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SECOND DIVISION
November 30, 2004

Nos. 1-03-2832 and 1-03-2912, Consolidated

This insurance coverage case raises a question that has notbeen squarely answered in this State: When an insured is requiredby its contract with its insurer to give timely notice of alawsuit against it, but does not do so and has no excuse for notdoing it, does the insurer have to prove prejudice before it canavoid coverage? We conclude this insurer did not have to proveit was prejudiced by an unreasonably late notice of a lawsuit. We affirm the trial court's judgment for the insurer.

FACTS

Country Mutual Insurance Company (Country Mutual) broughtthis declaratory judgment action to establish whether theinsurance policies it had with Livorsi Marine, Incorporated(Livorsi) and Gaffrig Performance Industries (Gaffrig) requiredCountry Mutual to indemnify and defend them in an underlyingtrademark dispute.

Both Gaffrig and Livorsi purchased general liabilitypolicies from Country Mutual. The policies stated:

"[Country Mutual] will pay those sumsthat the insured becomes legally obligated topay as damages because of *** "advertisinginjury" to which this coverage part applies. [Country Mutual] will have the right and dutyto defend any "suit" seeking those damages. [Country Mutual] may at [its] discretioninvestigate any "occurrence" or offense andsettle any claim or "suit" that may result."

The policies' definition of "advertising injury" includedinjury arising from the "infringement of copyright, title, orslogan." The policies also listed conditions for the coverage,including a duty to notify Country Mutual "as soon aspracticable" in the event of an occurrence, offense, claim orsuit and to "immediately send" the insurer copies of any demands,notices, summonses, or legal papers in connection with a claim orsuit.

On December 1, 1999, Livorsi filed a complaint againstGaffrig for trademark infringement, dilution, and consumer fraud. That same day, Gaffrig filed its countercomplaint against Livorsialleging trademark infringement and unfair competition. Trialcommenced in March 2002.⁽¹⁾

On November 20, 2001, Country Mutual filed its complaint fordeclaratory judgment, alleging its policies with Livorsi andGaffrig did not provide coverage for the trademark lawsuits fortwo reasons: (1) the lawsuits did not fall under the definitionof "advertising injury"; and (2) both Livorsi and Gaffrig failedto provide timely notice of the lawsuits, thereby breaching acondition of the policies' coverage. The parties stipulated thatCounty Mutual did not receive actual notice of the trademarklawsuits until August 2001, 21 months after the lawsuits werefiled.

The trial court entered a declaratory judgment in favor ofCountry Mutual based on the failure of Livorsi and Gaffrig toprovide timely notice of the trademark lawsuits. Whether theclaims fell within the coverage of the policies is not an issuein this appeal by Livorsi and Gaffrig.

DECISION

The issues are framed by the parties' briefs and we willhold the parties to them despite efforts to slip away during oralargument. That means the appellants agree the notice of lawsuitgiven Country Mutual was unreasonably and inexcusably late. Italso means Country Mutual was caught in a conflict of interestbecause it insured both appellants, leaving it in a positionwhere it could not prove it was prejudiced by the late notice. Where a conflict exists, the insurer must decline to participatein the defense and must pay the costs of independent counsel forthe insured.⁽²⁾ Murphy v. Urso, 88 Ill. 2d 444, 451-52, 430 N.E.2d1079 (1981).

That leaves us with a single issue, one of law: Given thecircumstances presented to us, did Country Mutual have to proveprejudice? Because it is a legal issue, we will approach it on ade novo basis. People v. Johnson, 206 Ill. 2d 348, 359, 794N.E.2d 294 (2002).

This is a contract case. The insurance contract controlsthe insured's duties. Northern Insurance Co. of New York v. Cityof Chicago, 325 Ill. App. 3d 1086, 1091, 759 N.E.2d 144 (2001). When the contract includes a provision requiring the insured tonotify the insurer of a suit against it, the notice provision isa "condition precedent to the triggering of the insurer'scontractual duties." Northbrook Property & Casualty InsuranceCo. v. Applied Systems, Inc., 313 Ill. App. 3d 457, 464, 729N.E.2d 915 (2000).

When the insured fails to comply with the notice provision,the insurer may be relieved of its duty to defend the insuredunder the policy. Northern Insurance Co. of New York, 325 Ill.App. 3d at 1091. In short, "notice provisions are validprerequisites to coverage and not mere technical requirementswhich the insured is free to overlook or ignore with impunity." Kerr v. Illinois Central Railroad Co., 283 Ill. App. 3d 574, 582,670 N.E.2d 759 (1996).

