The Role of Prejudice in Resolving Insurance Condition Clause Disputes: The Good; The Bad; The Ugly

This Article examines the legal consequences that flow out of an insurance company’s denial of coverage based on an insured’s failure to comply with policy conditions. Specifically, this Article examines the various methods used by courts to strike a balance between the principle of freedom of contract and policy norms associated with resolving condition clause disputes. The pros and cons of the historical condition precedent vs. condition subsequent analysis and the modern day functional approach to contractual interpretation are dissected and discussed in the insurance contract context. The prejudice rule, which is associated with the functional approach to contract interpretation, is the primary tool used by courts to resolve insurance disputes that arise out of an insured’s failure to comply with a condition provision contained in an insurance policy. Prejudice, as a factor in determining the legal consequences of an insured’s breach of an insurance policy condition, has led to the recognition of three distinct rules. This Article illustrates the legal implications of each rule. The law regarding insurance condition disputes is in an irreconcilable state. Any attempt at comparing the law among the states would be useless because the holdings arise in different insurance context, involve differently worded provisions, and are justified by different rationales, often with historical significance unique to the particular jurisdiction in question. Nevertheless, this Article examines the extent to which States, individually, have integrated the prejudice rule into their condition clause jurisprudence. The state-by-state approach provides the foundation for a qualitative and quantitative evaluation of prejudice rule jurisprudence