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Colorado Supreme Court applies notice-prejudice rule to first-party homeowners’ property insurance policy case

4/25/24

By: Sean C. Harrison and Lorne G. Hiller

In March 2024, the Colorado Supreme Court ruled in Gregory v. Safeco Insurance Company of America, Runkel v. Owners Insurance Company, 2024 WL 1040531, that, as a matter of first impression, the notice-prejudice rule was expanded to apply to first-party homeowners’ property insurance policies, labeling them as occurrence-based policies. 

Gregory involved two sets of homeowners, Karyn Gregory (“Gregory”) and Lisa and Sylvan Runkel (the “Runkels”), who had filed claims for hail damage to their homes. Gregory’s and the Runkels’ insurance companies both denied their claims on the grounds that they were filed outside their policies’ one-year notice periods. In both cases, the lower courts granted summary judgment to the insurers, finding that Gregory’s and the Runkels’ failures to comply with their policies’ notice provisions relieved their insurers of the obligation to cover their claims.  

The Court reversed the lower courts’ rulings, holding that the notice-prejudice rule applies to occurrence-based, first-party homeowners’ property insurance policies. Under this rule, which had only been applied to liability policies in Colorado to date, an insurer can deny coverage based on late notice of a claim only if it can prove it was prejudiced by the insured’s delay in reporting. The Court cited three public policy considerations that supported the adoption of the rule: the adhesive nature of insurance contracts, the public policy objective of compensating victims, and the inequity of granting the insurer a windfall due to a technicality. 

The Court concluded that in an occurrence-based policy, “the purpose of notice is simply to allow the insurer to investigate, to attempt to resolve the claim, and to defend against it, and thus, in this context, the timeliness of notice is not a fundamental contract term that is a condition precedent to coverage itself.” The Court opined that permitting an insurer to deny coverage because of date-certain notice requirements would essentially convert an occurrence-based policy to a claims-made policy and “permit the insurer to enjoy the benefits of a claims-made policy without complying with the statutorily mandated requirements of such a policy.” Thus, the Court reversed the judgments of the lower courts and remanded the cases for further proceedings, holding that the same two-step approach from Clementi v. Nationwide Mutual Fire Insurance Co., 16 P.3d 223 (Colo. 2001) must be followed: (1) “whether an insured’s notice was timely or whether any delay was reasonable,” and (2) if the “insured’s notice was untimely and that the delay was unreasonable… whether the insurer was prejudiced by such untimely notice.”  

Writing in dissent, Justice Melissa Hart, joined by Chief Justice Boatright and Justice Marquez, argued that the majority misunderstood the nature of the insurance market and the purpose of date-certain notice requirements in a first-party property policy. The dissent also argued that the majority improperly applied the second public policy consideration—“the public policy of compensating tort victims”—and extended it to “an undefined and unlimited policy in favor of the protection of individuals who the court believes deserve it.” Last, the dissent argued that date-certain notice provisions are not mere technicalities that can be ignored but are, in fact, essential terms that allow insurers to price insurance and assess potential liability. Ultimately, the dissent suggested that the majority’s decision “provides no limiting principles and risks destabilizing Colorado insurance markets.”  

It appears the Colorado Supreme Court may have made the late notice exclusion a bit “Rockier,” and we will continue to monitor how the insurance market responds to this decision and how it will impact property insurance claims.   

For more information, please contact Lorne Hiller at lorne.hiller@fmglaw.com or Sean Harrison at sean.harrison@fmglaw.com or your local FMG attorney.