The Notice Prejudice Rule & Voluntary Payments

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The Colorado Supreme Court refused to apply the notice-prejudice rule to a policy provision prohibiting the insured from making voluntary payments on, or settling, a claim without the insurer’s consent. The court reasoned that “the no-voluntary-payments clause of the contract at issue here actually goes to the scope of the policy’s coverage.”

“The policies at issue also contain a voluntary payments clause, which provides that the insured will not incur any expense without prior approval except at his own cost. Indiana law provides that an insurer is not liable when an insured breaches a voluntary payment clause by not obtaining the insurer’s consent prior to incurring the expense.”

On the other hand, the North Carolina Court of Appeals requires a material prejudice requirement to insurance disputes concerning the voluntary payments clause in a liability policy. A school system made a $49,200 claim against the insured roofing contractor for water damage to school property in the building. The insured allegedly agreed with the school system to be responsible for payment of the water damage claim prior to the insurer’s decision on the claim. At some point the insurer denied coverage for the claim. The insured filed a declaratory judgment action to determine whether the claim was covered.

ZALMA OPINION

Conditions are an important part of every insurance contract. Conditions like the Voluntary Payments Condition, the prompt reporting condition, and the proof of loss condition will void coverage in most states. In some states the courts will apply the notice prejudice rule so it is important, before making a decision on a breach of a material condition, it is prudent to seek the advice of a competent insurance coverage lawyer in the state where the loss occurred, before making a decision on the claim and if the loss is in a state that applies the notice prejudice rule, whether there was actual prejudice as a result of the breach.

© 2021 – Barry Zalma

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