In a recent win for policyholders, the Supreme Court of Colorado handed down a pair of decisions that extended the notice-prejudice rule to first-party property policies. Colorado law now requires an insurer to demonstrate that it was prejudiced by the insured’s late notice of a claim before it can deny coverage based on untimeliness in both property and liability policies.
In Gregory v. Safeco Insurance Company of America and Runkel v. Owners Insurance Company, the Colorado court held that property insurance carriers are no longer able to deny coverage based solely on a policyholder’s failure to provide timely notice. Instead, the insurer must demonstrate that the delay prejudiced its ability to investigate or defend against the claim. The court’s decision to extend the notice-prejudice rule to first-party occurrence policies was based on two primary findings.
First, the court found that recent cases were consistently applying the notice-prejudice rule to occurrence policies—those for which coverage is triggered by an “accident, including a continuous or repeated exposure to harmful conditions.” In doing so, the court distinguished the purpose of notice provisions in occurrence policies from those found in claims-made policies—for which coverage is triggered by a claim made during the policy period. The court decided to “adhere to now-settled precedent that in an occurrence policy, the purpose of notice is simply to allow the insurer to investigate, to attempt to resolve the claim, and to defend against it, and thus, in this context, the timeliness of notice is not a fundamental contract term that is a condition precedent to coverage itself.”
Second, the Colorado Supreme Court relied on three important policy considerations identified in its earlier decision in Clementi v. Nationwide Mutual Fire Insurance Company, where it first decided to adopt the notice-prejudice rule for uninsured motorist policies: (1) the adhesive nature of insurance contracts; (2) the public policy objective of compensating tort victims; and (3) the inequity of granting the insurer a windfall due to a technicality. In 2005, the Colorado Supreme Court extended this rule to commercial general liability policies in Friedland v. Travelers Indemnity Company. Applying these three policy justifications here, the court found that they also supported application of the notice-prejudice rule to first-party property policies.
Moreover, the court held that lower courts must now follow the two-step approach outlined in Clementi: First, a court must determine whether an insured’s notice was timely and whether any delay was reasonable. If notice is determined to be timely or any delay was reasonable, then the analysis ends there and the court should conclude that coverage exists. If, however, an insured’s notice is found to be untimely and the delay unreasonable, then the court moves to step two. This second step requires the court to determine whether the insurer was prejudiced by the policyholder’s untimely notice. Where this is the case, the insurer bears the burden of proving such prejudice by a preponderance of the evidence.
While these decisions allow property owners to avoid coverage denials based solely on the timeliness of notice and require insurers to prove that any delay actually affected their ability to investigate or defend a claim, it is always good practice to provide prompt notice where possible. Policyholders should make sure they review the notice provisions applicable to their coverages and identify any specific notice timeframes identified in their policies, as well as any potentially applicable proof of loss and other informational requirements.
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