Every insurance policy outlines certain duties a policyholder is required to perform following a loss. However, the prompt notice provision appears to be increasingly gaining traction by opportunistic insurance companies and their defense attorneys who seek to use this as a technicality to avoid liability for an otherwise covered loss.
The prompt notice provision typically reads as follows:
Duties In The Event Of Loss Or Damage
You must see that the following are done in the event of loss of or damage to Covered Property:
b. Give us prompt notice of the physical loss or physical damage. Include a description of the property involved.
The purpose of this clause is to allow insurers to investigate potential claims while memories are fresh and physical evidence is available. Whether notice is “prompt” will depend on the specific facts and circumstances surrounding notification to an insurer after an insured learns of the loss. Where notice is determined late or not “prompt,” New Mexico requires an insurance company to demonstrate that it has been substantially prejudiced as a result of the late notice to avoid liability under the Duties in the Event of Loss or Damage provision of the policy.1 The rationale is that failing to require an insurer to show substantial prejudice by an insured’s breach would frustrate the insured’s reasonable expectation that coverage will not be denied arbitrarily.2
Whether an insurer was substantially prejudiced by the untimely reporting of a claim is going to be fact and claim specific. An insured should be prepared to provide any and all information available which would necessarily assist the insurer in fully investigating the claim regardless of the untimely notice. Doing so will decrease the likelihood that an insurer attempts to avoid payment for a covered loss under the policy through an unsubstantiated technicality.
While New Mexico’s substantial prejudice rule provides crucial protection to policyholders, it is important to understand the distinction between late reporting of a claim and the time-to-sue or legal action against us provision within a New Mexico insurance policy. While an insurance company must demonstrate substantial prejudice to avoid coverage for late notice, time-to-sue provisions are strictly enforced in New Mexico.3
1 Foundation Reserve Ins. Co. v. Esquibel, 607 P.2d 1150, 1152 (N.M. 1980).
2 Roberts Oil Co. v. Transamerica Ins. Co., 833 P.2d 222, 228–29 (N.M. 1992).
3 See my previous post, New Mexico Allows an Insurance Policy to Reduce the Statutory Period to File a Lawsuit.