All policies contain a provision which tells the policyholder how to inform the insurance company about a loss. The provisions are called “notice of loss” clauses. They are considered a condition precedent to payment under the policy. A condition precedent is an act that must occur before indemnity will arise under the insurance contract. In other words, the policyholder must follow the notice of loss requirements before he will get paid.
Courts, however, are not so firm on holding policyholders accountable for this clause. Even though a policy will state that notice must be given within a certain time frame, or in a timely manner, or promptly – each company has its own standard as to when it wants to find out about a loss – a policyholder’s failure to follow this rule will not always bar coverage.
Modern courts are reluctant to punish policyholders and allow insurance companies to avoid payment due to a loophole. However insurance companies have good reason for adding this clause to their policies. It is important to timely know about a loss, how it occurred and who may be affected. The insurer needs to begin gathering information for its investigation into whether such a loss is covered.
To balance both the needs of the insurance company to gather timely information, along with the potential for harsh results to a policyholder if it fails to follow this one condition, courts have adopted the “prejudice rule.” This rule states that in order for an insurance company to avoid payment due to late notice, it now needs to show that it was unduly prejudiced by the delay. Insurance companies must present concrete proof that witnesses are gone, evidence has dissipated, or the insurer cannot reasonable ascertain liability.
The case of Mutual Boiler Re v. Nebraska Beef, 8 09CV159, U.S. Dist. Ct. Nebraska (9/27/10) presents a good example. A copy of the order is attached: Mutual Boiler Re v. Nebraska Beef Order The court affirmed its own summary judgment on the notice issue, finding that the insurance company was not prejudiced by the late notice.