Legal Insight: Colorado Supreme Court Expands the Notice-Prejudice Rule (Again)

What does that mean for Colorado homeowners’ and their insurance policies?

If you have homeowners’ insurance and have read your policy, you know that it contains rules—lots of rules. One of those rules is the “notice period,” meaning the deadline by which you (the insured) must submit a claim (give notice) to your insurance company (the insurer).

In the broadest terms, there are two types of insurance policies: “claims-made” and “occurrence-based.”

In a claims-made policy, the insurer agrees to cover claims made and reported during the policy period. If this is the type of insurance you have, stop reading this while you go check to make sure you know when your policy expires.

In an occurrence-based policy, the insurer agrees to cover claims based on occurrences that take place during the policy period—even if the actual claims aren’t made until later. How much later can you file your claim? Most policies specify the deadline—the notice period. But what happens if you miss that deadline? Traditionally, the rule has been: you’re out of luck. You agreed to the deadline, and you blew it. But in a pair of cases decided on March 11, 2024, the Colorado Supreme Court changed the rules.

Gregory v. Safeco Insurance Company of America, No. 22SC399, and Runkel v. Owners Insurance Company, No. 22SC563 (decided together as 2024 CO 13), both involved homeowners who discovered hail damage to their roofs but did not file claims within the one-year notice period required by their policies. When the homeowners did eventually file claims, the insurers denied coverage, and the homeowners sued the insurers. The homeowners asked the courts to apply the “notice-prejudice rule,” an exception to the strict traditional rule. Under the notice-prejudice rule, an insurer may only deny a claim due to late notice if the late notice prejudiced the insurer’s ability to investigate or defend against the claim. Furthermore, if the insured challenges the insurer’s denial of coverage, it’s the insurer’s burden to prove that it was prejudiced by the late notice.

The Colorado Supreme Court first adopted the notice-prejudice rule for underinsured motorist (UIM) policies in 2001 in Clementi v. Nationwide Mutual Fire Insurance Company, 16 P.3d 223 (Colo. 2001). The Court extended the rule to commercial general liability policies in 2005 in Friedland v. Travelers Indemnity Company, 105 P.3d 639 (Colo. 2005). But unlike the one-year notice period that the homeowners faced in Gregory, the policies in both Clementi and Friedland required notice “as soon as practicable” or within a “reasonable” time, not by a specific date. In addition, the policies in both Clementi and Friedland covered injuries to third parties, not “first-party” claims (claims for losses by the insureds themselves) like the claims by the homeowners in Gregory.

In Gregory and Runkel, the trial courts and the court of appeals refused to apply the notice-prejudice rule in the new context of first-party claims under policies with a specific notice period. The homeowners appealed to the Colorado Supreme Court, which—in a closely divided 4-3 opinion—expanded the notice-prejudice rule to occurrence-based, first-party homeowners’ property and liability policies.

The Court’s majority gave two main reasons for its decision.

First, it noted that its prior decisions relied heavily on the difference between claims-made policies and occurrence policies. The notice-prejudice rule applies only to occurrence policies, and the Court found the homeowners’ policies to be occurrence-based. Pointing to Colorado’s heightened statutory requirements for claims-made policies, the Court reasoned that “[a]llowing an insurer to convert an occurrence policy to a claims-made policy” by strictly enforcing the notice period “would permit the insurer to enjoy the benefits of a claims-made policy without complying with the statutory mandated requirements of such a policy.” It also concluded that, in this context, the notice period “is not a fundamental contract term that is a condition precedent to coverage itself.”

Second, the Court pointed to Colorado’s well-established “public policy of compensating tort victims.” In Clementi, the Court had pointed to this public policy along with the take-it-or-leave-it (sometimes called “adhesive”) nature of insurance contracts and “the inequity of allowing insurers to receive a windfall due to a technicality” as reasons supporting the adoption of the notice-prejudice rule. In Gregory, the majority decided that these concerns apply to first-party property policies just as they did to UIM and general liability insurance.

The decision in Gregory represents a significant expansion of the notice-prejudice rule, one that makes it easier for insureds to obtain coverage even for late claims. When a homeowner challenges the denial of a claim for late notice, courts must follow the two-step approach first laid out in Clementi: a court must first determine whether the insured’s notice was timely, and if not, whether any delay was unreasonable. If the notice was timely or any delay was reasonable, the analysis ends there, and the late notice is excused. If the court determines the notice was untimely and or any delay was unreasonable, however, then the insurer must prove that it was prejudiced by the late notice in order for its denial of coverage to stand.

In a sharp dissent that criticized the majority’s “limited understanding of the insurance industry,” three justices argued that this logic has “no limiting principles and risks destabilizing Colorado insurance markets.” Indeed, the majority’s reliance on broad statements about fairness and public policy suggests that the Court may not be finished expanding the notice-prejudice rule to new contexts. The “ripple effects” of this decision will become evident as insureds, insurers, and courts put it into practice in the coming years.