Opinion ID: 553412
Heading Depth: 2
Heading Rank: 5

Heading: Was Associated Prejudiced by the Breach?

Text: 43 We note at the outset that courts in some jurisdictions presume prejudice in cases of late notice. See, e.g., Tiedtke v. Fidelity & Casualty Co., 222 So.2d 206, 209 (Fla.1969). In California, however, there is no presumption of prejudice. Under California law, the insurer has the burden of proving actual and substantial prejudice, and a mere possibility of prejudice will not suffice. Moe v. Transamerica Title Ins. Co., 21 Cal.App.3d 289, 302, 98 Cal.Rptr. 547, 555 (1971); see Campbell, 60 Cal.2d at 305-07, 384 P.2d at 156-57, 32 Cal.Rptr. at 828-29. 44 Although no categorical definition of prejudice has been found, it is not disputed that California case law place[s] a heavy burden on an insurer seeking to defend on the ground of breach of the notice clause. Colonial Gas Energy Sys. v. Unigard Mut. Ins. Co., 441 F.Supp. 765, 769 (N.D.Cal.1977). Indeed, prejudice is not established merely because the late notice prevented the insurer from contemporaneously investigat[ing] the claim, nor does it arise from the mere denial of the opportunity to make an early settlement of the claim. Northwestern Title Sec. Co. v. Flack, 6 Cal.App.3d 134, 142-43, 85 Cal.Rptr. 693, 697 (1970). Furthermore, it is not sufficient for the insurer simply to display[ ] end results; the probability that such results could or would have been avoided absent the claimed default or error must also be explored. Clemmer, 22 Cal.3d at 883 n. 12, 587 P.2d at 1108, 151 Cal.Rptr. at 295. Thus, under California case law, the only prejudice sufficient to allow an insurer to avoid liability based on late notice is found in those cases where the insurer actually demonstrated that there was a substantial likelihood that it could have either defeated the underlying claim against its insured, or settled the case for a smaller sum than that for which its insured ultimately settled the claim. See Northwestern, 6 Cal.App.3d at 143, 85 Cal.Rptr. at 698; see also Lexington, 815 F.2d at 899. 45 In this case, Associated contends that the evidence of record supports the district court's findings of fact that Associated was prejudiced in three ways. First, by the fact that the late notice deprived it of the opportunity to investigate the Fibreboard cross-claim and participate in the settlement negotiations. Second, because of its inability to establish a reserve earlier and thereby obtain a tax deduction under earlier tax laws. Lastly, by the fact that Associated was unable to assert a claim for its own reinsurance, because its reinsurer, Mission Insurance Company, went bankrupt in 1985. 46 The district court, however, in its Findings of Fact and Conclusions of Law concluded that Associated was prejudiced in the following three ways: (1) by the fact that a commitment was made by [ICP] committing [Associated's] funds to funding [the ICP-Fibreboard] settlement; (2) by the fact that Associated was deprived of any opportunity to take any evasive action of any kind to protect themselves against [the] loss; and (3) because Associated was not given the opportunity, until it was too late ... to join with [ICP] and its representatives in the defense and control of any claim, suit or proceeding involving the certificate of reinsurance. The district court further stated that it's basically prejudicial to be denied ... notice of what is going on.... 47 It seems clear that the district court, in accord with Associated's first contention, improperly presumed prejudice because Associated was deprived of the opportunity to join and control the underlying claim. It also seems clear that, pursuant to Associated's second and third contentions, the district court improperly presumed prejudice because Associated was unable to take evasive action to protect itself against the loss. The court, in specifically addressing Associated's second and third allegations of prejudice, declared that in terms of the evidence presented regarding the Mission Insurance Company, I suppose that could be considered prejudice as well.... The question of whether establishing a reserve would have enabled [Associated] at an earlier time to claim a tax deduction is a prejudice, but ... these things are all very difficult to say after the fact what prejudice there would have been  (emphasis added). Regardless, Associated has cited no case, and we have found none, to support the proposition that such collateral matters may constitute prejudice so as to relieve an insurer from its liability under an insurance contract. 48 It is noteworthy that there is authority that allows an insurer to collect money damages to the extent that they were proximately caused by the late notice. See Security, 531 F.2d at 978. Indeed, it has been stated that such a construction of the contract does not deny the reinsurer the protection it needs, and it does give the reinsured the security and returns for which it paid. Id. It is not necessary, however, for this court to decide this question since, based on the record, there is no factual basis for concluding that Associated suffered the alleged collateral losses, or that, had they been sustained, they would have resulted from the delayed notice. 49 In summary, the district court erred in invoking a presumption of prejudice. The court did not find, nor did Associated allege, the actual and substantial prejudice necessary under California law to relieve Associated of its contractual liability. Furthermore, there is no evidence upon which to conclude, under California law, that Associated was prejudiced by ICP's late notice.