Brakeman v. Potomac Insurance Co.

371 A.2d 193, 472 Pa. 66, 1977 Pa. LEXIS 618

• Court: Supreme Court of Pennsylvania
• Decided: March 16, 1977
• Docket: 71
• Status: Published

Opinions

OPINION OF THE COURT

EAGEN, Chief Justice.

On March 8, 1970, the appellee, Allan E. Brakeman, was involved in an accident when his motorcycle collided with an automobile operated by David Baker in Mead-ville Pennsylvania. ■ The Baker automobile was owned by Edwin Baker, David’s father. David, a seventeen-year-old licensed operator, was insured under an automobile liability insurance policy maintained by the elder Baker with the appellant, The Potomac Insurance Company [hereinafter Potomac]. As a result of the accident, Brakeman allegedly suffered permanent disability and loss of income. Potomac did not receive written notice of the accident until October 6, 1970, after the Bakers had received a letter from Brakeman’s attorney stating that suit against David Baker was being instituted. Potomac refused to defend against Brakeman’s suit or accept any liability flowing from the accident, stating that Baker breached the insurance contract by failing to provide Potomac with timely notice of the accident. Brakeman filed suit against Baker on February 24, 1971, in the Court of Common Pleas of Crawford County. Baker retained his own counsel and on January 10, 1972, a verdiet in the sum of ten thousand dollars ($10,000.00), the exact amount of Baker’s insurance coverage, was directed by the Court in favor of Brakeman and against Baker by agreement of the parties and without actual trial.

Brakeman then brought the instant action against Potomac in the Court of Common Pleas of Crawford County to recover the amount of the consent judgment. A jury returned a general verdict in favor of Brakeman for ten thousand dollars ($10,000.00). The court, however, subsequently granted Potomac’s motion for judgment non obstante veredicto on the ground that Baker’s written notice to Potomac, some seven months after the accident, was unreasonable and in violation of the clause in the insurance policy requiring notice of the accident “as soon as practicable.”

Brakeman appealed to the Superior Court of Pennsylvania which reversed the judgment entered in the trial court in favor of Potomac and remanded the record with directions to proceed with a new trial. The Superior Court ruled that a delayed notice of an accident will not release the insurer from liability under the policy, even in the absence of extenuating circumstances, if the claimant can show that the insurer was not in fact prejudiced thereby. Brakeman v. Potomac Insurance Co., 236 Pa. Super. 320, 344 A.2d 555 (1975).¹ We granted allocatur.

The insurance policy in the instant case contained the following provisions:

In the event of an accident, occurrence or loss, written notice containing particulars sufficient to identify the insured and also reasonably obtainable information with respect to the time, place and circumstances thereof, and the names and addresses of the injured and of available witnesses, shall be given by or for the insured to the company or any of its authorized agents as soon as practicable.

“No action shall lie against the company unless, as a condition precedent thereto, the insured shall have fully complied with all of the terms of this policy, nor until the amount of the insured’s obligation to pay shall have been finally determined either by judgment against the insured after actual trial or by written agreement of the insured, the claimant and the company.” [Emphasis added.]

Our past decisions clearly establish the validity of a provision in an insurance policy requiring written notice of accident to be given “as soon as practicable” and where an insurance policy has contained such a clause, we have said that the duty to give the notice as stipulated is a condition precedent, and its breach releases the insurance company from the obligations imposed by the policy, regardless of whether the company suffered prejudice thereby. Meierdierck v. Miller, 394 Pa. 484, 147 A.2d 406 (1959); Jeannette Glass Co. v. Indemnity Insurance Co. of North America, 370 Pa. 409, 88 A.2d 407 (1952); Unverzagt v. Prestera, 339 Pa. 141, 13 A.2d 46 (1940); Ross v. Mayflower Drug Stores, Inc., 338 Pa. 211, 12 A.2d 569 (1940). We have interpreted “as soon as practicable” to mean within a reasonable timé depending on the facts and circumstances of each case, Farmers National Bank v. Employers Liability Assurance Corp., 414 Pa. 91, 199 A.2d 272 (1964); Jeannette Glass Co. v. Indemnity Insurance Co. of North America, supra; Unverzagt v. Prestera, supra, and the cases indicate that extenuating circumstances may excuse a delay in notification provided there has not been a lack of due diligence.² Wardle v. Miller, 375 Pa. 565, 101 A.2d 720 (1954); Hughes v. Central Accident Insurance Co., 222 Pa. 462, 71 A. 923 (1909).

