Chapter 8 The Need for a Prompt Notice of Claim

• Library: The Commercial Property Insurance Policy Deskbook (ABA) (2018 Ed.)

CHAPTER 8 The Need for a Prompt Notice of Claim

Every commercial property insurance policy requires the insured to report losses promptly upon their occurrence. They do so in multiple ways, but all exist to give the insurer notice sufficient to allow it to conduct a thorough investigation and resolve the claim promptly. There has been much litigation concerning the notice provisions that must be understood by an insured before presenting a claim to the insurer.

For example, the basic commercial property ISO form provides that the insured must "Give us prompt notice of the loss or damage. Include a description of the property involved."¹

The question posed to the insurer is what is "prompt notice?"

The Notice-Prejudice Rule

The notice of loss provision just quoted is a condition precedent that, if not fulfilled, defeats any claim presented under the policy. However, the usually uncomplicated phrase "late notice" has become a target of courts that change clear and unambiguous language in a condition to a situation of confusion and doubt.

The timely notice of claims is generally an express requirement of an insurance policy and fundamental to the efficient and predictable administration of claims. The modern trend by U.S. courts and legislatures has been to diminish "late notice" as a defense to coverage and limit its effect to provable prejudice incurred by the insurer in the event of a less than prompt notice.

Specifically, numerous U.S. jurisdictions have moved away from strict enforcement of the requirement of timely notice—that is, failure to notify timely constitutes a forfeiture of coverage—to one that requires a showing of harm to the insurer before coverage is lost. Called the "notice-prejudice" rule, the basic premise is that unless the insurer has been prejudiced by an insured's late notice, coverage will not be forfeited. Recent litigation and legislation from around the country has taken the teeth out of the defense and makes its viability uncertain.

For decades, New York law applied the "late notice" defense in a Draconian fashion. Where an insurance policy required the insured to notify the insurer of an occurrence "as soon as practicable," the absence of timely notice constituted a failure to comply with a condition precedent, which, as a matter of law, vitiated the contract. The burden was placed on the insured to show that the delay was not unreasonable— meaning that there was a reasonable excuse for the delay—and delays of less than ten months and even as short as 29 days were routinely found to be unreasonable as a matter of law.

In Jones v. Bituminous Casualty Corp., the court concluded that statu-torily mandated insurance policies raise the possibility of creating a windfall for the insurer. Because modern insurance policies are contracts of adhesion governed by the doctrine of reasonable expectations, the court worked to rule in favor of the insured. The court, therefore, concluded that it should weigh its analysis in favor of extending the "notice-prejudice" rule to excess liability insurance.²

The decisions and legislation illustrate the uncertainty and disorder of U.S. law regarding the viability of a late notice defense to coverage. Insureds must be careful to comply fully with all policy conditions or they may be found to have waived their rights to insurance coverage. Likewise, insurers and insureds must be aware of the law in each of the jurisdictions in which they issue or purchase policies to ensure a denial of coverage based upon an insured's noncompliance with a notice provision remains supported by the ever-changing controlling law.

The California Supreme Court has also made it clear that to prevail on a defense based on the cooperation clause—that provision of the policy that requires the insured to cooperate with the investigation of the insurer, to report losses promptly, and to appear for and testify at trial in the defense of the insured—the insurer has the burden of showing that it has been prejudiced by the failure to cooperate.³ That is, the insurer "must establish at the very least that if...