Does the Notice-Prejudice Rule Apply to Claim-Made Policies?

There are occurrence and claims-made insurance policies. In both, there is a ‘prompt’ notice requirement. However, a claims-made policy has a ‘date-certain’ notice requirement that effectuates the limits of coverage. Earlier Colorado court holdings had not addressed this and a recent Colorado Supreme Court opinion determined public policy concerns are not in favor of applying a notice-prejudice rule.¹ Thus, the notice-prejudice rule does not apply to a date-certain notice requirement in a claims-made insurance policy.

In reviewing the notice-prejudice rule, the question is whether the insurance company is prejudiced by an insured’s failure to notify of a loss. Said another way, does the insured’s breach of the policy requirement defeat the purpose of the requirement? Other jurisdictions offer persuasive public policy justifications for applying the notice-prejudice rule, including “(1) the adhesive nature of insurance contracts, (2) the public policy objective of compensating tort victims, and (3) the inequity of the insurer receiving a windfall due to a technicality.”² The notice-prejudice rule was applied to a liability policy in Friedland in 2005.³ Friedland was required to give notice to his insurer of an occurrence ‘as soon as practicable’ and immediate notice of a suit, yet he waited more than six years after suit was filed and six months after settling his claim. The court held that the insured was to have an opportunity to rebut the presumption of prejudice. But does this rationale apply to claims-made policies?

An occurrence policy is defined by the Colorado Division of Insurance as “an insurance policy that provide liability coverage only for injury or damage that occurs during the policy term regardless of when the claim is actually made.⁴ A claims-made policy is “an insurance policy that provides coverage only if a claim is made during the policy period or any applicable extended reporting period.”⁵ Both policies require prompt notification of a claim. The purpose is to allow an insurer to adequately investigate and defend a claim. Claims-made policies typically also require notice of a claim within the policy period. To apply the notice-prejudice rule to excuse an insured’s noncompliance with a date-certain notice requirement rewrites the insurance contract and creates coverage where none previously existed. This allows the insured to “reap a windfall.” Strict enforcement of the date-certain notice requirement of a claims-made policy does not give rise to the inequity as previously thought. Thus, the notice-prejudice rule is not extended to a date certain notice requirement in a claims-made insurance policy in Colorado.

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¹ Craft v. Philadelphia Indemnity Ins. Co., 2015 CO 11, No. 14SA43 (10th Cir. Feb. 17, 2015).
² Clementi v. Nationwide Mutual Fire Insurance Co., 16 P.3d 223 (Colo. 2001).
³ Friedland v. Travelers Indemnity Co., 105 P.3d 639 (Colo. 2005).
⁴ 3 Colo. Code Regs. 702-5:5-1-8 (2014).
⁵ Id.