The Colorado Supreme Court Has Ruled that Claims-Made Deadlines in Colorado Insurance Policies Will Be Strictly Enforced and Are Not Subject to a Prejudice Analysis
On February 17, 2015, in the case of Craft v. Philadelphia Indemnity Insurance Company, the Colorado Supreme Court resolved an unanswered question of insurance coverage which affects all claims-made insurance policies. The Court held that insurance companies need not demonstrate that they are prejudiced before denying coverage under a claims-made liability insurance policy where the insured does not give timely notice within the claims-made period provided for in the policy.
WHY THIS CASE IS IMPORTANT
This case comes down from Colorado’s highest court and answers the previously unresolved question in Colorado as to whether prejudice has to be shown before an insurance company could deny coverage under a claims-made insurance policy where the insured fails to give timely notice by a date-certain contained in the policy. This case stands for the proposition that Colorado courts will strictly construe the claims-made periods contained in insurance policies. Colorado courts will not provide insured parties with any leeway in that regard, even if the insured party can show that the insurer has not been prejudiced by claims being made after the deadline provided in the policy.
This decision means that insureds must be exceedingly diligent in being aware of, and complying with, claims-made deadlines contained in their insurance policies. As a practice pointer, insured parties should err on the side of giving notice, even of potential claims, within the claims-made reporting period to ensure timely claims are made.
FACTS OF THE CASE
Philadelphia Indemnity Insurance Company issued a claims-made policy for a corporation’s directors and officers liability coverage. The policy required the insured to provide written notice of claim “as soon as practicable” after becoming aware of a claim, but “not later than 60 days” after the policy period expired.
Near the end of the one-year policy period Craft, an officer of the company who was covered by the policy, was sued by a third party. Craft, unaware of the policy, defended himself against the suit. Approximately sixteen months after the policy period expired, Craft learned of the policy and immediately contacted the insurer to seek coverage, without response. Craft then settled the case out of court. Months later, the insurer responded to inquiries from Craft’s attorney, indicating only that certain policy exclusions applied to Craft’s claim.
Craft then sued the insurer in state court for denying him coverage, and the insurer removed the case to the Federal District Court for the District of Colorado. Once there, the insurer filed a Motion to Dismiss the case on grounds that Craft gave untimely notice. The Federal District Court granted that motion. Craft appealed that dismissal to the Tenth Circuit Court of Appeals on the grounds that the notice-prejudice rule should be applied to his insurance claim.
Under the notice-prejudice rule, an insured who gives late notice of a claim to his or her insurer does not lose coverage benefits unless the insurer proves by a preponderance of the evidence that the late notice prejudiced its interests. Prompt notice serves to give an insurance company an opportunity to investigate or defend the insured’s claim and to receive the insured’s cooperation in the process of gathering information, negotiating settlement, securing and giving evidence, attending hearings and trials, and assisting witnesses to attend hearings and trials. If these interests are defeated because an insured fails to give prompt-notice, an insurer suffers prejudice.
The Colorado Supreme Court has applied the notice-prejudice rule in the context of occurrence policies in the past where an insured failed to give prompt-notice under the terms of a liability policy (e.g., provide notice “as soon as practicable”), but prior to this case, the Colorado Supreme Court had not addressed whether the notice-prejudice rule applied to claims-made policies or date-certain notice requirements (e.g., provide notice “not later than 60 days” after expiration of the policy period). The Tenth Circuit Court of Appeals sent a formal request to the Colorado Supreme Court to answer the narrow question of whether the notice-prejudice rule applies to a date-certain notice requirement in a claims-made insurance policy in Colorado.
THE RULING
The Colorado Supreme Court held that the notice-prejudice rule does not apply to a date-certain notice requirement in a claims-made insurance policy. The Supreme Court based that decision on the fact that a date-certain notice requirement serves only to define the boundaries of a policy’s basic coverage terms; extending the notice-prejudice rule to a date-certain notice requirement would defeat the fundamental concept on which coverage is premised.
The Supreme Court did not rule on whether the notice-prejudice rule applies to prompt-notice requirements in claims-made policies, but it demonstrated favor for the notice-prejudice rule, generally, in the context of a prompt-notice requirement.