Two state supreme court rulings, issued within the space of approximately one week, enforced the notice provisions in claims-made insurance policies and confirmed that insurers need not show prejudice to sustain a late notice defense. In Craft v. Philadelphia Indemnity Insurance Company, ___ P.3d ___, 2015 WL 658785 (Colo. Feb. 17, 2015), the Colorado Supreme Court, applying Colorado law, answered a question of state law certified by the United States Court of Appeals for the Tenth Circuit, and concluded that the “notice-prejudice rule” – which requires an insurer to show it was prejudiced from late notice of a claim – does not apply to the date-certain notice requirement in a claims-made insurance policy. In Anderson v. Aul, ___ N.W.2d ___, 2015 WL 773904 (Wisc. Feb. 25, 2015), the Wisconsin Supreme Court, applying Wisconsin law, held that Wisconsin’s notice-prejudice statutes did not supersede the claims-made-and-reported policy’s reporting requirement.
In Craft, the appellant in the Tenth Circuit Court of Appeals – the principal shareholder and president of a contracting company – was sued for alleged misrepresentations during a merger. See 2015 WL 658785 at *2. Appellant did not learn of his company’s liability insurance policy – or give notice to the insurer – until more than a year after the policy period in which the suit was filed had expired. Id. The policy required the policyholder to provide written notice of a claim “as soon as practicable” but “not later than 60 days” after the policy period expired. Id. The insurer denied the appellant’s claim, and subsequently, the appellant sued the insurer for denial of insurance benefits. Id. The insurer moved to dismiss the suit on the grounds that the appellant failed to give notice within the sixty-day window. Id. Granting the insurer’s motion to dismiss, the federal district court held that the “notice-prejudice rule” does not apply to claims-made liability policies. Id. The policyholder then appealed. Recognizing that Colorado state courts had yet to define fully the scope of the notice-prejudice rule, and deeming this issue to be “of particular importance” to both insurers and policyholders in Colorado, the Tenth Circuit certified to the Colorado Supreme Court the question of whether the notice-prejudice rule applies to the date-certain notice requirement of a claims-made policy. Craft v. Philadelphia Indem. Ins. Co., 560 Fed. App’x. 710, 712 (10th Cir. Feb. 11, 2014); see 2015 WL 658785 at *6.
In addressing this question, the Colorado Supreme Court traced the history of Colorado’s notice-prejudice rule and reviewed the development and purpose of the claims-made policy. 2015 WL 658785 at *3-6. It noted that claims-made policies are distinguishable from the policies to which the notice-prejudice rule had previously been applied. Id. at *6. Specifically, it noted that the date-certain notice requirement serves “to effectuate the agreed-upon temporal limits of coverage” – “[i]n other words, coverage is triggered only if the insured provides timely notice of the claim.” Id. at *3, *6. It then reasoned that excusing notice given after the date-certain notice period would “alter the parties’ agreed allocation of risk” and “rewrite a fundamental term of the insurance contract.” Id. at *2 & *8.
The court noted that the public policy reasons offered in support of application of the notice-prejudice rule to other types of policies did not support application of the rule to claims-made policies. Id. at *9. For example, the court noted that applying the notice-prejudice rule to such policies would not necessarily result in greater compensation for tort victims, since, if insurers could not limit risk through a date-certain notice requirement, they would likely increase their premiums. Id. “As a result, fewer policies might be issued, potentially outweighing the marginal increase in coverage that the notice-prejudice rule would create by excusing late notice in some instances.” Id. The court further noted that, although arguments have been made that the notice-prejudice rule prevents aninsurer from reaping a “windfall” by invoking a technicality to deny coverage in the occurrence-based liability context, the rule “would allow the insured to reap the windfall” in the claims-made liability context by “effectively creat[ing] coverage where none previously existed.” Id. at *10 (quotation and citation omitted). The court, thus, responded to the certified question in the negative and returned the case to the Tenth Circuit for further proceedings. Id.
In Anderson, the underlying plaintiffs sued an attorney (the policyholder) for legal malpractice. Anderson, 2015 WL 773904 at *1. The attorney’s professional liability insurer intervened in the lawsuit and sought summary judgment to declare that its policy did not cover the claim. Id. The policy at issue was a “claims-made-and-reported” policy, wherein coverage was provided for “claims that are first made against the insured and reported to the [insurance company] during the policy period.” Id. (emphasis and brackets in original). At issue was the applicability of Wisconsin’s notice-prejudice statutes, where untimely notice will not bar coverage unless timely notice was “‘reasonably possible’ and the insurance company was ‘prejudiced’ by the delay.” Id.
The Wisconsin Supreme Court, reversing the appellate court’s ruling, held that the notice-prejudice statutes do not supersede the reporting requirement specific to the claims-made-and-reported policies. Id. The court “did not locate anything in the statutory text, the history of claims-made-and-reported policies, the statutory history, or the Committee materials indicating that the legislature intended to invalidate claims-made-and-reported policies.” Id. at *12. The court then concluded that requiring coverage of an untimely reported claim “would defeat the fundamental premise of claims-made-and-reported policies,” and it declined to read the notice-prejudice statutes to require that result. Id. at 15. The court also held that, even if the notice-prejudice statute applied, the insurer would still prevail because requiring an insurance company to provide coverage for a claim reported after the end of a claims-made-and-reported policy period would be “per se prejudicial to the insurance company.” Id. at *16.
The Craft and Anderson rulings resolved open questions in Colorado and Wisconsin regarding the scope of the notice-prejudice rule by declining to apply it in the claims-made liability context. The rulings add to the growing majority of rulings nationwide that have upheld unambiguous policy language regarding notice requirements in claims-made policies and the parties’ agreed-upon allocation of risk. See Craft, 560 Fed. App’x at 712; Anderson, 2015 WL 773904, at *12.