Thus, under our prior decisions, a party claiming rights under a liability insurance policy has had the burden of proving compliance with the terms and conditions of that policy and the determination whether to relieve the insurer of its obligations under the policy on the ground of late notice has depended only on the length of delay in giving the notice and the reasons offered to excuse the delay. As such, our prior decisions are in line with the rule applied in a majority of jurisdictions. See Annot. 18 A.L.R.2d 443 (1951); 8 J. Appleman, Insurance Law and Practice § 4732 (1962), and cases cited therein. Our research indicates, however, a trend of late in several jurisdictions away from the classic contractual approach towards a view that considers prejudice to the insurance company as a material factor in determining whether to relieve the insurance company of its coverage obligations by virtue of late notification. Even in these last mentioned jurisdictions, however, there is no agreement as to whether the insurer has the initial burden of demonstrating prejudice. Some courts place the burden on the claimant to establish an absence of prejudice to the insurer in order to recover on the policy despite late notice,³ while others require the insurance company to show that it was prejudiced by the tardiness of the notice in order to escape liability.⁴ We think the preferable rule is that which requires the insurance company to prove not only that the notice provision was breached, but also that it suffered prejudice as a consequence.

The rationale underlying the strict contractual approach reflected in our past decisions is that courts should not presume to interfere with the freedom of private contracts and redraft insurance policy provisions where the intent of the parties is expressed by clear and unambiguous language. We are of the opinion, however, that this argument, based on the view that insurance policies are private contracts in the traditional sense, is no longer persuasive. Such a position fails to recognize the true nature of the relationship between insurance companies and their insureds. An insurance contract is not a negotiated agreement; rather its conditions are by and large dictated by the insurance company to the insured. The only aspect of the contract over which the insured can “bargain” is the monetary amount of coverage. And, as we have recognized, notice of accident provisions, such as that with which we are concerned instantly, are uniformly found in liability insurance policies. Meierdierck v. Miller, supra, 394 Pa. at 486, 147 A.2d at 408. Indeed, a review of the cases indicates that often the policies express the condition in identical language. In Cooper v. Government Employees Insurance Co., 51 N.J. 86, 237 A.2d 870 (1968), the Supreme Court of New Jersey stated:

“. . . [W] e have recognized that the terms of an insurance policy are not talked out or bargained for as in the case of contracts generally, that the insured is chargeable with its terms because of a business utility rather than because he read or understood them, and hence an insurance contract should be read to accord with the reasonable expectation of the purchaser so far as its language will permit.”

51 N.J. at 93, 237 A.2d at 873.⁵ Thus, an insured is not able to choose among a variety of insurance policies materially different with respect to notice requirements, and a proper analysis requires this reality be taken into account.⁶

A strict contractual approach is also inappropriate here because what we are concerned with is a forfeiture. The insurance company in the instant case accepted the premiums paid by the insured for insurance coverage and now seeks to deny that coverage on the ground of late notice. As was said in Cooper v. Government Employees Insurance Co., supra:

“[Ajlthough the policy may speak of the notice provision in terms of ‘condition precedent/ . . . nonetheless what is involved is a forfeiture, for the carrier seeks, on account of a breach of that provision, to deny the insured the very thing paid for. This is not to belittle the need for notice of an accident, but rather to put the subject in perspective. Thus viewed, it becomes unreasonable to read the provision unrealistically or to find that the carrier may forfeit the coverage, even though there is no likelihood that it was prejudiced by the breach. To do so would be unfair to insureds.”

