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PREJUDICE AGAINST INSURERS?

PREJUDICE AGAINST INSURERS?

PREJUDICE AGAINST INSURERS?
September 18
12:35 2019

A recent California Supreme Court ruling is being hailed by policyholder advocates as potentially extending implementation of the actual prejudice rule further. How might that affect you and your clients?

PREJUDICE AGAINST INSURERS?

Expanded application of the “actual prejudice” rule benefits insureds—if they don’t get complacent

Even where the actual prejudice rule appears to be firmly established, judges who believe an insured was grossly negligent in failing to provide timely notice of a loss may shift the burden to the policyholder to prove that the delay did not prejudice the insurer.

By Joseph S. Harrington, CPCU

Time marches on and so, apparently, does the progression of the “actual prejudice” rule in insurance law. The California Supreme Court may just have extended it even further.

The actual prejudice rule holds that an insurer cannot deny coverage solely on the basis of late notice of a claim. Rather, a carrier must provide coverage unless it can demonstrate that a late notice materially prejudiced its ability to respond to a claim. The rule applies to both first-party property and third-party liability claims, although it looms larger in liability insurance, where timely notice of a claim is critical to mounting an effective defense.

As of the end of 2016, more than 40 states had implemented the actual prejudice rule to some extent, according to a comprehensive 50-state (and D.C.) survey of the relevant law by attorneys with the Chicago-based law firm Tressler LLP.

That total marks a steady advance in the adoption of the rule over recent decades, an advance capped by a 2009 New York statute that ended New York’s status as the largest jurisdiction clinging to the older doctrine that timely notice of a claim was a “condition precedent” for coverage to apply.

Over the same period, the actual prejudice rule was effectively written into standardized homeowners policies. For example, the Insurance Services Office (ISO) added the following language to the liability section of its 2000 homeowners forms: “We have no duty to provide coverage under this policy if your failure to comply with the following duties [after a loss] is prejudicial to us.”

California decision

A recent ruling by the California Supreme Court is being hailed by policyholder advocates as potentially extending implementation of the actual prejudice rule even further.

In the case, a college discovered lead contamination in soil during construction of some dormitories and proceeded to remediate the loss before informing its insurer of the claim. The insurer denied coverage on the basis that the insured (1) failed to provide timely notice of the loss and (2) violated the policy’s consent provision by proceeding with remediation work without getting the insurer’s approval.

In its widely reported opinion, the California Supreme Court held that the state’s actual prejudice rule (also known as the “notice-prejudice” rule) is a fundamental policy of the state and, as such, it superseded an explicit provision of the policy establishing New York law as governing all matters arising from the policy. (New York law still allows a condition precedent standard for coverage under policies issued outside of New York.)

Furthermore, the California Supreme Court held there was no reason to assume that violation of the consent provision, on its own, necessarily prevented the insurer from protecting its own interests—provided the coverage in question was first-party property coverage. The court could not establish whether the coverage in question was first- or third-party, however, so the case will head back to a federal district court for that determination.

Where things stand

Agents, brokers, and their insureds are generally happy with the advance of the actual prejudice rule, but they have to be on guard against complacency.

While the rule has been implemented widely, it is not universal. It does not apply in at least five states, including Colorado and Illinois, plus the District of Columbia, according to the Tressler LLP study.

In Florida, Tressler says, an insured may bear the burden of demonstrating that a delay in notice of a loss did not prejudice the insurer, while Virginia in effect suspends application of the rule if violation of notice requirements are “substantial and material.” In North Carolina, a delay in providing notice must not be made in bad faith, while West Virginia requires an insured to demonstrate that its delay in providing notice was “reasonable.”

The Tressler study adds that Texas does not apply the actual prejudice rule to commercial claims of personal or advertising injury, and that several states will honor “condition precedent” provisions written into commercial policies.

Beyond that, at least 17 states provide for an exception to the rule for claims-made policies; the rationale being that late notice tends to thwart the purposes of claims-made coverage. The longer the delay in notice, the more a claims-made policy is made to function as an occurrence-based policy.

Even where the actual prejudice rule appears to be firmly established, judges who believe an insured was grossly negligent in failing to provide timely notice of a loss may shift the burden to the policyholder to prove that the delay did not prejudice the insurer.

It’s never wise to sit on indications of a loss, no matter how you think the law is progressing.

The author

Joseph S. Harrington, CPCU, is an independent business writer specializing in property and casualty insurance coverages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P-C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services.

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