Why it matters: Applying a ruling from the Colorado Supreme Court on the state’s notice-prejudice rule, the Tenth Circuit Court of Appeals tossed a policyholder’s declaratory injunction suit seeking coverage. Earlier this year the state’s highest court answered a certified question from the federal appellate panel to hold that Colorado’s notice-prejudice rule does not apply to a date-certain notice requirement in a claims-made insurance policy. Dean Craft, the principal shareholder and president of Campbell’s C-Ment Contracting, was sued in July 2010 for alleged misrepresentations he made during a merger. Unaware the company had a directors and officers policy, Craft initially defended himself. When he learned of the policy in 2012, he immediately requested coverage. Carrier Philadelphia Indemnity Insurance Co. balked, arguing that the claims-made policy—which required written notice “as soon as practicable” but “not later than 60 days” after the policy expired—had expired on Nov. 1, 2010. Craft sued, relying on the notice-prejudice rule to contend Philadelphia wasn’t prejudiced and should step up to provide a defense. A federal court in Colorado granted the insurer’s motion to dismiss Craft’s suit, and when Craft appealed, the Tenth Circuit certified the issue to Colorado’s highest court. After the Colorado Supreme Court issued its decision, the Tenth Circuit affirmed dismissal of the suit, concluding that Craft “gave notice of his claim far past the policy’s 60-day date-certain notice requirement.”
Detailed discussion: As the principal shareholder and president of Campbell’s C-Ment Contracting, Inc., Dean Craft was covered by the company’s directors and officers (D&O) insurance policy issued by Philadelphia Indemnity Insurance Company that ran from November 2009 to November 2010. One problem: Craft was unaware of the policy.
When he was sued in July 2010 in Colorado state court for allegedly making misrepresentations as part of a stock purchase and merger option agreement, Craft initially defended himself. He learned of the Philadelphia policy in March 2012 and immediately notified the insurer of the lawsuit against him.
Craft then sued Philadelphia in Colorado state court for breach of contract, breach of good faith and fair dealing, and unreasonable delay and denial of payment of insurance benefits. Philadelphia removed the case to federal court and argued that coverage was not available to Craft because he failed to comply with the notice requirements in the policy.
The claims-made policy stated that insureds were to give notice of a claim “as soon as practicable” and required the insured to give notice of the claim by a date certain “not later than 60 days” after the expiration of the policy. Because Craft didn’t notify Philadelphia until 16 months after the policy expired, he was not entitled to coverage, the insurer argued.
Craft contended that the notice-prejudice rule applied in Colorado, which meant Philadelphia had to demonstrate that it was prejudiced by the delay in notice before dodging its coverage obligation. The federal court disagreed and dismissed the suit, and Craft appealed to the Tenth Circuit Court of Appeals.
The federal appellate panel certified two questions to Colorado’s highest court: whether the notice-prejudice rule applies to claims-made liability policies in general and whether the rule applies to both types of notice requirements in those policies (prompt notice as well as the date certain).
Tweaking the questions to focus solely on the date-certain notice requirement, the Colorado Supreme Court answered that the notice-prejudice rule did not apply. “[E]xcusing noncompliance with such a requirement would alter a fundamental term of the insurance contract and would not serve the public policy interests that originally supported the adoption of the notice-prejudice rule,” the court wrote.
Although the state’s highest court established the notice-prejudice rule in 2005, the policy at issue in that case was an occurrence policy, the court explained, and the “conceptual differences between occurrence and claims-made liability policies lie at the core of this case.” While claims-made policies provide coverage for claims that are made during a policy period regardless of the timing of the events that gave rise to the claim, occurrence policies provide coverage for occurrences that take place within the policy period, regardless of when a claim is made.
“In a claims-made policy, the date-certain notice requirement defines the scope of coverage,” the Colorado Supreme Court wrote. “Thus, to excuse late notice in violation of such a requirement would rewrite a fundamental term of the insurance contract.”
The date-certain notice requirement “defines the temporal boundaries of the policy’s basic coverage terms,” the court explained, and “timely notice of a claim is the event that triggers coverage.” For this reason, “although excusing late notice and applying a prejudice requirement make sense in the context of a prompt notice requirement, extending such concepts to a date-certain notice requirement ‘would defeat the fundamental concept on which coverage is premised.’”
Principles of contract law in the insurance contract supported this conclusion, the court added. Excusing late notice “would prevent parties from defining coverage with certainty, no matter how definitive or express the notice requirement. Such a result would significantly diminish the advantages of claims-made policies for both insurers and insureds: insurers could no longer ‘close the books’ on previous policy periods, and policy premiums presumably would rise to account for the risk that an insured might notify the insurer of a claim after the policy period has expired.”
The Colorado Supreme Court returned the case to the Tenth Circuit, where the federal appellate panel applied the ruling to the facts of the case and affirmed dismissal of Craft’s suit.
“Because Craft’s was a claims-made policy and he gave notice of his claim far past the policy’s sixty-day date-certain notice requirement, the Supreme Court’s ruling requires that we affirm the district court’s dismissal,” the panel wrote.
To read the Colorado Supreme Court’s opinion in Craft v. Philadelphia Indemnity Insurance Co., click here.
To read the Tenth Circuit’s order, click here.