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Legal News Articles
The Requirement for a Showing of Prejudice in Cases
of Late Notice of Claim Under Colorado Law:
Effects of the Adoption of the "Modern Rule" ©
by David P. Hersh(1)
Introduction
The Colorado Supreme Court's holding in Clementi v. Nationwide Mutual Fire Insurance Company(2) [hereinafter Clementi] on January 22, 2001, represents a step in the progression of cases involving the effects of late notice to an insurer and the conditions under which such late notice will be considered. Clementi is instructive for all practitioners advising clients, whether insureds or insurers, concerning the current state of Colorado law on the giving of late notice of claim. While Clementi is limited on its facts to Underinsured Motorist [UIM] claims, it seems likely that the rationale of Clementi will ultimately be applied to liability claims.
"Late notice" falls within that category of considerations known as policy defenses, as it is one of the Terms and Conditions that parties agree to in a typical insurance contract that allows an insurance carrier to avoid or be relieved of certain obligations. Unlike a contention that the claim does not fall with the grant of coverage in an insurance contract, a "late notice" policy defense concedes that claim is the type which is covered by the policy, but contends that the insured's failure to live up to the requirements of the insurance contract relieves the insurer of its obligations to pay an otherwise compensable claim. Considerations of late notice are important to both insurers and insureds, since a determination of unexcused late notice of a claim or suit often acts to relieve the insurance carrier of any further obligations under the insurance contract. The insured is then left without the benefit of insurance coverage which otherwise would be available. Given the costs of defending against civil actions, as well as the exposure for compensatory damages from a well-pled suit, a "late notice" determination has substantial consequences for both the insured and the insurance company.
Most insurance policies require that the insured provide the insurer with prompt notice of a claim at or about the time that the claim arises or becomes known to the insured, or within a reasonable period of time thereafter. This is termed in the industry as "notice of claim". Further, most policies require the insured to promptly notify the insurance carrier when he is served with process in a legal proceeding, known as giving "notice of suit". Notice of claim and notice of suit are two closely-related but different obligations under the typical insurance policy.(3) When the insured fails to provide the insurance carrier with timely notice of the claim or notice of the suit, the insurance carrier often raises this late notice policy defense with the insured through either a declination of coverage letter or a reservation of rights letter, indicating the relevant [in the view of the insurance carrier] terms and conditions of the insurance policy. Quite often these letters cite not only the "notice of claim" and/or "notice of suit" provisions, but also the "cooperation" clause found in the typical insurance contract. This clause requires the insured to reasonably cooperate with the insurance company in the investigation and defense of the claim.
Timely notice of claim is an important part of an insurance contract, as it allows the insurance carrier to investigate the loss while the facts are still "fresh", and make a determination as to how the claim should be handled. In the event that the claim goes to suit, timely notice is important so that the insurance carrier can provide the insured with an effective defense against the suit. Historically, unexcused late notice of claim or suit will allow the insurance carrier to deny the claim for failure of the insured to comply with the conditions precedent to making a valid claim.
Notice in Colorado — Historical background
Contracts of insurance are to be construed like any other contract, and are subject to the same general rules of contract interpretation: unambiguous terms will be given effect, the Court will not rewrite the contract, and the contract is to be construed against the drafter. Since the requirement that the insured give timely notice of a claim or notice of suit is contractual in nature, and thus turns on the specific terms and conditions of the insurance contract, where there is no ambiguity in those terms, they will be given their plain and ordinary meaning. When dealing with the terms and conditions of an insurance contract, the first rule of interpretation is to read the contract language itself.(4) Many standard policies have language which requires the "insured"(5) to provide notice of a claim "as soon as practicable". This is standard policy language which has been found by Colorado courts to be plain and unambiguous.(6) Historically, the question of whether notice given complied with this requirement, i.e. is "timely", has been a fact-intensive consideration. Further, when the carrier claims that the notice is not timely, the burden has been on the insured to demonstrate the late notice is excused by some reasonable factor or factors. Historically, Colorado courts have not required an insurer to show that the claimed late notice caused prejudice to the carrier in order to void coverage under the policy.
