Liability Insurance: Notice-prejudice After Friedland - May 2006 - Tort and Insurance Law
| Publication year | 2006 |
| Pages | 71 |
| Citation | Vol. 35 No. 5 Pg. 71 |
2006, May, Pg. 71. Liability Insurance: Notice-Prejudice After Friedland - May 2006 - Tort and Insurance Law
May 2006
Vol. 35, No. 5 [Page 71]
Tort and Insurance Law
This column provides information concerning current tort law issues and insurance issues addressed by practitioners representing either plaintiffs or defendants in tort cases. In addition, it addresses issues of insurance coverage, regulation, and bad faith.
Column Editor:
William P. Godsman of the Law Office of William Godsman, Denver - (303) 455-6900, wgodsman@qwest.net
About The Authors:
This month's article was written by Marilyn S. Chappell, Denver, an attorney with Wells, Anderson & Race, LLC, where she specializes in insurance coverage, product liability, and construction defect litigation - (303) 813-6539, mchappell@warllc.com; and Damian J. Arguello, Denver, an associate with Davis Graham & Stubbs LLP, where he specializes in insurance coverage litigation of environmental and mass tort matters - (303) 892-7411, damian.arguello@dgslaw.com.
Liability insurance policies typically require the insured to promptly notify the insurer of a claim as a condition for providing coverage for the claim. Such notice provisions are intended to help the insurer obtain the information necessary to investigate and defend the claim. Consequently, if the insured violates this provision by failing to provide the required notice, the insurer may assert a "late notice" defense to coverage. This assertion can disrupt the insured's expectation of receiving the coverage for which it contracted.
In the 1981 decision Marez v. Dairyland Ins. Co.,(fn1 )the Colorado Supreme Court rejected the argument that the late notice defense should be available only to liability insurers who have been prejudiced by the delayed notice. However, in 2001, the Court held that an uninsured motorist insurer must demonstrate prejudice to rely on the defense in the case Clementi v. Nationwide Mut. Fire Ins. Co.(fn2) The Clementi decision was interpreted to suggest that the Court would adopt the notice-prejudice rule in the liability insurance context, as well.(fn3)
In Friedland v. Travelers Indemn. Co.,(fn4 )decided by the Colorado Supreme Court on January 31, 2005, the Court adopted a prejudice requirement for liability insurance cases involving late notice. However, the Court discussed the content of the prejudice requirement only in general terms. Thus, although it is now clear in Colorado that insurers generally must prove prejudice to successfully invoke the late notice defense, the content of the prejudice requirement has yet to be explained by Colorado courts. This article summarizes the Court's holding in Friedland, examines the prejudice requirement as adjudicated by other courts, and briefly addresses practical aspects of the notice-prejudice rule to help practitioners determine the implications of the Friedland decision.
The Friedland Decision
In the Friedland case, plaintiff Robert M. Friedland ("insured") was a former officer and director of a company sued by the United States and the State of Colorado under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA")(fn5) due to pollution from mining operations.(fn6) The company had been insured under comprehensive general liability insurance policies issued by defendant The Travelers Indemnity Company ("insurer").(fn7) After approximately four years of litigation, the insured settled the CERCLA claims against him.(fn8) He then notified the insurer of the claim and filed suit against the insurer, seeking reimbursement of his defense costs and indemnity payments.(fn9) Notice to the insurer of the CERCLA claim occurred more than six years after the CERCLA action had been filed, and approximately six months after settlement of the action.(fn10)
The insurer moved for summary judgment, based in part on the insured's alleged noncompliance with the notice provisions of the applicable insurance policies.(fn11) Relying on the Marez(fn12) decision, the trial court granted the insurer's motion.(fn13) The trial court did not consider whether the insurer had been prejudiced by the late notice of the claim.(fn14) Under C.A.R. 50, the Colorado Supreme Court granted certiorari review while the case was pending in the Colorado Court of Appeals.(fn15)
The Colorado Supreme Court, in a 4-2 decision,(fn16) expressly overruled Marez and applied the notice-prejudice rule to liability policies.(fn17) The Court recognized that timely notice of a claim helped provide an insurer with "adequate opportunity to investigate the claim, present legitimate defenses to its insured's liability, and be involved in settlement negotiations."(fn18) However, lack of timely notice should not bar coverage in all cases: "an ever-growing majority of jurisdictions . . . adopted the notice-prejudice rule, whereby late notice does not result in loss of coverage benefits unless the insurer proves prejudice to its interests by a preponderance of the evidence."(fn19) The Court added, as it had determined in Clementi,(fn20) that three factors supported adoption of the notice-prejudice rule: (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 and the insured not receiving policy benefits due to a technicality.(fn21)
The Court further held that a three-step analysis governs the prejudice determination:
1. Was the notice "untimely" and the insured's delay in giving notice "unreasonable"?
2. If the notice was untimely and the insured's delay in giving notice was unreasonable, can the insurer "demonstrate that it was prejudiced"?
3. If the late notice occurred after the insured's settlement of the underlying case, there is a "presumption of prejudice in favor of the insurer."(fn22) Under this third prong, in some factual circumstances the insurer may not suffer actual prejudice despite lack of notice until after resolution of the underlying litigation.(fn23) Consequently, the insured "must have an opportunity to rebut this presumption of prejudice based on the specific facts of the case, before a trial court may bar the insured from receiving coverage benefits."(fn24) If the insured comes forward with evidence rebutting this presumption, "it is then up to the insurer to go forward with the evidence that actual prejudice existed."(fn25)
Under the specific facts of Friedland, the Court determined that the insurer was entitled to a presumption of prejudice, because it did not receive notice of the claim...
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