The Notice-Prejudice Rule provides protection to policyholders by requiring an insurer show it was substantially prejudiced by the failure of a policyholder to promptly notify it of a claim. Essentially, insurers need to argue that because of late or delayed notice of the claim, the loss cannot be adequately investigated and assessed and therefore the indemnity obligation no longer exists.
As we noted in an earlier post[https://www.insurancelawcoverage.com/fire-insurance/2017/10/16/make-fire-claim/], insurance policies require compliance with all terms in a policy before a lawsuit can be filed and prompt notice will always be one such requirement. However, the notice-prejudice rule acts to relax or relieve a policyholder of strict compliance with this policy requirement where the policyholder’s delayed notice of the claim results in no prejudice to the insurer.
There are a number of contours to this rule, two of which will be discussed below:
1) Does the notice-prejudice rule apply to all policies?
2) If I submit my claim but not my proof of loss, does the notice-prejudice rule still apply?
1) Notice-Prejudice rule does not apply to all policies
As you may be aware, insurance policies come in all shapes and sizes and protect against a multitude of types of losses. In the professional liability arena, insurance policies typically fall into two categories: “occurrence” based or “claims-made” policies.
Occurrence based policies provide coverage for a loss that occurs within a policy period, regardless of whether the claim was made outside of the policy period. Not surprisingly, these policies have the potential for increased liability, and thus insurance increased obligation, far outside of the policy period.
Insurers often issue claims-made or claims-made and reported policies to limit their own exposure. In claims-made policies, the insurer only must defend and indemnify against claims made in the policy period. In claims-made and reported policies, the insurer must defend and indemnify only for claims made and reported to the insurer in the policy period. This effectively limits the time for which an insurer may be on the hook to a policyholder.
You may be asking how this all relates to the notice-prejudice rule.
Recently, a U.S. District court in California held that with respect to claims made and reported policies, the notice-prejudice rule does not apply. (Centurion Medical Liability Protective Risk Retention Group, Inc. v. Gonzalez, 2017 WL 5624940 (C.D. Cal. Nov. 1, 2017)). Translation: an insurer need not show any prejudice in order to justify denying coverage on the basis of an untimely claim. Essentially, the court reasoned that insurance companies structure their policies precisely to limit their exposure and to apply the notice-prejudice rule with these policies would be to unfairly increase their risk.
2) Untimely proof of loss may not bar claim against insurer
In another post, we explained how even if there is no visible damage, smoke damage from a large regional fire provides coverage under your homeowner’s policy. We also cautioned that timely notice to your insurer is important in order to protect your rights.
Recently, a California court of appeal held that the notice-prejudice rule also protected a group of homeowners whose homes were not burned, but were damaged by smoke as a result of the 2009 Southern California wildfires (Station Fire). (Henderson v. Farmers Group, Inc., 148 Cal.Rptr.3d 385 (2012)).
In that case, the insurer defended itself against bad-faith claims by arguing that the homeowners all tendered their proof of loss of smoke damage beyond the time required in the policy. Even though all the homeowners were timely in submitting their claims, they did not fully comply with the terms of the policy in submitting their proof of loss.
The court ruled against the insurer, holding that the notice-prejudice rule applies to the proof of loss as well and that the insurer would need to show it was substantially prejudiced as a result. It is of course unclear how far this ruling would extend in other situations where smoke damage was not the loss.
Lastly, it is hard to think of a situation where a policyholder would want to delay notifying their insurer of a loss. However, the notice-prejudice rule stands ready in situations where inadvertence or mistakes in submitting a claim to the insurer.
At Kerr & Wagstaffe LLP, our attorneys specialize in insurance policyholder rights. To learn more about the attorneys and their insurance practice, please explore the links at the top of this page.