Insurance Law Client Alert: Appeals Court Extends Notice-Prejudice Rule to First-Party Sworn Statements in Proof of Loss

In Henderson v. Farmers Group (No. B236259, filed 10/24/12), a multi-plaintiff breach of contract and bad faith case against Fire Insurance Exchange (“FIE”) and other Farmers Group entities arising out of the August 2009 Southern California wildfires, the appeals court reversed summary judgments entered in favor of the insurer as against numerous policyholders, ruling that: (1) an insurer is required to show prejudice in order to rely on the insured’s failure to file a sworn proof of loss; (2) the insurer had waived the defense of late notice of loss by failing to specifically raise it; and (3) an unfair business practices claim is not barred by the decision in Moradi-Shalal v. Fireman’s Fund (1988) 46 Cal.3d 287 (“Moradi-Shalal“).

In Henderson, the FIE homeowners policy required prompt notice of claims. The policy conditioned coverage on the insured supplying a signed, sworn proof of loss statement within 60 days of a request by FIE. The policy also had a no-action clause prohibiting action against FIE unless all conditions had been satisfied.

FIE sent one policyholder a written request for submission of the proof of loss, enclosing copies of the required form. FIE then followed up with two subsequent reminders. Sixty-one (61) days after the first notice, FIE denied the claim for failure to comply.

For several other policyholders, FIE sent the request for a sworn statement in proof of loss, but then notified the policyholders that it needed further time to await the results of contamination tests. FIE repeated its request for the proof of loss, but then denied the claims on the ground that there was no evidence of contamination rising to a level requiring remediation. In denying the claims, FIE purported to generally reserve all rights.

One other policyholder waited until nearly a year after the fires to make a claim. FIE also requested a proof of loss form, but then denied the claim on the ground that there was no evidence of contamination requiring remediation. Again, FIE generally reserved all rights.

The trial court granted summary judgment for FIE, finding that the failure to submit the proof of loss forms within 60 days barred coverage; that one insured’s late note of a claim had prejudiced FIE and also barred coverage; and that the insureds’ unfair business practices claims were barred by Moradi-Shalal.

The appeals court reversed. Citing Campbell v. Allstate Ins. Co. (1963) 60 Cal.2d 303, the Henderson court said certain breaches of policy conditions require a showing of substantial prejudice. Although the Campbell court had only identified policy notice and cooperation clauses as examples of policy conditions that require the insurer to show prejudice, the Henderson court stated that: “While the [Campbell] court did not expressly name proof of loss conditions, there is nothing in the language or reasoning of the opinion that excludes them.”

For support, the Henderson court relied on Hanover Insurance Co. v. Carroll (1966) 241 Cal.App.2d 558, which had applied the notice-prejudice rule to uninsured motorist claims. The Henderson court reasoned that the purpose of the proof of loss condition is to facilitate the insurer’s investigation and identify fraudulent claims, but that there is no reason to think that such an investigation would be any more productive based on the difference of a few days. The court also found support in other cases, as well as a difference in opinions whether the notice-prejudice rule was strictly limited to the notice and cooperation clauses.

As to the late notice of claim by one policyholder, the appeals court cited Insurance Code section 554, which states that delay in notice or proof of loss is waived in the event of a failure to promptly and specifically object. The Henderson court ruled that although FIE had presented evidence of prejudice, in that the insured had remodeled the home in the interim, precluding a full inspection of the alleged damage, a general reservation of rights was insufficient, and FIE’s failure to promptly and specifically object had forfeited the defense.

As to the unfair practices claims under Business and Professions Code section 17200, the Henderson court acknowledged the overlap between the Unfair Claims Law in Business and Professions Code section 17200 (“UCL”) and the Unfair Insurance Practices Act found at Insurance Code section 790.03 (“UIPA”). The Henderson court also noted that under Moradi-Shalal, enforcement of the UIPA rests solely with the Insurance Commissioner. But the Henderson court said that there is a split of authority on whether a breach of contract or bad faith cause of action may serve as a predicate for a UCL claim where the allegations supporting the claim also would constitute a violation of the UIPA. (Citing State Farm Fire & Casualty Co. v. Superior Court (1996) 45 Cal.App.4th 1093 [permitting bad faith to support a UCL claim]; and Textron Financial Corp. v. National Union Fire Ins. Co. (2004) 118 Cal.App.4th 1061 [finding UCL claims barred by Moradi-Shalal].)

The Henderson court came down in favor of allowing UCL claims in bad faith cases, stating: “We follow State Farm. . . . we conclude that Moradi-Shalal does not bar a UCL cause of action based on an insurer‘s bad faith, even though the conduct in question may also constitute a violation of the UIPA. Since ‘courts retain jurisdiction to impose civil damages or other remedies against insurers in appropriate common law actions,’ including those based on breach of the implied covenant of good faith and fair dealing [], a UCL claim based on those actions is not an end-run around Moradi-Shalal.”

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October 25, 2012