Given the myriad of decisions that extol the binding natureof notice provisions in insurance contracts, what is the basis,then, for an argument that the insurer must prove prejudice--unreasonable delay in notice or not? The decisions in this areaare plentiful, but categorization is elusive. There is too muchspillage.

When an insurance policy requires the insured to notify theinsurer of an occurrence or lawsuit "as soon as practicable," asdid the policy in this case, the test is whether notice was givenwithin a reasonable time. Northern Insurance Co. of New York,325 Ill. App. 3d at 1091. We need not stop in this case todetermine whether the delays in the insureds' notices werereasonable. They agree they were not. This case turns onwhether the insurance company's failure to prove the unreasonablylate notice caused it prejudice bars a denial of coverage.

It is fairly clear that prejudice to the insurer is a factorto consider with other factors when the issue is whether noticeof an occurrence was reasonable. Zurich Insurance Co. v. WalshConstruction Co. of Illinois, Inc., No. 1-03-2617, at 5 (Ill.App. Ct. 2004); Household International, Inc. v. Liberty MutualInsurance Co., 321 Ill. App. 3d 859, 869, 749 N.E.2d 1 (2001);American Country Insurance Co. v. Bruhn, 289 Ill. App. 3d 241,247, 682 N.E.2d 366 (1997); American States Insurance Co. v.National Cycle, Inc., 260 Ill. App. 3d 299, 311, 631 N.E.2d 1292(1994).

The reasonable notice of occurrence provision provides theinsurance company an opportunity to investigate the accident andprotect itself against unjustified claims. American CountryInsurance Co. v. Efficient Construction Corp., 225 Ill. App. 3d177, 181, 587 N.E.2d 1073 (1992). Reasonable notice gives theinsurer an opportunity to gather and preserve possible evidence. Bruhn, 289 Ill. App. 3d at 247.

Saying that prejudice is a factor to consider in occurrencenotice cases is not the same as saying the insurer cannot denycoverage unless it proves prejudice. Some courts hold theinsurance company does not have to prove it was prejudiced by thelack of reasonable occurrence notice before it can validly denycoverage. Bruhn, 289 Ill. App. 3d at 247; General Casualty Co.of Illinois v. Juhl, 283 Ill. App. 3d 376, 382, 669 N.E.2d 1211(1996); American States Insurance Co., 260 Ill. App. 3d at 311.

Other courts have held lack of prejudice to the insurer is afactor to be considered only where the insured has a good excusefor the late notice or where the delay was relatively brief. Montgomery Ward & Co., Inc. v. Home Insurance Co., 324 Ill. App.3d 441, 449, 753 N.E.2d 999 (2001); Fletcher v. Palos CommunityConsolidated School District No. 118, 164 Ill. App. 3d 921, 928,518 N.E.2d 363 (1987).

But this is not a notice of occurrence case. It is a noticeof lawsuit case. "A notice of suit requirement in a policyserves the purpose of enabling the insurer to conduct a timelyand thorough investigation of the insured's claim ***, as well asto locate and participate in the defense of the insured." Northbrook, 313 Ill. App. 3d at 465. Unreasonably late noticedenies the insurer an opportunity to assess the loss and therebyprotect its interests. Kerr, 283 Ill. App. 3d at 585.

Here, the appellants say the insurer's inability to proveprejudice, due to its conflict of interest, prohibits a denial ofcoverage. The insurer, in turn, contends that under thecircumstances of this case a lack of prejudice is irrelevant.

Some Illinois decisions do say prejudice is required in allcases where the insurer claims late notice of a lawsuit. Thefirst case to say it is Rice v. AAA Aerostar, Inc., 294 Ill. App.3d 801, 690 N.E.2d 1067 (1998).

Rice is the standard-bearer for the must-prove-prejudicecontenders. It also is the first Illinois decision to hold adifferent rule applies to notice of lawsuit cases.

In Rice, the defendant's insurer, State Farm, was notifiedthat the plaintiff slipped and fell in a parking lot owned bydefendant, but never received written notice of a personal injurylawsuit filed by plaintiff. Rice, 294 Ill. App. 3d at 803-04. Adefault judgment was entered against defendant, and plaintiffsought to garnish defendant's insurance fund. The trial courtgranted State Farm's motion for summary judgment.

