A recurring professional liability insurance coverage issue is whether or not the notice prejudice rule applies to claims made policies. In a recent decision, District of Colorado Judge Richard P. Matsch, applying Colorado law, held that the notice prejudice rule did apply to claims made professional liability insurance policy with an “as soon as practicable” notice requirement, and he also rejected the carrier’s late notice defense on the grounds that the insurer’s failure to involve itself in or even inquire about the underlying claim undermined its assertion that it had been prejudiced by the late provision of notice.
Children’s Hospital Colorado was insured under a professional liability insurance policy requiring the hospital to give notice “as soon as practicable” of a medical incident that “may reasonably expected to give rise to a claim being made.” The policy provided that any claim arising out of the medical incident that is later made and reported to the insurer “shall be considered first made at the time such notice was given.” The policy provided further that if a claims or suit is brought against an Insured, the hospital must provide the insurer with “written notice of claim or suit as soon as practicable.”
In February 2008, a patient suffered a serious injury at the hospital. The hospital submitted a timely report of the incident to the insurer in April 2008. The parents of the injured patient filed a lawsuit against the hospital in January 2013. The hospital did not notify the insurer of the lawsuit until November 2014. In a November 17, 2014 report, the hospital notified the insurer about the lawsuit and advised that mediation was to be held on November 19, 2014. The insurer did not request any additional information about the underlying claim until after the case later went to trial.
The mediation was unsuccessful and trial in the matter commenced in March 2015. On March 17, 2015, a representative of the hospital advised the insurer that trial in the matter had commenced the previous day. The insurer’s claims representative first requested information about the lawsuit during the second week of trial. Also, during the second week of trial, the hospital’s attorney advised the insurer’s claims representative that he (the defense counsel) thought the case could settle for $3 million to $5 million. The claims representative did not ask the defense counsel to pursue settlement.
On March 26, 2015, the insurer sent a letter to the hospital declining coverage, incorrectly stating that the first notice was not sent until August 5, 2008 (that is, after the May 1, 2008 policy expiration date). The trial continued and resulted in a verdict in favor of the plaintiffs. The court ultimately entered judgment in the plaintiffs’ favor in the amount of $14.3 million.
The hospital disputed the insurer’s coverage denial, noting that the insurer based its denial on an incorrect notice date. The insurer withdrew its denial but sent a subsequent letter in which it asserted that the hospital had not complied with the policy’s requirement of written notice to the insurer as soon as practicable after the lawsuit was brought. The hospital filed an action seeking a judicial declaration of its right to coverage. The parties filed cross-motions for summary judgment.
The April 13 Decision
In his April 13, 2017 order, Judge Matsch granted the hospital’s motion for summary judgment and denied the insurer’s motion for summary judgment.
Judge Matsch noted that the Colorado Supreme Court had declined to extend the notice-prejudice rule to a date-certain notice requirement in a claims-made policy. However, he said that the Colorado Supreme Court had declined to reach the question presented here, which was whether the notice-prejudice rule applies where the insured has complied with the date-certain notice requirement of a claim-made policy, but allegedly has not complied with the requirement that notice be provided to the insurer “as soon as practicable” after a lawsuit or claim is presented.
Judge Matsch concluded that the notice-prejudice rule applied to this case and that the insurer bears the burden of proving both unreasonably late notice and prejudice. Judge Matsch found that the hospital had not provided the insurer with notice of the underlying lawsuit “as soon as practicable,” but concluded that the insurer had not provided sufficient evidence that it was prejudiced by the delayed notice.
In reaching the conclusion that the insurer had not presented sufficient evidence of prejudice, Judge Matsch noticed that the insurer “failed to make any inquiry about the case, exhibit any desire to learn about, comment on, or participate in preparation and trial, or otherwise exercise any claimed right under the Policy to monitor or work with [the hospital’s attorney] in settlement negotiations, investigation or trial.” The insurer’s failure to take any of these steps “completely undermines” the insurer’s “speculative and unsupported position” that it was prejudiced because timely notice would have permitted the insurer to avoid or mitigate the judgment that ultimately was entered against the hospital.