51 N.J. at 93-94, 237 A.2d at 873-874.⁷

We are reluctant, therefore, to allow an insurance company to refuse to provide that which it was paid for unless a sound reason exists for doing so.

The purpose of a policy provision requiring notice of an accident or loss to be given within a certain time is to give the insurer an opportunity to acquire, through an adequate investigation, full information about the circumstances of the case, on the basis of which, it can proceed to disposition, either through settlement or defense of the claim. Farmers National Bank v. Employers Liability Assurance Corp., supra; Hachmeister, Inc. v. Employers Mutual Liability Insurance Co., 403 Pa. 430, 169 A.2d 769 (1961); Jeannette Glass Co. v. Indemnity Insurance Co. of North America, supra; Bartels Brewing Co. v. Employers’ Indemnity Co., 251 Pa. 63, 95 A. 919 (1915); 8 J. Appleman, Insurance Law and Practice § 4732 (1962). Such a requirement protects the insurance company from fraudulent claims, as well as invalid claims made in good faith, by allowing the insurance company to gain early control of the proceedings. Since the insurance company has the advantage of a trained legal and investigatory staff, which is unavailable to the average insured, the notice requirement normally operates to benefit the insured as well as the insurance company.

Thus, a reasonable notice clause is designed to protect the insurance company from being placed in a substantially less favorable position than it would have been in had timely notice been provided, e. g., being forced to pay a claim against which it has not had an opportunity to defend effectively. In short, the function of a notice requirement is to protect the insurance company’s interests from being prejudiced. Where the insurance company’s interests have not been harmed by a late notice, even in the absence of extenuating circumstances to excuse the tardiness, the reason behind the notice condition in the policy is lacking, and it follows neither logic nor fairness to relieve the insurance company of its obligations under the policy in such a situation. As was succinctly stated by Judge (now Justice) Tate in Miller v. Marcantel, 221 So.2d 557 (La.App. 1969):

“The function of the notice requirements is simply to prevent the insurer from being prejudiced, not to provide a technical escape-hatch by which to deny coverage in the absence of prejudice nor to evade the fundamental protective purpose of the insurance contract to assure the insured and the general public that liability claims will be paid up to the policy limits for which premiums were collected. Therefore, unless the insurer is actually prejudiced by the insured’s failure to give notice immediately, the insurer cannot defeat its liability under the policy because of the non-prejudicial failure of its insured to give immediate notice of an accident or claim as stipulated by a policy provision.”

221 So.2d at 559. We have in the past excused a condition of forfeiture where to give it effect would have been purely arbitrary and without reason, and we are of the opinion that, in the absence of prejudice to the insurance company, such a situation exists in the context of a late notice of accident. Cf. Burne v. Franklin Life Insurance Co., 451 Pa. 218, 301 A.2d 799 (1973); Grandin v. Rochester German Insurance Co., 107 Pa. 26 (1884). Allowing an insurance company, which has collected full premiums for coverage, to refuse compensation to an accident victim or insured on the ground of late notice, where it is not shown timely notice would have put the company in a more favorable position, is unduly severe and inequitable. Moreover, we do not think such a result comports with the reasonable expectations of those who purchase insurance policies.⁸

For the foregoing reasons, we are of the opinion that the law established by our prior decisions relative to the effect of a clause in a liability insurance policy requiring the giving of notice of accident to the insurance company “as soon as practicable” has been too restrictive and should be changed. We therefore hold that where an insurance company seeks to be relieved of its obligations under a liability insurance policy on the ground of late notice, the insurance company will be required to prove that the notice provision was in fact breached and that the breach resulted in prejudice to its position.

