Colorado’s Notice-Prejudice Rule Does Not Apply to Claims-Made Policies

Sitting en banc, the Colorado Supreme Court has held that the state’s notice-prejudice rule does not apply to date-certain notice requirements in claims-made insurance policies.  Craft v. Phila. Indem. Ins. Co., 2015 WL 658785 (Colo. Feb. 17, 2015).  Wiley Rein submitted an amicus brief on behalf of several trade associations on behalf of the insurer.

The insured officer sued the insurer for breach of contract after the insurer denied his claim for coverage resulting from a suit alleging misrepresentations made during a stock sale.  The claims-made D&O policy required the policyholder to give notice: (1) as soon as practicable after learning of the claim; and (2) no later than 60 days after the policy’s expiration.  The parties did not dispute that the policyholder failed to provide notice in conformance with either provision, but the policyholder argued that the insurer was required to show prejudice before denying coverage.  The district court granted the insurer’s motion to dismiss, holding that Colorado’s notice-prejudice rule only applied to occurrence policies.  On appeal, the United States Court of Appeals for the Tenth Circuit certified the question of whether the rule applies to date-certain notice requirements in claims-made policies.

In declining to extend the notice-prejudice rule to claims-made policies, the state supreme court first distinguished claims-made from occurrence policies.  Concluding that the timely notice requirement in claims-made policies is a “prerequisite to coverage,” the court added that the “conceptual differences” between the types of policies have “important practical implications for the risks that insurers undertake and the premiums that [policyholders] pay.”  The court also contrasted “prompt” notice provisions, which require a policyholder to notify the insurer of an occurrence “as soon as practicable” and are intended to “allow an insurer to adequately investigate and defend a claim,” with “date-certain notice requirements” that fulfill the “very different function” of defining the “temporal boundaries of the policy’s basic coverage terms.”  Because the court found that under date-certain provisions “timely notice of a claim is the event that triggers coverage,” it concluded that while applying a prejudice requirement to a prompt notice provision makes sense, extending the rule to date-certain provisions “would defeat the fundamental concept on which coverage is premised.”

The court rejected the policyholder’s argument that the notice-prejudice rule should apply to “fill gaps” between successive policy periods where the policyholder has renewed a policy in effect at the time a claim was made.  Finding the cases cited inapplicable to the present case, the court declined to interpret the insurance contract as providing “seamless coverage.”  The court also rejected the argument that the same public policy concerns underpinning application of a notice-prejudice rule to occurrence policies supported extending the rule to claims-made policies.  In particular, the court found that imposing a prejudice requirement on date-certain notice provisions would not necessarily benefit tort victims because the “marginal increase” in coverage created by excusing late notice in some instances would likely lead to increased premiums or reduced coverage.  The court further reasoned that, because the notice requirement in a claims-made policy forms a “fundamental” term of an insurance contract and corresponding notice is a “material condition precedent to coverage,” to extend the prejudice requirement would “essentially rewrite[] the insurance contract and effectively create[] coverage where none existed.”