Making a Claim

Failure to promptly notify your church’s insurer can result in loss of coverage.

A church hired a contractor to build a new sanctuary. The church purchased a performance bond from an insurance company that made the insurer a “surety” guaranteeing satisfactory completion of the project.

At the conclusion of the project the church sent the insurer a letter informing it that “there are several matters which are still incomplete and several other problems relating to this construction project” and that it was the insurer’s legal obligation to pay monetary damages for the subpar performance or take steps to complete the contract. The insurer informed the church that there was no coverage under the policy since the church had failed to comply with all the terms and conditions of the policy. The church sued the insurer for breach of contract, and the insurer asked the court to dismiss the lawsuit.

The trial court concluded that the language of the performance bond “unambiguously sets out a process” that the church was required to follow in order for the insurer to be liable under the policy, and that the church had not satisfied that process. The court noted that “the purpose of the provisions in the performance bond was not to be mere technical steps, but rather to insure that the insurer was notified of any issues and provided with an opportunity to assert its rights to have the project completed.”

The appeals court’s ruling

On appeal, the church conceded that it did not comply with the notice and procedural requirements of the performance bond. But, it insisted that the insurer knew, or should have known, that the church declared the contractor to be in default and intended to seek payment to complete the project as permitted by the performance bond. It claimed that its failure to follow the strict language of the policy was merely a technical violation that did not prejudice the insurer, and that it had “substantially complied” with the policy’s requirements.

The performance bond policy contained the following provisions:

3. The insurer’s obligation under this policy shall arise after:

3.1 The [church] has notified the contractor and the insurer that [it] is considering declaring a contractor default and has requested and attempted to arrange a conference with the contractor and the insurer to be held not later than fifteen days after receipt of such notice to discuss methods of performing the Construction Contract. If the [church], the contractor and the insurer agree, the contractor shall be allowed a reasonable time to perform the Construction Contract, but such an agreement shall not waive the [church’s] right, if any, subsequently to declare a contractor default; and

3.2 The [church] has declared a contractor ….

4. When the [church] has satisfied the conditions of Paragraph 3, the insurer shall promptly and at the insurer’s expense take one of the following actions:

4.1 Arrange for the contractor, with consent of the [church], to perform and complete the Construction Contract; or

4.2 Undertake to perform and complete the Construction Contract itself, through its agent or through independent contractors; or

4.3 Obtain bids or negotiated proposals from qualified contractors acceptable to the [church] for a contract for performance and completion of the Construction Contract, arrange for a contract to be prepared for execution by the [church] and the contractor selected with the [church’s] concurrence, to be secured with performance and payment bonds executed by a qualified insurer equivalent to the bonds issued on the Construction Contract, and pay the [church] the amount of damages as described in Paragraph 6 in excess of the balance of the contract price incurred by the [church] resulting from the contractor’s default ….

The court observed:

The bond unambiguously sets forth the conditions under which [the insurer’s] obligations as insurer would arise …. We must disagree that [the church’s] failure to follow the protocol set forth in the performance bond was merely a technical violation of the formal notice requirements in this case …. Despite the unambiguous provisions of the performance bond, [the church] simply did nothing to contact [the insurer] regarding its dispute with [the contractor] until eight months after litigation was commenced between it and [the contractor]. Additionally [the church] failed to provide [the insurer] with the options delineated in section 4 of the bond. 2010 WL 1172080 (Tenn. App. 2010)

Relevance to church leaders

It is very important for church leaders to be familiar with this case, for it illustrates several fundamental points:

1. Be familiar with notice requirements under your church’s insurance policies. Church insurance policies generally require that the church notify the insurer in writing and within a specified period of time concerning any potential claim that occurs. Failure to do so can relieve the insurance company of any duty to defend the church in a lawsuit or pay a settlement or jury verdict resulting from the unreported claim. The duty to notify your insurance company of a potential claim arises when the injury or loss occurs, and not when a lawsuit is filed. As the court in this case noted, the purpose of the notice requirement is to give the insurance company sufficient time to investigate the matter and provide a defense.

Church leaders should be familiar with the notification requirements in all of the church’s insurance policies, including performance bonds issued in the course of a construction project. If you change insurance companies, be sure to review the new insurance policies. Do not assume that they will contain the same notice provisions as the previous policies.

2. Notifying your broker may not be enough. Many churches purchase their insurance through a local broker. Sometimes this person is a member of the congregation. Church leaders naturally assume that in the event of an accident or injury they can simply call this individual and everything will be “taken care of.” The following case study illustrates that such a conclusion may not always be correct. A broker may not be deemed to be an “agent” of the insurance companies he or she represents, and as a result, when a church provides its insurance broker with notice of an accident or loss it is not necessarily notifying its insurance company.

