Contractual Notice Provisions: What is the Notice Prejudice Rule?

Many San Diego business contracts contain provisions or clauses requiring various types of notice. For example, in a commercial lease — a type of contract — the tenant might be required to give 60 days’ notice to the landlord of the tenant’s decision not to renew the lease at the end of the lease term. As another example, a supply contract might require that one party must give written notice to the other of a claimed breach of contract and a 30-day period of time for the breach to be “cured” or fixed.

In general, notice provisions will be enforced by California courts in the same manner as other contract terms. That is, failure to give the notice required under the contract will be, itself, a breach of the contract.

Interestingly enough, there is an exception to this rule for insurance policies (and it might have a wider application). Insurance policies are a form of contract. Most insurance policies require that, if there is an event that is covered by the policy, then the insured must give notice to the insurance company of the event and/or claim. Generally, the policy will state that the insurance company can deny the claim if no notice is given or if notice is not given within the time frame stated in the policy. However, for insurance policies, California courts do not enforce the notice provisions strictly, but follow what is called the “notice prejudice rule.” Under this rule, an insurance company may not deny an insured’s claim under an occurrence policy based on lack of timely notice or proof of claim unless the insurance company can show that the delayed notice resulted in some sort of prejudice to the insurance company — such as lost evidence, inability to investigate the claim, higher cost of repairs and similar. As the courts have phrased it: “… the insurer must show it lost something that would have changed the handling of the underlying claim.” See Belz v. Clarendon America Ins. Co., 158 Cal.App.4th 615 (Cal. App. 2nd Dist. 2007). This is an old rule in California dating to the early 1960s.

The purpose of the notice prejudice rule is to prevent an insurance company from shielding itself from its contractual obligations through a technical escape-hatch. The gist of an insurance policy is the insurance coverage and, depending on the circumstances, the failure to give timely notice might be a de minis failure or a failure that is not central to the contract.

The notice prejudice rule could have applications in non-insurance contexts. The rule falls under the legal theory that breaches must be material breaches of contract. One could imagine circumstances where a one- or two-day delay in given notice was not material to the contract and, thus, could be considered “excused.”

The California Supreme Court is set to decide whether California’s notice prejudice rule is the “fundamental public policy” of the state per certified questions from the US Ninth Circuit Court of Appeals. See Pitzer College v. Indian Harbor Ins. Co., 845 F.3d 993 (US 9th Cir. January 13, 2017).

Contact San Diego Corporate Law

For more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard was recently named as a “Rising Star” by SuperLawyers.com. Mr. Leonard can be reached at (858) 483-9200 or via email. Mr. Leonard offers legal services for San Diego and California businesses including contract drafting and review.

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