Craft v. Phila. Indem. Ins. Co.

• Decision Date: 17 February 2015
• Docket Number: Supreme Court Case No. 14SA43
• Parties: Dean CRAFT, Plaintiff–Appellant v. PHILADELPHIA INDEMNITY INSURANCE COMPANY, a foreign corporation, Defendant–Appellee.
• Court: Colorado Supreme Court

343 P.3d 951

2015 CO 11

Dean CRAFT, Plaintiff–Appellant

v.PHILADELPHIA INDEMNITY INSURANCE COMPANY, a foreign corporation, Defendant–Appellee.

Supreme Court Case No. 14SA43

Supreme Court of Colorado.

February 17, 2015

Attorneys for Plaintiff–Appellant: Scott R. Larson, P.C., Scott R. Larson, Denver, Colorado, Recht Kornfeld, P.C., Heather R. Hanneman, Denver, Colorado.

Attorneys for Defendant–Appellee: Hall & Evans, L.L.C., John E. Bolmer, II, Denver, Colorado, Hinshaw & Culbertson LLP, Bethany K. Culp, Suzanne L. Jones, Minneapolis, Minnesota.

Attorney for Amici Curiae American Insurance Association, Complex Insurance Claims Litigation Association, and Property Casualty Insurers Association of America: Springer & Steinberg, P.C., JoAnne M. Zboyan, Denver, Colorado.

Attorneys for Amicus Curiae COPIC Insurance Company: Ruebel & Quillen Jeffrey Clay Ruebel, Casey A. Quillen, Westminster, Colorado.

Attorney for Amicus Curiae The Colorado Trial Lawyers Association: Roberts Levin Rosenberg PC, Bradley A. Levin, Denver, Colorado.

Attorneys for Amicus Curiae United Policyholders: Reed Smith LLP, James M. Davis, Chicago, Illinois, Reed Smith LLP, Timothy P. Law, Philadelphia, Pennsylvania, United Policyholders, Amy Bach, San Francisco, California.

En Banc

Opinion

JUSTICE MÁRQUEZ delivered the Opinion of the Court.

¶ 1 We accepted jurisdiction pursuant to C.A.R. 21.1 to answer questions of state law certified to this court by the United States Court of Appeals for the Tenth Circuit regarding the applicability of the “notice-prejudice rule” to claims-made insurance policies.

¶ 2 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 by a preponderance of the evidence that the late notice prejudiced its interests. Friedland v. Travelers Indem. Co., 105 P.3d 639, 643 (Colo. 2005). We first adopted the rule in the context of an underinsured motorist policy in Clementi v. Nationwide Mutual Fire Insurance Co., 16 P.3d 223, 230 (Colo. 2001). We later applied it to a liability policy in Friedland. 105 P.3d at 643. However, the liability policy in Friedland was an occurrence policy—that is, a policy that provides coverage for “occurrences” during a policy period, regardless of when a claim is made. We have not had occasion before today to address whether or how the notice-prejudice rule applies to claims-made liability policies.

¶ 3 A claims-made policy covers only those claims brought against the insured during the policy period and reported to the insurer by a date certain, typically within a brief window following the expiration of the policy period. The date-certain notice requirement effectuates the parties' arrangement and limits the insurer's liability to those claims reported within the time specified.

¶ 4 In this case, the insurer issued a policy that provided directors and officers liability coverage. The policy required the insured to give prompt notice of a claim; specifically, notice “as soon as practicable” after learning of the claim. The policy also required the insured to give notice of the claim by a date certain; specifically, “not later than 60 days” after the expiration of the policy. Near the end of the one-year policy period, a company officer was sued for alleged misrepresentations he made during a merger. Unaware of the insurance policy, the officer defended himself against the suit. When he learned of the policy, approximately sixteen months after the policy period had expired, he immediately contacted the insurer but did not receive a response. The officer later settled the suit. He then sued the insurer for denying coverage under the policy. The insurer removed the case to federal district court and moved to dismiss the case on grounds that the officer gave untimely notice of his claim. The district court granted the motion to dismiss, rejecting the officer's argument that the notice-prejudice rule applied to the claims-made policy issued by the insurer. The officer appealed, and the case is now before the Tenth Circuit.

¶ 5 The Tenth Circuit has certified two questions to this court: (1) whether the notice-prejudice rule applies to claims-made liability policies in general; and (2) if so, whether the rule applies to both types of notice requirements in those policies. Craft v. Phila. Indem. Ins. Co., 560 Fed.Appx. 710, 715 (10th Cir. 2014).

¶ 6 We answer the certified questions more narrowly than originally presented because the parties have agreed in their briefing to this court that the prompt notice requirement of the claims-made policy in this case is not at issue. Accordingly, we restrict our analysis here to the date-certain notice requirement.

