Notice Clauses in Insurance Policies, the South Carolina Supreme Court’s Neumayer Decision, and Construction Defect Cases

In its Neumayer opinion issued at the end of July, the South Carolina Supreme Court resolved an issue specific to an automobile liability insurance policy but in doing so, alluded to implications for the commercial general liability insurance policies that typically are the applicable insurance coverage in construction defect cases.[1]  The issue in the Neumayer decision was whether a South Carolina statute governing automobile insurance policies barred the application of a notice clause in an automobile insurance policy.

The policy had a typical notice and cooperation provision which required the insured to give the insurer prompt notice of an accident and to immediately send the insurer copies of any legal papers.  The statute at issue provides that any policy endorsement or rider that purports to limit the automobile insurance coverage required by the statute is void.

The plaintiff, the injured party, sued the insured, the insured did not answer, and the plaintiff had a default judgment entered against the insured.  The insurer did not receive notice that its insured was involved in a lawsuit until 18 months after the entry of default.  The plaintiff sought to collect the full amount of the default judgment from the insurer, and the insurer refused to pay on the basis that the insured had not complied with the notice clause in the policy.

The parties proceeded to a declaratory judgment action as to coverage and the insurer’s obligation to pay the judgment, and the trial court ruled in favor of the injured party.  The trial court reasoned that the insurer was obligated to pay the full amount of the default judgment because the statute rendered the notice provision void.

The precise issue in the case was a narrow one as to the impact of an automobile insurance statute on an automobile insurance policy.  However, to reach the opinion’s result, Justice Hearn, writing for a unanimous Court, started from the wide lens of liability insurance notice provisions generally.  The Court noted that “[n]early every insurance policy contains a provision requiring the insured to timely notify its insurer when a lawsuit is filed against the insured.”  The Court recognized that allowing insurers to escape coverage due to an insured’s failure to provide notice a suit creates inequities, and as a result, South Carolina law provides an insurer can only avoid coverage where both the insured failed to provide notice and the insurer was substantially prejudiced by the lack of notice.

The Court ultimately held the automobile insurance statute did not bar the application of the policy’s notice clause, but of more interest to the world of construction law, the Court reaffirmed the “notice-prejudice rule” and implied that an insurer cannot be prejudiced where the insurer received actual notice of a suit even if the notice received did not technically comply with a notice clause.  Specifically, the Court noted how a notice clause cannot provide “a ‘technical escape hatch’ for the insurer to deny coverage,” and the notice-prejudice rule serves to dispense with technicalities and balance the equities of the insurer’s need for notice with the right of “an innocent third-party [to recover] benefits to which he would otherwise be entitled.”

The key takeaway for construction defect cases is the decision reiterates the need for a homeowner or homeowner’s association plaintiff and a general contractor defendant to get notice of a lawsuit to the insurers for all of the implicated parties.  Doing so should help defend against insurers later seeking to avoid liability through a policy’s notice clause.  Under the notice-prejudice rule, an insurer will have a hard time denying coverage on the basis of a failure to comply with the notice provision when the insurer had actual notice of the lawsuit sent to it by a party in the suit.

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[1] Neumayer v. Philadelphia Indem. Ins. Co., Op. No. 27902 (S.C. Sup. Ct. filed July 24, 2019) (Shearouse Adv. Sh. No. 30 at 22).