Late notice provisions and the burden of proving prejudice in occurrence-based policies versus claims-made-and-reported policies.
Most insurance policies contain provisions requiring the insured to provide prompt notice of a claim to the insurer. Usually, the policy requires that notice be given in a "timely" manner, "as soon as practicable," or "immediately." US courts have taken three main approaches regarding the effect of so-called "late notice" provisions. The majority of courts hold that an insurer may not deny coverage based upon late notice unless the insurer can prove that it was prejudiced by the delay—this has been dubbed the "notice-prejudice" rule in many jurisdictions. Other courts hold that late notice raises a presumption of prejudice to the insurer, but that the presumption is rebuttable if the insured can demonstrate a lack of prejudice. Finally, a minority of jurisdictions interpret notice provisions strictly, holding that insurers may deny coverage based upon failure to comply with a notice provision, regardless of prejudice or the lack thereof.
However, in a growing number of cases involving liability policies, courts have predicated their decisions regarding the effect of late notice provisions on the type of policy at issue, specifically differentiating between "occurrence" policies (policies covering "occurrences" during a specified policy period), and "claims-made-and-reported" policies (policies that cover claims brought against the insured during the policy period and reported to the insurer by a "date certain," typically a date shortly after the policy expires). For example, the Colorado Supreme Court has held that, while the notice-prejudice rule still applies in Colorado for occurrence policies, it does not apply to the "date certain" notice requirement in claims-made-and-reported policies.1
The Colorado Supreme Court reached this decision in response to a certified question from the United States Court of Appeals for the Tenth Circuit of whether "under the notice-prejudice rule, an insured who gives late notice of a claim to his or her insurer [loses] coverage benefits unless the insurer proves by a preponderance of the evidence that the late notice prejudiced its interests."2 The insurer in the Tenth Circuit case had issued a claims-made-and-reported directors and officers liability coverage policy to the insured that required the insured to give the insurer notice of any claims against it by the "date certain" of "not later than 60 days" after expiration of the policy.3 When the one-year policy period was nearing its end, a company officer was sued for alleged misrepresentations he made, but, unaware that the policy existed, the officer failed to contact the insurer or notify it of the claim until over a year after the policy had expired, when he became aware of its existence. After the officer settled the underlying suit against him, he sued the insurer for denying coverage based upon the late notice. The district court granted the insurer's motion to dismiss on the grounds of untimely notice, and the insured appealed, bringing before the Tenth Circuit the question of the applicability of the notice-prejudice rule to claims-made-and-reported policies.4
Since the Colorado Supreme Court had never before faced that specific issue, the Tenth Circuit certified the question to the state's highest court, which held that prejudice was not required in that situation in order for the insurer to deny coverage based upon late notice.5 In its decision, the Colorado Supreme Court explained that in claims-made-and-reported policies, "the date-certain notice requirement defines the scope of coverage" and that "to excuse late notice in violation of such a requirement would rewrite a fundamental term of the insurance contract."6 The court spent an entire section of its decision distinguishing between claims-made-and-reported and occurrence-based policies, finding that the difference between the two has a significant impact on both the risks that carriers insure and the premiums that insureds pay.7
Whereas occurrence policies typically contain a general prompt notice requirement, which allows the insurer to investigate the claim, the court noted that claims-made-and-reported policies contain a more specific "date-certain" requirement which establishes specific temporal boundaries for coverage under the policy.8 In other words, timely notice of a claim is the triggering event in a claims-made-and-reported policy. As such, the court decided that, while applying the notice-prejudice rule made sense in the context of occurrence policies, "extending such concepts to a date-certain notice requirement would defeat the fundamental concept on which coverage is premised."9 The court reinforced this decision with fundamental principles of contract law, noting that, in the insurance policy context, unambiguous contract terms must be enforced where such terms distribute risk and constitute the bargained-for product.10 Ultimately, the court found that to apply the notice-prejudice rule to claims-made-and-reported policies would be to "alter the parties' agreed allocation of risk."11 This, the Court refused to do.12
Other courts have reached similar conclusions, and for similar reasons. For example, in 2016, the New Jersey Supreme Court faced the same question as the Colorado Supreme Court: whether an insurer must demonstrate prejudice before disclaiming coverage based upon late notice under a claims-made-and-reported policy.13 As in Colorado, the New Jersey Supreme Court answered the question in the negative, although this time the court specified that its decision was specifically based upon the fact that the policy was "not a contract of adhesion but was agreed to by sophisticated parties."14
In the New Jersey case, Templo Fuente De Vida Corp. ("Templo Fuente") sued Merl Financing Group, Inc. ("Merl") for failure to obtain funding that resulted in the termination of a contract to purchase property.15 Merl was insured under a claims-made-and-reported Directors, Officers and Private Company Liability Insurance Policy with National Union. However, because Merl waited more than six months after being served with the initial complaint before providing notice of the claims to National Union, National Union denied coverage.16 The underlying litigation was settled, and Merl assigned to Templo Fuente its rights and interests under the policy with National Union. Templo Fuente then initiated suit against National Union based on its denial of coverage under the policy. The trial court dismissed the complaint, finding insufficient notice under the requirements of the policy, and the Appellate Division affirmed, both courts finding that the insurer was not required to show prejudice in order to disclaim coverage based on late notice.17
