(Article from Insurance Law Alert, February 2015)
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Addressing a matter of first impression under Colorado law, the Colorado Supreme Court ruled that the notice-prejudice rule does not apply to violations of date-certain notice requirements in claims-made policies.
Craft v. Philadelphia Indem. Ins. Co., 2015 WL 658785 (Colo. Feb. 17, 2015).
Under a notice-prejudice rule, coverage remains available to a policyholder unless the untimeliness of the notice prejudiced the insurer’s interests. Colorado has adopted the notice-prejudice rule in the context of underinsured motorist and occurrence-based policies. In
Craft, the court addressed whether the rule applies to claims-made policies that contain time-specific notice requirements. The policy at issue required the insured to give notice (1) “as soon as practicable” after learning of a claim and (2) “not later than 60 days” after expiration of the policy. Because the first requirement was not implicated by the facts of the case, the sole issue considered by the court was whether the notice-prejudice rule applied to the second requirement, known as a “date-certain” clause. The Colorado Supreme Court held that it does not.
The court reasoned that the date-certain notice requirement of a claims-made policy defines the scope of coverage. Therefore, “to excuse late notice in violation of such a requirement would rewrite a fundamental term of the insurance contract.” The court further explained that the rationales for applying a notice-prejudice rule in the occurrence-based policy context do not extend to claims-made policies. More specifically, the court indicated that whereas a prompt notice provision in an occurrence-based policy serves to allow an insurer to investigate claims and participate in the defense and settlement negotiations, a date-certain requirement in a claims-made policy defines the “temporal boundaries of the policy’s basic coverage terms.” The court therefore concluded that while “excusing late notice and applying a prejudice requirement makes sense in the context of a prompt notice requirement, extending such concepts to a date-certain notice requirement ‘would defeat the fundamental concept on which coverage is premised.’”
In setting this bright-line rule, the court expressly declined to apply a notice-prejudice rule where a claims-made policy is renewed, creating back-to-back policy periods. A small minority of courts have endorsed this approach in order to “fill the ‘gaps’ between successive policy periods that may result when a claim is made in one period but not reported until the subsequent policy period, after the previous policy’s reporting period has expired.”
See, e.g., AIG Domestic Claims, Inc. v. Tussey, 2010 WL 3603844 (Ky. Ct. App. Sept. 17, 2010) (finding that two successive claims-made policies created “seamless coverage” such that policyholder’s failure to report a claim during the first policy period did not bar coverage because the claim was reported during the second policy period) (discussed in
November 2010 Alert). The court deemed such decisions inapposite.