Answering a lingering question that has dogged many first party claims in California, a California Court of Appeal has found that the "notice-prejudice rule" applies to a first-party proof of loss. Some first party insurance policies provide that upon request of the insurer, a policyholder submit a sworn "proof of loss" and policies may also impose time limits for filing a "proof of loss." Sometimes these periods are as short as 30 or 60 days –which is often before the loss is fully assessed or valued. Courts in most jurisdictions will construe the provision liberally in favor of the policyholder, especially if there has been "substantial compliance" in furnishing the details of the loss. Nevertheless, a time limitation has often provoked concern where there has been delay in finalizing a claim. In Henderson v. Farmers Group, Inc., Case No. B236259 (October 24, 2012), the California Court of Appeal recently held that an insurer may not enforce the proof-of-loss requirement unless it proves the delay has caused the insurance company substantial prejudice.
The California notice-prejudice rule originated in Campbell v. Allstate Ins. Co., 60 Cal.2d 303 (1963). There, the court held that while "[a]n insurer may assert defenses based upon a breach of the insured of a condition of the policy . . . , the breach cannot be a valid defense unless the insurer was substantially prejudiced thereby." Id. at 305. Campbell was a case involving third party liability insurance. In the ensuing decades, the notice-prejudice rule has become firmly ensconced in California insurance jurisprudence. The rule has prevented insurance forfeiture based on strict application of policy notice requirements – at least in the context of "occurrence" policies (though not necessarily "claims made" policies).
However, until now, it was unclear if the Campbell "substantial prejudice" standard applied to certain other policy "conditions," including requirements that first-party policyholders submit a proof of loss within a specified period of time. The Court of Appeal has answered this question in the affirmative in Henderson. Reasoning that there is nothing in Campbell to exclude proofs of loss from the notice-prejudice rule, and that the purpose of both requirements is essentially the same – to facilitate the insurance company's investigation of the loss – the court held that the same standard should apply to both "conditions" of coverage. The ruling indicates that California courts may well extend the substantial prejudice rule to other contexts.
The Henderson ruling is welcome news to policyholders whose claims are governed by California law, because insurance companies will have even greater difficulty denying valid claims on the basis of non-prejudicial technicalities. Nevertheless, policyholders may rest even easier if they secure a written extension of any filing deadline contained in their first party policies.
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