It should not be overlooked here that, even though the hospital did not provide timely notice of the ultimate lawsuit, it did provide timely notice of the original incident shortly after it occurred. The analysis in this case almost certainly would have been different if the hospital had not at the outset provided timely notice of the medical incident. Indeed, the hospital’s timely provision of the notice of medical incident apparently was a consideration in Judge Matsch’s conclusion that the “notice prejudice rule” applied to the policy’s requirement that the hospital provide notice of lawsuit “as soon as practicable.”
Judge Matsch’s analysis of the question of whether or not the insurer had suffered prejudice as a result of the late notice of the subsequent lawsuit is interesting. First of all, he not only concluded that the insurer had the burden to come forward with evidence showing that it had been prejudiced, but also that the insurer must show that the prejudice was the result of the late notice. Second of all, in assessing whether or not the late notice had prejudiced the insurer, he applied a credibility assessment. He did not take at face value the insurer’s assertion that if it had received timely notice it could have avoided or mitigated the judgment ultimately entered against the hospital.
Instead, Judge Matsch assessed the insurer’s assertion about what it might have been able to do if only provided with timely notice in light of the insurer’s conduct in processing the claim. He concluded that given the insurer’s passive and uninvolved claims response, the insurer’s “speculative and unsupported” claims of the ways in which it had been prejudiced were “completely undermine[d].”
I think Judge Matsch’s consideration of these issues is interesting. It is not uncommon for insurers seeking to show that late notice has prejudiced their interests to provide conjectural assertions about how adverse developments might have been averted if only it had been provided with timely notice. These conjectures are often, like the insurer’s assertion here, speculative, at best.
Where, as here, the insurer has the burden of showing that the late provision of notice caused the insurer prejudice, the insurer’s speculation rightly should be subjected to the same credibility assessment as Judge Matsch applied here. Where the insurer’s own conduct shows that it was not attentive or diligent in processing the claim, the speculation that it might have averted adverse developments if only provided with timely notice should be, as was the case here, viewed as insufficient to show that the insurer has been prejudiced.
There are several key points here that should be stressed. First, where the notice prejudice rule applies, it is the insurer’s burden to show that it has been prejudiced. Second, the insurer must not only who that it has been prejudiced, it must show that it was the late notice that caused the prejudice. Third, the insurer’s assertion that it could have avoided adverse developments if only it had been provided with timely notice is subject to a credibility assessment based upon the insurer’s claims processing track record in connection with the claim.
The indispensable predicate for all of these considerations to apply is the conclusion that the notice prejudice rule applies. As Judge Matsch noted, Colorado’s courts have held that the notice prejudice rule does not apply to a claims made policy with a date-certain notice requirement. There are, however, and as this case shows, various exceptions some courts have recognized to the more general rule.
As I have noted frequently on this site, late notice is a happens frequently. Late notice happens because of misunderstandings about the operation of the policy ; because the person who knows about the claim may not be the same as the person that know about the insurance; or for no reason at all. Late notice happens, period. In my view, late notice alone should not result in the forfeiture of the policyholder’s benefits under the policy, at least where the insurer has suffered no prejudice as a result.
For that reason, and also in light of the hodge-podge of different rules in different jurisdictions about the notice prejudice rule and whether or not it applies to claims made policies, it may be advisable, as I have previously discussed in prior posts, to seek (where available) the addition of policy language along these lines:
If the Insured fails to provide notice of such Claim to the Insurer as required under this Section, the Insurer shall not be entitled to deny coverage for the Claim based solely upon late notice unless the Insurer can demonstrate that its interests were materially prejudiced by reason of such late notice.
The inclusion of this language will ameliorate the hardships that can arise when the late provision of notice results in coverage preclusion. The inclusion of this language would certainly eliminate the dispute about whether or not the notice prejudice rule applies in the context of claims-made policies.
In any event, whether the notice-prejudice rule applies by operation of law or as a result of the inclusion of this type of language, the insurer’s assertion that it has been prejudiced should be subject to the same kind of credibility assessment as Judge Matsch applied here. Mere “speculative and unsupported” assertions should be insufficient to establish prejudice, particularly where as here the insurer’s track record in handling the claims belies the assertion that adverse developments could have been avoided if only the insurer had been provided timely notice.