Default Judgments - If the Insured Allows the Door to Close, Must the Insurer Attempt to Open It?

I. INTRODUCTION

An insurance policy normally requires an insured to provide his or her insurer with prompt notice of any claim or lawsuit. Once the insurer receives notice, it triggers the insurer’s duty to investigate and/or defend its insured.

Ordinarily, this system serves the interest of the insured and the insurer. Once the insured gives the insurer notice, he or she relinquishes control of the claim to the insurer’s professionals. The insurer can evaluate the claim and handle it until it is ultimately resolved.

However, the system does not always function smoothly. For a variety of reasons, the insured sometimes fails to give the insurer prompt notice and a default judgment is entered against the insured before the insurer gets involved. In this paper, we will explore the insurer’s duty to its insured when the insured fails to give the insurer notice of the lawsuit until a judgment is entered against the insured.

II. THE NOTICE PROVISION

Most liability insurance policies require an insured to provide the insurance company with timely notice of suit and to forward the complaint, process or other suit papers to the insurer “immediately,” “promptly,” or “as soon as practicable.” See e.g. South Carolina Ins. Co. v. Hallmark Enterprises, Inc., 88 N.C. App. 642, 650, 364 S.E.2d 678, 682 (N.C. Ct. App. 1988) (finding where insurer did not receive notice of suit for more than one year after default judgment was entered, the insurer’s ability to protect its interests was materially prejudiced). The purpose of a notice of suit provision is to require the insured to give an insurer timely notice to allow the insurer to effectively defend the lawsuit. Harwell v. State Farm Mutual Automobile Ins. Co., 896 S.W.2d 170, 174 (Tex. 1995) (citations omitted). Prompt notice enables the insurer to begin its investigation and to initiate other procedures as soon as possible to provide its insured with an adequate defense. South Carolina Ins. Co. v. Hallmark Enterprises, Inc., 364 S.E.2d at 680.

Sometimes, an insurer does not receive notice of suit pending against its insured until after a default judgment has been entered. If the failure to receive notice is a result of the insured’s breach of the notice provision, the insured’s breach may relieve the insurer of its obligation to defend.

The courts have adopted two different approaches to analyze the insurer’s duty. The first approach views the breach in terms of traditional contract analysis. Under this approach, the notice is a condition precedent to coverage and the insured’s unexcused breach will relieve the insurer of any duty to defend. The second approach, which is the modern trend, analyzes the issue in terms of prejudice. It focuses upon whether the insured’s breach of the notice provision prejudiced the insurer.

III. TRADITIONAL APPROACH – UNEXCUSED BREACH OF NOTICE PROVISION RELIEVES INSURER OF ANY OBLIGATION TO DEFEND

A small number of jurisdictions continue to support the traditional view that the insured’s inexcusable or unreasonable delay in giving notice of suit or the insured’s failure to forward suit papers relieves an insurer of its obligation to defend. See AXA Marine & Aviation Ins. Limited v. Seajet Industries, Inc., 891 F.Supp. 978, 982 (S.D.N.Y. 1995) (holding under New York law, where an insured fails to comply with the notice of suit provision, the insurer is relieved of its duty to defend the insured, regardless of prejudice); State Farm Mutual Automobile Ins. Co. v. Burgess, 474 So. 2d 634, 636 (Ala. 1985) (determination of whether insurer was prejudiced by the delay is immaterial where the requirement of reasonably timely notice is expressly made a condition precedent to any action against the insurer); Marez v. Dairyland Ins. Co., 638 P.2d 286, 290 (Colo. 1981) (refusing to adopt prejudice rule and holding that an unexcused delay in forwarding suit papers automatically relieves the insurer of its obligations under the policy); State Farm Mutual Automobile Ins. Co. v. Porter, 221 Va. 592, 597, 272 S.E.2d 196, 199 (Va. 1980) (forwarding of suit papers is a condition precedent to coverage under the insurance policy and prejudice to the insurer is immaterial); Viani v. Aetna Ins. Co. 95 Idaho 22, 30, 501 P.2d 706, 715 (Idaho 1972) (finding lack of prejudice to an insurer is immaterial where the insured fails to perform the condition precedent of giving notice of suit within a reasonable time).

