In Craft v. Philadelphia Indemnity Ins. Co., 2015 CO 11 (Colo. Feb. 17, 2015), Craft was the principal shareholder and president of two entities to which Philadelphia issued claims-made directors and officers coverage. One of the entities sued Craft for misrepresentations allegedly made in the course of a stock purchase and merger option agreement. Philadelphia’s policy required notice of a claim no later than 60 days after the policy expired. Craft was unaware the Philadelphia policy existed and, therefore, did not tender his defense of the underlying suit until nearly one year after the claims-made policy had expired.
Rejecting Craft’s argument that Colorado’s notice-prejudice rule as announced in Friedland v. Travelers Indem. Co., 105 P.3d , 642 (Colo. 2005), applied to the claims-made policy at issue, the federal district court granted Philadelphia’s motion to dismiss, reasoning that Friedland applied only to occurrence-based policies. In Friedland, the court concluded that, although notice given after the defense and settlement of a lawsuit is unreasonable as a matter law and the insurer is presumed to have been prejudiced by the delay, the insured must be given an opportunity to rebut the presumption.
Craft appealed to the United States Court of Appeals for the Tenth Circuit, which was reluctant to apply the notice-prejudice rule to the claims-made policy at issue in Craft, and concluded that Colorado’s highest state court should have the opportunity to address the scope of the Friedlanddecision. Craft v. Phila. Indem. Ins. Co., 560 Fed. App’x 710, 71 (10th Cir. 2014).
Colorado Supreme Court Ruling
The Colorado Supreme Court discussed the history of Colorado’s notice-prejudice rule and analyzed the differences between claims-made and occurrence-based policies. The court noted that the Friedland notice-prejudice rule was based on public policy considerations present in occurrence-based coverage, but not necessarily present in claims-made coverage. Additionally, the court reasoned that excusing late notice and applying a prejudice requirement would defeat the fundamental concept on which claims-made coverage is based: timely notice.
The court also rejected Craft’s argument that because the entities had successively renewed coverage with Philadelphia, the notice-prejudice rule should fill the “gaps” between successive policy periods that may result when a claim is made in one period but not reported until the subsequent policy period, after the previous policy’s reporting period has expired.
The Craft decision is significant because it was the first time the Colorado Supreme Court addressed whether or how the notice-prejudice rule applies to claims-made policies. The heart of the court’s ruling comes at the close of its decision where it confirms unequivocally that the claims-made feature in the policy is a “condition precedent” to coverage, which cannotbe trumped by the notice-prejudice rule: “The date-certain notice requirement of a claims-made policy is a fundamental term of the insurance contract, and notice under such a provision is a material condition precedent to coverage.” (Emphasis added.) To hold otherwise, the Craft court reasoned, would be “to apply the notice-prejudice rule to excuse an insured’s noncompliance with a date-certain notice requirement [which] essentially rewrites the insurance contract and effectively creates coverage where none previously existed.”
Significantly, Craft is in accord with other state supreme court decisions that have considered the enforceability of the date-certain notice requirement in claims-made policies. See, e.g., Chandler v. Valetine, et al., 330 P.3d 1209 (2014) (Oklahoma); Hasbrouck, et al. v. St. Paul Fire and Marine Ins. Co., et al., 511 N.W.2d 364 (1993) (Iowa); Catholic Medical Center, et al. v. Executive Risk Indem., Inc, 867 A.2d 453 (2005) (New Hampshire); Gulf Ins. Co. v. Dolan, Fertig and Curtis, 433 So.2d 512 (1983) (Florida).
Whether the date-certain notice requirement in claims-made policies is strictly enforced is an issue of continuing interest for insurers andpolicyholders. Wilson Elser will continue to report on future decisions regarding this important issue.