Insurers frequently raise the timing of notice as a defense to a policyholder’s claim for coverage. This is an “all or nothing defense,” as “late notice” can create a forfeiture of coverage. As a result, it gets litigated frequently—as shown by recent state high court cases in Colorado and Wyoming. In recent decades, there has been a dramatic judicial shift on the notice issue, with many jurisdictions liberalizing the rules applicable to notice to insurers and following the traditional rules limiting contract forfeitures.
Recent decisions in Colorado and Wyoming illustrate the tension in the law on notice. The Colorado Supreme Court has twice cut back on its previous ten-year streak of expanding coverage for insureds by refusing to allow insurers to enforce technicalities in notice clauses to prevent coverage. Colorado’s neighbor to the north, Wyoming, headed in the other direction in 2016. Most states now employ the modern rule, which requires insurers to prove prejudice before they can void coverage. In May 2016, the American Law Institute adopted the modern rule for its Restatement of the Law, Liability Insurance, a position that could be influential in the courts.
Wyoming: Modern Rule
In deciding to follow the modern rule, the Supreme Court of Wyoming noted just weeks ago that “[p]ublic policy is not harmed by requiring insurers to be prejudiced before denying coverage for late notice.” In the recent Wyoming decision Century v. Hipner, 2016 WY 81, the court found that Hipner failed to notify Century of a claim for a defense from a suit by a paralyzed car accident victim for nine months, even though notice had been given to the broker two months earlier. The court found that Century suffered no prejudice from the late notice, which was admittedly not within “as soon as practicable” required notice period. This decision changed Wyoming law, which previously had followed the outdated “per se rule,” which allowed an insurer to void the policyholder’s insurance contract with no showing of prejudice to the insurer.
Colorado: Retrenchment on the Modern Rule
Policyholders with insurance policies in Colorado should be aware of recent decisions affecting the law on notice. In 2005, the Colorado Supreme Court enforced a gold mine’s CGL coverage for a settlement of an EPA enforcement action even though the underlying case was filed six years before the notice, and the mine had negotiated a settlement with the EPA over six months before notice. The court concluded that the insurer had shown no prejudice from the timing of notice and refused to nullify the policyholder’s coverage. Friedland v. Travelers Indem. Co., 105 P.3d 639 (Colo. 2005). Several intervening decisions had expanded the application of the prejudice concept to notice requirements under insurance policies. See, e.g., Lauric v. USAA Cas. Ins. Co. 209 P3d 190 (Colo. App. 2009).
Last year, however, the supreme court refused to apply the notice-prejudice rule to claims-made policies. Craft v. Philadelphia Ins. Co., 343 P.3d 951 (Colo. 2015). There, an officer of an insured company sought coverage under a D&O policy approximately 16 months after the policy period expired, even though the underlying lawsuit was filed during the policy period and the case had already been settled.
This year, the Colorado Supreme Court reversed a court of appeals ruling, holding that an insured cannot obtain coverage for a settlement of a claim or even a pending case with or without notice, if the carrier objects to the settlement. Stresscon v. Travelers Indem. Co., 370 P.3d 140 (2016) (Stresscon I). In 2013, the court of appeals had expanded the notice-prejudice rule to the “no voluntary payments clause” in Stresscon v. Travelers Indem. Co., 2013 COA 131. There, a concrete subcontractor, who admitted that it caused an accident at an U.S. Army base which delayed the project, notified its insurance carrier of the general contractor’s claims. The carrier arguably refused coverage, and the insured then settled with its general contractor on a series of contract claims (after allegedly inviting the carrier to the settlement meetings) and later sued for an indemnity. The court of appeals correctly rejected this technicality and found that the concrete company was well justified in its decision to settle and thus had successfully rebutted the arguable prejudice from the late notice and was entitled to recover.
Advice for Policyholders
The lesson here is that an insured should always give notice when an event occurs that might result in a claim. Brokers often fear a threat of cancellation or an increase in rates, but a mere notice without a specific claim should never cause that outcome, and it can always be withdrawn.
Because notice rules vary by state, policyholders should carefully follow the notice provisions of the policy and seek insurer approval of any settlement and document all efforts to communicate with the insurer. If no response is received, the policyholder should confirm in writing the lack of a response. While there is some risk that a notice might affect future rates, the risk of negating coverage is greater. The real conundrum arises when the carrier is defending under a reservation of rights but refuses to consent to a settlement inside the policy limits.
In Colorado, insureds must now accept that they cannot settle a claim or case without carrier approval if the carrier is providing a defense, even under a reservation of rights and objection to the settlement. The insured can attempt to have the carrier agree to waive the no voluntary payments clause and try to enter into some type of dispute resolution of whether a settlement is reasonable, but the carrier may well object to that too. If the carrier refuses coverage or reserves its rights, it would seem that the insured has the right to settle over the carrier’s objection, but after the Stresscon I decision, the law is very unclear. The insured just has to hope that the final verdict comes out within the carrier’s limits. If the insured really wanted to fund its own settlement and has full documentation of events that showed the carrier was given every opportunity to participate in the negotiations, then a future Colorado court might endorse that. The reason is that the Stresscon court relied on a conclusion that there was no notice to the carrier about the settlement, but there is still some risk that the carrier would not have to pay the settlement.