These courts apply a strict contractual analysis and hold that unreasonable delay or failure to forward suit papers is breach of contract and prejudice to the insurer is immaterial. The notice of suit requirement is held to be a condition precedent to coverage and the insurer is automatically relieved of its obligations under the policy where there is an unexcused breach by the insured, even if the insurer suffered no prejudice. AXA Marine & Aviation Ins. Limited, 891 F.Supp. at 983. The traditional rule has been expressed as follows:

    [F]ailure to notify the insurer within a reasonable time constitutes a breach of that contract requiring a justifiable excuse or extenuating circumstances explaining the delay. Unless the delay is so explained, the insurer cannot be held liable under the insurance contract to defend the insured and to pay any judgments recovered against him.

Marez v. Dairyland Ins. Co., 638 P.2d at 289 (citations omitted).

In jurisdictions following the traditional rule, an insurer has no duty to defend and consequently has no obligation to petition to open a default judgment against its insured where the insured inexcusably failed to give the insurer timely notice of suit. Id. In finding no duty to defend as a matter of law, the courts acknowledge that an insurer has certain business interests which it is entitled to protect, including control over the litigation and the ability to make settlement offers. Viani v. Aetna Ins. Co., 95 Idaho 22, 30, 501 P.2d 706, 715 (Idaho 1972).

Perhaps, the most vivid example of this strict approach is the case of State Farm v. Porter, 221 V.A. 592, 272 S.E.2d 196 (1980). In this case, the plaintiff was struck while crossing a street by an automobile driven by Edwards, the State Farm insured. Plaintiff Porter filed suit against Edwards but State Farm never received the suit papers or any accident report. Later, Edwards pleaded guilty to the hit and run charge. At Edwards’ discovery deposition, Porter’s attorney learned that he was insured by State Farm on the date of the accident. Porter’s attorney sent a letter to State Farm alerting the company to the pending claim. After receiving the letter, State Farm took a statement from its insured who denied striking plaintiff Porter.

Shortly after taking the insured’s statement, State Farm sent a reservation of rights letter based upon late notification and non-cooperation by the insured. A copy of the letter was sent to Porter’s attorney. In response, Porter’s attorney gave State Farm the name of an eye witness. State Farm took a statement form the witness.

Several months later, Porter’s attorney dismissed without prejudice the first complaint and reinstituted a complaint against both Edwards and his wife for injuries and damages arising out of the accident. Porter’s attorney sent a copy of the suit papers to State Farm. Neither Edwards nor his wife delivered any suit papers to State Farm.

In reversing the lower court judgment in favor of Porter and against State Farm, the Supreme Court of Virginia held that the insured breached the notice provision by failing to give State Farm notice of the suit or forwarding the suit papers. Giving notice of the suit and forwarding the suit papers were conditions precedent to coverage under the policy requiring substantial compliance by the insured. Since the insured failed to substantially comply, coverage was not triggered. Because of the insured’s breach, the court did not have to address the issue whether State Farm was prejudiced by the conduct of its insured.

This rule, places the burden squarely on the insured to establish that the breach was excusable or that the insured acted reasonably.

    We believe that it is erroneous to impose on an insurer a duty to determine if suit has been filed and served when its policyholder has not forwarded suit papers, nor should an insurer be saddled with the “sentry duty of tracking back and forth to the courthouse to keep a check on if or when the insured may be served with process.”

Koski v. Allstate Ins. Co., 456 Mich. 439, 446, 572 N.W.2.d 636, 640 (Mich. 1998)(citations omitted) or (quoting Weaver v. Hartford Accident & Indem. Co., 570 S.W.2d 367, 369 (Tex. 1978).

