The Colorado Supreme Court heard arguments on Tuesday in a pair of cases that could make it easier for homeowners to pursue late-filed property damage claims through their insurance policies.

Under the longstanding approach to property coverage, the burden fell to homeowners to show that a claim filed beyond their policy deadline should nonetheless proceed because extenuating circumstances prevented them from filing earlier.

However, plaintiffs in Denver and Boulder County are asking the state’s highest court to instead put the obligation on the insurance industry to show why they would be disadvantaged by a late-filed claim. The “notice-prejudice rule,” as it is known, requires insurers to demonstrate a policyholder’s late notice harmed their ability to investigate and defend against a claim.

To date, the Supreme Court has only extended the rule to a narrow class of insurance claims. The industry argued to the court that it is reasonable to expect homeowners to report property damage within a one-year deadline. Moreover, broadening the scope of the notice-prejudice rule would affect the willingness of insurers to provide affordable coverage.

The status quo “supports the overall public policy of freedom to contract and allowing contracts to be enforced as written,” argued attorney Holly C. White for Safeco Insurance Company of America.

“What about the public policy of an insured who pays all their premiums, and then they get a loss, and an insurance company says, ‘Thanks for the premiums. Denied,'” countered Justice Richard L. Gabriel.

Justice Maria E. Berkenkotter pointed out that no matter what, insurers will always have to pay out property damage claims filed beyond the deadline for providing notice – either because homeowners have a good excuse under the current standard or because the companies will be unable to prove they were harmed under a new standard.

“This is really about the burden of proof living with the insurance company,” rather than the homeowner, she said.

In May 2017, a hailstorm damaged the roof of Karyn Gregory’s Denver home. She did not learn of the damage until a contractor told her in October 2018. Gregory made a claim to her insurer, Safeco, but the company denied it because Gregory filed 17 months after the hailstorm – and beyond the one-year reporting deadline in her insurance policy.

Similarly, Owners Insurance Company denied the claim of Lisa and Sylvan T. Runkel III, whose Superior home received hail damage in July 2019. The Runkels did learn about the damage before their own one-year deadline, and Owners hired an inspector to calculate the roof damage. However, Owners ultimately denied the claim because the Runkels filed it 10 days late.

Lower courts dismissed both sets of plaintiffs’ claims against their insurers, and rejected their arguments that the notice-prejudice rule should apply.

“Maybe so, but we do not see this policy judgment as ours to make,” wrote Judge W. Eric Kuhn for the Court of Appeals, suggesting the state Supreme Court take up the issue.

The notice-prejudice rule currently applies in two scenarios: personal injuries from an uninsured or underinsured motorist, and general liability insurance. When the Supreme Court first adopted the rule in 2001, it cited three reasons for placing the burden on insurance companies to show a late-filed claim negatively affected them:

? Insurance contracts are one-sided in favor of the insurer

? Ensuring “innocent” personal injury victims receive compensation is a public policy goal

? Insurers would receive a windfall by denying coverage on a technicality

During oral arguments on Tuesday, Justice Melissa Hart observed that all insurance contracts are one-sided, and companies always receive a windfall when they collect premiums and deny coverage. Therefore, the question was whether the protection for personal injury victims extends to homeowners.

“I don’t think we’ve established a public policy of compensating innocent homeowners for acts of god,” she said.

“I’m thinking in particular, just over the last handful of years, some mass weather events – mass hailstorms, fires, floods, rainstorms, you name it,” added Justice Monica M. Márquez. “We’re not talking about the one-off (personal injury) victim. We’re talking about thousands or maybe an entire city who may be filing claims. Many of which might require the insurer to prove prejudice.”

Lawyers for the plaintiffs responded that those who pay their premiums should receive coverage for damage that happens within the policy window. Moreover, it is not always obvious that a home is weather-damaged.

“Oftentimes, what we deal with in these situations is the homeowner is wholly unaware they have hail damage until potentially well down the road they have a roof leak,” said David M. Roth, representing Gregory. 

“I had a client who was out of town for a Fourth of July party during a hailstorm. Came back and had no idea,” said Rodney J. Monheit for the Runkels.

Although the insurers argued that easing the path for late-filed claims would inject unpredictability into the insurance markets, some members of the court pointed out that in the case of the Runkels – who filed 10 days late yet still received a damage assessment from their insurer – there was clearly no harm in exceeding the deadline.

“There’s significant injury to their property through no fault of theirs,” said Gabriel to the insurer’s attorney. “And the question is: Why shouldn’t you have to show a lack of prejudice to you?”

The cases are Gregory v. Safeco Insurance Company of America and Runkel v. Owners Insurance Company.