Failure to Provide Notice of Loss to Excess Insurers Bites Celotex

August 5, 2008

In a ruling that further underscores the importance of providing prompt notice to all insurers that may have coverage for a claim, a federal appellate court applying Illinois law recently held that nine excess insurance companies have no obligation to provide coverage for asbestos-related property damage lawsuits due to the late notice by the insured. The underlying Plaintiffs were seeking more than $2 billion in damages from Celotex.

Even though Celotex believed that it had millions of dollars in primary insurance coverage available to it for the asbestos lawsuits, the United States Court of Appeals for the 11th Circuit ruled that Celotex’s late notice to its excess insurers barred coverage under those excess policies because the evidence conclusively showed that the insured knew that the claims would eventually exceed the primary insurers’ limits of liability.

The court stated that under Illinois law an insured has some discretion in notifying an excess insurer of a claim or occurrence. The “critical question” was whether the insured should have reasonably known, based on the “totality of the circumstances,” that its excess insurers would be impacted by the claims. The evidence clearly stacked up against Celotex on this issue. Documents and testimony established that by 1980 Celotex foresaw “a massive wave of property damage litigation” and that future property damage asbestos claims would impact its excess coverage. The court also found it relevant that the property damage lawsuits filed against Celotex sought damages of over $2 billion, which dwarfed the less than $7 million in primary coverage.

Celotex’s primary coverage argument was that its delay in notifying the excess insurers was not unreasonable under the circumstances because the company’s primary insurers were defending the asbestos lawsuits, and Celotex had millions of dollars remaining in unexhausted primary limits of liability. The court rejected this position, stating that “an insured who has reason to believe excess carriers will be impacted in the future must give notice when it reaches that understanding; it cannot wait until the underlying coverage is about to run out.”

This ruling serves as yet another important reminder to policyholders to identify and notify each insurance carrier whose policy might reasonably be impacted when a loss or claim arises. Policyholders should also follow a practice of re-evaluating whether they have notified all potentially applicable insurers as the claim or lawsuit progresses.

Asbestos Settlement Trust v. Cont’l Ins. Co. (in re Celotex Corp.), 2008 WL 2637094 (11th Cir. July 7, 2008) (unreported decision).

McGuireWoods’ Insurance Coverage Counseling & Litigation Group provides legal representation to policyholders in coverage litigation, including bad faith actions.