All contracts of insurance place certain requirements on the insured both before and after a covered loss has occurred. For example, all insurance policies require that an insured notify the insurer of a covered loss and cooperate with the insurer in the investigation of the loss and in the pursuit or defense of any claims arising out of the loss. Traditionally, if an insured failed to comply with such notification or cooperation requirements, the insurer could flatly deny coverage of the claim. Recently, however, an increasing number of courts are requiring that the insurer show that it has been prejudiced in some way before it can deny coverage for the insured's failure to comply with such requirements. This requirement of showing prejudice will be referred to in this article as the insurer prejudice rule. In Maine, the insurer prejudice rule was first recognized in a limited context in 1985. The application of the insurer prejudice rule in Maine remained limited until the Maine Supreme Judicial Court, sitting as the Law Court, suggested in Marquis v. Farm Family Insurance Company that the rule must be applied in all situations where an insurer has denied coverage based on the insured's failure to comply with any procedural requirement placed on the insured by the insurance policy. Although placing great limitations upon insurers, the broad application of the insurer prejudice rule, established in Marquis, is justified both by public policy considerations and the principles of contract law concerning partial or immaterial breach. These same principles which support placing the burdens and limitations of the insurer prejudice rule on insurers, however, also support certain contractual remedies which are not generally recognized by the courts or pursued by insurers. Thus, in order for the insurer prejudice rule to be equitable to insureds and insurers alike, insurers must be permitted to take advantage of these remedies. Since the scope of the insurer prejudice rule appears to be expanding in Maine and elsewhere, it is increasingly more important for both insurers and insureds to understand the various aspects and implications of the rule. This Article will provide an analysis of the insurer prejudice rule.

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