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What Happens if an Auto Accident Defendant Does Not Notify their Insurance Company?

In Neumayer v. Philadelphia Indem. Ins. Co., decided July 24, 2019, the SC Supreme Court addressed the question of whether an insurance company is required to pay a verdict when their insured did not give them notice that a lawsuit had been filed.

Neumayer was a pedestrian who was hospitalized after he was hit by a bus in Cayce, SC. He filed suit against the driver and her employer, but neither defendant answered the lawsuit. They also neglected to forward the complaint to their insurance company, and Neumayer was awarded a $622,500 default judgment.

18 months later, the insurance company discovered the existence of the lawsuit when Neumayer's attorney attempted to collect the judgment from them...

It's not Neumayer's fault that the insurance company wasn't notified - that's the insured's responsibility. Can a defendant in an auto accident ensure that the plaintiff is not compensated just by refusing to inform their insurance company of the claim?

The Notice-Prejudice Rule

Even before auto insurance coverage was mandatory in South Carolina, we adopted the "notice-prejudice rule," which is now the majority rule in the United States.

If an insurer is not notified of a lawsuit by it's insured, the insurance company must prove that they were "substantially prejudiced" by their insured's failure to notify them of the claim:

...many jurisdictions, including South Carolina, judicially adopted a notice-prejudice rule, whereby the insurer had the burden to show that it was substantially prejudiced by the failure of its insured to comply with the notice and cooperation provisions. Vermont Mut. Ins. Co. v. Singleton By & Through Singleton, 316 S.C. 5, 12, 446 S.E.2d 417, 421 (1994) ("Where the rights of innocent parties are jeopardized by a failure of the insured to comply with the notice requirements of an insurance policy, the insurer must show substantial prejudice to the insurer's rights."); Factory Mutual, 256 S.C. at 381, 182 S.E.2d at 729-30 ("[W]e think the sound rule to be that, in an action affecting the rights of innocent third parties under an automobile liability insurance policy, the noncompliance by the insured with policy provisions as to notice and forwarding suit papers will not bar recovery, unless the insurer shows that the failure to give such notice has resulted in substantial prejudice to its rights."); Squires v. Nat'l Grange Mut. Ins. Co., 247 S.C. 58, 67, 145 S.E.2d 673, 677 (1965) (placing the burden of proof on the insurer to demonstrate substantial prejudice).

What is "substantial prejudice?" And, what happens when the insurance company proves substantial prejudice? Is the injured person just out of luck?

What Does Substantial Prejudice Mean?

Although "substantial prejudice" is not clearly defined, one thing is clear - if an insurance company was not notified of a claim and it results in a default judgment that they had no opportunity to defend, that is substantial prejudice.

So, when a defendant fails to notify their insurance company and there is a default judgment, can the insurance company refuse to pay?

Can an Insurer Deny Coverage Completely When They are Not Given Notice?

In Shores v. Weaver, 315 S.C. 347, 354, 433 S.E.2d 913, 916 (Ct. App. 1993), the SC Court of Appeals found that, even if the insurance company proves substantial prejudice after a default judgment where they were not notified of the lawsuit, they must pay the required statutory minimum coverage:

"[I]n accordance with the public purpose of protecting innocent third parties through mandatory insurance, [the insured's] violation of a provision of the policy providing this mandatory minimal coverage did not defeat or void that coverage." Id. at 355, 433 S.E.2d at 917. The court's rationale was grounded on the fact that the legislature mandated minimum limits coverage to protect innocent third parties. Id. at 356, 433 S.E.2d at 917. In essence, a contrary holding would have permitted an insurer to deny the very coverage that the General Assembly mandated that all motorists obtain, effectively nullifying the legislature's efforts to safeguard the public. Id. at 355, 433 S.E.2d at 917. Accordingly, after Shores, an insurer could no longer rely on a policy's notice clause to deny mandatory minimum limits coverage to an injured third party, regardless of prejudice.

So, a defendant's failure to notify their insurance company doesn't let them completely off the hook. But, if the minimum requirements are 25k, the defendant has a policy with limits greater than $1 million, and the plaintiff has a million-plus in damages, does the insurance company have to pay anything over 25k?

In United Services Automobile Association v. Markosky, 340 S.C. 223, 530 S.E.2d 660 (Ct. App. 2000), the Court of Appeals held that an insurance company can rely on a notice clause to deny coverage above the mandatory minimum when the defendant does not notify them of the claim:

The court of appeals agreed with State Farm, holding that the notice-prejudice rule still controlled when policies in excess of the mandatory minimum limits were involved. Accordingly, an insurer could continue to rely on its notice clause to defend against coverage above the mandatory minimum if it proved substantial prejudice.

What if the defendant fails to notify their insurance company or forward the complaint to them, but the insurance company learned of the lawsuit from another source?

The Court's decision in Neumayer only applies in situations where the insurance company was not notified by the defendant, the failure to notify resulted in substantial prejudice, and the insurance company did not have actual notice of the lawsuit. SC Code Section 38-77-142 (B) says:

If an insurer has actual notice of a motion for judgment or complaint having been served on an insured, the mere failure of the insured to turn the motion or complaint over to the insurer may not be a defense to the insurer, nor void the endorsement or provision, nor in any way relieve the insurer of its obligations to the insured, provided the insured otherwise cooperates and in no way prejudices the insurer.

If the insurance company knows about the lawsuit, whether their insured told them or they learned it from another source, they can intervene and they cannot be substantially prejudiced by their insured's failure to notify.

Does a Notice Provision Deny or Limit Coverage in Violation of SC Law?

The specific question that the Court answered in Neumayer was whether SC Code Section 38-74-124 (C) invalidates the notice provision in an insurance contract:

Any endorsement, provision, or rider attached to or included in any policy of insurance which purports or seeks to limit or reduce the coverage afforded by the provisions required by this section is void.

The Court found that this code section does not invalidate notice provisions in insurance contracts, and the notice-prejudice rule still applies in SC.

Got Axelrod?

If you were injured in an auto accident in South Carolina, your Myrtle Beach auto accident attorney on the Axelrod team will meet with you, investigate the accident, and determine all possible sources of recovery which may include multiple defendants and insurance companies.

Call Axelrod and Associates now at (843) 916-9300 or send an email to set up a free consultation and case review today.

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