The California Court of Appeal has ruled that where an insured reports a claim, withdraws it and then resubmits it years later, the insured is not entitled to further pursue the claim, since the insurer was able to demonstrate the delay had caused substantial prejudice. (1231 Euclid Homeowners Association v. State Farm Fire & Casualty Company (2006) 37 Cal.Rptr.3d 795)
Facts
The 1231 Euclid Homeowners Association (“HOA”) managed a condominium complex, which State Farm insured. Immediately after an earthquake, city building officials inspected the complex and determined it had not sustained any structural damage. In addition, a structural engineer retained by the HOA inspected the complex and found that it had not sustained any structural damage.
The HOA promptly notified State Farm that the complex had sustained damage resulting from earthquake. State Farm’s policy provided coverage subject to a substantial deductible.
Shortly after notifying State Farm of the damage, the HOA obtained five repair bids, none of which exceeded $13,000. State Farm’s adjuster inspected the complex, and determined that the cost to repair the damage would be about $10,000. All of these initial estimates were far less than the policy’s deductible.
Less than three weeks after notifying State Farm of the damage, the HOA’s president notified State Farm that the HOA had decided to withdraw the claim. Subsequently, State Farm wrote a letter to the president to confirm this decision. The HOA proceeded to make various repairs to the complex, although the amount the HOA spent was still far less than the policy’s deductible.
About eight years later, the HOA filed suit against State Farm. In the suit, the HOA contended that the cost to repair the earthquake damage to the complex was at least $750,000, well in excess of the policy’s deductible.
Holding
Because of a special “reviver” statute enacted regarding certain earthquake claims, the policy’s contractual limitation period did not bar the suit. Nonetheless, the Court of Appeal ruled that by first making a claim and then withdrawing it, the HOA had effectively failed to satisfy the policy’s “notice of loss” and “proof of loss” requirements.
The Court of Appeal further noted that, by making repairs and then waiting about eight years to re-contact State Farm, the HOA “effectively denied to State Farm any opportunity to fully investigate the loss.” The Court held that the HOA’s failure to provide a timely notice of claim and proof of loss violated the conditions of the policy, prejudiced State Farm’s rights and compelled summary judgment in State Farm’s favor.
Comment
This case demonstrates that, even where a limitation period (whether contractual or statutory) does not bar a claim, a carrier is not obligated to pay the claim if the carrier can establish the insured’s delayed pursuit of the claim has caused the insurer to suffer substantial prejudice. Generally, the insurer will bear the burden of establishing such prejudice.