Foran Glennon Palandech Ponzi & Rudloff

April 2015

Colorado Supreme Court holds that “date certain” notice requirement in claims-made D&O Policy applies according to its terms, notwithstanding notice-prejudice rule

John Eggum

On a certified question from the Tenth Circuit, the Colorado Supreme Court has held that the notice‑prejudice rule does not apply to date-certain notice requirements in claims-made insurance policies.  The notice requirements in a claims-made policy define the scope of coverage, and accordingly cannot be excused based upon whether or not the insurer was prejudiced.  Under the circumstances, this meant that coverage was precluded by the policy requirement that notice of claim be made “not later than 60 days” after expiration of the policy.

Background.  In 2001, the Colorado Supreme Court adopted a notice-prejudice rule, deviating from prior rulings, and holding that 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.  The rule was adopted in connection with the Court’s evaluation of an occurrence policy – an insurance policy that provides coverage for “occurrences” during a policy period regardless of when a claim is made.  Since adoption of the notice-prejudice rule in 2001, the Court had not had occasion to consider whether the rule should apply to claims-made policies as well.

Factual Circumstances of Suit. This case arose out of a stock purchase agreement made in 2007.  Under the agreement, Dean Craft, the principal shareholder and president of Campbell’s C-Ment Contracting, Inc. (“CCCI”), agreed to sell his interest in CCCI to Suburban Acquisition Company over a period of years (10% of the business sold immediately, and the remainder later).  In connection with the agreement, Mr. Craft made certain representations and warranties, including with respect to CCCI’s water rights in a pond near one of CCCI’s plants.

In 2010, Suburban sued Craft for breach of the 2007 agreement, based on alleged misrepresentations regarding the purported water rights (the “Suburban Lawsuit”).  At the time suit was commenced, Craft did not know that CCCI had obtained directors and officers liability insurance.  When he became aware of the Policy during the pendency of the Suburban Lawsuit in 2011 – more than a year after the Policy had expired – Craft made a claim, asserting rights as an Insured.

The policy period for the D&O Policy, issued by Philadelphia Indemnity Insurance Company, was November 1, 2009 to November 1, 2010.  The Policy required that notice of any claim be made “as soon as practicable” after becoming aware of the claim, but “not later than 60 days” after the policy expired.  The Insurer did not immediately respond to Craft’s indisputably untimely claim, and thereafter Craft went forward with settling the Suburban Lawsuit.

After settling, Craft brought suit against Philadelphia for failure to provide coverage for the Suburban Lawsuit.  Philadelphia thereafter successfully moved to dismiss based on the failure of the claim to be made within the time specified by the Policy.  Craft appealed, arguing that the notice-prejudice rule applied to excuse untimely notice.  The Tenth Circuit, apparently concluding that the law was sufficiently unsettled on whether the notice-prejudice rule applied, certified the question of the application of the notice-prejudice rule to the Colorado Supreme Court.

Discussion. In deciding that the notice-prejudice rule was not applicable with respect to “date-certain” requirements of claims made policies, the Colorado Supreme Court thoroughly analyzed the rationales underlying the application of the notice-prejudice rule, and the key differences between the insurance agreement made with respect to occurrence-based policies and claims-made policies.  Like many states, Colorado resisted a notice-prejudice rule until fairly recently.  Prior to 2001, an unexcused delay in providing notice of a claim to an insurer precluded coverage for the claim, without regard to whether the insurer was prejudiced by the delay in notice.  The Colorado Supreme Court eventually decided to reevaluate that rule for (primarily) public policy reasons.  In connection with this examination, the Court determined that in instances where an insurer was not prejudiced by the timing of notice, enforcing the notice provisions to preclude coverage provided the insurer with a windfall.  This consequence, combined with the Court’s conclusions that insurance policies are contracts of adhesion and that Colorado had a policy of providing just compensation to tort victims, called for adoption of a notice-prejudice rule in Colorado.  Absent a showing of prejudice, an insurer could not properly disclaim coverage for a claim under an occurrence policy.

In considering the certified question arising out of the Craft-Philadelphia suit, the Colorado Supreme Court decided it could not extend the notice-prejudice rule to claims-made policies based on core “conceptual differences” between occurrence and claims-made policies.  As characterized by the Court, under an occurrence policy, the occurrence entitled the insured to benefits under the insurance policy, and the notice requirements can be interpreted as a condition of retaining those benefits.  With regard to a claims-made policy, the occurrence does not control the right to the benefits of the insuring agreement – the act of providing notice does.  The difference in “trigger” for receiving the benefits of each type of insurance policy justified differing treatment.

Although public policy considerations remained relevant, the Colorado Supreme Court found that the plain language of the claims-made policy required enforcement of the triggering event for coverage according to the terms of the contract – notice within the policy term or applicable extended reporting period.  Specifically, the Court found: “Applying the notice-prejudice rule to the date-certain notice requirement in a claims-made policy would alter the parties’ agreed allocation of risk. In short, to excuse late notice in violation of such a requirement would alter a basic term of the insurance contract.”  Accordingly, the untimely notice made by Craft will almost certainly preclude coverage for the Suburban Suit when the case returns to the Tenth Circuit.

Conclusion.  The result arrived at by the Colorado Supreme Court in Craft represents a straightforward and strict application of the plain language of the D&O Policy at issue.  The procedural posture that brought the case to the Colorado Supreme Court is very telling, however, about certain substantive issues.  The shift to the notice-prejudice rule that some states have made has created significant enough uncertainty in the law that the Tenth Circuit panel presented with this case found it necessary to certify this question to the Colorado Supreme Court.  This may be the result of a lack of clarity in the notice-prejudice jurisprudence, or a lack of developed law distinguishing occurrence policies from claims-made policies.  In either case, this decision will hopefully provide a helpful guide to other courts evaluating these issues, as the strict application of the notice of claim provisions of claims-made policies is essential to the ability of insurers to manage risk using claims-made policy forms.

The case is Craft v. Philadelphia Indemnity Insurance Company, 343 P.3d 951 (Colo. 2015).