Certified Indemnity Co. v. Thun(7) is generally considered the first "modern" Colorado case to consider the parameters of late notice. Thun was involved in an automobile accident but failed to provide notice of the claim to the insurer for seventy-three days, after the insurer had made two requests of Thun that he submit formal notice of the claim. Thereafter, suit papers were forwarded to the insurer with one week of service on Thun. The notice of claim language in Thun's policy was the standard "as soon as practicable" language and was followed by a cooperation clause. Apparently Thun offered no excuse for the delay in his reporting of the claim. The Colorado Supreme Court held that since Mr. Thun had not offered an excuse to justify the unreasonable delay of seventy-three days in providing the notice of claim, the insurance carrier was relieved of its responsibilities under the contract of insurance and was not required to indemnify Thun for the losses claimed by the injured party. Citing "ancient and venerable law"(8) the Thun court concluded that Thun's delay was unreasonable as a matter of law, and held for the carrier. No discussion was made about the need for the carrier to show "prejudice" from this unreasonable delay in reporting the claim.
Marez v. Dairyland Insurance Co.(9) was the next significant case to address the late notice of claim issue in the context of whether the carrier must show prejudice. Marez was a liability case(10) like Thun. The Marez policy contained the standard "as soon as practicable" language and a cooperation clause. In that case the insured never did provide notice of the claim to the carrier nor did she provide the carrier with notice of the suit that was filed and served on her. The insurance carrier learned of the claim and the suit "by happenstance more than two and one-half years after the accident". The Court in Marez emphasized the "total lack" of notice provided by the insured, emphasizing this language on three separate occasions in the opinion. Marez offered no explanation or excuse for the lack of notice of either the claim or the lawsuit. Citing Thun, the Marez court distinguished providing late notice from providing no notice, and concluded as a matter of law that the failure to provide notice of claim or suit constituted a material breach of the insurance contract, thereby relieving the insurance carrier of further responsibilities under the insurance contract. The Petitioners urged the Court to overrule Thun and Barclay and require that Dairyland Insurance Company show not only lack of notice, but prejudice resulting therefrom. The Marez court discussed the "modern trend" of requiring the insurer to show prejudice resulting from late notice, but declined the request to impose such a duty on the insurance carriers. In so ruling the Supreme Court noted that the Marez case did not provide a factual background within which they could make such a rule, and that even if they were inclined to change the Barclay/Thun "no showing of prejudice rule", the Marez case was not the one in which to do it.(11) However, the Marez court clearly "left the door open" for a subsequent decision to overrule the Barclay/Thun rule with the "modern trend" rule requiring the carrier to not only establish unexcused late notice, but also prejudice resulting therefrom.
Holding of Clementi
Some twenty years after Marez recognized the encroachment of the "modern trend" on the historical rule described and utilized in the Barclay/Thun line of cases, the Supreme Court issued its opinion in Clementi. Clementi reversed the decisions of the trial court and the Court of Appeals and held that an insurance company must show prejudice resulting from an unexcused late notice of claim within the context of an UIM claim. In so doing the Court finally took the steps foreshadowed in Marez, particularly those steps urged by Justice Quinn in his dissent, and brought Colorado insurance notice law into line with the overwhelming majority of states that now require the showing of some prejudice to the carrier from the unexcused late notice before the obligations of the contract may be avoided by the carrier. Writing for the Court in a per curium opinion, Justice Nancy Rice's opinion in Clementi reviews the history of late notice law, addresses the competing public policy considerations at work when Courts are called upon to interpret insurance contracts, and outlines the reasons why the prejudice requirement espoused by Justice Quinn should now become the law in Colorado, at least as applied to UIM claims.
James Clementi is a state trooper who was injured in a car accident while in the scope and course of his employment. The other driver's [tortfeasor's] policy limits were $50,000. Clementi reached Maximum Medical Improvement [MMI] about one year after the accident, at which time the scheduled amount due him under Workers Compensation made it clear that the tortfeasor's insurance limits would not be sufficient to repay the Workers Compensation lien and compensate Clementi for his injuries. The Court determined that at least as of that date Clementi was on notice of his UIM claim, and under an obligation to provide his UIM carrier with notice of that UIM claim. Five months after learning that the tortfeasor's insurance limits would be insufficient and seventeen months after the accident occurred, Clementi finally gave notice to his UIM carrier of his UIM claim. The Clementi policy contained the standard "as soon as practicable" notice language and a cooperation clause.
