Archive for February, 2015

Colorado Supreme Court Holds that the Notice-Prejudice Rule Does Not Apply to Date-Certain Notice Requirement in Claims-Made Policies

Wednesday, February 25th, 2015

By Eryk Gettel, Sedgwick San Francisco

Like many jurisdictions, Colorado’s notice-prejudice rule generally provides that an insured who fails to provide timely notice of a claim does not lose policy benefits unless the insurer establishes that the late notice prejudiced its interests.  Friedland v. Tranvers Indem. Co., 105 P.3d 639, 643 (Colo. 2005).  In Craft v. Philadelphia Indemnity Insurance Co., 2015 WL 658785 (Colo. Feb. 17, 2015), the Colorado Supreme Court held that this rule does not apply to date-certain notice requirements in claims-made policies.

Dean Craft was the principal shareholder and president of Campbell’s C-Ment Contracting, Inc. (CCCI).  Craft agreed to sell a portion of his CCCI shares to Suburban Acquisition Company (Suburban), and later sold his remaining shares back to CCCI.  Suburban and CCCI sued Craft for alleged misrepresentations and fraud regarding the stock sales.

At the time he was sued, Craft was unaware that CCCI had purchased a D&O policy from Philadelphia Indemnity Insurance Company (Philadelphia).  The policy required the insured to notify Philadelphia “as soon as practicable” after becoming aware of a claim, but “not later than 60 days” after the policy period expired.  The policy period was November 1, 2009 to November 1, 2010.  Craft did not report the matter to Philadelphia until March 2012 (more than one year after the policy had expired), and settled the underlying litigation in June 2012.  Philadelphia ultimately denied coverage for Craft’s legal fees and the underlying settlement because Craft had not complied with the policy’s notice provision.

Craft sued Philadelphia in Colorado State Court for breach of contract, breach of the implied covenant of good faith and fair dealing, and statutory violations.  Philadelphia removed the case to federal district court, and then successfully moved to dismiss the coverage action on the basis that Craft did not notify Philadelphia of the claim within 60 days of the policy’s expiration date.  After appealing the district court’s decision, the Tenth Circuit certified the following questions to the Colorado Supreme Court:  (1) whether the notice-prejudice rule applies to claims-made liability policies as a general matter; and (2) whether the rule applies to one or both types of notice provisions in claims-made policies.  Because the parties agreed that the prompt notice requirement was not at issue, the Colorado Supreme Court limited its analysis to the issue of whether the notice-prejudice rule applies to a claims-made policy’s date-certain requirement.  The court answered the question in the negative.

The court first explained how “occurrence” and “claims-made” policies differ in terms of the coverage they provide.  Whereas occurrence policies (like the policy in Friedman)provide coverage for injuries or damage that occur during the policy term regardless of when the claim is actually made, claims-made policies (like the policy in Craft) only provide coverage if the claim is made during the policy period or any applicable extended reporting period.  The court further explained that this conceptual difference is critical to the risks that insurers undertake and the premiums that insureds pay.  With a claims-made policy, the risk to the insurer passes when the policy expires.  Thus, the date-certain requirement in a claims-made policy is a fundamental policy term because it defines the temporal boundaries of the policy’s basic coverage terms.  The court found that, to extend the notice-prejudice rule in the context of a claims-made policy’s date-certain notice requirement, “would defeat the fundamental concept on which coverage is premised.”

The court also rejected Craft’s argument that strict enforcement of the date-certain notice requirement would result in a windfall for the carrier based on a technicality.  To apply the notice-prejudice rule so as to excuse an insured’s noncompliance with a date-certain requirement would essentially rewrite the policy and effectively create coverage where none previously existed.  By doing so, the insured — and not the insurer — would reap the windfall.

