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Addressing a matter of first impression, the Nebraska Supreme Court ruled that an insurer is not liable for defense costs where a policyholder violates a voluntary payments provision by settling an underlying suit without the insurer’s knowledge.  Rent-A-Roofer, Inc. v. Farm Bureau Prop. & Cas. Ins. Co., 291 Neb. 786 (2015).

In 2007, Rent-A-Roofer (“RAR”) was sued for faulty workmanship.  Farm Bureau refused to defend the suit on the basis that it did not allege an “occurrence” and that a policy exclusion barred coverage.  RAR hired its own counsel and ultimately settled the suit.  In 2010, RAR was sued by a different plaintiff, who alleged similar causes of action.  This time, instead of notifying Farm Bureau of the claim, RAR proceeded with its hired counsel, reached settlement, and then sought reimbursement of indemnity and defense costs from Farm Bureau.  In ensuing litigation, Farm Bureau argued that there was no coverage because RAR violated the policy’s notice and voluntary payments provisions.  A Nebraska trial court agreed and granted Farm Bureau’s summary judgment motion.  On appeal, RAR amended its prayer for relief to seek only defense costs.

The Nebraska Supreme Court ruled that “an insurer’s duty to defend is relieved when the insured fails to notify the insurer of a claim until after it has reached a binding settlement agreement with the claimant, in breach of both the notice and voluntary payments provisions of its insurance policy.”  Under Nebraska law, prejudice is required in order to deny coverage based on a violation of a notice provision.  However, the Nebraska Supreme Court had not previously addressed whether a showing of prejudice is necessary with respect to a coverage denial based on a breach of a voluntary payments provision.  Noting disagreement among jurisdictions on this issue, the court concluded that “it is proper to maintain the prejudice requirement when an insurer seeks to avoid the policy for breach of a voluntary payments provision.”  However, the court held that prejudice is established as a matter of law where, as here, a policyholder’s settlement deprived the insurer of the opportunity to participate in litigation or settlement negotiations.

Significantly, the Nebraska Supreme Court rejected RAR’s argument that its duty to  notify Farm Bureau of the claim was waived in light of the insurer’s previous coverage denial of an allegedly similar claim. Although a policyholder has no continuing duty to provide notice as to a claim that an insurer has explicitly denied, that rule of law does not apply where the two claims involve different parties, occurrences and allegations.