On appeal, the court said State Farm may be liable for thejudgment against defendant, despite the written noticerequirement in the policy, if it had "actual notice" of thelawsuit. Rice, 294 Ill. App. 3d at 807. The court distinguishedbetween notice of the occurrence and notice of the lawsuit, Rice,294 Ill. App. 3d at 807, a distinction grounded more in ipsedixit than in stare decisis.

The court then said, "[w]hen notice of the lawsuit is theissue, the rule is that the insurer is required to show that itwas prejudiced by the insured's omission or delay in order toescape liability on its policy." Rice, 294 Ill. App. 3d at 807-08, citing Annotation, Modern Status of Rules Requiring LiabilityInsurer to Show Prejudice to Escape Liability Because ofInsured's Failure or Delay in Giving Notice of Accident or Claim,or in Forwarding Suit Papers, 32 A.L.R. 4th 141, 145 (1984). NoIllinois decision was cited in support of this "rule." NoIllinois decision was cited to support the court's discernment ofa different rule for notice of lawsuit cases. In fact, there isauthority to the contrary. See Northbrook, 313 Ill. App. 3d at465 ("A review of these cases reveals that, regardless of thetype of notice involved, the courts generally apply the samelegal principles in their analyses.") But see Montgomery Ward,324 Ill. App. 3d at 449 (distinguishing between notice of lawsuitand notice of occurrence cases).

The Rice court did not decide whether State Farm wasprejudiced by the lack of notice. In fact, prejudice played norole in the court's decision. The court held State Farm was notentitled to summary judgment because its affidavit failed toaddress whether it was aware of the lawsuit through other means, even though it did not receive formal notice from the plaintiff. The court reversed and remanded the case for State Farm toprovide additional evidence of lack of actual notice. Rice, 294Ill. App. 3d at 808-09.

The A.L.R. 4th annotation does not distinguish betweennotice of occurrence and notice of lawsuit cases. Instead, itspeaks of a "traditional proposition" that states a liabilityinsurer "need not show that it was prejudiced by an insured'sunreasonable and unexcused omission or delay in giving notice ofan accident or in forwarding suit papers ***" 32 A.L.R. 4th at146. The 1984 annotation then refers to a "modern trend" thatholds a liability insurer is required to show it was prejudicedby the insured's omission or delay "in giving notice of anaccident or forwarding suit papers ***" 32 A.L.R. 4th at 157.

We find no such "modern trend" in Illinois decisions. Ricewas an actual notice case. No Illinois decision before or sinceRice has barred an insurer which cannot prove prejudice fromdenying coverage to an insured who gave an unreasonably latenotice of a lawsuit.

Close inspection reveals the cases often cited as furtheringthe Rice line of must-prove-prejudice in notice of lawsuitdecisions do not actually rely on the Rice dictum for theirholdings. Most recently, Zurich Insurance Co., No. 1-03-2617, at5, embraced Rice's occurrence/lawsuit notice distinction and the"modern rule" that the insurer must show it was prejudiced by theomission or delay in a lawsuit notice in order to escapeliability on its policy. But the holding in the case was thatthe insured gave timely notice to the insurer, which had actualnotice of the lawsuit anyway.

In Household International, Inc., the outcome was decidedunder New York law, which provides prejudice to the insurer is afactor to be considered when deciding whether notice of a lawsuitwas timely given. Household International, Inc., 321 Ill. App.3d at 870-71.

The court discussed Rice's requirement of proof of prejudicein Illinois Founders Insurance Co. v. Barnett, 304 Ill. App. 3d602, 611-12, 710 N.E.2d 28 (1999), found the insurer proved noprejudice, then held:

"Based on the totality of circumstances in this case,we conclude that the circuit court's decision thatplaintiff [insurer] received actual notice of Barnett'slawsuit was not against the manifest weight of theevidence." Illinois Founders, 304 Ill. App. 3d at 612.

We do not see why the Illinois Founders and Rice courtswould discuss and rely on the existence of actual notice fortheir decisions if failure to prove prejudice were fatal to theinsurers' denial of coverage. Nor do we see a principled basisfor distinguishing between notice of occurrence and notice oflawsuit. That is, if the insurance company suffers no prejudicedue to an unreasonable notice, why does it matter whether thelate notice related to an occurrence or a lawsuit? We have foundno decision that offers a satisfactory reason for thedistinction.