However, these jurisdictions recognize that an insured may have a legitimate excuse for failing to forward suit papers to its insurance carrier. Under these circumstances, the courts refuse to allow insurers to be relieved of their duty to defend.

One recognized defense to the breach of the notice provision exists where the insured did not know of the proceedings against him until after the entry of a default judgment. Duzich v. Marine Office of America Corp., 980 S.W.2d 857 (Tex. Ct. App. 1998); Newport v. MFA Ins. Co., 448 N.E.2d 1223 (Ind. Ct. App. 1983); Commercial Contractors Corp. V. am. Ins. Co., 152 Conn. 31, 202 A.2d 498 (1964). An insured who does not have notice of a claim until after entry of a default judgment, has a legitimate excuse and the insurer is not excused from its duty to defend. Id. In general, the sufficiency of the excuse proffered by an insured for his or her failure to timely notify the insurer of a suit is a question of fact for a jury to determine. Duzich v. Marine Office of America Corp., 980 S.W.2d at 868 (citing Appleman, Ins. Law and Pract. § 4731).

Another defense exists where an insured can show that he or she was never served with the suit papers.

    Where the insured had no notice of a pending action until the entry of a default judgment, a delay in giving notice did not excuse the insurer’s duty to defend . . . If the insured, against whom a default was entered, did not himself receive a summons, the insurer cannot set up a failure to forward a copy of the summons as a defense.

8 Appleman, Insurance Law & Pract. § 4741.

A delay or noncompliance with the notice of suit provision will also be excused if the insured “in good faith reasonably believes there is no policy coverage or that the insured was not liable on the main action.” Sparacino v. Pawtucket Mut. Ins. Co., 50 F.3d 141, 143 (2nd Cir. 1995) (quoting Kason v. City of New York, 83 Misc. 2d 810, 373 N.Y.S.2d. 456, 459 (N.Y. Sup. Ct. 1975). An insured’s belief that he or she is not liable will excuse a failure to give timely notice if the belief is reasonable under all the circumstances. Sparacino, 50 F.3d at 143.

In Sparacino, the insured reported a rock-throwing incident to its insurance broker but not its insurer. Although the insurance policy contained a notice of suit provision, the insured never informed its insurer after receiving a letter from its insurance broker stating that the incident was not covered under the terms of the policy.

The insured also believed that it could not be held liable for the alleged intentional and criminal assault by one of its union members. These reasonable beliefs, that a claim was not covered and that the insured could not be held liable, constituted valid excuses for the failure to notify the insurer. For both reasons, the insurer was obligated to defend.

In Argentina v. Otsego Mut. Fire Ins. Co., 86 N.Y.2d 748, 750, 655 N.E.2d 166, 167 (N.Y. 1995) a 171-day delay in forwarding suit papers was excused where third party defendant’s nonbelief in liability was held to be reasonable. The insured asserted that it had a “good faith belief” that the injured party would not seek to hold them liable. Id. The court determined that although the accident was serious enough to occasion emergency room treatment, there was no evidence that the insureds knew or should have known that permanent ongoing injury had occurred. In addition, the court found that the close familial relationship between the plaintiff and the insureds supported a finding that the insureds reasonably believed that they would have been made aware if the plaintiff had been contemplating a lawsuit. Id.

While once an overwhelming majority approach in this country, the number of jurisdictions that still follow this traditional view has decreased dramatically. See Charles C. Marvel, Annotation, Modern Status of Rules Requiring Liability Insurer to Show Prejudice to Escape Liability Because of Insured’s Failure or Delay in Giving Notice of Accident or Claim, or in Forwarding Suit Papers, 32 A.L.R. 4th 141, §3[a] (2000). The modern trend wholly abandons the strict contractual analysis of the notice provisions in insurance contracts and instead focuses upon prejudice as the key factor in determining an insurer’s duty.

