Notice-Prejudice Rule Applied to Proof Of Loss Condition

California Court of Appeal Ignores Prior Supreme Court Decision

Courts try to do justice and modify statutes and earlier precedent to provide a remedy to people otherwise not entitled to receive it by ignoring the fact that there is no power in the court to dispense with a condition, or excuse the nonperformance of it. The case discussed below seems to have ignored its obligation to follow Supreme Court precedent and took on itself the power to rewrite a contract of insurance to give plaintiffs the right to sue their insurers even though the insureds failed to fulfill a mandatory condition precedent to indemnity and the right to sue.

The state of California mandates a statutory fire insurance policy requiring, among other things, that an insured submit a sworn statement in proof of loss within 60 days of the loss. Modern policies are permissibly more favorable to the insured by only requiring submission of a sworn proof of loss within 60 days of a demand.

Failure to submit the proof of loss is a breach of a material condition precedent to the benefits of the policy. One hundred twelve years ago the California Supreme Court ruled in White v. Home Mutual Ins. Co., 128 Cal. 131, 60 P. 666 (1900) that, unless waived, failure to file the proof within the time limited by the policy is fatal to an action upon it.

The Supreme Court in White stated:

“The contract is that the action cannot be brought until after a full compliance by the insured with all the forgoing requirements. One of these requirements demanded the insured to furnish proofs of loss within 60 days from the date of the fire. At the time this complaint was filed the insured had not complied with this requirement of the contract and the 60 days had long since gone by.”

The trial court in White allowed the insured recovery because the insurer had presented the proofs necessary within “a reasonable time.” The Supreme Court reversed because the condition was clear and unambiguous and because White clearly breached a material condition precedent. That case has not been reversed or modified.

Regardless, the Court of Appeal, without a mention of White v. Home Mutual, decided that the so-called notice prejudice rule requires the court to ignore the Supreme Court’s clear and unambiguous ruling and require that failure of providing a timely proof of loss sixty days after it is requested must substantially prejudice the insurer before the condition will be enforced in Ocie E. Henderson et al v. Farmers Group, Inc., et al, No. B236259 (Cal.App. Dist.2 10/24/2012)


Ocie E. Henderson, Anthony Wallace, Roscoe and Edna M. Allen, and John and Sharon Billingslea (Plaintiffs) appealed from judgments entered after the court granted motions for summary adjudication in favor of Fire Insurance Exchange (FIE), which disposed of all appellants’ causes of action. Besides FIE, Plaintiffs sued Farmers Group, Inc. (Farmers Group); Farmers Insurance Exchange; Fire Underwriters Association (FUA); Mid-Century Insurance Company; Truck Insurance Exchange; and Truck Underwriters Association alleging that these entities collectively denied or underpaid valid claims for property damage sustained in the 2009 Southern California wildfires (Station Fire). Plaintiffs brought causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing (bad faith), and unfair business practices under the Business and Professions Code.

FIE moved for summary adjudication of breach of contract and bad faith claims by Henderson, Wallace and the Allens on the grounds that their failure to submit sworn proofs of loss, as required under their respective insurance policies, constituted a complete defense to these claims. The court granted the motions on this ground. Because Henderson and the Allens dismissed their claims for unfair business practices, the court entered a judgment. On appeal, they contend that the summary adjudication against them was erroneous because FIE cannot rely on the failure to submit a proof of loss as a defense absent a showing of substantial prejudice.

In August 2009, the Station Fire destroyed 250 square miles of forest and 89 homes in Southern California. Plaintiffs owned homes located near the fire line. While none of their homes was burned by the fire, they claimed their homes sustained damage from smoke, soot, and ash from the fire, requiring remediation.

The policies required Plaintiffs to provide a signed, sworn proof-of-loss notice within 60 days of a request by FIE. The policies, like the policy in White v. Home Mutual, provide that the insured cannot bring an action against FIE unless he or she has fully complied with all policy terms and conditions.


The primary issue in these cases is whether, in order to sustain a defense based upon the failure of Henderson, Wallace, and the Allens to submit a sworn proof of loss, FIE must show substantial prejudice.

Although the notice-prejudice rule in the past was limited to the “notice” condition of the policy the Court of Appeal in this case added to the rule that it also requires the insurer to prove prejudice before enforcing the condition that required the insured to submit a sworn statement in proof of loss within 60 days of request.

Noting that the purpose of the proof of loss requirement is to give the insurer the necessary facts to facilitate its investigation of a claim of loss after it has received notice of the claim and that the proof of loss helps the insurer identify fraudulent claims it still concluded that it is unenforceable if the delay did not prejudice the insurer. In so doing it adopted the reasoning of the trial court in White that was reversed by the Supreme Court.

FIE’s employees testified that they waited for the insured to submit a proof of loss only where FIE’s hygienist recommended cleaning, i.e., when its investigation determined the insured had sustained a specific measure of damage and cleanup costs would be greater than the deductible. The Court of Appeal reasoned that a reasonable trier of fact might infer that the insureds’ failure to provide a sworn proof of loss in such cases was a technical forfeiture that FIE used to avoid paying for cleanup costs when its hygienists recommended that course of action after testing samples from the property. The Court of Appeal, by so doing, ignored the fact that the Legislature, and the California Supreme Court, made it a mandatory condition precedent to receipt of indemnity.

The Court of Appeal concluded that the notice-prejudice rule applies to this case. In order to enforce a defense based upon plaintiffs’ failure to provide a timely proof of loss and that FIE, and all first party insurers, must show that it suffered substantial prejudice as a result of the breach of condition.


The Legislature of the state of California, like the legislatures of almost every other state, enacted a standard fire insurance policy that compels submission of a sworn statement in proof of loss within 60 days of a fire or any extension of time provided by the insurer.

In this case FIE gave extra time to the Plaintiffs and only required a sworn proof of loss within 60 days of its request. The Plaintiffs failed to provide that proof of loss and California Supreme Court precedent, even though hoary with age, should be followed and the breach of the proof of loss condition must be treated as an common condition precedent. Failure to comply deprives the insured of the right to sue.

As the Supreme Court stated in White:

“Time, too, is the essence of the contract in conditions of this kind, and there is now power in the court to dispense with a condition, or excuse the nonperformance of it.”

The Court of Appeal in this case dispensed with a material condition and appears to have exceeded its power and ignored the precedent set by the Supreme Court. It has, without the agreement of the parties and the Legislature rewritten the policy. Hopefully, if the California Supreme Court is asked to review, will support its precedent from 1900.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013”; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at


About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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