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by Christopher J. Edwards

In PAJ, Inc. v. Hanover Ins. Co., the Texas Supreme Court set forth the “notice-prejudice rule,” which states that unless an insurer was prejudiced by an insured’s delay in giving timely notice of its claim or suit, an insurer cannot deny coverage solely based on untimely notice.[1]  Whether this rule applies to other insurance policy provisions is less certain, as Texas courts and federal courts applying Texas law grapple with its scope.[2] The Tyler Court of Appeals recently tackled its application in Cade v. State Farm Lloyds, where the court was presented with a dispute regarding whether the insurer was prejudiced by any failure to comply with conditions precedent in the policy.

In this case, State Farm Lloyds (“State Farm”) issued a residential policy to Kenneth and Barbara Cade (the “Insureds”) covering the Insureds’ dwelling and the contents within the property. During the applicable policy period, a windstorm blew a large tree onto a portion of the dwelling. The Insureds submitted a claim to State Farm for damage to the house, and State Farm performed several inspections of the property.[3] State Farm issued payment for repairs to the affected portion of the real property. Approximately eighteen months after the windstorm, the Insureds asserted that several items of their personal property inside the house were damaged or destroyed. Moreover, they asserted that the house was a total loss, and the initial payment was inadequate. Subsequently, the Insureds filed suit against State Farm, asserting claims for breach of contract and violations of the Texas Insurance Code and Deceptive Trade Practices Act. In response, State Farm filed two motions for summary judgment, one for the personal property claim and one for the real property claim. In the motions, State Farm asserted that (1) the Insureds failed to comply with certain policy conditions, (2) the house contained no personal property of value, and (3) that any further damage to the house was not caused by the windstorm. In response, the Insureds argued that State Farm failed to prove it was prejudiced by any failure to comply with conditions precedent.[4] The trial court granted both motions without specifying its basis for the ruling.

In reviewing the trial court’s decision, the appellate court evaluated State Farm’s adjuster and engineer reports, which indicated that (1) the house had been abandoned for years; (2) the house had pre-existing damage caused by wear and tear, lack of maintenance, and long-term deterioration; and (3) the tree impacted only a portion of the house while unaffected areas of the interior suffered from dry-rot and deterioration, likely resulting from years of neglect and little maintenance. In response, Cade offered his deposition as evidence, but his deposition revealed that he had not been living in the house for a decade prior to the reported date of loss, he had no personal knowledge of the home’s pre-loss condition, and he thought his wife had been tending to the property. Because Cade did not include an affidavit or estimate to support his claim that the house was a total loss and because State Farm’s evidence indicated that it paid for covered damages and any further damage to the property resulted from non-covered perils, the court granted State Farm’s motion for summary judgment on the real property claim.[5]

Regarding the personal property claim, State Farm asserted that the Insureds failed to: (1) provide immediate notice to State Farm; (2) protect the property from further damage or loss; (3) prepare an inventory of damaged personal property showing in detail the quantity, description, age, replacement cost, and amount of loss substantiated by bills, receipts, and related documents; (4) comply with requests for exhibitions of the damaged property, records, documents, and statements; and (5) submit a signed, sworn proof of loss within 91 days of the loss.[6] In response, Cade contended that State Farm failed to show that it was prejudiced by the Insureds’ failure to abide by these policy conditions. First, the court noted that it was “undisputed that Cade did not comply with the conditions regarding his personal property claim” because he (1) did not notify State Farm of the personal property claim until eighteen months after the reported date of loss and a month before filing suit; (2) failed to testify in detail or provide support regarding the items he claimed damaged; and (3) admitted to not removing any of the home’s contents until “much, much later.”[7] The crucial inquiry for the court was determining whether State Farm must show that it was prejudiced by Cade’s failure to comply with the policy conditions.

