Can an insurance carrier reject a homeowner's claim if it is late?

Karyn Gregory had a homeowners’ insurance policy with Safeco Insurance Company of America, effective from February 15, 2017, to February 15, 2018, which specified coverage only for losses occurring within that period. It also required that any claims for loss due to windstorm or hail be reported within 365 days of the event.

Gregory’s home was damaged by a hailstorm on May 8, 2017, but she didn’t realize the damage until about 18 months later when preparing to sell her home. She filed a claim on October 22, 2018, which was beyond the 365-day notice period specified in her policy. Safeco denied her claim due to its untimely filing. Gregory then sued Safeco in Denver District Court, claiming breach of contract and bad faith, among other things.

However, the court sided with Safeco, ruling the claim untimely and unreasonable. Gregory appealed, arguing that the court should apply Colorado’s notice-prejudice rule, which might allow for some flexibility in the filing deadline. Nevertheless, the appeals court upheld the original decision, stating that extending the notice-prejudice rule to such cases was beyond its power, maintaining that the timely notice requirement was a precondition for coverage. Gregory’s late notification was deemed unexcused, absolving Safeco from covering the loss.

Gregory then took her case to the Colorado Supreme Court

The judgement of Gregory v. Safeco Insurance Company of America was handed down last week along with the related case of Runkel and Sylvan T. Runkel III v. Owners Insurance Company, both concerned the application of the notice-prejudice rule to occurrence-based first-party homeowners’ property insurance policies. That is – if late notice doesn’t prejudice the insurer – can it still reject the claim?

Overview of the decisions

In both cases, the Supreme Court of Colorado extended the application of the notice-prejudice rule to occurrence-based first-party homeowners’ insurance policies. This rule requires an insurer to demonstrate that it was prejudiced by the insured’s late notice of a claim before denying coverage based on the untimeliness of the claim. This marks a departure from the traditional approach that allowed insurers to deny claims based on late notice without proving prejudice.

Implications for insurance professionals

1. Policy drafting and risk management: Insurers must carefully review and possibly revise policy language related to notice requirements for claims. While the inclusion of specific timelines for notice is standard practice, insurers might need to ensure that policies explicitly address the consequences of late notice and how prejudice will be evaluated.
2. Claims handling procedures: Insurers need to adjust their claims handling procedures to incorporate the evaluation of prejudice in cases of late notice. This involves not only determining whether a late notice has occurred but also assessing whether the delay has materially affected the insurer’s ability to investigate or settle the claim.
3. Training and compliance: Insurance companies should train their claims handlers and legal teams on the nuances of the notice-prejudice rule as applied to homeowners’ policies. This training should include understanding how to document and demonstrate prejudice when a claim is reported late.
4. Underwriting practices: The decision may influence underwriting practices, as insurers assess the potential for increased claims due to the application of the notice-prejudice rule. Insurers might need to adjust premiums or policy terms to mitigate the risk of late claims and the associated challenges in proving prejudice.
5. Legal and regulatory outlook: This development underscores the dynamic nature of insurance law and the potential for legal precedents to evolve. Insurance professionals should stay informed about legal trends and regulatory changes that could affect policy language, claims processing, and the overall insurance market.
6. Public policy and customer relations: The court’s decision reflects broader public policy goals, including the equitable treatment of insureds and the avoidance of windfalls for insurers due to technicalities. Insurers should consider these principles in their operations and customer relations, balancing the need for timely notice with fairness to policyholders.