Notice-Prejudice Rule Did Not Apply to Date-Certain Notice Requirement in Claims-Made Insurance Policy, Colorado Supreme Court Rules

The Colorado Supreme Court, in response to questions certified by the U.S. Court of Appeals for the Tenth Circuit, has ruled that the “notice-prejudice rule” did not apply to a date-certain notice requirement in a claims-made insurance policy.

The Case

The insurer issued a policy that provided directors and officers liability coverage. The policy required the insured to give prompt notice of a claim; specifically, notice “as soon as practicable” after learning of the claim.The policy also required the insured to give notice of the claim by a date certain; specifically, “not later than 60 days” after the expiration of the policy.

Near the end of the one-year policy period, a company officer was sued for alleged misrepresentations he made during a merger. Apparently unaware of the insurance policy, the officer defended himself against the suit.

The officer alleged that he learned of the policy approximately 16 months after the policy period had expired. He settled the suit and then sued the insurer for denying coverage.

The insurer argued that the officer had not given timely notice of his claim and moved to dismiss. The district court granted the motion to dismiss, rejecting the officer’s argument that the notice-prejudice rule applied to the claims-made policy issued by the insurer. That rule provides that an insured who gave late notice of a claim to his or her insurer did not lose coverage benefits unless the insurer proved by a preponderance of the evidence that the late notice prejudiced its interests.

The officer appealed to the Tenth Circuit, which asked the Colorado Supreme Court to decide whether the notice-prejudice rule applied to claims-made liability policies.

The Colorado Supreme Court’s Decision

The Colorado Supreme Court held that the notice-prejudice rule did not apply to a date-certain notice requirement in a claims-made insurance policy. (The court only ruled on that issue because the parties had agreed that the prompt notice requirement of the claims-made policy in this case was not at issue and that only the date-certain notice requirement was at issue.)

The court explained that, in a claims-made policy, the date-certain notice requirement defined the scope of coverage. Thus, the court continued, to excuse late notice in violation of such a requirement “would rewrite a fundamental term of the insurance contract.”

The court pointed out that coverage under a claims-made policy was triggered only if the insured provided timely notice of the claim. The date-certain notice requirement was “integrally related to the nature” of claims-made policies, the court declared, and excusing late notice and applying a prejudice requirement to the date-certain notice requirement would defeat the policy’s “fundamental concept.”

The case is Craft v. Philadelphia Indem. Ins. Co., No. 14SA43 (Colo. Feb. 17, 2015).