Insurance policies usually require an insured to provide notice of a claim to its insurer as set forth in the insurance policy. Some policies simply require an insured give the insurer notice of a loss or claim “as soon as reasonably practicable,” but not every policy includes that specific language. Some insurance policies contain deadlines that are triggered by specific events, statute or regulation. However, every policy-holder and every attorney representing a policy-holder should know that when a deadline applies, the failure to meet it may result in no coverage under some circumstances.
Almost all insurance policies contain conditions that call for the insured to give notice of a loss, claim, suit, or occurrence “as soon as practicable.” Just what is the time limit under that language? It typically depends on the facts involved. But failure to give notice “as soon as practicable” does not necessarily mean that the insured loses coverage. Instead, California courts have long held that a delay in notice may be a defense to coverage by an insurer only if the insurer proves that it was actually and substantially prejudiced by the delay. (See Shell Oil Co. v. Winterthur Swiss Co., 12 Cal. App. 4th 715, 760 (1993) (“California law is settled that a defense based on an insured’s failure to give timely notice requires the insurer to prove that it suffered substantial prejudice.”) In this context, the prejudice must be real; potential prejudice will not suffice. (Shell Oil, 12 Cal. App. 4th at 761.)
However, the “notice-prejudice” rule mentioned above will not necessarily protect insureds under all policies. Some policies− such as errors and omissions and directors and officers liability policies− may be “claims-made-and-reported” policies, which typically require not only that notice be given “as soon as practicable” but also that a claim arise and be reported before the expiration of the policy or some other specified deadline. For these types of policies, courts typically enforce the reporting requirement whether or not the insurer has been prejudiced by late notice. (See Indus. Indem. v. Superior Court, 224 Cal. App. 3d 828, 831 (1990).)
First-party policies (such as those providing property insurance) also typically require that an insured submit a proof of loss. These policies often specify that the proof must be submitted within a specified period from the “inception” of the loss. Thus, to determine when notice must be given, the insured must assess when the loss “incepted.” The California Supreme Court has recognized that this issue “should be determined by reference to reasonable discovery of the loss.” (Prudential-LMI Commercial Ins. v. Superior Court, 51 Cal. 3d 674, 686-687 (1990)( “determining when appreciable damage occurs such that a reasonable insured would be on notice of a potentially insured loss is a factual matter for the trier of fact.”.)
Most first-party insurance policies also contain a contractual limitations period within which notice must be provided. For example, California’s standard fire insurance provision states: “No suit or action on this policy for the recovery of any claim shall be sustainable in any court of law or equity unless all the requirements of this policy shall have been complied with, and unless commenced within 12 months next after inception of the loss.” The California Supreme Court adopted the rule that a contractual limitations period is tolled “from the time an insured gives notice of the damage to his insurer… until coverage is denied.” (Prudential-LMI, 51 Cal. 3d at 693.) In fact, once an insurer denies a claim, the tolling stops, even if the insurer continues to discuss or review the claim after a denial. (See Migliore v. Mid-Century Ins. Co., 97 Cal. App. 4th 592, 604 (2002).) To avoid any dispute, an insured should confirm in writing with the carrier that the limitations period will not be deemed to have commenced running again after notice until the insurer has delivered its final coverage position.
California’s fair claims settlement practices regulations also impose stringent requirements related to notice under certain policies on insurers. If you have a claim that may be subject to coverage under one of your insurance policies, it is best to provide notice as quickly as possible to avoid any waiver.
Our Insurance Department is well equipped to assist with providing notice of claims, a review of insurance policies, or advice concerning any insurance coverage issues.
JoLynn M. Pollard is senior counsel with Hunt Ortmann and head of the Firm’s Insurance practice. If you would like additional information about the subject matter of this bulletin, please contact JoLynn Pollard at jpollard@huntortmann.com.