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The Notice Prejudice Rule & Voluntary Payments  

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\\u2019s consent. The  court reasoned that \\u201cthe no-voluntary-payments clause of the contract at  issue here actually goes to the scope of the policy\\u2019s coverage."  

\\u201cThe 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\\u2019s 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\\u2019s 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.  Where the insured has breached the voluntary payments clause of the  policy but the insurer has not demonstrated that the insured\\u2019s actions  prevented the insurer from investigating or litigating a claim, summary  judgment for the insurer must be denied. In reaching its decision the  court said:  

[W]e conclude an insurer must show prejudice where the insured has  breached the voluntary payments clause of the parties\\u2019 insurance  contract. Defendant has not demonstrated that plaintiff\\u2019s actions  prevented defendant from investigating or litigating the claim.  Insurers must, even when they have evidence that establishes that an  insured has breached a material condition of the policy, also collect  evidence that establishes that the breach prejudiced the rights of the  insurer in those states requiring a showing of prejudice.  

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.

 \\xa9 2021 \\u2013 Barry Zalma