CASE STUDY. A church member was injured when he fell on church property during a funeral. At the time of the injury the church had a general liability insurance policy that required the church to give the insurance company written notice of any accident “as soon as practicable.” Immediately following the accident the pastor instructed the chairman of the board of trustees to notify the church’s insurance broker about the accident. The chairman did so by calling the insurance broker’s office. An employee of the broker assured the chairman that the insurance company would be duly notified. In fact, the insurance company was not notified. Nine months later the church received a letter from an attorney for the injured member threatening to sue the church unless it paid the member a large amount of money. The church immediately turned this letter over to its insurance broker, who in turn forwarded it to the church’s insurance company. The insurance company refused to provide the church with a defense of the lawsuit or pay any amount of money based on the accident since the church had failed to provide it with written notice of the accident “as soon as practicable” as required by the insurance policy. A court ruled that the insurance company had no legal duty to defend the church or pay for any jury verdict since the church had failed to notify it of the accident “as soon as practicable.” Shaw Temple v. Mount Vernon Fire Insurance Company, 605 N.Y.S.2d 370 (A.D. 2 Dept. 1994).

Tip. If you notify your insurance broker of a loss, insist on a written assurance that he or she will notify the insurance company in writing within the period of time specified in the insurance policy. If you do not hear back within a week or so, contact the broker again to follow up. Better yet, the church itself should notify both its broker and insurance company. The insurance company’s address will be listed on your insurance policy. Ask the insurance company to provide you with written confirmation of receipt of your notice.

3. Written rather than oral notice. If your insurance policy requires written notice, then be sure you provide written rather than oral notice of a loss.

Tip. Church leaders should be familiar with the insurance policy’s provisions regarding notification of the insurance company. Is written notice required? If so, how soon after a loss? It is essential that these provisions be scrupulously followed in order to prevent a loss of coverage.

Tip. If you change insurance companies, be sure to review the new insurance policy. Do not assume that it will contain the same “notice” provisions as your previous policy.

4. Timely notice. How soon does your church insurance policy require that notice be submitted to the insurance company following an accident or loss? Be sure you know, and that this requirement is followed whenever there is an accident, personal injury, or other kind of loss.

Tip. The duty to inform your insurance company of an accident or loss arises when the injury occurs, and not when a lawsuit is filed. The purpose of the notice requirement is to give your insurance company sufficient time to investigate the incident and provide a defense.

Example. On September 15, 2011, a pastor is informed by a parent that her minor child was molested by a church volunteer. The volunteer is questioned, and admits having molested the child. This incident represents a potential loss under the church’s insurance policy, triggering a duty to inform the church’s insurance company of the loss within the period of time specified in the insurance policy. The church should inform its insurance company immediately, and not wait until a lawsuit is filed. Waiting until a lawsuit is filed to notify the insurer not only hinders its ability to investigate the incident and defend the case, but also may result in loss of coverage under the policy. This could have disastrous consequences for the church.

5. Recent examples. Listed below are two recent cases in which insurers were relieved of any obligation under an insurance policy because of the insured’s failure to provide timely notice of a potential claim:

Example. An insured failed to provide timely notice of a potential claim to its insurer. In ruling that the insured’s failure to comply with the notice requirement relieved the insurer of any obligation under the insurance policy, a New York court observed: “Where an insurance policy requires that notice of an occurrence be given ‘as soon as practicable,’ notice must be given within a reasonable time in view of all of the circumstances …. the insured’s failure to satisfy the notice requirement constitutes ‘a failure to comply with a condition precedent which, as a matter of law, [voids] the contract.'” Courduff’s Oakwood Road Gardens & Landscaping Co., Inc. v. Merchants Mutual Insurance Company, 2011 WL 1733968 (N.Y.A.D. 2011).

Example. A woman caused an accident that resulted in injuries to the driver of another vehicle. While the woman promptly notified her auto and homeowner insurers of a potential claim, she failed to notify the insurer of an umbrella policy until nearly four years after the accident. The umbrella insurance policy became relevant in this case due to the severity of the victim’s injuries. The umbrella insurer denied coverage due to the insured’s failure to provide timely notice. A New York court agreed: “[The insurer] demonstrated that the insured did not provide it with notice of the occurrence until more than three years after the accident occurred.” This case is important because many persons, and churches, have an umbrella policy that provides coverage over and above the policy limits under a general liability policy. In some cases the umbrella policy is offered by a different insurer than the general liability insurer, and this can result in an insured’s failure to notify the umbrella carrier of a potential loss. When a potential loss occurs, it is essential that all insurers be promptly notified (general liability, umbrella, auto, directors and officers, and so on). Hanover Insurance v. Prakin, 916 N.Y.S.2d 615 (N.Y.A.D. 2011).

KEY POINT. Some courts have ruled that an insured’s failure to comply with an insurance policy’s notice requirement does result in the loss of coverage if the insured can demonstrate that the delay did not “prejudice” the insurer. This exception is no excuse for not complying with a policy’s prompt notification requirement, since (1) not all states recognize this exception, and (2) an insured should never assume that its failure to provide prompt notice of a potential claim will not prejudice the insurer.

This article first appeared in Church Finance Today, September 2011.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. "From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations." Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.

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