to negotiate settlement have been lost; or (3) opportunities to defend have been lost.” According to the Court of Appeals, “to demonstrate prejudice, the insurer must show that it would have handled some aspect of the investigation, discovery or defense differently, and that with this change, [the insurer] could have either defeated the underlying claims or settled the underlying claims for a lower sum than for what the insureds settled.”
Lexington first argued prejudice from a lost opportunity to independently investigate before Lyons began remediation. The court noted, however, that Lexington had independently inspected the mine and had failed to come forward with specific proof of how its investigation was hampered by the delay. Lexington next argued prejudice in connection with the remediation effort, contending that had lost the opportunity to provide input to Lyons on how to resolve the water inflow problem. That was equally unavailing; according to the opinion, Lexington “did not present evidence on how this input would have affected the remedial efforts [and in] the ansence of this evidence, a reasonable jury could conclude that Lexington failed to prove prejudice from the inability to participate in [Lyons’] remediation efforts.
Finally, Lexington urged “underwriting prejudice,” arguing that “the delay prevented a meaningful evaluation of risk during the underwriting of the renewal policies [and that] earlier notice could have led to cancelation, non-renewal, or amendment” of the contracts of insurance that it had issued. This failed to impress the panel as well because “the record contains no evidence that Lexington would have done anything differently had [Lyons] presented timely notice.” In sum, therefore, Judge Bacharach reversed because he held that while “[t]he fact-finder could infer prejudice, [it] could also have found the opposite.”