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