We recognize that prejudice is a difficult matter to prove affirmatively,⁹ but although it may be difficult for the insurance company to prove it suffered prejudice as a consequence of an untimely notice, it appears to us that it would be at least as difficult for the claimant to prove a lack of prejudice. In view of the facts that an insurance contract is not a truly consensual agreement, that what is involved is a forfeiture and it is the insurance company who chooses to disclaim its obligations under the policy, it is more equitable to place the burden of showing prejudice on the insurance company.¹⁰

Finally, since this opinion announces a new rule and since Potomac had no prior notice that it would be required to show it suffered prejudice as a result of the late notice in the instant case, in the interest of fairness Potomac must be given the opportunity in a new trial to meet the standard herein announced. In addition to the issue of prejudice, Potomac should be allowed to litigate the basic questions of Baker’s liability and Brakeman’s damages.¹¹ Potomac’s initial denial of liability and refusal to defend Baker against Brakeman’s claim may very well have been based on a reliance upon our past decisions. We cannot say that such reliance was unjustified; nor can we say that Potomac would not have contested Baker’s liability and damages in the tort action, had the new rule been in effect.

Accordingly, the order of the Superior Court is affirmed with directions that the new trial proceed in accordance with this opinion.

JONES, former C. J., did not participate in the decision of this case. NIX, J., did not participate in the consideration or decision of this case. ROBERTS, J., filed a concurring and dissenting opinion. POMEROY, J., filed a dissenting opinion.

1 . The ruling of the Superior Court was not in keeping with prior decisions of this Court.

2 . Ordinarily however, in the absence of extenuating circumstances, the question, whether notice was reasonable and therefore timely, has been one for the court. Meierdierck v. Miller, supra; Jeannette Glass Co. v. Indemnity Insurance Co. of North America, supra; Unverzagt v. Prestera, supra; Ross v. Mayflower Drug Stores, Inc., supra. Notwithstanding a specific jury response to a special interrogatory that sufficient extenuating circumstances existed to excuse the seven-month delay in the instant case, the trial court ruled to the contrary in granting Potomac’s motion for judgment n. o. v. Brakeman contended that there were two extenuating circumstances to excuse the seven-month delay. He argued 1) that Edwin Baker gave oral notice of the accident to Potomac’s agent, Gelvin, Jackson & Starr, within a few days after the accident and 2) that David Baker was a minor at the time of the accident. The Court rejected the first contention on the ground that the jury specifically determined in response to special interrogatories that the first written notice to Potomac was given on October 6, 1970, and that no oral notice had been given prior to that time. The court also rejected the second contention on the ground that “if the operator is old enough to be licensed to drive a motor vehicle he is old enough to be held to comply with the requirements of the policy protecting him.” In support of that conclusion, the court pointed out that David Baker was in fact only five months short of majority age at the time of the accident.

3 . Dairyland Insurance Co. v. Cunningham, 360 F.Supp. 139 (D. Colo. 1973); Tiedtke v. Fidelity & Casualty Co., 222 So.2d 206 (Fla. 1969); Henderson v. Hawkeye-Security Insurance Co., 252 Iowa 97, 106 N.W.2d 86 (1960); Calhoun v. Western Casualty & Surety Co., 260 Wis. 34, 49 N.W.2d 911 (1951).

4 . Lindus v. Northern Insurance Co., 103 Ariz. 160, 438 P.2d 311 (1968); State Farm Mutual Automobile Insurance Co. v. Johnson, Del.Supr., 320 A.2d 345 (1974); Cooper v. Government Employees Insurance Co., 51 N.J. 86, 237 A.2d 870 (1968); Lusch v. Aetna Casualty & Surety Co., 272 Or. 593, 538 P.2d 902 (1975); Pickering v. American Employers Insurance Co., 109 R.I. 143, 282 A.2d 584 (1971); Factory Mutual Liability Insurance Co. v. Kennedy, 256 S.C. 376, 182 S.E.2d 727 (1971); Oregon Automobile Insurance Co. v. Salzberg, 85 Wash.2d 372, 535 P.2d 816 (1975); La-Place v. Sun Insurance Office, Ltd., 298 F.Supp. 764 (D.V.I. 1969).

5 . See also State Farm Mutual Automobile Insurance Co. v. Johnson, Del.Supr., 320 A.2d 345 (1974); Pickering v. American Employers Insurance Co., 109 R.I. 143, 282 A.2d 584 (1971); LaPlace v. Sun Insurance Office, Ltd., 298 F.Supp. 764 (D.V.I. 1969); Note, “The Materiality of Prejudice to the Insurer as a Result of the Insured’s Failure to Give Timely Notice,” 74 Dick.L.Rev. 260 (1970).

