Can the Late Notice Prejudice Rule Lead to Claims Gamesmanship?


The Colorado Supreme Court recently adopted the notice prejudice rule1 as noted in Colorado Supreme Court: Late Notice, No Prejudice, No Problem:

The notice-prejudice rule, however, requires the insurer to demonstrate that the delay in notification materially prejudiced its position before it can deny coverage based on a late notice. Essentially, this rule shifts the focus from strict adherence to contractual deadlines to a more equitable consideration of whether the insurer was actually harmed by the late notice. The notice-prejudice rule previously applied only to uninsured/underinsured motorist and third-party liability policies in Colorado.

Following a LinkedIn comment by insurance defense attorney Steve Badger criticizing the decision, I wrote a response in The Doom and Gloom Assumes a Costume of Plume—The Insurance Industry Needs to Stop Being So Negative and Watch Out for Its Customers. At the end of that post, I noted:

There is another aspect of the case that can lead to wrongful gamesmanship, which I will describe in an upcoming post.

It is important for everybody to understand what the insurance industry and Steve Badger complain about concerning late notice of claims. Steve Badger contends that a late notice of claim should result in denial rather than payment because he believes that the practice of filing claims long after an event, such as a hurricane or hailstorm, leads to gamesmanship in the claims process, which is often caused by roofers and AOB attorneys. The insurance industry’s position is that a late notice of damage inherently makes it more difficult for insurers to investigate and accurately assess the damage. Accordingly, the “duty after loss” to perform the immediate notice of loss is material and significant from the insurer’s view.

The industry view is that the delay can be exploited by contractors to inflate the cost of repairs, and make claims for losses that are not caused by the event claimed, which inherently increases adjustment and claims expenses just to investigate claims not found worthy of payment and drives up premiums to pay for increased severity and frequency of claims compared to historical severity and frequency actuarial results. Since I have spent quite a bit of time with Steve Badger discussing and debating these issues, I believe his position is likely formed by his broader concerns about the integrity of the insurance claims process. Unlike my practice, where I see insurance company claims abuses, insurance defense attorneys work on claims sent to them by insurers that they believe are simply not worthy. Badger literally shows examples of these in his public comments.

My view is that a policyholder who makes a claim late should be able to collect if the late notice has not prejudiced the insurance company.  My blog post provided an example, which I believe happens all the time because we have represented numerous policyholders in a similar scenario. However, the late notice rule in the modern claims era can lead to a potential downside that promotes gamesmanship.

The gamesmanship is much easier to accomplish in states that have a long statute of limitations and disallow a shortened statute of limitations. Florida is an excellent example of such a state. The result has led to statutory reforms disastrous for policyholders in reaction to perceived and actual instances of claims gamesmanship strategies.

In Florida, the insurance industry provided numerous examples of contractors providing incentives to policyholders to entice the investigation of a possible claim to roofs where the storm occurred years before. Sales teams of roofers were trained on how to approach policyholders to make such claims and promising something too good to be true—“You have nothing to lose, let us make the claim for you with an AOB, and let’s see if the insurer will pay for the replacement of your roof.  We will even find and hire attorneys to help out at no cost to you.”

This scenario with AOB attorneys, along with extraordinary sales tactics by some in the construction restoration industry and a five-year statute of limitations, killed the Florida insurance market. Insurance company claims managers were besieged with an historic rise in the frequency of late reported property claims. They made new claims processes, which were much more difficult for all claimants. Good or bad claims were caught in this new scenario of claims processing. Claims payments were much more difficult, and property insurance litigation increased. I could write a book on the Florida example of gamesmanship.

Unless you live under a rock in the property insurance field, the Florida scenario is known to many. It is what Badger and the insurance industry fear. That was part of why I wrote the post about the industry overreacting to a rule of law that seems very equitable to many. Indeed, the prejudice rule is common in most states and has worked with little gamesmanship ever occurring.

I often remind many in the insurance industry that they have this tendency to overreact to one case or instance of fraud. They complain about an instance of fraud as if it is normal for everybody to be doing it, and make up statistics that are not supported. They seem to be in a jihad against the people purchasing the insurance product as soon as they have a loss. I stated this in Badger Traps and How Contractors Can Avoid Being Accused of Insurance Fraud:

One of the remarkable aspects of property insurance claim handling is how often some insurance companies get into a ‘holy war’ about insurance fraud. Both Steve Patrick and Steve Badger will tell anybody that is listening that neither promotes fraud by the insurance company, the policyholder, the contractor or the public adjuster. Indeed, each says fraud should be called out no matter who is doing it. I have literally heard them say the same thing about fraud in different speeches, in different parts of the country.

The bottom line is that the case allows Colorado policyholders who reported their property loss late a means to still collect if the insurer has not been prejudiced. While there is some increased chance of some examples of “gamesmanship” that happened in Florida, Colorado law is different than Florida. Colorado allows for a shortened statute of limitations and case law allowing insurers to specifically prevent AOBs in their property insurance policies.

Thought For The Day 

Courage is resistance to fear, mastery of fear, not absence of fear.

—Mark Twain


1 Gregory v. Safeco Ins. Co. of Am., 2024 CO 13, — P.3d —, 2024 WL 1040531 (Colo. Mar. 11. 2024).



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