Markwest Energy Partners, L.P. v. Zurich Am. Ins. Co.

• Decision Date: 14 July 2016
• Docket Number: Court of Appeals No. 15CA0770
• Parties: MARKWEST ENERGY PARTNERS, L.P., a Delaware master limited partnership, Plaintiff–Appellant, v. ZURICH AMERICAN INSURANCE COMPANY, a New York corporation, Defendant–Appellee
• Court: Colorado Court of Appeals

411 P.3d 1080

MARKWEST ENERGY PARTNERS, L.P., a Delaware master limited partnership, Plaintiff–Appellant,

v.ZURICH AMERICAN INSURANCE COMPANY, a New York corporation, Defendant–Appellee,

Court of Appeals No. 15CA0770

Colorado Court of Appeals, Div. I.

Announced July 14, 2016

Rehearing Denied September 29, 2016

Snell & Wilmer, L.L.P., Michael E. Lindsay, James D. Kilroy, Jessica E. Yates, Luke W. Mecklenburg, Denver, Colorado, for Plaintiff–Appellant

McElroy, Deutsch, Mulvaney & Carpenter, L.L.P., Jane E. Young, Greenwood Village, Colorado, for Defendant–Appellee

Reed Smith, L.L.P., James M. Davis, Chicago, Illinois; John N. Ellison, Anthony B. Crawford, Philadelphia, Pennsylvania, for Amicus Curiae United Policyholders

Opinion by JUDGE DAILEY

¶ 1 In this insurance coverage dispute, plaintiff, MarkWest Energy Partners, L.P. (MarkWest), appeals the district court's entry of summary judgment in favor of defendant, Zurich American Insurance Company (Zurich).

¶ 2 The district court concluded that, because MarkWest failed to comply with a condition precedent in a liability policy requiring it to timely report an "incident" to Zurich, it was barred from recovering anything from Zurich. Contrary to the district court, we conclude that Colorado's "notice-prejudice" rule applies, and that, consequently, MarkWest is only barred from recovering if Zurich was prejudiced by the late report of the incident. Thus, we reverse and remand for further proceedings.

I. Background

¶ 3 MarkWest, a natural gas company, procured from Zurich a commercial general liability policy (the Policy) with a limited pollution liability endorsement (the Endorsement), covering "incidents" occurring between November 1, 2012, and November 1, 2013.

¶ 4 On November 4, 2012, MarkWest was constructing a pipeline in Ohio when a chemical used in the drilling process escaped the drilling area, thereby contaminating the surrounding area. MarkWest immediately reported the incident to local environmental officials, who approved a chemical cleanup protocol weeks later and confirmed that cleanup had been successfully completed in February 2013.

¶ 5 On March 28, 2013, MarkWest notified Zurich of the contamination and filed an associated claim for over $3 million. Although the incident had occurred and Zurich had been notified well within the Policy's coverage dates, Zurich denied the claim because MarkWest had failed to provide notice within sixty days of the "incident," as required by the Endorsement.

¶ 6 MarkWest filed the present action to recover from Zurich $3 million-plus in damages with respect to the original insurance claim, as well as additional damages for bad-faith (common law and statutory) denial of coverage.

¶ 7 Zurich filed a motion for summary judgment under C.R.C.P. 56(b), and MarkWest responded with a motion for determination of a question of law under C.R.C.P. 56(h). As pertinent here, both cross-motions addressed the same issue—that is, whether MarkWest was barred from pursuing the lawsuit because of its noncompliance with the Endorsement's notice provision, or whether MarkWest could proceed with its claim in the absence of prejudice to Zurich as a result of the untimely notice.

¶ 8 The district court ruled in favor of Zurich, concluding that,

• by failing to report the pollution incident to Zurich within the sixty day notice period, "MarkWest did not comply with an express condition precedent in the insurance contract";

• therefore, "MarkWest's right to coverage under the Policy was never triggered"; and

• "the question of whether Zurich was prejudiced by MarkWest's untimely notice is, therefore, irrelevant."

¶ 9 Consequently, the district court denied MarkWest's motion for determination of a question of law and granted Zurich's motion for summary judgment.

II. Analysis

¶ 10 MarkWest contends that the district court erred because "unless [Zurich] can show its ability to investigate the occurrence or defend against a claim was prejudiced by late notice, [the court] cannot deny a claim based solely on a failure to strictly comply with the notice provision." We agree.

¶ 11 We review de novo a district court's order granting summary judgment. Mountain States Adjustment v. Cooke , 2016 COA 80, ¶ 11, 412 P.3d 819. Summary judgment is proper when there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Geiger v. Am. Standard Ins. Co. of Wis. , 192 P.3d 480, 482 (Colo. App. 2008).