The Supreme Court concluded that the trial court properly decided that the notice of the claim given by Clementi was untimely as a matter of law, coming five months after the last date on which Clementi reasonably should have been aware of his UIM claim. The Supreme Court likewise concluded and that the delay was unreasonable [without excuse] as a matter of law. The Supreme Court then turned to the issue of whether a showing of prejudice should be required of Nationwide in the denial of benefits based on this defective notice of claim. Justice Rice provided a thorough examination of the development of the prejudice rule, explaining why the Court had declined to require a showing of prejudice in Marez. The Clementi Court specifically held that since the Marez claim involved "a no-notice liability case", it was "inapplicable" to the issue before the Court in Clementi.
Observing that the "vast majority of courts have joined the modern trend" of requiring a showing of prejudice in late notice of claim UIM cases, our Supreme Court adopted just such a rule. Justice Rice's opinion discusses the policy considerations behind such a rule, and how the law has progressed over the years to the "modern position" adopted in almost all States. The Court comments about the "unequal bargaining power" of the insurer and insured, and notes that the Courts have assumed a "heightened responsibility" to scrutinize insurance policies which compromise the insured's interests. The Court also noted concern regarding the severity of a forfeiture provision premised on a "technical violation" of a notice provision in an insurance policy and cited to the Restatement (Second) of Contracts with apparent approval of the "disproportionate forfeiture" doctrine. Based on the review of public policy considerations, the Supreme Court "joined in the modern trend" and concluded and held that insurer prejudice should now be considered in late notice UIM cases where the carrier seeks to vitiate coverage.
The Clementi Court set out a two-step approach to UIM late notice cases: 1) the nature of the delay in providing notice, along with any excuse therefore, in determining whether the notice was "untimely"; 2) once a court has concluded that the notice given was "untimely" and the delay was "unreasonable" [i.e. unexcused], the court must consider the issue of whether the insurer was prejudiced by the untimely notice.
After some discussion of the various State's approach to the issue of how the prejudice should be proved, the Clementi Court determined that the insurance carrier must establish prejudice flowing from the tardy notice. Rejecting the suggestion that untimely notice should raise a presumption of prejudice that the claimant would be required to rebut, the Supreme Court held that once there is a showing of untimely notice, the burden is on the insurance carrier to show that it was prejudiced thereby. Thus, any carrier seeking to avoid coverage by application of the late notice provision of a UIM policy must demonstrate by a preponderance of the evidence that it was prejudiced by the delay.(12)
The Court provided some guidance as to what will constitute prejudice, stating that a carrier is prejudiced by delayed notice "only when its ability to investigate or defend the insured's claim is compromised" by the lateness of the notice. Based on the Court's adoption of the prejudice requirement in cases of late notice of claim, the Supreme Court remanded the matter to the trial court for a determination of whether and how the carrier was prejudiced by the delay of the Clementis.
By its terms and facts, the Clementi decision stands for the proposition that where a UIM claimant has failed to provide timely notice of a claim and where the insured does not provide a reasonable explanation for the delay, the insurance carrier must establish by a preponderance of the evidence that it has suffered some prejudice thereby. Upon such a showing, the UIM carrier will be entitled to prevail on its policy defense of "late notice of claim", thereby being relieved of further obligations under the UIM provisions of the applicable policy.
The Future of late notice following Clementi
Clementi, clearly limited on its face to the context of claims for UIM benefits, changes the proof necessary for an insurance carrier to prevail on a late notice policy defense. It also appears to be a harbinger of things to come for liability policies, just as the dissent in Marez foreshadowed the ruling in Clementi. The Clementi court made a clear departure from the prior Colorado rule in adopting the notice-prejudice rule. Under Clementi, where an insured finds itself in a position of providing the carrier with unexcused late notice of a UIM claim, the insured may still prevail on its claim for benefits under the policy and defeat the carrier's assertion of the policy defense of late notice if the preponderance of the evidence presented to the trial court does not support a claim of prejudice. Likewise, carriers seeking to rely on the late notice policy defense in UIM claims must now shoulder the burden of demonstrating to the trial court that they have suffered some tangible prejudice as a result of the delay in the reporting of the claim.
