In Craft v. Philadelphia Insurance Co., 2015 CO 11 (Feb. 17, 2015), the Colorado Supreme Court held that the notice-prejudice rule (an insured who gives late notice of a claim to his/her insurer does not lose coverage benefits unless the insurer proves resultant prejudice) does not apply to claims-made insurance policies with date-certain notice requirements.
In the underlying action, Dean Craft was the principal shareholder and present of Campbell’s C-Ment Contracting, Inc. (“CCCI”). Craft agreed to sell some of his CCCI shares to Suburban Acquisition Company (“Suburban”) as part of a stock purchase and merger agreement. In that deal, Craft warranted that CCCI held good and marketable title to certain business assets. When it was later determined that CCCI did not hold such title, Suburban sued Craft for his alleged misrepresentations.
Upon being sued, Craft did not know that CCCI and Suburban had purchased directors and officers liability insurance from Philadelphia Insurance Company (“Philadelphia”). The Philadelphia policy provided that, as an express condition precedent to coverage, the insured must provide written notice to Philadelphia “as soon as practicable” after the insured was aware of a claim, but in any event “no later than 60 days” after the policy period expired. Craft did not learn of the Philadelphia policy until more than a year after the policy expired. After learning of the policy, Craft immediately notified Philadelphia. However, Philadelphia denied coverage.
Craft settled with Suburban and CCCI and then sued Philadelphia for, inter alia, breaching the insurance contract. After removing the suit to federal court, Philadelphia successfully moved to dismiss the suit on the grounds that Craft failed to provide notice within sixty days of the expiration of the policy period. In so holding, the district court rejected Craft’s contention that the notice-prejudice rule applied to excuse his failure to comply with this notice provision. Craft appealed, and the Tenth Circuit certified to the Colorado Supreme Court questions regarding whether the notice-prejudice rule applied to claims-made liability policies.
The Colorado Supreme Court declared that the notice-prejudice rule did not so apply. The court began by noting that unlike occurrence-made policies, where “prompt” notice requirements are designed to protect an insurer’s rights by permitting them to investigate and defend against claims, under claims-made policies, notice requirements act as key contractual terms, “effectuat[ing] the agreed-upon temporal limits of coverage.” This key component of claims-made policies enables insurers to better underwrite the costs of coverage and, in turn, allows them to write-off certain risks after the expiration of the policy period. If courts were to ignore the expiration date of a claims-made policy, it would effectively rewrite a fundamental term of the insurance contract, “defeat[ing] the fundamental concept on which [claims-made] coverage is premised.” The court further stated, “if insurers could not limit risk through a date-certain notice requirement, they would likely, out of necessity, increase their premiums and reduce the number of claims-made policies they offer.” The court therefore declined to apply the notice-prejudice rule as a means of bypassing the claims-made policy’s notice requirement, “a material condition precedent to coverage.”