6 . This lack of choice is underscored when one considers that the automobile has become very nearly a practical necessity in the last quarter century and that it is a misdemeanor to operate a passenger vehicle without the insurance coverage required by the Pennsylvania No-Fault Motor Vehicle Insurance Act. Act of July 19, 1974, P.L. 489, No. 176, Art. I, § 601, 40 P.S. § 1009.601 (Supp. 1976).

7 . Note 5, supra.

8 . Also, an analysis that does not consider whether the insurance company has suffered prejudice from an untimely notice too lightly disregards significant public policy considerations. Insurance contracts are not purely private matters between insurance companies and their insureds; rather there is a public interest in automobile liability insurance contracts and that is the protection of innocent victims of automobile accidents. See Harleysville Mutual Casualty Co. v. Blumling, 429 Pa. 389, 241 A.2d 112 (1968); Nationwide Mutual Insurance Co. v. Ealy, 221 Pa.Super. 138, 289 A.2d 113 (1972); Pennsylvania No-Fault Motor Vehicle Insurance Act, Act of July 19, 1974, P.L. 489, No. 176, Art. I, § 101 et seq., 40 P.S. § 1009.101 et seq. (Supp.1976). This public interest would be disserved by a rule that denied an accident victim recovery against the insurance company because it received late notice of the accident, even though it suffered no prejudice as a consequence thereof. Cooper v. Government Employees Insurance Co., 51 N.J. 86, 237 A.2d 870 (1968); Factory Mutual Liability Insurance Co., 256 S.C. 376, 182 S.E.2d 727 (1971); Oregon Automobile Insurance Co., 85 Wash.2d 372, 535 P.2d 816 (1975); Note, “The Materiality of Prejudice to the Insurer as a Result of the Insured’s Failure to Give Timely Notice,” 74 Dick.L.Rev. 260 (1970).

9 . 8 J. Appleman, Insurance Law and Practice § 4732 (1962); See also Note, “Liability Insurance Policy Defenses and the Duty to Defend,” 68 Harv.L.Rev. 1436 (1955).

10 . Note 4, supra; Note, “The Materiality of Prejudice to the Insurer as a Result of the Insured’s Failure to Give Timely Notice,” 74 Dick.L.Rev. 260 (1970). Cf. Campbell v. Allstate Insurance Co., 60 Cal.2d 303, 32 Cal.Rptr. 827, 384 P.2d 155 (1963); Conroy v. Commercial Casualty Insurance Co., 292 Pa. 219, 140 A. 905 (1928); Young v. American Bonding Co., 228 Pa. 373, 77 A. 623 (1910); Hargrove v. CNA Insurance Group, 228 Pa.Super. 336, 323 A.2d 785 (1974); Flagg v. Puleio, 189 Pa.Super. 329, 150 A.2d 400 (1959); Frank v. Nash, 166 Pa.Super. 476, 71 A.2d 835 (1950).

11 . We need not and do not decide whether Potomac would have been otherwise estopped to contest the basic questions of Baker’s liability and Brakeman’s damages and bound by the consent verdict because of its initial refusal to defend Baker. Potomac argues that Brakeman cannot recover on the consent judgment because of the “actual trial” provision in the insurance policy. Brakeman, on the other hand, contends that Potomac’s initial refusal to defend Baker repudiated the policy and Potomac should not be allowed the benefit of a policy provision that is predicated on the willingness of the insurance company to defend its insured. See and compare Wright v. Allstate Insurance Co., 285 S.W.2d 376 (Tex.Civ.App.1955); Martinique Shoes, Inc. v. New York Progressive Wood Heel Co., 207 Pa.Super. 404, 217 A.2d 781 (1966), with Murphy & Co. v. Manufacturers’ Casualty Co., 89 Pa.Super. 281 (1926); Roberts v. Fireman’s Insurance Company, 376 Pa. 99, 101 A.2d 747 (1954).