Even though an insured waited nine months to report a wildfire claim for smoke, soot and ash contamination, the insurer waived the defense by failing to promptly object and by proceeding to investigate the claim. In addition, even though other insureds failed to submit sworn proof of loss forms, the insurer still needed to show that the failure caused substantial prejudice. ( Henderson v. Farmers Group, Inc. (2012) 210 Cal.App.4th 459)
Facts
Multiple policyholders claimed that a wildfire caused smoke, soot and ash contamination to their real property and personal property. All of the policyholders had purchased coverage from Fire Insurance Exchange (FIE).
Some of the policies required that the policyholders provide “immediate notice,” and the other policies required notice “without unreasonable delay.” All of the policies also required that the insureds provide a signed, sworn proof of loss statement within 60 days of a request by FIE.
One of the insureds did not report the damage until approximately nine months after the fire. FIE did not object to the late notice, and proceeded to investigate the claim with the assistance of an industrial hygienist. During its investigation, FIE determined that, in the nine-month period that elapsed between the date of the fire and the report to FIE, the insureds had remodeled the house.
FIE eventually denied coverage for the claim because the industrial hygienist determined that the property had insignificant contamination and did not require any remediation. The insured sued FIE, but the trial court ruled that the insured’s nine-month delay in reporting the damage had caused substantial prejudice to FIE. Thus, the court entered summary judgment in favor of FIE.
With regard to the other insureds, FIE provided them with blank proof of loss forms, and notified them that the forms were due within 60 days. During this 60-day period, FIE investigated the claims with the assistance of various industrial hygienists. As to some of the claims, the industrial hygienist determined that the property had insignificant contamination and did not require any remediation. As to other claims, the industrial hygienist determined that the property required at least some remediation.
When the insureds failed to submit completed proof of loss forms within 60 days, FIE denied their claims. The insureds sued FIE and, during discovery, an FIE employee admitted that FIE had relied on the industrial hygienists’ reports when FIE denied coverage for the claims. Nonetheless, the trial court ruled that the insureds’ failure to submit the proof of loss forms within 60 days barred their suit, and the court entered summary judgment in favor of FIE.
Holding
As to the insured that waited nine months to report the loss, the Court of Appeal noted that Insurance Code section 550 provides, in part, as follows: “In case of loss upon an insurance against fire, an insurer is exonerated if notice thereof is not given to him without unnecessary delay….” The Court held that even though FIE had sustained substantial prejudice because of the delay, FIE had waived the defense. In reaching this conclusion, the Court relied upon Insurance Code section 554, which provides, in part, that “[d]elay in the presentation … of notice … of loss is waived, if [the insurer] omits to make objection promptly and specifically upon that ground.”
As to the insureds who failed to submit proof of loss forms within 60 days, the Court of Appeal ruled that the failure to submit the proof of loss forms had not caused substantial prejudice to FIE. This was supported by the fact that FIE admitted that it had based its determination of damage (or lack thereof) on the findings of the industrial hygienists that FIE had retained.
Comment
Ironically, the Court ruled that even though FIE had established that the one insured’s nine-month delay in giving notice of loss had caused substantial prejudice, FIE had waived the defense by failing to object “promptly and specifically.” FIE perhaps could have protected itself by raising the objection as soon as the insured reported the claim, and by then investigating the claim under a reservation of rights.
Note that the parties and the Court assumed, without discussion, that smoke, soot and ash damage is tantamount to fire damage. Based on this assumption, the parties and the Court assumed the claims were subject to Insurance Code section 2071, which sets forth California’s standard form fire insurance policy.
Although there are several reported third-party liability cases that require an insurer to establish substantial prejudice when an insured gives late notice of a claim, this is the first reported first-party fire insurance case that requires an insurer to establish substantial prejudice when an insured gives late notice of a claim. Because the proof of loss requirement is specifically allowed by Insurance Code section 2071, FIE presumably will seek review by the California Supreme Court.