On appeal, the New Jersey Supreme Court, like the Colorado Supreme Court, relied on basic tenets of contract law, noting that unambiguous policy terms control and that courts should not "engage in strained construction to support the imposition of liability or write a better policy for the insured than the one purchased."18 Again paralleling the Colorado Supreme Court's decision, the court differentiated between claims-made-and-reported and occurrence policies, noting that the rise in popularity in claims-made-and-reported policies was a calculated attempt by insurance companies to reduce the risks associated with occurrence policies, with a corresponding decrease in premiums for insureds.19 The court explained that claims-made-and-reported policies are specifically limited by the dates of the policies, eliminating the insurer's potential for exposure for a lengthy and unpredictable period of time and thus allowing for the issuance of policies at reduced premiums – benefits to both parties of the claims-made-and-reported contract.20 Additionally, "in exchange for limiting coverage only to claims made during the policy period, the carrier provides the insured with retroactive coverage for errors and omissions that took place prior to the policy period," again benefitting the insured, who choose to enter into a claims-made-and-reported contract as opposed to an occurrence-based policy.21
The court also pointed out that unlike the majority of occurrence policies, where the policyholders are unsophisticated consumers, claims-made-and-reported policies typically insure sophisticated parties who "are much better able to deal with the insurers on an equal footing."22 As such, the court concluded that the equitable concerns present in occurrence policies, based upon the nature of the parties involved, did not control its analysis of the notice requirement in a claims-made-and-reported contract entered into between two sophisticated parties.23 Thus, the court strictly applied the unambiguous terms of the policy, and, finding that the insured breached the notice requirement, concluded that the insured failed to meet a condition precedent of coverage under the policy. Because of this, the court held that the insurer was entitled to decline coverage without demonstrating any prejudice as a result of the late notice.24
Notably, in both of these cases, the insured failed to provide notice of the claim until well after the policy period had ended, and after any "date certain" provided in the policy. Some courts have held that, even with claims-made policies, an insurer is still required to demonstrate prejudice as a result of late notice when an insured fails to provide notice of a claim "as soon as practicable," but nonetheless provides notice, albeit delayed notice, within the policy period.25
Moreover, some jurisdictions have continued to require insurers to demonstrate prejudice before denying coverage based on late notice, even for claims-made policies, and even when notice is given after the policy period. Maryland is such a jurisdiction. In Sherwood Brands, Inc. v. Great American Insurance Co., the Court of Appeals of Maryland held that an insurer was required to demonstrate how it was prejudiced by the insured's late notice before denying coverage on those grounds.26 The claims-made policy in this case stated that the insured "shall, as a condition precedent to their rights under this Policy, give the Insurer notice in writing of any Claim . . . which is made during the Policy Period" and that "such notice shall be given as soon as practicable, but in no event later than ninety . . . days after the end of the Policy Period."27 The insured was sued in March 2008, the policy expired on May 1, 2008, and the insured notified Great American in October 2008. Great American denied coverage for late notice, and Sherwood sued Great American for breach of contract and declaratory relief.28 The trial court granted Great American's motion for summary judgment, and Sherwood appealed.29
The Maryland Court of Appeals vacated the trial court's decision, primarily based upon Maryland's unique statutory law.30 Specifically, the court cited to Maryland Insurance Code Annotated § 19-110, which states:
An insurer may disclaim coverage on a liability insurance policy on the ground that the insured . . . has breached the policy . . . by not giving the insurer required notice only if the insurer establishes by a preponderance of the evidence that the lack of . . . notice has resulted in actual prejudice to the insurer.31
While the court noted that most jurisdictions have held that the notice-prejudice rule does not apply to claims-made-and-reported policies, the Court declined to "jump on [that] bandwagon," pointing out that other jurisdictions were not construing insurance policies in light of statutes like Maryland's § 19-110.32 Analyzing § 19-110, the court stated that the key issue was "whether, in giving Great American notice more than ninety days after the expiration of the 2007-08 Policy, Sherwood 'breached the policy.'"33 The court explained that, if the notice provision in the policy was a "condition precedent" to coverage, then Sherwood did not "breach" the policy by failing to obey the notice provisions, because "the non-occurrence of a condition precedent does not constitute a breach . . . ."34 On the other hand, the court continued, if the notice provision was deemed a "covenant," then Sherwood's failure to provide Great American notice no later than ninety days after expiration of the policy would constitute a "breach" of the policy, and, as such, "§ 119-110 would apply."35 Even though the Great American policy explicitly stated that giving timely notice was a "condition precedent" to coverage under the policy, the court concluded that the notice provision in the policy was a covenant, and therefore that Sherwood's failure to give Great American timely notice constituted a breach of the policy. This, in turn, meant that § 19-110 applied to the situation, requiring Great American to demonstrate that it was prejudiced by Sherwood's late notice in order to deny coverage.36
Although courts in a minority of jurisdictions, like Maryland, require an insurer to demonstrate prejudice before denying coverage, notwithstanding whether the policy is occurrence based or "claims-made-and-reported," most jurisdictions have jumped on the "bandwagon" of declining to apply the notice-prejudice rule to claims-made-and-reported policies. While the issue may become more complicated if the insured provides delayed notice that still technically falls within the policy period, or before the date certain, sophisticated insureds who fail to report claims within the policy period in a claims-made-and-reported policy will be hard pressed to argue that the insured should be required to demonstrate prejudice before disclaiming coverage in most jurisdictions.