Better late than never for an insured: Late Notice to an insurer of a claim

In Lloyd’s Underwriters v. Blue Mountain Log Sales Ltd., 2015 BCSC 630, the British Columbia Supreme Court considered whether an insurer was obligated to pay for pre-tender defence costs, meaning defence costs that were incurred by the insured prior to the insurer being put on notice of the claim. Blue Mountain, insured by Lloyd’s under a number of policies, was named as a defendant in an action in Washington State. Blue Mountain did not realize that the lawsuit might trigger coverage under its insurance policies and did not tender its defence to Lloyd’s for nearly two years after the litigation first arose.

During the two years from the start of the litigation to the time of giving notice to Lloyd’s, Blue Mountain incurred defence costs, which it argued Lloyd’s was obligated to pay despite its failure to give notice to Lloyd’s during that time.

Lloyd’s took the position that under the policy Blue Mountain had an obligation to provide timely notice, cooperate with Lloyd’s in their defence, and to not make any voluntary payments except at its own cost.

The insurer’s position was that the failure of Blue Mountain to give timely notice of the claim was a breach of a condition precedent and the insurer could not be responsible for defence costs of which it was not aware.  However, Lloyd’s did not seek to deny coverage entirely.  Rather, they argued that coverage for defence costs only arose at the time of notice. Timely notice was the condition and triggering event for Lloyd’s’ duty to defend the claim.

Blue Mountain argued that Lloyd’s was responsible for its pre-tender defence costs unless it could prove that its late notice amounted to a breach of a policy condition, and that it was not entitled to relief from forfeiture.

The court considered whether the failure to give timely notice was merely imperfect compliance, as opposed to non-compliance with the policy. The court held that the weight of Canadian authority supported that a breach of a notice provision is generally treated as imperfect compliance rather than non-compliance. Therefore, the imperfect compliance was subject to relief from forfeiture, as per the relevant provisions of the Insurance Act and Law and Equity Act.

The court held that unless the late notice caused real prejudice to the insurer, it could not avoid pre-tender expenses because, otherwise, the insurer may avoid expenses for which it received a premium from the Insured, effectively, “getting something for nothing.” The court held that viewing late notice as imperfect compliance afforded an opportunity to accurately adjust the equities between the parties.

In light of the fact that there was no real prejudice to Lloyd’s as a result of the Blue Mountain’s failure to give timely notice, the court held that Lloyd’s could not avoid the pre-tender defence costs.