IV. MODERN VIEW – THE INSURED’S BREACH OF THE NOTICE PROVISION MUST PREJUDICE THE INSURER

A vast majority of jurisdictions now require that the insurer demonstrate that it has been prejudiced by the insured’s untimely notice or failure to forward suit papers before the insurer may be relieved of its duty to defend. Alcazar v. Hayes, 982 S.W.2d 845, 850 (Tenn. 1998) (citations omitted) (holding that once it is determined that the insured has failed to provide timely notice, prejudice is presumed but the insured may rebut this presumption by proffering evidence showing no prejudice); see also Cooperative Fire Ins. Assoc. of Vermont v. White Caps, Inc., 166 Vt. 355, 356, 694 A.2d 34, 35 (Vt. 1997) (holding an insurer which seeks to be relieved of its obligations under a policy on grounds that a notice provision was breached must prove that the breach resulted in substantial prejudice to avoid liability); Marquis v. Farm Family Ins. Co., 628 A.2d 644, 650 (Me. 1993) (holding insurer prejudice rule must be applied in all situations where an insurer has denied coverage based on the insured’s failure to comply with any procedural requirement in the insurance policy); Great American Ins. Co. v. C. G. Tate Construction, 315 N.C. 714, 719, 340 S.E.2d 743, 747 (N.C. 1986) (holding “notice as soon as practicable” provision is satisfied by insured despite any delay in notifying the insurer, so long as it is occasioned in good faith and the insurer is not materially prejudiced); Brakeman v. Potomac Ins. Co., 472 Pa. 66, 81, 371 A.2d 193, 200 (Pa. 1977) (holding where the insurer’s interests have not been harmed by a late notice, even in the absence of excuse, the reason behind the notice condition in the policy is lacking and it is not fair to relieve the insure of its obligation under the policy).

Under this approach, courts refuse to apply the strict contractual analysis reflected in the traditional approach. In rejecting the traditional approach, the courts have enumerated various public policy justifications to support this shift, including, the adhesive nature of insurance contracts, the objective of compensating tort victims, the inequity of an insurer receiving a windfall due to a technicality, and the purpose of the notice provision itself, which is to insulate the insurer from prejudice. Alcazar v. Hayes, 982 S.W.2d at 850-52; Cooperative Fire Ins. Assoc. of Vermont v. White Caps, Inc., 166 Vt. at 360, 694 A.2d at 37.

For example, the Supreme Court of Vermont stated that while an insurance company may reasonably require the insured to promptly notify the company in the event of a claim or suit, imposing a forfeiture of coverage for a violation of this requirement “falls beyond the reasonable expectations of the ordinary insurance consumer.” Cooperative Fire Ins. Assoc. of Vermont, 166 Vt. at 360, 694 A.2d at 37. This modern approach does not permit the notice of suit provision to function as a “technical escape-hatch” for an insurer to deny liability in the absence of prejudice which is damaging to both the unwary and innocent insured. 166 Vt. at 362, 694 A.2d at 38 (citations omitted).

The courts utilizing this approach attempt to ensure that the notice of suit provision is not “given a greater scope than required to fulfill its purpose . . . [of protecting] the ability of the insured to defend by preserving its ability to fully investigate [and litigate] the accident . . . . If, under the circumstances of a particular case, the purpose behind the requirement has been met, the insurer will not be relieved of its obligations. If, on the other hand, the purpose of protecting the insurer’s ability to defend has been frustrated, the insurer has no duty under the contract.” South Carolina Ins. Co. v. Hallmark Enters., Inc., 88 N.C. App. at 647, 364 S.E.2d at 681 (quoting Insurance Co. v. Construction Co., 303 N.C. 387, 396, 279 S.E.2d 769, 774-75).