Here, the court considered how Texas courts and federal courts applying Texas law have grappled with the “notice-prejudice” rule in the context of various policy conditions. The court noted that federal courts applying Texas law consistently conclude that “an insured's failure to provide a sworn proof of loss is subject to the notice-prejudice rule.”[8] In rarer instances, a showing of prejudice would not be required when considering a proof of loss provision.[9] Moreover, some courts are reluctant in extending this rule to appraisal provisions.[10] Without deciding whether State Farm had to prove prejudice resulting from the Insured’s failure to abide by the policy conditions, the court concluded that State Farm “has in fact demonstrated prejudice.”[11] Explaining its basis, the court reasoned that State Farm had no opportunity to perform an investigation of the personal property because by the time it had received notice of the Insured’s personal property claim, the Insured did not provide State Farm with detailed inventory and documentation of the property and sold the house and filed suit a month later.[12] Accordingly, the court affirmed the trial court’s grant of summary judgment regarding the personal property claim.

The Lowdown: Cade is a good reminder that the notice-prejudice rule does not have universal application when considering certain policy provisions at dispute. The purpose of the notice-prejudice rule is to ensure coverage is not forfeited when there are immaterial deviations from compliance with notice of loss or claim provisions. However, where coverage is already found but the insured has failed to comply with another policy provision, such as the appraisal provision, a showing of prejudice is not required when it would not frustrate the purpose of the rule.[13] Despite indications from federal courts that the notice-prejudice rule applies to an insured’s failure to provide a sworn proof of loss, it is imperative to remember that some Texas courts are not so eager to apply that rule.[14]

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[1] 243 S.W.3d 630, 636-637 (Tex. 2008) (where the Texas Supreme Court determined that an insured’s failure to abide by the timely notice provision under an occurrence-based policy does not defeat coverage absent prejudice by the delay); see also Prodigy Communications Corp. v. Agric. Excess & Surplus Ins. Co., 288 S.W.3d 374, 383 (Tex. 2009) (where the Texas Supreme Court extended the notice-prejudice rule to claims-made policies that require an insured to notify its insurer of a claim within the policy term or other reporting period specified, even if the insured failed to provide notice “as soon as practicable”).

[2] Cade v. State Farm Lloyds, No. 12-23-00285-CV, 2024 WL 4363341, at *5 (Tex. App.—Tyler Sept. 30, 2024, no pet. h.).

[3] Id, at *1.

[4] Barbara Cade passed away shortly after suit was filed.

[5] Id. at *4.

[6] Id, at *5.

[7] Id.

[8] Id. (citing Cunningham v. Allstate Vehicle & Prop. Ins. Co., No. 4:18-CV-4, 2018 WL 2020723, at *2-3 (E.D. Tex. May 1, 2018) (where the Eastern District of Texas discusses its series of rulings in denying insurers’ motions for summary judgment on the basis that the insured failed to abide by the proof of loss provision).

[9] Id. (citing City of Spearman v. Tex. Mun. League Intergovernmental Risk Pool, 601 S.W.3d 72, 76-77 (Tex. App.—Amarillo 2020, pet. denied) (where the Amarillo appellate court expressed its reluctance in extending the notice-prejudice rule to a proof of loss provision because the very nature of the provision “serves a key purpose that differs” from a notice of loss or claim provision, the latter of which a showing of prejudice would be required under PAJ). 

[10] Id. (citing GuideOne Mut. Ins. Co. v. First Baptist Church of Brownfield, 495 F. Supp. 3d 428, 438 (N.D. Tex. 2020)) (where the Northern District of Texas, Lubbock Division, determined that a “sworn proof of loss is a condition precedent to appraisal” and the insurer need not prove prejudice resulting from the insured’s failure to provide a sworn proof of loss as required under the policy).

[11] Id.

[12] Id., at *6 (with the court noting that while State Farm’s adjuster investigated the interior of the house and noted no personal property of value, he was there to inspect damage to the house itself as opposed to damage to the personal property).

[13] GuideOne Mut. Ins. Co., 495 F.Supp.3d at 438.

[14] City of Spearman, 601 S.W.3d at 77 (where the Amarillo appellate court discussed the federal district court trend of expanding the notice-prejudice rule to apply to the insured’s obligation of submitting proofs of loss, ultimately concluding that “opinions issued by federal courts dealing with Texas law do not bind [the court]”).