The Wyoming Supreme Court in Century Surety Co. v. Jim Hipner, LLC, 2016 WY 81, 377 P.3d 784 (2016), engaged in a jurisprudential review of the enforceability of non-prejudicial notice requirements in insurance policies and why courts have moved away from the traditional rule by adopting the modern view which is commonly called the notice-prejudice rule. The case provides an excellent expose of the rationales supporting the notice-prejudice rule and is a must read.
Courts and commentators have acknowledged the public policy rationale justifying the inclusion of notice provisions in insurance policies. The Tennessee Supreme Court in Alcazar v. Hayes, 982 S.W.2d 845, 849 (Tenn. 1998) provided the following statement regarding the importance of notice provisions:
The purpose of a policy provision requiring the insured to give the [insurance] company prompt notice of an accident or claim is to give the insurer an opportunity to make a timely and adequate investigation of all the circumstances. An adequate investigation often cannot be made where notice is long delayed, because of the possible removal or lapse of memory on the part of witnesses, the loss of opportunity for examination of the physical surroundings and making photographs thereof for use at the trial, and the possible operation of fraud, collusion, or cupidity. Such a requirement tends to protect the insurer against fraudulent claims, and also against invalid claims made in good faith. If the insurer is given the opportunity for a timely investigation, reasonable compromises and settlements may be made, thereby avoiding prolonged and unnecessary litigation.
The public can be harmed by untimely claims in the insurance context due to “increased premiums and inadequate insurance administration.” Alcazar, 982 S.W.2d at 849. When the insurance company is provided prompt notice of claims, the insurance company is able to preserve adequate reserve funds which is essential to solvency.
A vast majority of jurisdictions now follow the modern trend and have adopted the notice-prejudice rule. There are three policy justifications for departing from the traditional approach: (1) the adhesive nature of insurance contracts; (2) the public policy objective of compensating tort victims; and (3) the inequity of the insurer receiving a windfall due to a technicality. Given these three public policy considerations, the Wyoming Supreme Court adopted the notice-prejudice rule.
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