Jurisdictions requiring prejudice as a prerequisite to relieve an insurer of its duty to defend where the notice provision has been breached, essentially follow one of three different approaches: (1) once it is shown that the insured has breached the notice of suit provision, the contract is, nevertheless, effective unless the insurer shows that it has been prejudiced by the delay; (2) once it is shown that the insured has breached a notice provision, a rebuttable presumption exists that the insurer has been prejudiced by the delay; and (3) prejudice to the insurer is considered a factor in the initial inquiry of whether the insured has provided timely notice. American Justice Ins. Reciprocal v. Hutchinson, 15 S.W.3d 811, 817 (Tenn. 2000).

This first approach, places the burden on the insurer to establish prejudice. The second approach, places the burden on the insured to rebut the presumption of prejudice. The third approach combines the two other approaches, putting the burden on both parties to establish the factors most favorable to their position. Of the three approaches, the most prevalent is the first, which places the burden upon the insurer to establish prejudice.

A. Prejudice Presumed by Entry of Default Judgment

In some jurisdictions, the prejudice requirement is satisfied where the insurer can establish that the default judgment was entered before the suit papers were forwarded to the insurer. Absent any actual knowledge of the suit, the insurer is considered to be prejudiced as a matter of law. See e.g., Liberty Mutual Ins. Co. v. Cruz, 883 S.W.2d 164, 166 (Tex. 1993) (finding an insurer is prejudiced as a matter of law and has no duty to defend where it is not notified of suit until after default judgment becomes final); Members Ins. Co. v. Branscum, 803 S.W.2d 462, 467 (Tex. Ct. App. 1991) (finding insurer is prejudiced as a matter of law and has no duty to defend where insured did not notify insurer of suit until after default judgment was final and it was too late to move for a new trial or to perfect an appeal). See also South Carolina Ins. Co. v. Hallmark Enters. Inc., 88 N.C. App. 642, 647, 651, 364 S.E.2d 678, 682 (N.C. Ct. App. 1988) (finding insurer has no duty to defend where insured fails to provide the insurer with notice of suit until one year after default judgment because such delay frustrates the insurers ability to defend); Alexander & Alexander, Inc. v. Hartford Accident & Indem. Co., 1983 U.S. Dist. LEXIS 16330, *5 (holding where a substantial default judgment has been entered before insurer’s receipt of notice of suit, prejudice is clearly shown and insurer has no duty to defend); Hallman v. Marquette Cas. Co., 149 So.2d 131, 135 (La. App. 2d. Cir. 1963) (holding that a showing of prejudice by the insured was not required in a failure to forward suit papers where a default judgment is taken against the insured before the insured receives notice).

In Liberty Mut. Ins. Co. v. Cruz, a taxi cab company was a named insured under comprehensive automobile and umbrella excess policies which placed a duty upon the insured to notify the insurance company in the event a suit was brought. 883 S.W.2d at 165. No notice of suit was sent to Liberty Mutual. A default judgment was entered against the insured on May 20, 1987. On July 2, 1987, forty-one days after entry of the default judgment, Liberty Mutual received a copy of the default judgment. Under Texas law, the default judgment had become final. Id. at 165. The court held that had Liberty Mutual was therefore prejudiced as a matter of law, reasoning that had Liberty Mutual known of the suit, it may have chosen to answer and litigate the merits of the underlying suit. The court noted that it would be hard to imagine more prejudice to an insurer than where it had no knowledge of a suit until the time of appeal had expired. Id. at 166.

In these jurisdictions, prejudice is presumed because of the impact the default judgment has upon the insurer’s ability to control the defense. The failure to give notice of suit until after default judgment, among other things, deprives the insurer of the right to cross-examine plaintiff’s witnesses, investigate the circumstances and prepare a timely defense. Hallman v. Marquette Cas. Co., 149 So.2d at 134-35. In holding that the insured has forfeited its rights under the policy, these jurisdictions note that it would be unfair to require insurers to follow every case in which they are notified of an accident which occurred and to discover for themselves whether suits against their insured are filed. Lodrigue v. Cumis Ins. Soc’y, Inc., 560 So. 2d 848, 851 (La. App. 3rd Cir. 1990).

