Kentucky Appeals Court Holds That Claims-Made Policies Require No Showing Of Prejudice For Late Notice, Following Restatement Principles


By: Barry Miller

Notice provisions in claims-made policies are not subject to the notice-prejudice rule, according to a Kentucky decision applying the Restatement of the Law of Liability Insurance (“Restatement”).

Kentucky State University tendered a claim under its professional liability policy after two former employees alleged improper termination. The insurer denied coverage because the University gave notice of it claim 93 days after the policy period ended—three days late under the policy.

Kentucky has required insurers to show prejudice from late notice under occurrence-based policies since 1991. The trial Court agreed with the University that the insurer had to show prejudice under its claims-made policy as well.

But the Court of Appeals of Kentucky reversed, citing federal cases predicting that Kentucky would not require a showing of prejudice for claims-made policies.

It also cited § 35(2) of the Restatement.

The Restatement has generated controversy since the American Law Institute (“ALI”) issued draft principles in 2010. After 29 drafts, and eight years of lobbying by insurers and policyholders, the ALI issued the final Restatement in 2018. Some states responded with bills prohibiting their courts from applying the Restatement’s provisions.

Kentucky’s house and senate passed one such bill, providing that no restatement sets the law or public policy of Kentucky. Governor Andy Beshear vetoed the bill, saying it violated separation of powers.

Randy Maniloff’s “Coverage Opinions” newsletter reported on March 8 that three federal courts relied on the Restatement in February decisions. He noted that courts who have cited the Restatement so far have not written decisions that should cause insurers to lose any sleep.

Nor should the Kentucky court’s holding trouble insurers. It used the Restatement to reinforce a rule that Kentucky federal courts have applied since 2003, that insurers need not show prejudice from late notice under claims-made policies. But Kentucky insurers may sleep less soundly as they wonder whether this uncontroversial opinion foretells a wider use of the Restatement in the Commonwealth’s courts.

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