Notice-Prejudice Rule Applies to Claims-Made Policy

Applying the notice-prejudice rule to a claims-made policy, the United States District Court for the District of Colorado has held that there is defense and indemnity coverage for the medical malpractice case filed against its hospital insured because, while notice of the malpractice suit was not given “as soon as practicable,” the insurer had not shown that it was prejudiced by the delay.  Children's Hosp. Colo. v. Lexington Ins. Co., 2017 WL 1356092 (D. Colo. Apr. 13, 2017).  The court reasoned that certain failures by the insurer to inquire about, comment on, or otherwise participate in the trial from the time it learned of the suit to the jury’s verdict in excess of $17 million undermined the argument that the insurer had been prejudiced.

The insured, a children’s hospital, held a professional liability claims–made policy that required that the insured notify the insurer “as soon as practicable” if it became aware during the policy of any “medical incident” which could reasonably be expected to give rise to a claim. If such a claim did arise, the policy provided that it would be considered first made at the time notice was given, but only if notice of the claim or suit was made “as soon as practicable.” The hospital notified the insurer’s claims affiliate of an incident regarding injuries to a patient via a reporting form a few days prior to the expiration of the policy period.  The patient’s family filed suit against the hospital more than four years later, but the hospital did not notify the insurer about the filing of the suit for almost two years, during which time an unsuccessful mediation occurred where the family demanded over $13 million.  The matter proceeded to trial, and a jury eventually returned a verdict against the hospital in excess of $17 million.

After the insurer disclaimed coverage, citing noncompliance with the policy’s notice requirements, the hospital filed a declaratory judgment action.  On the parties’ cross-motions for summary judgment, the court first determined that the notice-prejudice rule would apply such that the insurer would have to prove unreasonably late notice and prejudice in order to deny coverage on account of late notice.  In extending the notice-prejudice rule, the court acknowledged that the Colorado Supreme Court had previously declined to extend the rule to a date-certain notice requirement in a claims-made policy, but that it had not addressed whether the rule would apply when the insured has complied with the date-certain notice requirement, but not with the requirement that notice be provided “as soon as practicable” after a lawsuit or claim is filed.

The court determined that the hospital did not provide notice of the lawsuit “as soon as practicable” after it was presented to the hospital, but that the insurer’s failures with respect to monitoring, participating in, or otherwise showing any desire to learn about the trial once it learned of the lawsuit, “completely undermines [the insurer’s] speculative and unsupported position that it was prejudiced because with earlier notice [of the suit] it would have been able to avoid or mitigate the liability it now faces by resolving the [family’s] lawsuit for less than the ultimate judgment entered against [the hospital].”  Accordingly, the court awarded summary judgment to the hospital.