Last Monday, Houston Federal District Court Judge Gray Miller denied an insurer’s motion for summary judgment based on late notice of a first-party theft claim under a business policy.  Texas law requires a carrier relying on late notice of a claim to prove it was prejudiced by the lack of timely notice and Judge Miller’s opinion is an object lesson on the difficulty of proving actual prejudice. 

In Campuzano v. Sentinel Ins. Co., No. CIV.A. H-13-2522, 2015 WL 520901 (S.D. Tex. Feb. 9, 2015), the insured was a small business owner who operated a booth at an antique and flea market.  On November 22, the insured submitted a claim for theft of approximately $60,000 of inventory from his booth which allegedly occurred on October 16.  After the carrier denied the claim on the ground that the policy was canceled in August due to non-payment of premiums, the insured reported a new claim on December 1, claiming that an earlier, previously unreported theft of $49,000 worth of inventory had occurred on July 26—before the policy was canceled.  Although the insured claimed he had promptly reported the July theft to the police, he was never able to produce a police report for the July theft, instead claiming the police report for the second theft listed all missing items from both thefts. The entire chain of events appeared highly suspicious, and might lead an objective observer to wonder if any theft took place at all.  However, Judge Miller took a methodical approach and determined that fact questions existed which precluded summary judgment on the insured’s breach of contract claim.

The carrier moved for summary judgment based on the insured’s violation of the policy’s prompt notice condition, arguing it had been prejudiced by the lack of prompt notice of the July theft because the insured could not differentiate between the inventory items allegedly stolen during the policy period and those allegedly stolen after the policy was canceled.  The carrier argued if it had received timely notice of the July theft, it could have made a site visit to identify the inventory missing versus what was still present, which became impossible due to the insured’s delay.  Judge Miller rejected this argument holding the accounting of missing inventory could be “easily recreated at trial through documents.” 

The carrier also argued the insured had violated his duty to provide documents.  However, the court observed the insured did provide some documents, and the real question was their adequacy to prove the claimed loss.  Judge Miller concluded the insured had complied with this duty “to the extent possible given the record-keeping practices of his business,” and saw this not as a violation of a policy condition, but as an evidentiary question for the jury.  The court  expressed confidence that if the insured could not adequately prove his claim at trial, he would be the one to pay the price, not the carrier.

In a silver lining, Judge Miller granted a no-evidence summary judgment in favor of the carrier on the insured’s extra-contractual claims, which included common-law bad faith and fraud.

[Editor’s Note: Carriers should remember the actual prejudice standard under Texas law does not require that the claim investigation be impossible, but merely requires that it be more difficult as a result of the prejudicial delay by the insured in reporting the claim.  Judge Miller’s treatment of the issues, however, does reinforce the reality that getting a summary judgment on these issues remains very difficult under Texas law and many of these types of claims have to be taken to trial and won for the issues to be finally resolved in favor of the carrier.]

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