Recently, I had a discussion regarding "inception of the loss" versus "discovery of a loss" to real property and how this may affect or trigger an insured’s timely notice to an insurance carrier. The issue was if a landlord rents a property out to a tenant and does not know there is damage to the building but reports the damage to the carrier and mitigates the damage as soon as he is aware of the problem, will the landlord’s delayed notice to the carrier negatively impact the conditions of insurance coverage under the policy?
Every insurance policy imposes certain conditions on coverage. Generally, conditions impose certain duties on the insured in order to obtain coverage. In most cases of property damage coverage, policies require that the insured provide timely notice of the loss. In instances where a loss is not discovered immediately, such as in this landlord-tenant scenario, it’s good to know that coverage is still possible in California. California Courts follow the "notice-prejudice rule."
The “notice-prejudice rule" has been construed and used in many contexts when it comes to conditions of coverage. However, it pertinently states that unless an insurer can demonstrate actual prejudice from late notice, the insured’s failure to provide timely notice will not defeat coverage. Northwestern Tile Secur. Co. v. Flack (1970) 6 CA3d 134, 141-143; Downey Sav. & Loan Ass’n v. Ohio Cas. Ins, Co., (1987) 189 CSA3d 1072, 1088-1089. Therefore, if an insured can show that the insurer is no worse off at the time of giving notice upon the insured’s discovery, the delay may be irrelevant. Arguably, there may be a good chance that policy coverage will apply.
Over time, this "notice-prejudice rule " has been flipped where an insurer may deny coverage on the basis of the insured’s refusal to cooperate if it is substantially prejudiced by the refusal to provide material information. Othman v. Global Indem. Co. (9th Cit. 1985) 759 F2d 1458, 1465.
Although all policies are different, where some are based on claims made and others on when claims are reported, the "notice-prejudice rule" does not extend the time for reporting claims to the insurer under a "claims made and reported" policy. Such policies only cover claims reported to the insurer during the policy period. Timely reporting of the claim is the event that triggers coverage, and this condition is enforceable according to its terms. Pacific Employers Ins. Co. v. Sup. Ct. (1990) 221 CA3d 1348, 1356.
Although the "notice-prejudice rule" protects an insured from a delay which does not prejudice an insurer, in California, when homeowner’s policies which may shorten a statute or requirement to file suit, the "notice-prejudice rule" may not be used to extend contractual limitations on filing suit which are designed to promote justice by preventing stale claims.
What we must take away from the "notice-prejudice rule" is that in California, insureds may have a little leeway for short or inconsequential delays. But where an insured purposefully refuses to cooperate under the conditions of a policy in providing material information, or reports a claim beyond the statue or policy period, that protection will not be granted.