Two other cases said to be in the Rice camp should bementioned. In Cincinnati Insurance Co. v. Baur's Opera House,Inc., 296 Ill. App. 3d 1011, 694 N.E.2d 593 (1998), the courtfirst found the insurer had received adequate notice of alawsuit, then went on to determine whether the insurer sufferedprejudice--which it did, sending the case back to the trial courtfor consideration of the insurer's summary judgment motion. Vegav. Gore, 313 Ill. App. 3d 632, 730 N.E.2d 587 (2000), held thetrial court erred as a matter of law in determining that theinsurer had received actual notice sufficient to locate anddefend against the lawsuit. Prejudice to the insurer was afactor that led to that conclusion.

Arrayed against the Rice dictum cases is a line of Illinoislate notice of lawsuit decisions that treat prejudice to theinsurer as a factor to be considered when assessing thereasonableness of the notice. These cases reject the notion thatan insurer must prove unreasonably late notice of a lawsuitcaused it prejudice before it can deny coverage. These include:Northbrook, 313 Ill. App. 3d at 469 (Unjustified excuse for 17-month delay, coupled with prejudice to insurer, is unreasonablylate notice); Continental Casualty Co. v. Cuda, 306 Ill. App. 3d340, 350, 715 N.E.2d 663 (1999) (Prejudice to insurer isirrelevant where insured failed to give notice of claim duringthe policy period); Kerr, 283 Ill. App. 3d at 585 (Where insuredfailed to comply with notice provision the insurer will not beliable, even if there is no showing of prejudice); Twin City FireInsurance Co. v. Old World Trading Co., 266 Ill. App. 3d 1, 8-9,639 N.E.2d 584 (1993) (Insurer does not have to proveunreasonably late notice caused it prejudice to be relieved ofits duty to pay, but prejudice is a factor to consider where theinsured did not present a good excuse for the late notice);Illinois Insurance Guaranty Fund v. Lockhart, 152 Ill. App. 3d603, 608-09, 504 N.E.2d 857 (1987) (Two year delay in givingnotice was unreasonable; insurer did not have to prove it wasprejudiced by the delay); Sisters of Divine Providence v.Interstate Fire & Casualty Co., 117 Ill. App. 3d 158, 161-62, 453N.E.2d 36 (1983) (Notice given three years after suit filed andone month before trial was unreasonable; insurer does not have toestablish prejudice in order to be relieved of liability underthe policy).

We reach these conclusions derived from the melange ofIllinois decisions:

(1) An insurer's failure to prove prejudice is a factor toconsider when determining whether the insured's notice wasunreasonably and inexcusably late, whether the notice has to dowith an occurrence or a lawsuit;

(2) Once it is determined the insured's notice wasunreasonably and inexcusably late, the failure of the insurer toprove it suffered prejudice is irrelevant, whether the notice hasto do with an occurrence or a lawsuit.

In this case, we are presented with unusual circumstanceswhere the insureds do not dispute their notices were unreasonablylate and the insurer does not claim it has proved prejudice. Theinsureds have not pointed to any authoritative public policystatement that would justify judicial addition to the terms ofthe contract.

We find the insurer did not have to prove prejudice in orderto deny coverage. By so finding, we enforce the contract freelyentered into by the parties. The notice provision is clear andunambiguous and should be applied as written, United States FireInsurance Co. v. Schnackenberg, 88 Ill. 2d 1, 4, 429 N.E.2d 1203(1981), without distorting the meaning of words or searching forambiguities where none exists. Western Casualty & Surety Co. v.Brochu, 105 Ill. 2d 486, 495, 475 N.E.2d 872 (1985).

We affirm the trial court.

CONCLUSION

For the reasons stated, we affirm the trial court's findingthat Country Mutual is entitled to a declaratory judgment that itis not required to extend coverage to Livorsi and Gaffrig.

Affirmed.

BURKE, P.J., and HALL, concur.

1. On December 19, 2003, the United States District Court forthe Northern District of Illinois entered a judgment in favor ofGaffrig and against Livorsi, granting an injunction but no moneydamages. Gaffrig Performance Industries, Inc. v. Livorsi Marine,Inc., Nos. 99 C 7778; 99 C 7822 (N. Dist. Ill. 2003). Theindemnification issue is thus rendered moot, and the parties seekonly the costs of defending the lawsuits.

2. We do not and need not decide whether an insurer caught ina conflict of interest like the one in this case ever can showprejudice. A conflicted insurer is entitled to have an attorneyof its own choosing participate in all phases of the litigation,subject to the control of the case by the insured's attorney. Maryland Casualty Co. v. Peppers, 64 Ill. 2d 187, 199, 355 N.E.2d24 (1976).