Some courts have even found prejudice as a matter of law where a default judgment is not yet final and is still appealable. Kimble v. Aetna Cas. & Surety Co., 767 S.W.2d 846, 851 (Tex. Ct. App. 1989). Prejudice is presumed by the entry of the default judgment. Id. In Kimble v. Aetna Cas. & Surety Co., the insured notified the insurer of the lawsuit after a default judgment had been entered but before the time for filing a motion for a new trial had expired. Kimble, 767 S.W.2d at 850. The court held that insurer did not have to seek to have the default judgment set aside because prejudice resulted from the entry of the default judgment. Id. at 851. Noting the rigorous standard to set aside a default judgment, the court reasoned that it was by no means certain that the insurer could have established entitlement to have the default judgment opened. Therefore it was prejudiced. Id.

Similarly, in Koski v. Allstate Ins. Co., 456 Mich. 439, 446, 572 N.W.2d 636, 640 (Mich. 1998), the insured did not notify his insurer, Allstate, of suit against him and a default judgment was entered. Allstate learned of the default judgment approximately three months after it was entered. Id. The insured argued that Allstate was not prejudiced because it received notice of the default judgment before it became final, and could have taken steps to set the judgment aside. The court disagreed, stating the insured overstated Allstate’s ability to set aside the default and held that prejudice to Allstate was clear. In support of its decision, the court noted that Michigan law provides that a default may be set aside within 21 days after its entry. Since the 21-day period had passed, Allstate’s only recourse toward setting aside the judgment was upon a showing of extraordinary circumstances which did not appear to exist under the facts of the case. Consequently, Allstate was released from its duty to defend under the policy. 456 Mich. at 447-48; 572 N.W.2d at 640.

It has also been held that an insurer has no duty to defend an insured in an appellate proceeding where the insured negligently failed to notify the insurer of the lawsuit until after a default judgment has been entered against the insured. Western Chain Co. v. Am. Mut. Liab. Ins. Co., 386 F.Supp. 440, 442 (N.D.Ill. 1974) (finding no duty to defend where notice-of-suit provision breached by insured). However, if an appellate court enters an order requiring a new trial, then the insurer would have a duty to defend. Id. With the granting of a new trial, the insurer would not be prejudiced by the initial failure to give notice and would have a fully opportunity to defend the insured. Id. The court hinted that if the insurer entered the case while the default judgment was still pending, the insurer could subject itself to liability for the judgment under waiver and estoppel principles. Id. Similarly, where an injured party moves to vacate a default judgment and, thereafter, commences a second suit, and the new suit papers are forwarded to the insurer without delay, the insurer will have a duty to defend the new lawsuit. North River Ins. Co. of N.Y. v. Gourdine, 205 Va. 57, 64, 135 S.E.2d 120, 125 (Va. 1964) (finding delay in notifying an insurance company of process in a first action affords no defense in the second action where notice is timely given).

B. Prejudice Not Presumed Where Default Judgment Can Be Easily Set Aside

Courts will often look to the ease of opening a default judgment before presuming prejudice to the insurer. These courts hold that prejudice is a matter of degree and entry of default judgment does not establish prejudice as a matter of law. Franco v. Selective Ins. Co., 184 F.3d 4, 8 (1st Cir. 1999) (finding requisite degree of prejudice not shown where insurer had a good chance of getting default judgment set aside). In Franco, a default judgment was entered against the insureds in October of 1996. In December of 1996 the insureds’ insurance carrier, Selective, was notified of the default. In May of 1997, the insureds moved to set aside the default but the motion was denied finding both that the delay was unreasonable and that the insureds had shown no good reason for their failure to answer the complaint. Selective did not join in the insureds’ motion to set aside judgment and did not intervene or file its own motion.