Court Confirms Insurer Permitted to Choose Counsel in Discharging Duty to Defend

Friday, February 13th, 2015

An insurer’s duty to defend and how that duty gets discharged may be one of the most frequently litigated coverage issues.  Although typical policies afford insurers the right to control their insureds’ defense, insureds often prefer to appoint their own counsel and have their insurer reimburse them for their defense costs.  That is especially true where the insurer reserves its rights under its policy.  The latest opinion addressing this issue came out of the U.S. District Court for the Northern District of California in Travelers Property Casualty Co. v. Kaufman & Broad Monterey Bay, et al., No. 5:13-cv-04745-EJD (Feb. 11, 2015).

Sometime before February 2012, the developers (“KB”) of a housing project located in Northern California hired Norcraft to perform cabinet work.  Norcraft was insured under commercial general liability insurance policies issued by Travelers, which extended additional insured coverage to KB for liability arising out of Norcraft’s work.  In February 2012, homeowners sued KB for construction defects including defects in Norcraft’s work (the “underlying lawsuit”).  Travelers agreed to defend KB in that lawsuit after receiving a copy of Norcraft’s subcontract with KB – which Travelers did not receive until almost eight months after the underlying plaintiffs filed their lawsuit against KB – and appointed defense counsel to do so.  KB objected to the law firm Travelers appointed to defend them because they claimed it was “ethically conflicted from representing [KB] since it had represented parties adverse to [KB] in other cases pertaining to similar issues as the [underlying lawsuit].”

Facing KB’s objection to the appointed counsel, Travelers sought a declaration that KB’s objection was a “material breach of [Travelers’] policies and of the implied covenant of good faith and fair dealing.”  KB counterclaimed arguing that Travelers “did not intend to provide [KB] with an immediate, full, complete, and conflict-free defense” because Travelers knew about the appointed law firm’s alleged conflicts.  The parties cross-moved for summary judgment.

First addressing KB’s claim that Travelers did not “immediately” defend them in the underlying lawsuit, the court concluded that Travelers’ duty to defend was not triggered until it received all relevant information to determine the existence of coverage.  In that regard, the court noted that Travelers first received that information when it received a copy of Norcraft’s subcontract with KB and agreed to defend approximately one week later.

The court next addressed KB’s argument that Travelers did not provide it with a “complete” defense.  KB claimed that Travelers’ defense was not “complete” because it extensively reserved its rights to, among other things, withdrawing its defense if it later determined there was no coverage available under its policy.  The court concluded that this argument failed because KB did not explain why Travelers’ reservation of rights violated its duty to defend.

KB also argued that Travelers improperly “entered into a secretly negotiated settlement agreement” with the underlying plaintiffs that resolved their claims arising out of Norcraft’s work.  Rejecting KB’s argument that this violated Travelers’ duty to defend, the court wrote:

Since it is undisputed that [Travelers] had the duty to defend, [Travelers] had the right to control settlement negotiations of the covered claims without [KB’s] participation.  That [Travelers] settled only the claims arising out of the work of Norcraft does not make the settlement improper, nor does it indicate that [Travelers] further its own interests, and [KB] have not shown that it experienced increased defense fees and costs – outside of what it would have otherwise incurred – due to [Travelers’] withdrawal from the [underlying lawsuit].

Ultimately, the court concluded that, because Travelers “fulfilled its contractual duty to defend [KB] against all claims arising out of the work of Norcraft, . . . [Travelers] did provide a complete defense.”  And because it found that Travelers satisfied its duty to provide KB with an “immediate” and “complete” defense, the court found that Travelers was entitled to appoint counsel to defend KB in the underlying lawsuit.

Sedgwick Attorneys
Sedgwick’s insurance attorneys regularly present to clients and other industry professionals on a wide range of topics. For a complete list of our attorneys, click here.
Our Firm
The most complex and high-stakes legal challenges facing the insurance industry demand the highest level of expertise and commitment, delivered by a coordinated team across all areas of insurance law. We deliver a personal, partner-led service to achieve the resolution of international and domestic liability and insurance business issues that are sensitive to the relationship between insurers, insureds and brokers, read more.

Search
Subscribe
Subscribe via RSS Feed
Receive email updates: