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Better Late Than Never – Late Notice May Not Be Detrimental To Coverage Under An Occurrence Policy

On Behalf of | Feb 14, 2019 | Auto Dealership Law, Business Litigation, Business Transactions, Construction Litigation, Contract Disputes, Employment Litigation, Labor And Employment Law, Real Estate Law, Regulatory Compliance |

As anyone who has ever tried to read through an insurance policy can attest, there are pages upon pages of terms, conditions, exclusions, limitations, definitions, and … notice requirements. Most notice requirements in policies mandate that notice of a claim be provided in a prompt or timely manner. While the failure to strictly adhere to the policy’s notice requirements can result in a forfeiture of coverage, late notice may not always be detrimental. In Marty Lat v. Farmers New World Life Insurance Company (10/16/18 Court of Appeal 2nd Dist.), the Court of Appeal held that an insurance company may not deny an insured’s claim under an occurrence policy based on lack of timely notice or proof of claim unless the insurer can show actual prejudice from the delay.

The facts of Marty Lat are relatively straight forward. Maria Carada purchased an “occurrence” life insurance policy from Farmers New World Life Insurance Company (“Farmers”) and named her sons – Marty and Mikel Lat (“Lat”) – as beneficiaries. The policy established an “accumulation account” to which Carada’s premium payments and interest were added and from which the monthly costs of insurance and other amounts were deducted. If the accumulation account was reduced below the amount needed to cover the next month’s deductions, a 61-day grace period began within which Carada could pay the premium needed to cover the deduction. If the grace period expired before Farmers received the necessary premium payment, the policy terminated and could not be reinstated. Importantly, the policy also included a rider under which Farmers agreed to waive the cost of insurance while Carada was totally disabled if Carada provided Farmers with notice and proof of her disability.

In August 2012, Carada was diagnosed with cancer and became totally disabled. She did not, however, notify Farmers. On May 20, 2013, Farmers sent a letter to Carada advising her that the premium payments were insufficient to pay for the coverage under the policy and gave her until July 20, 2013 to make payment or the policy would lapse. On July 23, 2013 Farmers sent Carada a letter stating that the policy’s grace period had expired and coverage was no longer in force. Carada died on September 23, 2013 and Lat submitted a claim which was denied by Farmers. Subsequently, a suit was filed. Farmers moved for summary judgment which was granted. The trial court held that the 61- day grace period had expired and the premium had not been paid. Consequently, the policy lapsed. An appeal was filed and the Court of Appeal reversed.

On appeal Lat argued that their mother was totally disabled within the meaning of the policy’s rider. Consequently, the cost of the insurance under rider was waived while Carada was disabled and the policy should never have lapsed. Farmers, on the other hand, argued that it was never provided with proper notice of disability as required under the policy. According to Farmers, it properly reduced the accumulation account, notified Carada of the shortfall in premium, and correctly declared that the policy had lapsed.

The Court of Appeal noted the distinction between “occurrence” policies, “claims made” policies, and “claims made and reported” policies. The Court held that although Carada had not given Farmers notice of her disability, the requirement was excused by California’s notice prejudice rule. Under the notice prejudice rule, an insurance company may not deny an insured’s claim under an “occurrence” policy based on lack of timely notice or proof of claim unless it (the insurer) can show actual prejudice from the delay. The rule is based on the rationale that the primary and essential part of the contract is insurance coverage, not the procedure for determining liability. The notice requirement serves to protect insurers from prejudice … not to shield them from their contractional obligations through a technical escape hatch. Moreover, the burden of establishing prejudice is on the insurance company and prejudice is not presumed by delay alone. To establish prejudice, the insurer must show it lost something that would have changed the handling of the underlying claim.

According to the Court, under the Rider, there could be no deduction from Carada’s accumulation account while she was disabled and there was no dispute that Carada was totally disabled and was entitled to the deduction waiver had she provided notice. The notice prejudice rule prevented Farmers from denying the benefit of the deduction waiver unless Farmers suffered actual prejudice from the delayed notice. Farmers made no such showing. In fact, the only reason why Farmers terminated the policy was that it applied the deductions it had promised Carada it would waive. While Farmers had an excuse for its conduct, once it learned of Carada’s disability and her entitlement to the deduction waiver, Farmer’s continued refusal to honor its contractual obligations prevented judgment in its favor.

Learning Point: While it is always prudent to provide timely notice of a claim to your insurer, the failure to do so may not be fatal. The facts surrounding the claim and the type of policy matter. In many instances, California’s notice prejudice rule applies to place the burden on the insurer to demonstrate that the late notice caused it prejudice. If an insurer cannot make a showing of prejudice, then the late notice may not preclude coverage.

Please contact Keith Butler at [email protected] if you have questions about any issue discussed in this article, or any other related matter.



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