adobestock_85250363All insurance policies obligate policyholders to promptly report claims. Prompt reporting affords the carrier the opportunity to quickly investigate and determine if a loss is covered, and to take steps to limit further damage. These opportunities are not available when claims are reported late, and “late notice” is an oft-cited basis to reserve rights or disclaim coverage. Case law developing around the issue generally requires that that the carrier demonstrate “actual prejudice” caused by the late notice. Last week, the Colorado Court of Appeals issued a significant opinion clarifying aspects of Colorado’s “Notice-Prejudice” Rule. It has now applied the Rule to occurrence policies that require notice as a condition precedent to coverage.

The case of MarkWest Energy Partners, L.P. v. Zurich Am. Ins. Co., 2016 COA 110, arose from a 2012 chemical spill on a pipeline construction project. MarkWest quickly acknowledged the spill to government officials, and a cleanup plan was agreed-to and completed within 3 months. MarkWest reported its $3 million loss to Zurich just four months after the spill. Zurich argued that it did not have to cover the claim because its policy contained a pollution-related endorsement with a 60-day notice period as a condition precedent to coverage.

Resolving the issues in the policyholder’s favor, the Court first discussed the purpose and past applications of the Notice-Prejudice Rule: “Under the notice-prejudice rule, an insured who gives late notice of a claim to his or her insurer does not lose coverage benefits unless the insurer proves … that the late notice prejudiced its interests.” The Colorado Supreme Court previously rejected a requirement that the insurer prove prejudice in a claims-made context because the “date-certain” notice requirement in such policies is a fundamental term and a material condition precedent to coverage. Applying the notice-prejudice rule to claims-made policies “essentially rewrites the insurance contract and [impermissibly] creates coverage where none previously existed.”

Next, the Court reviewed cases applying the Rule from other jurisdictions, as well as its underlying public policy. The Court explained that late notice of a claim may not always prejudice the insurer, and most other jurisdictions require evidence of prejudice caused by the delay, particularly in situations involving occurrence policies. The opinion closes by predicting that our Supreme Court “would apply the notice-prejudice rule to a notice provision framed as a condition precedent to coverage in an occurrence liability policy” because the purpose of the provision and underlying public policy remain the same whether the requirement is couched as a condition or as a condition precedent.

This opinion shows that, in the absence of demonstrable prejudice, liability insurers cannot “draft around” the Notice-Prejudice Rule by characterizing the notice provision as a condition precedent to coverage.

If you have questions about this update, please contact Stephanie Montague.