Key Decisions

November 2012- An Insurer Must Show Prejudice

(filed under: Key Decisions Archive | November 20, 2012)

An Insurer Must Show Prejudice Resulting From An Insured’s Failure To Submit A Timely Proof Of Loss or Promptly Report A Loss If It Wishes To Deny Coverage For That Failure

Henderson v. Farmers Group, Inc.
(Cal. Ct. of App., 2d Dist.), filed October 24, 2012


Ocie E. Henderson, Anthony Wallace, Roscoe and Edna M. Allen, and John and Sharon Billingslea made claims to their homeowners’ insurance carrier, Fire Insurance Exchange (“FIE”) for smoke damage allegedly arising from a wildfire.  FIE sent experts to inspect the various policyholders’ homes to determine if there was smoke damage.  The experts determined that there was less than a threshold amount of smoke particles in some homes and more than the threshold in others.

FIE denied all of the claims.  Its reasons variously included that there was insufficient smoke particles present to constitute a loss, that the policyholders had not submitted timely proofs of loss, and that the policyholders had not timely reported their claims.

The policyholders sued FIE for breach of contract, breach of the implied covenant of good faith and fair dealing, and unfair business practices under Business and Professions Code section 17200, et seq.  Besides FIE, they sued Farmers Group, Inc. (Farmers Group); Farmers Insurance Exchange; Fire Underwriters Association (FUA); Mid-Century Insurance Company; Truck Insurance Exchange; and Truck Underwriters Association.  They alleged that these entities collectively denied or underpaid valid claims for property damage sustained in the fire.

FIE moved for summary adjudication based on the fact that Henderson, Wallace and the Allens failed to submit proofs of loss within the time frame set in their policies and therefore had not satisfied conditions precedent to payment.  FIE moved for summary adjudication based on the fact that the Billingsleas failed to promptly report the claimed loss and therefore had not satisfied conditions precedent to payment.  FIE also asserted that under the holding in Moradi-Shalal v. Fireman’s Fund Ins. Co., 46 Cal.3d 287 (1988), it could not be liable for unfair business practices.  The other defendants moved for summary judgment based on the fact that they were not contracting parties and therefore could not be liable.

The trial court granted the motions.


The Court of Appeal reversed in part and affirmed in part.

It held that for an insurer to prevail on a defense based on the policyholder’s failure to submit a proof of loss, it must establish prejudice as a result of that failure and that in its motions FIE failed to do so.  The court explained that proofs of loss are intended to assist the insurer in its investigation and to help it ferret out fraudulent claims.  It reasoned that in terms of accomplishing this, there is no difference between a proof of loss that is submitted a day early and one submitted a day late.  It also reasoned that in the context of the particular claims, timely proofs of loss would add nothing to the insurer’s investigation.

The court held that FIE had established prejudice based on the Billingsleas’ late reporting, and it had waived its right to deny the Billingsleas’ claim based on late reporting because it did not object to the Billingsleas’ delayed notice until the lawsuit.

The court held that even though there is no private right of action for violation of the Unfair Claims Practices Act embodied in Insurance Code section 790.03, acts constituting a breach of contract could support a cause of action under the Business and Professions Code.

The court rejected FIE’s contention that it was entitled to an adjudication, that it was not liable for bad faith because it relied on an interpretation of the proof of loss condition that is subject to dispute. The court reasoned that any evidence that FIE relied on judicial authority in denying coverage was undercut by evidence that FIE’s practice was to only require proofs of loss on valid claims. The court said that a jury could conclude that FIE acted unreasonably and used the failure to provide timely notice or proof of loss, not because it believed these were required under California law, but as a shield to deny meritorious claims.

The court affirmed as to the remaining defendants.  It found that there was uncontroverted evidence that negated a basis for holding them liable.


Although the policyholders won this battle, that does not mean they will win the case.  Nothing precludes FIE from establishing prejudice due to late or absent proofs of loss.  Nor does anything preclude FIE from establishing that the presence of minute numbers of smoke particles does not amount to a loss or a loss in excess of the applicable policy deductibles.

The court provided a road map for insurers that are part of a group of related companies to extricate those related companies when they are sued.