by Christopher Graham and Joseph Kelly

Introduction: A date-certain notice requirement refers to the absolute time limit found in claims-made policies for reporting claims—namely as soon as practicable, but in no event more than 30, 60 or 90 days or the like following the policy term. In Craft v. Philadelphia Ins. Co., Case No. 14SA43 (Feb. 17, 2015), a landmark decision that brought in heavy-weight friend-of-the court briefs from insurance trade associations, policyholder groups, and trial lawyers, the Colorado Supreme Court joined a number of other courts in refusing to extend the so-called notice prejudice rule to a date-certain notice requirement in a claims-made policy. Doing so, concluded the court, would change the fundamental nature of claims-made insurance.

Underlying suit: Dean owned a cement contracting business. He was its president. One day he sold 10% of his shares to Suburban, entering into a stock purchase and merger option agreement, warranting and representing that his company had certain water rights. But that allegedly was untrue. About two years after the sale, his company acquired his remaining shares. Dean was out. About a year later, Suburban sued Dean for breaching the purchase agreement, based on alleged misrepresentations about the company’s water rights. Later his company became a plaintiff and a fraud claim was added.

The D&O policy and notice: At the time of the suit, the company had a D&O policy, with a 1-year policy period, effective November 1, 2009-2010. As an express condition precedent to coverage, the policy required an insured to provide written notice to the D&O insurer “as soon as practicable” after becoming aware of a claim, but “not later than 60 days” after the policy period expired, so by December 30, 2010.

The company and Suburban purchased the D&O policy, but Dean didn’t know about it. So he defended himself against the claims by Suburban and the company.

In about March 2012, about 16 months after the D&O policy expired, Dean finally learned about the D&O policy and provided the D&O insurer notice of the suit, but received no response.

The coverage suit: Dean settled the suit by Suburban and the Company and then sued the D&O insurer for coverage. As a defense, the D&O insurer raised Dean’s failure to report the claim by the policy’s December 30, 2010 reporting deadline. Dean argued the D&O insurer couldn’t avoid coverage based on late notice absent proof that it was prejudiced by the delay. The D&O insurer argued that the notice-prejudice rule didn’t apply to a date-certain notice requirement in a claims-made policy.

The Federal District court granted the D&O insurer’s motion to dismiss Dean’s claims. Dean appealed. The Tenth Circuit then certified two questions to the Colorado Supreme Court: (1) whether the notice-prejudice rule applies to claims-made liability policies in general; and (2) if so, whether the rule applies to both types of notice requirements in those policies.

The case generated national interest from policyholders and insurers alike. There were friend-of-the-court briefs by the insurance industry including the American Insurance Association, Complex Insurance Claims Litigation Association, and Property Casualty Insurers Association of America; from trial lawyers, including The Colorado Trial Lawyers Association; and from a policyholder group, United Policyholders.

The Decision: The court reframed the Tenth Circuit’s certified questions, limiting the issue to whether the notice-prejudice rule applies to the date-certain notice requirement in a claims-made policy. It then answered that question as “no.”

Colorado, like many states, required that an insurer issuing an occurrence policy prove prejudice to avoid coverage based on late notice. In refusing to extend the notice-prejudice rule to claims-made policies, the court stressed the fundamental differences between occurrence and claims-made policies:

The conceptual differences between occurrence and claims-made liability policies lie at the core of this case. The Colorado Division of Insurance defines an occurrence policy as “an insurance policy that provides liability coverage only for injury or damage that occurs during the policy term, regardless of when the claim is actually made.” 3 Colo. Code Regs. 702-5:5-1-8 (2014). A claims-made policy, by contrast, is “an insurance policy that provides coverage only if a claim is made during the policy period or any applicable extended reporting period.” Id. Thus, occurrence policies and claims-made policies are almost the mirror image of each other: an occurrence policy provides coverage for events that happen during the policy period, even if the claim is brought many years in the future; a claims-made policy provides potential coverage for claims brought against the insured during the policy period, even if the underlying event giving rise to liability occurred many years in the past. See 1 Steven Plitt, Daniel Maldonado & Joshua D. Rogers, Couch on Insurance § 1:5, at 15-16 (3d ed. 2009 & Supp. 2014). With an occurrence policy, an occurrence entitles the insured to benefits under coverage that already exists, and timely notice is merely a condition of retaining that coverage. 3 Allan D. Windt, Insurance Claims and Disputes § 11:5 (6th ed. 2013). Claims-made policies, on the other hand, provide only potential coverage because timely notice of the claim to the insurer is a prerequisite to coverage under such policies. Id. In other words, coverage is triggered only if the insured provides timely notice of the claim.

This conceptual difference has important practical implications for the risks that insurers undertake and the premiums that insureds pay. Claims-made policies proliferated in the 1970s as a solution to the problems many insurers were facing in writing professional malpractice insurance policies. See Sol Kroll, The Professional Liability Policy “Claims Made”, 13 Forum 842, 849-50 (1978). In setting premiums for occurrence policies, underwriters had difficulty predicting decades into the future considerations such as inflationary trends, jury verdicts that outpaced inflation, and new theories of liability. Id. at 846, 848. Faced with increasing costs of doing business, the typical insurer either had to raise premiums, offer fewer products, or withdraw from the professional liability insurance market altogether. Id. at 847. With claims-made policies, however, the risk to the insurer passes when the policy period expires. Given this limitation, “a more predictable rate structure” could be assembled and justified for such policies, and, thus, rates bore a “more reasonable relationship to the current fiscal situation in a given state.” Id. at 848.

Both occurrence and claims-made policies generally require an insurer to provide some sort of prompt notice of a claim. The critical difference between the policies is the date-certain or absolute reporting deadline in claims-made policies. As the court explained:

Claims-made policies typically contain a second type of notice requirement not found in occurrence policies: the requirement that the insured provide notice of a claim within the policy period or a defined reporting period thereafter. See 13 Lee R. Russ & Thomas F. Segalla, Couch on Insurance § 186:13, at 32 (3d ed. 2005 & Supp. 2014). Such a date-certain notice requirement fulfills a very different function than a prompt notice requirement. Whereas a prompt notice requirement serves to allow the insurer to investigate the claim and negotiate with the third party asserting the claim, the date-certain notice requirement defines the “temporal boundaries of the policy’s basic coverage terms.” Id. In other words, timely notice of a claim is the event that triggers coverage. See 3 Allan D. Windt, Insurance Claims and Disputes § 11:5 (6th ed. 2013). 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.” Id.

Tags: D&O, professional liability, errors and omissions, claims-made, notice, date-certain notice requirement, prejudice, occurrence, absolute reporting deadline, claims made and reported, Colorado