[authors: Chris Mosley, Katie Varholak, Chris Jackson]

On February 17, 2015, the Colorado Supreme Court issued Craft v. Phila. Indem. Ins. Co., No. 14sa43, 2015 WL 658785 (Colo. Feb. 17, 2015), in which it held the notice-prejudice rule applicable to occurrence policies does not apply to claims-made policies. This addresses a big issue for any company with claims-made insurance policies, including D&O, EPLI and professional liability policies.  While this ruling is not surprising, it is important that policyholders with claims-made policies understand the ramifications of the decision and the importance of providing timely notice of claims under those policies.

Notice-Prejudice Rule – “Occurrence” Policies (Clementi; Friedland)

The so-called “notice-prejudice rule” is a court-created rule that precludes an insurer from denying coverage under an “occurrence” policy as a result of an insured’s late tender of a claim to the insurer unless the insurer can show it was prejudiced by the insured’s late notice. The Supreme Court first announced its support for this rule in in Clementi v. Nationwide Mutual Fire Insurance Co., 16 P.3d 223 (Colo. 2001) where the Court applied it to an automobile liability claim. The Supreme Court extended the rule to commercial general liability policies four years later in Friedland v. Travelers Indemnity Co., 105 P.3d 639 (Colo. 2005). Although the Supreme Court left open exactly what constitutes “prejudice” sufficient for an insurer to disclaim coverage for late notice under an “occurrence” policy, in general the Supreme Court suggested an insurer must establish it would have achieved a better result had it had the opportunity to participate in the underlying claim.

Notice-Prejudice Rule – “Claims-Made” Policies (Craft)

In Craft, the Supreme Court addressed the issue of whether the notice-prejudice rule should apply to claims-made policies, and held that it did not. The Court recognized the categorical differences between “occurrence” and “claims-made” policies. Specifically, the court determined imposing a prejudice requirement in a claims-made policy would disrupt the bargain between the insurer and policyholder and fundamentally change the nature of claims-made policies.

What Craft Means To Your Company

Craft follows the majority rule across the country that insureds must tender claims within the time frames set forth in claims-made policies to secure coverage under those policies. The ruling is important because many types of policies come as claims-made policies – including most professional liability policies, most D&O policies and some commercial general liability policies. Thus, the decision reaffirms the critical need to provide timely notice of any claim, or potential, claim which may arise under any claims-made policy you may have. Good practice dictates you provide prompt notice of claims under all policies, including “occurrence” and “claims-made” policies so as to avoid potentially unnecessary disputes with your insurer.

With these principles in mind, the Craft decision has several important implications for you and your company’s insurance programs.

• When reviewing your insurance program with your broker, be sure your risk managers and corporate counsel understand which policies are claims-made and which policies are occurrence-based.
• When putting together your insurance programs, be particularly careful if you are switching between claims-made and occurrence policies to cover the same risk. Doing so may create a gap in coverage unless specifically addressed in the underwriting process. A good broker can navigate you through this process.
• Build date-certain notice requirements into your corporate incident response plans for each type of claim that may arise under a claims-made policy. The deadline for claims should be the first thing your risk manager looks for when a claim or potential claim is received by your company.
• Regardless of the type of policy you believe a claim may trigger, notify your insurers about a claim or potential claim as soon as possible. Doing so is the best route to ensuring proper coverage and, after Craft, complying with the date-certain requirement is a prerequisite to coverage under claims-made policies.