Selective argued that it had been prejudiced by not receiving notice of the suit until nearly two months after the default had been entered and, therefore, it had no duty to defend the insureds. The court held that it was by no means apparent that the magistrate would have denied a motion to vacate the default judgment if Selective had appeared in December 1996 to vacate the judgment and cast itself as an innocent insurer which had never been given notice. Id. at 8. The court reasoned that, in federal court, a default judgment can readily be set aside for good cause. Because Selective had a good chance of getting the default judgment opened, the court held the requisite degree of prejudice required to relieve Selective of liability was not shown and Selective was liable for breaching its duty to defend. Id. See also Burgess v. American Fidelity Fire Ins. Co., 107 Mich. App. 625, 630, 310 N.W.2d 23, 25 (Mich. Ct. App. 1981) (finding an insurer may not claim prejudice from lack of notice of suit where, when ultimately notified, it did not promptly act to protect the interests of itself or the insured); Wendel v. Swanberg, 384 Mich. 468, 481, 185 N.W.2d 348, 355 (Mich. 1978) (holding jury could reasonably have concluded that insurer was prejudiced by its own inaction, rather than the insured’s failure to promptly forward suit papers).

In Wendel v. Swanberg, the insured forwarded suit papers to the insurer’s agent within two months after the entry of default judgment. The insurer took no action. Noting that the law is liberal in setting aside a default judgment within a four month period after the default, the court held that the jury could reasonably conclude that the insurer, which had notice of the accident, was not prejudiced by delay in forwarding suit papers. The suit papers had allegedly been sent to an agent of the insurer within two months of the default judgment. The court noted that it would have automatically opened the default judgment within four months after it was entered. Therefore, any prejudice was caused by the insurer’s own inactions and presumably, its failure to petition to set aside the default judgment. Wendel, 384 Mich. at 480, 185 N.W.2d at 354. But see Kimble v. Aetna Cas. & Surety Co. and Koski v. Allstate Ins. Co., supra.

C. Does Insurer Have a Duty to Appeal Where a Petition to Strike/Open a Default Judgment is Denied?

It appears that the general rule is that an insurer only has a duty to appeal if reasonable grounds for an appeal exist. Delmonte v. State Farm Fire and Cas. Co., 90 Haw. 39, 49, 975 P.2d 1159, 1169 (Haw. 1999) (citations omitted); see also Truck Ins. Exchange of the Farmers Ins. Group v. Century Indem. Co., 76 Wn. App. 527, 532, 887 P.2d 455, 459 (Wash. Ct. App. 1995) (finding an insurer’s duty to defend includes a duty to seek post-judgment relief if there are reasonable grounds to believe a substantial interest of the insured may be served or protected); Aetna Ins. Co. v. Borrell-Bigby Elect. Co., Inc., 541 So. 2d 139, 140 (Fla. Ct. App. 1989) (holding an insurer’s duty to defend its insured includes the duty to appeal an adverse judgment where good faith grounds exist to do so). However, at least one jurisdiction holds that an insurer must always appeal upon the request of an insured or suffer damages for breach of contract. Palmer v. Pacific Indem. Co., 74 Mich. App. 259, 265, 254 N.W.2d 52, 55 (Mich. App. 1977).

Whether an appeal is reasonable may depend on factors such as the likelihood or ease in which default judgments are opened in the particular jurisdiction, the insured’s reasons for failure to forward suit papers, etc. The same factors which the courts look at to determine whether to open a default judgment would appear to be factors that would also indicate whether there are reasonable grounds for an appeal. In jurisdictions, like Michigan, which hold that an insurer must always appeal at the request of the insured, the insurer clearly has a duty to appeal a court’s refusal to open default judgment.

V. CONCLUSION

By fulfilling the notice of suit provision, the insured opens the door to coverage. Once the notice is received, the insurer is obligated to defend its insured.

Where the insured breaches the notice of suit provision, an insurer cannot assume that it will no longer have a duty to defend. Depending upon the jurisdiction, the insurer may still have the obligation to defend. If, under those circumstances, the insurer throws away the keys and refuses to try to open the door, it could face litigation from both the claimant and the insured.