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Bank's Failure to Notify Insurer

What are the consequences when a bank gives a notice of claim to its insurer late? For one bank, it resulted in a big loss. In a recent Illinois case, a bank was sued by a convicted felon for failure to fund an $8,000,000.00 real estate sale. The summons was served on the bank's corporate registered agent and the registered agent followed its instructions to forward the notice to a particular bank employee. The employee was no longer employed by the bank and the summons was located by another bank employee about six weeks later. The bank employee forwarded the papers to the bank's local attorney, but the attorney never received them.

As a result, the felon was able to obtain a judgment against the bank of $7,300,000.00 in compensatory damages, $66,500,000.00 in punitive damages, plus $24,000,000.00 in attorneys fees. When the felon pursued collection efforts six months later, the bank was served and the bank immediately notified its insurance company. The insurance company denied coverage based on a late notice.

The underlying judgment was eventually overturned but the bank had to spend $1,800,000.00 to achieve this result. The bank continued to battle with its insurance company over the $1,800,000.00. The bank's position was that it notified its insurer as soon as it had actual notice of a lawsuit. However, the court concluded that the notice of lawsuit was given to the bank when service was made on the bank's corporate registered agent originally.

The moral of this story is that a bank must be careful of the processes it puts in place for receiving notices of lawsuits. If a bank designates a corporate registered agent, the bank must update its contact with the registered agent if its employee leaves. In addition, the bank must make sure that employees are properly trained to deal with any summonses received by the bank which should include follow up with any attorney that a summons is forwarded to. This case highlights the losses that a bank can sustain due to a series of unfortunate events.