Texas hail season is in full swing and the courts are giving insureds (and their prospective attorneys) a lot to think about when it comes to turning in those claims. The eagerly awaited decision by the Fifth Circuit in Hamilton Properties v. American Insurance Co. was handed down on April 14, affirming the decision by Northern District of Texas’s Judge Jane Boyle that an insured’s delay of 19 months in turning in its hail claim relieved American Insurance Co. of its coverage obligations under the property policy.[1] But while insurance lawyers on both sides of the docket were waiting with bated breath for that opinion, Judge George Kazen from the Southern District of Texas appeared to go another way in Herrera v. State Farm Lloyds with his opinion issued on March 18, finding that a delay of almost two years did not prejudice an insurer and thus did not relieve the insurer of its coverage obligations. Upon further inspection, however, Herrera is right in line with Hamilton and the other recent cases and stands as a message for insureds that late notice stands to be a significant hurdle to obtaining coverage under a property policy.
The Early Days of Late Notice
A common provision in property insurance policies is one whereby an insured is required to provide “prompt” notice of any claim. Texas courts have long held that such a requirement is a condition precedent to coverage, the breach of which voids coverage under the policy. However, the insured’s breach of the prompt notice provision alone is not enough to void coverage; instead the insurer must show it has been prejudiced by that breach. The requirement of “prejudice” was historically so high that late notice was rarely a viable defense to coverage under a property insurance policy — even when the notice was six years late![2]
However, in 2014, Judge Boyle of the United States District Court for the Northern District of Texas took a closer look at what this “prejudice” requirement really meant in Hamilton Properties v. American Insurance Co. Hamilton Properties involved the all-too typical hail claim scenario: more than a year and a half after the alleged date of loss, the insured filed a claim with its property insurer. The property insurer conducted its investigation and determined that multiple hail storms had hit the property between the claimed date of loss and the date the loss was reported, several of which fall outside the period of time the insurer provided coverage for the property. American Insurance denied the claim, citing the insured’s violation of the prompt notice provision and arguing that because of the late notice, it could not determine if the claimed damage occurred during its policy period. Hamilton Properties filed suit.
In a well-reasoned opinion, Judge Boyle made several significant rulings: 1) an insured has the burden of segregating property damage caused by a covered peril (such as a hail storm during the policy period) from property damage caused by an uncovered peril (such as excluded wear and tear or hail damage occurring outside the policy period); 2) a delay of 19-months is unreasonable and not prompt as a matter of law; and 3) the insured’s failure to provide notice compromised the reliability and availability of evidence necessary for the insurer to investigate the claim. Following Judge Boyle’s example, a number of other courts interpreting Texas law found for the insurer in hail cases on the basis of late notice.
In the background of this trend, however, has been the knowledge that the Fifth Circuit was reviewing Judge Boyle’s opinion. While “Hamilton Properties” became the battle cry for insurance companies frustrated with being presented with claims two and three years late, “but it’s on appeal!” was the response from plaintiffs lawyers.
The Latest on Late Notice
Based on the Fifth Circuit’s April 14 opinion, Hamilton Properties will remain good law, forcing insureds to meet their burden of segregating covered from uncovered damage and recognizing failure to provide prompt notice as a potentially significant breach of a policy condition which could result in forfeiture of coverage.
Specifically, the Fifth Circuit found that the evidence established that due to the delay, the insurer lost access to critical evidence before and after the claimed date of loss. Moreover, the court cited with approval the district court’s statement that there was no indication that the plaintiff’s attempt to mitigate the damage or document the changes further limited the insurer’s ability to determine whether and to what extent the claimed date of loss was the cause of the property damage.
Perhaps even more importantly, the Fifth Circuit held that even assuming that the insurer was not prejudiced by Hamilton’s late notice, the district court’s opinion should be affirmed because Hamilton failed to segregate covered damage from uncovered damage. The court explicitly held: “Hamilton’s failure to provide evidence upon which a jury or court could segregate covered damages from uncovered damages is fatal to its claim.”
Herrera v. State Farm Lloyds: Yes, Prejudice is Required
Just a month before the Fifth Circuit affirmed Hamilton Properties, Judge Kazen of the Southern District of Texas issued his opinion in Herrera v. State Farm Lloyd’s.[3] Plaintiffs lawyers throughout Texas rejoiced: finally an opinion finding that a significant delay (almost two years) did not reliever an insurer of its coverage obligations! Those same lawyers (wrongly) predicted the tide was turning and the Fifth Circuit would soon reverse Judge Boyle’s decision in Hamilton.
However, when the opinion is actually read, Herrera is right in line with Hamilton and the other cases discussing late notice. In Herrera, the insured filed a claim for hail damage almost two years after the alleged date of loss. State Farm sent its representative to the property and conducted an inspection. The representative identified some minor damage, including light hail damage to the ridge cap and two aluminum furnace caps, one hail damaged shingle and four wind damaged shingles on the test square of the left slope and one wind damaged shingle on the test square of the right slope. State Farm developed an estimate for repairs in the amount of $499.58. Because this amount was less than the policy’s deductible, State Farm sent a letter denying that any amount was due under State Farm’s policy.
Judge Kazen held that on these facts, State Farm had not established it was prejudiced by the delay. And this should not be a surprise. State Farm was able to complete its investigation, determine the specific damage caused by hail as opposed to wear and tear or other uncovered perils (a discussion State Farm had with the insured’s representative two days after the inspection) and calculate the cost for repairs. Neither Judge Kazen’s opinion nor State Farm’s motion for summary judgment suggests there was a question regarding the date of loss, which was made difficult to determine by the insured’s delay in submitting the claim. In fact, there were no facts alleged to suggest that State Farm was prejudiced by the delay in its investigation. The facts suggest otherwise — State Farm completed its investigation as it normally would and denied, not on late notice, but on the fact the claimed amount of damage was under the deductible. On these facts, Judge Kazen held there was no evidence of prejudice.
Herrera is not an outlier — it is consistent with the Hamilton line of cases: an insured forfeits coverage when it provides late notice and that late notice prejudices the insurer’s investigation. If the insurer admits that it was able to adequately complete its investigation and determine the extent of covered damage without any contention of prejudice resulting from the delay, then there is no “late notice” defense.
Conclusion
Hamilton Properties is here to stay: when an insured fails to provide prompt notice of its loss, there is a strong possibility the insurer’s ability to investigate and determine coverage will be prejudiced such that the insured forfeits coverage. Herrera reminds us that courts will not assume late notice automatically equals prejudice when the facts suggest otherwise. However, when late notice impacts the insurer’s ability to adequately complete its investigation, determine when the claimed damage occurred or identify the cause of the claimed damage, courts will find the insurer has been prejudiced.
Finally, let us not forget the other important holding in Hamilton: even if the insurer is not prejudiced, the burden of segregating covered damage from uncovered damage rests squarely with the insured. It’s interesting that the recent case law has dealt exclusively with how late notice prejudices an insurer’s ability to investigate — however, in light of the Fifth Circuit’s ruling, insureds should consider how late notice prejudices their own ability to meet their burden with regard to segregating covered and uncovered damage.
No one wins when an insured waits years after a loss to make a claim — no one but the third parties who insert themselves in the claim process, but that’s another topic.
[1] No. 15-10382 (5th Cir. April 14, 2016).
[2] See, e.g. Ridglea Estate Condominium Association v. Lexington Ins. Co., 415 F.3d 474 (5th Cir. 2005).
[3] No. 5:15-cv-148, 2016 WL 1076911 (S.D. Tex. March 18, 2016).