¶ 7 We hold that the notice-prejudice rule does not apply to a date-certain notice requirement in a claims-made insurance policy. In a claims-made policy, the date-certain notice requirement defines the scope of coverage. Thus, to excuse late notice in violation of such a requirement would rewrite a fundamental term of the insurance contract. Our opinion in Friedland did not address claims-made policies, and the public policy reasons we identified for extending the notice-prejudice rule to the liability policy in that case do not persuade us that the rule should also apply in this context. Accordingly, we reframe the certified questions as a single question: whether the notice-prejudice rule applies to the date-certain notice requirement of claims-made policies. We answer that question in the negative.

I. Facts and Procedural History

¶ 8 Dean Craft, appellant in the Tenth Circuit Court of Appeals, was the principal shareholder and president of Campbell's C–Ment Contracting, Inc. (“CCCI”). In July 2007, Craft agreed to sell approximately ten percent of his CCCI shares to Suburban Acquisition Company (“Suburban”) as part of a stock purchase and merger option agreement. In the 2007 agreement, Craft warranted that CCCI had good and marketable title to certain business assets, including water rights at a pond at CCCI's Arvada plant. In fact, CCCI had never owned the water rights. In June 2009, Craft sold the remainder of his shares back to CCCI.

¶ 9 In July 2010, Suburban sued Craft in Broomfield County District Court for breach of the 2007 agreement based on Craft's alleged misrepresentations regarding CCCI's water rights. The pleadings were later amended to add CCCI as a plaintiff-in-intervention and to include claims for fraud.

At the time he was sued, Craft did not know that CCCI and Suburban had purchased directors and officers liability insurance from appellee Philadelphia Indemnity Insurance Company (“Philadelphia”).¹ As an express condition precedent to coverage, the policy required the insured to provide written notice to Philadelphia “as soon as practicable” after becoming aware of a claim, but “not later than 60 days” after the policy period expired. The relevant policy period for this coverage was November 1, 2009 to November 1, 2010.

¶ 11 Craft did not learn of the insurance policy until March 2012—more than a year after the policy period in which the suit was filed had expired. Craft immediately notified Philadelphia of the lawsuit against him, but Philadelphia did not respond. In June 2012, ten days before trial, Craft agreed to settle with Suburban and CCCI. Months later, Philadelphia responded to Craft's attorney's repeated inquiries by indicating only that certain policy exclusions applied to Craft's claim.

¶ 12 Craft sued Philadelphia in Broomfield County District Court for breach of contract, breach of good faith and fair dealing, and unreasonable delay and denial of payment of insurance benefits in violation of section 10–3–1116, C.R.S. (2014). Philadelphia removed the case to federal district court and moved to dismiss the suit on grounds that Craft failed to provide notice of the underlying claim against him within sixty days of the expiration of the policy period. The court granted Philadelphia's motion to dismiss, rejecting Craft's argument that the notice-prejudice rule of Friedland v. Travelers Indemnity Co., 105 P.3d 639, 642 (Colo. 2005), applied to the policy in this case. The court reasoned that Friedland addressed an “occurrence” policy and that its holding does not apply to “claims-made” liability policies.

¶ 13 After Craft appealed this ruling, the Tenth Circuit certified the following questions of law to this court:

(1) whether the notice-prejudice rule applies to claims-made liability policies as a general matter; and

(2) whether the rule applies to one or both types of notice provisions in claims-made policies.

Craft v. Phila. Indem. Ins. Co. , 560 Fed.Appx. 710, 711 (10th Cir. 2014). In presenting the questions, the Tenth Circuit explained in depth its reluctance to apply the holding of Friedland to claims-made policies but concluded that this court should have an opportunity to address the scope of Friedland. See id . at 712–14.

II. Analysis

¶ 14 We answer the certified questions more narrowly than originally presented because the parties have agreed in their briefing to this court that the prompt notice requirement of the claims-made policy in this case is not at issue. Accordingly, we restrict our analysis to whether the notice-prejudice rule applies to the date-certain notice requirement of a claims-made policy.

¶ 15 In resolving this issue, we review the development of Colorado's notice-prejudice rule and the salient differences between occurrence and claims-made liability insurance policies. In either type of policy, a “prompt” notice requirement protects the insurer's interest in investigating and defending a claim. Unique to a claims-made policy, however, a “date-certain” notice requirement serves only to effectuate the agreed-upon temporal limits of coverage. Thus, to excuse notice given after the expiration of the reporting period would rewrite a fundamental term of the insurance contract. Our holding in Friedland did not address the...