In a pair of decisions issued this week, the Colorado Supreme Court ruled that the notice-prejudice rule applies to occurrence-based, first-party homeowners’ property policies, notwithstanding any contractual notice period stated in the policy. In both cases – Gregory v. Safeco Insurance Company of America, Case No. 2022SC399, and Runkel v. Owners Insurance Company, Case No. 2022SC563 – the applicable homeowner's insurance policies each included a 1-year contractual notice period, requiring notice be provided to the insurer within one year of the loss or damage. Neither homeowner submitted a claim within the 1-year notice period. The homeowners' claims were denied for failure to provide notice within the 1-year notice period. The decision may make it easier for homeowners to file late insurance claims.

The Colorado Supreme Court first adopted the notice-prejudice rule for underinsured motorist policies in 2001 in Clementi v. Nationwide Mutual Fire Insurance Company, 16 P.3d 223 (Colo. 2001). Under Clementi, an insurer may only deny an insured’s claim due to late notice if the failure to provide timely notice prejudiced the insured’s ability to investigate or defend against the claim. In 2005, the Colorado Supreme Court extended the rule to commercial general liability policies. Friedland v. Travelers Indemnity Company, 105 P.3d 639 (Colo. 2005). Both Clementi and Friedland arose under policies requiring notice be provided “as soon as practicable” or within a “reasonable” amount of time. This week’s ruling is a substantial expansion of the notice-prejudice rule to occurrence policies with contractual date-certain notice requirements. 

The court’s decision is based on two rationales. First, the court’s prior opinions concerning the notice-prejudice rule turned principally on the core conceptual distinctions between claims-made policies and occurrence policies, with the notice-prejudice rule applying to occurrence policies. The court cautioned that “[a]llowing an insurer to convert an occurrence policy to a claims-made policy” by including date-certain notice requirements “would permit the insurer to enjoy the benefits of a claims-made policy without complying with the statutory mandated requirements of such a policy.”[1] The court further stressed that “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 of not a fundamental contract term that is a condition precedent to coverage itself” as it is in a claims-made policy. 

Second, the three public policy reasons supporting the application of the notice-prejudice rule first recognized by the court in Clementi in 2001– the adhesive nature of insurance contracts, the public policy objective of compensating tort victims, and the inequity of granting the insurer a windfall due to a technicality – apply equally to first-party property policies. 

In cases where the notice-prejudice rule applies, which now include occurrence-based homeowners’ insurance policies, courts must follow the two-step approach first outlined in Clementi. The court must first determine whether the insured’s notice was timely or whether any delay in tendering the claim was unreasonable. If notice was timely or any delay in tendering the claim was reasonable, the analysis ends there and coverage must exist. If the court determines notice was untimely and delay in providing notice was unreasonable, then the court must determine whether the insurer was prejudiced by the untimely notice. The insurer bears the burden of proving it was prejudiced by late notice.

In a dissenting opinion, several Justices cautioned against extending the notice-prejudice rule because of the potential wide-ranging effects on the interpretation of insurance policies in Colorado. Justice Hart, joined by Chief Justice Boatright and Justice Márquez, expressed concern that this new application of the notice-prejudice rule – in which a date-certain notice requirement is treated more as a technicality and not as a central term of the policy – could create uncertainty in the enforcement of every insurance policy in Colorado, as courts grapple with determining which provisions are mere technicalities. The dissenting justices also disagreed with the majority that date-certain notice requirements are only technicalities, classifying them instead as a fundamental term of contract between the insured and the insurer that should be honored. And, unlike tort victims under general liability policies, property owners are better positioned to make a claim within a reasonable time. Finally, the dissenting justices expressed concern that the court’s decision could have far-ranging consequences on the availability and cost of insurance in Colorado. 

 [1] A claims-made policy must “contain a clear and adequate disclosure and alters the insured to the fact that the policy is a claims-made policy and explains the unique features distinguishing it from an occurrence policy and relating to renewal, extended reporting periods, and coverage of occurrences with long periods of exposure.” C.R.S. § 10-4-419(2).