Colorado Court Requires Insurer to Prove Prejudice to Raise Voluntary Payment Defense
The Colorado Court of Appeals recently held that before an insurance company can invoke an insurance policy voluntary payment clause as a defense to the insurer’s obligation to pay for an unnoticed settlement, that the insurer was required to prove actual prejudice first. In Stresscon Corp. v. Travelers Property Cas. Co. of America, 2013 WL 4874352 (Colo. App. Sept. 12, 2013), the insured concrete subcontractor reached a settlement with the general contractor to settle the general contractor’s claims for liability due to construction delays resulting from an accident caused by the insured’s subcontractor at a construction site. Travelers sent two reservation of rights letters to the insured concrete company stating that its policy might not cover the delay damages sought by the general contractor. Travelers also sent a letter to the general contractor, on behalf of the concrete company, denying that the concrete company was liable to the general contractor. At that point, the general contractor entered into settlement discussions with the concrete company. However, the concrete company did not inform Travelers of the settlement or obtain its consent before entering the settlement agreement. Under the settlement, the general contractor was reimbursed for delay damages caused by the accident and for other unrelated damages resulting from the accident that were clearly not covered by the concrete company’s policy with Travelers. Neither party attempted to allocate the settlement between covered and uncovered claims. Travelers first learned of the settlement agreement when it was sued by the concrete company for breach of contract. After a jury trial, the jury rendered a verdict in favor of the insured concrete company finding that Travelers had unreasonably denied the concrete company’s claim, and that Travelers had not been prejudiced by the settlement.
Colorado courts subscribe to the notice-prejudice rule. Under Colorado’s version of the notice-prejudice rule, (1) if an insured does not provide the insurer with notice of a claim until after the insured has settled; then (2) the insured will lose benefits after the settlement based on a presumption of prejudice; unless (3) the insured rebuts the presumption that the insurer’s interests were prejudiced by the lack of notice; and (4) the insurer does not then prove that it was actually prejudiced by the lack of notice.
On appeal, Travelers argued that the notice prejudice rule did not apply to breaches of “no voluntary payment” clauses. Travelers also argued that it was prejudiced, as a matter of law, whenever an insured settled with a third party claimant before that third party had filed a lawsuit. For these reasons, Travelers argued that it never had a duty to pay benefits to the insured concrete company. If it had no duty to pay benefits, it could not have unreasonably delayed or denied paying the concrete company benefits under the policy.
The Colorado Court of Appeals rejected Travelers arguments finding that the notice-prejudice rule should apply under the circumstances; that an insured’s pre-litigation settlement with a third party did not conclusively establish that the insurer was prejudiced; and that there was sufficient evidence to support the jury’s finding that Travelers was not prejudiced. The Court found that the notice-prejudice rule was applicable to “no voluntary payment” clauses. In reaching this conclusion, the Court found the analysis used by the Court in Roberts Oil Co. v. Transamerica Ins. Co., 113 N.M. 745, 833 P.2d 222, 229 (1992) to be persuasive:
[W]e do not believe that the policy considerations underlying a voluntary payment provision differ significantly from the policy considerations underlying a cooperation clause. The purposes of a voluntary payment provision are to “obviate the risk of a … collusive combination between the assured and the injured third party” and to “restrain the assured from voluntary action materially prejudicial to the insurer’s contractual rights.” These purposes achieve the same general objectives as the purposes of a cooperation clause.
The Stresscon Court concluded that “forfeiting insurance benefits when the insurer has not suffered any prejudice would be a disproportionate penalty and provide the insurer a windfall based on a technical violation of the policy.”
The Court in Stresscon also rejected Travelers argument that the notice-prejudice rule was inapplicable per se because the concrete company settled before the general contractor filed a lawsuit. Travelers argued for a bright-line rule that rendered all pre-suit settlements prejudicial as a matter of law. In rejecting this argument, the Court noted “[n]othing about the pre-suit nature of a settlement renders it any less trustworthy than [a] post-lawsuit settlement… In both circumstances, the insured party has admitted liability and/or agreed to settle the claim or the lawsuit without the insurer’s participation.” Without regard to whether the third party has yet filed a suit, such a settlement deprives the insurer of the opportunity to “investigate the claim, present legitimate defenses to its insured’s liability, and be involved in settlement negotiations.” Even assuming Travelers’ argument that, without a bright-line rule, policyholders and third parties would be tempted to collude to “set up” insurers, the Stresscon Court concluded that the presumption of prejudice, and the insurer’s opportunity to prove prejudice if the insured overcomes the presumption of prejudice, provided the insurer ample protection against that alleged putative risk.
Finally, the Stresscon Court found that there was sufficient evidence to support the jury’s verdict of no prejudice.