The opinion of the Clementi court leads to the conclusion that while Clementi is limited on its facts to UIM claims, given the opportunity this united Court would be inclined to adopt a similar rule in liability cases.(13) Footnote 5 to the Clementi decision, the extensive examination of public policy arguments in favor of adopting the notice-prejudice rule [which are arguably as applicable to a liability claim as to UIM claims], the pervasive reference to the "modern trend" in insurance law to require a showing of prejudice for carriers to prevail on late notice policy defenses [which this author understands also generally embraces liability cases], the way in which Justice Rice distinguished Marez as a "no-notice" rather than a "late notice" claim, and the substantial endorsement of the reasoning of Justice Quinn's dissent in Marez>, among other factors, seem to indicate that given the right liability case this Supreme Court would be inclined to adopt a notice-prejudice rule in all late notice cases. It is likely that our Supreme Court, given the opportunity, would adopt the notice-prejudice rule in liability cases for essentially the same reasons that it adopted that rule for UIM claims in Clementi.
It is now no longer sufficient for an insurer to simply claim that the notice of claim is untimely in order to avoid coverage under the policy. The insurer must now shoulder the two-fold burden of establishing that the notice of claim was unreasonably delayed [long enough to constitute "late", and without sufficient excuse](14) and that the carrier was prejudiced thereby. Factors to be considered appear to include whether or not law enforcement conducted an investigation, whether the insurance carrier will be prevented from conducting an effective investigation, whether the tortfeasor's insurance carrier conducted an investigation, whether there is a likely loss of evanescent evidence as a result of the delay, and the like.
Conclusion
The Clementi decision appears to be the most recent pronouncement of our Supreme Court following the progression of cases across the nation which continue to liberalize the application of insurance policies in favor of insureds and restrict the conditions under which insurance carriers may prevail on so-called "technical policy defenses". When viewed in retrospect, the decision in Clementi appears to be the natural progression of the reasoning of the Court and in harmony with both the inclinations of earlier decisions and the Court's strict requirement that it not make hypothetical determinations and declarations of law but rather decide only the cases presented for review. Carriers who have relied on the Barclay/Thun line of cases to strictly apply policy requirements and raise successful policy defenses are now required to go further in demonstrating how and why that policy defense, in this case late notice, should be applied to deprive the insured of otherwise available coverage.
1. David P. Hersh is a shareholder in the Denver firm of Burg Simpson Eldredge Hersh & Jardine, P.C. Mr. Hersh's practice involves a substantial representation of insurers and insureds on coverage and liability issues as well as a general litigation practice in both Colorado and Wyoming. This article is protected by the copyright laws of the United States.
2. Clementi v. Nationwide Mutual Fire Insurance Company, 2001 Colo. LEXIS 57 (Jan. 22, 2001)
3. Courts sometimes confuse these two concepts, or apply principles from one to the other, but these are two separate and independent obligations found in most insurance contracts.
4. As simple as this concept sounds, it has been the author's experience that many lawyers and claims personnel, let alone lay individuals, tend to fail to take this important threshold action. Since contracts vary by their terms, before looking to cases interpreting specific language in policies it is critical that the language of the policy be parsed.
5. "Insured" is most often found to be a defined term in the policy which is likely broader than the "named insured" on the policy declarations page.
6. See Certified Indemnity Co. v. Thun, 165 Colo. 354, 439 P.2d 28 (1968).
7. Id.
8. Barclay v. London Guarantee and Accident Co., Ltd., 46 Colo. 558, 105 P. 865 (Colo. 1909).
9. Marez v. Dairyland Insurance Co., 638 P.2d 286 (Colo.1981). See Also 32 A.L.R.4th 130 (2000).
10. I.e. a third party suit against the policy holder as the result of the injury.
11. In a strongly-worded three person dissent Justice Quinn urged the Court to adopt a prejudice rule even in the factual parameters of Marez.
12. The Court specifically declined to impose an obligation that the carrier demonstrate "substantial prejudice". Marez, supra note 9.
13. For a discussion and compilation of cases from Courts around the nation on whether a showing of prejudice is required where there is an unexcused late notice of claim, including some discussion of how various Courts have addressed who has the burden of proof and what that burden is made up of, see 32 ALR4th 141 (2000) "Modern Status of Rules Requiring Liability Insurer to Show Prejudice to Escape Liability Because of Insured's Failure or Delay in Giving Notice of Accident or Claim, or in Forwarding Suit Papers".
14. A discussion of what constitutes "late" notice is beyond the scope of this article.
© 2001 David P. Hersh