A. The Policy's Meaning

¶ 12 In its main text, the Policy excluded from coverage losses due to pollutants; the Endorsement to the Policy, however, stated that "this exclusion does not apply to ... ‘property damage’ caused by a ‘pollution incident’ provided that: ... [t]he ‘pollution incident’ ... [is] reported to [Zurich] in writing, within [sixty (60) ]¹ days from the date of [its] commencement."² The Endorsement also added a "Duties In The Event of Pollution Incident" provision to the Policy which (1) repeated MarkWest's obligation to report any pollution incident within sixty days of its commencement and (2) additionally required that MarkWest report any claim caused by a pollution incident "in writing as soon as practicable" and within five years after the policy's expiration date.

¶ 13 We construe insurance policies according to principles of contract interpretation. Shelter Mut. Ins. Co. v. Mid–Century Ins. Co. , 214 P.3d 489, 492 (Colo. App. 2008), aff'd , 246 P.3d 651 (Colo. 2011). Such principles would ordinarily lead us to conclude that timely notice of contamination was a condition precedent that had to be satisfied before coverage under the policy would be extended to pollution incidents. See Soicher v. State Farm Mut. Auto. Ins. Co. , 2015 COA 46, ¶ 22, 351 P.3d 559 ("A condition precedent is ‘[a]n act or event, other than a lapse of time, that must exist or occur before a duty to perform something promised arises.’ " (quoting Black's Law Dictionary 355 (10th ed. 2014))) (alteration in original); Dinnerware Plus Holdings, Inc. v. Silverthorne Factory Stores, LLC , 128 P.3d 245, 247–48 (Colo. App. 2004) ("Consistent with the plain meaning of ‘provided that,’ courts in other jurisdictions have recognized that use of that phrase will generally create a condition precedent."). Under these ordinary contract principles, then, we would conclude (as the district court did) that, in and of itself, MarkWest's failure to comply with the Endorsement's notice requirement bars recovery here.

¶ 14 But the issues in this case go beyond simple "contract interpretation" and application. They also involve matters of public policy surrounding the enforcement of insurance policies.

B. Colorado's "Notice–Prejudice" Rule

¶ 15 Traditionally, "an unexcused delay in giving notice relieve[d] the insurer of its obligations under an insurance policy, regardless of whether the insurer was prejudiced by the delay." Clementi v. Nationwide Mut. Fire Ins. Co. , 16 P.3d 223, 227 (Colo. 2001). "The traditional approach [was] grounded upon a strict contractual interpretation of insurance policies...." Id. at 226.

¶ 16 In Clementi , the supreme court identified three policy justifications for departing from the traditional approach, to wit, "(1) the adhesive nature of insurance contracts, (2) the public policy objective of compensating tort victims, and (3) the inequity of the insurer receiving a windfall due to a technicality." Id. at 229. Based on these policy considerations, the court abandoned its adherence to the "traditional approach" in uninsured motorist policies and adopted, in its place, the "so-called notice-prejudice rule." Id. at 225.

¶ 17 "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." Craft v. Phila. Indem. Ins. Co. , 2015 CO 11, ¶ 2, 343 P.3d 951 ; see Clementi , 16 P.3d at 229 (Under that rule, "an insurer [can] deny benefits only where its ability to investigate or defend the insured's claim was compromised by the insured's failure to provide timely notice.")

¶ 18 In Friedland v. Travelers Indemnity Co. , 105 P.3d 639 (Colo. 2005), the supreme court applied the notice-prejudice rule to, as here, an "occurrence" liability policy.³ In Friedland , the officer and director of a mining operation sued his insurer to recover defense costs and liability payments incurred in connection with a federal CERCLA⁴ suit brought to clean up pollution caused by the mine. Id. at 641. The individual had not, however, notified his insurer of the CERCLA lawsuit "as soon as practicable," as was required by the policy; rather, he had waited more than six years after the case had been filed and six months after it had been settled. Id. at 642. Under those circumstances, the court held that (1) the insured's notice was not timely; and (2) the notice-prejudice rule applied; but (3) "the insurer [would be] presumed to have been prejudiced by the delay" and the insured would have the opportunity to rebut that presumption. Id. at 643.

¶ 19 Ten years later, the supreme court rejected the application of the notice-prejudice rule to notice provisions in "claims-made" (as opposed to "occurrence") policies. See Craft , ¶ 7. The court based its decision on the different purposes notice requirements serve in the different types of policies: in an occurrence policy, the timing of notice affects the insurer's ability to investigate and defend a claim that would otherwise be covered by the policy, whereas in a claims-made policy, a date-certain notice requirement, by its very nature, defines the scope of coverage. See id. at ¶¶ 7, 28, 31–32, 45.⁵ Because "the date-certain notice requirement of a claims-made policy is a fundamental term of the insurance contract, and notice under such a provision is a material condition precedent to coverage," the court held that applying the notice-prejudice rule...