In a 4-3 decision in Travelers Property Casualty Co. of America v. Stresscon Corp., 2016 CO 22 (Case Number 2013SC815), issued April 25, 2016, the Colorado Supreme Court held that an insurer seeking to deny coverage to its insured for a breach of the no-voluntary-payments provision does not need to prove prejudice, as it would under the rule applicable to the notice provision of an occurrence-based insurance policy.  The Colorado Supreme Court reversed the intermediate appellate court, which had held that the high court’s decision in Friedland v. Travelers Indemnity Co., 105 P.3d 639 (Colo. 2005) compelled the result that prejudice was a requirement to deny coverage for a voluntary payment made without insurer consent.

To understand the Court’s decision in Stresscon and how the intermediate court came to the wrong conclusion, it is helpful to understand Friedland.  In that case, Friedland (the insured) defended a CERCLA case against him and settled after four years of litigation for $20 million.  Friedland, 105 P.3d at 641-642.  Friedland provided first notice to the insurer (Travelers) six months after the case concluded, seeking defense costs and indemnity.  Id.at 642.  Travelers filed a motion for summary judgment on several bases, including late notice and the “no voluntary payment” provision.  Id.  The trial court granted Travelers summary judgment based on late notice and did not address the other issues.  Id. at 643.  In a direct appeal to that court, the Colorado Supreme Court reversed the trial court’s decision.  The Court first adopted the notice-prejudice rule for liability policies that had been previously adopted in the uninsured motorist context in Clementi v. Nationwide Mutual Fire Ins. Co., 16 P.3d 223 (Colo. 2001).  Id. at 645.  The Court stated that the insurer must demonstrate that its “significant interests” had been prejudiced in order to deny coverage based on late notice.  Id. at 643-644.

The Friedland court then held that in the situation where notice to the insurer is providedafter the insured has defended and settled the case, “the delay is unreasonable as a matter of law and the insurer is presumed to have been prejudiced by the delay.  However, the insured must have an opportunity to rebut the presumption of prejudice.”  Id. at 641.  Specifically, “the insured, despite having made a unilateral settlement without notice to the insurer, must have an opportunity to rebut this presumption of prejudice based on the specific facts of the case, before a trial court may bar the insured from receiving coverage benefits.”  Id. at 648.  “If Friedland successfully rebuts the presumption of prejudice, Travelers must show by a preponderance of the evidence that it suffered actual prejudice from the delayed notices of claim and suit in order to be excused from paying policy benefits.”  Id. at 649.  The Court concluded by stating: “What form the proceedings on remand shall take regarding in the issues of prejudice, Friedland’s unilateral settlement, and the policy coverage, we leave to the trial court’s further determination” and noted that it was not addressing the other issues raised by Travelers in its summary judgment motion because the trial court had not addressed them.  Id. at 649.

In Stresscon, the insured sought indemnification from Travelers for a July 2007 construction accident.  Stresscon, 2016 CO 22, at ¶ 3.  Travelers was apparently notified and involved in the claim, but on December 31, 2008, “despite Mortenson’s [the claimant’s] failure to bring a lawsuit or seek arbitration against Stresscon, Mortenson and Stresscon entered into a settlement agreement without consulting Travelers.”  Id. at ¶ 4.  In March 2009, Stresscon filed suit against Travelers and others.  Id.  Travelers moved for summary judgment based on Stresscon’s settlement without Travelers’ consent, under the no-voluntary-payments provision of the policy, which stated: “No insured will, except at that insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.”  Id. at ¶ 5.  The trial court denied Travelers’ motion, finding that Friedland required the insurer to show prejudice, which involved disputed issues of fact.  Id.  Stresscon ultimately obtained a verdict against Travelers for bad faith breach of the insurance contract and an award of the statutory amount, costs, and attorneys’ fees, and the trial court denied Travelers’ request for a directed verdict.  Id. at ¶¶ 1, 4.  The Court of Appeals affirmed, relying on Friedland.  Id. at ¶ 6.

The Colorado Supreme Court reversed the Court of Appeals’ decision.  It held that an insurer can enforce the no-voluntary-payments provision of its policy without a showing of prejudice.  Id. at ¶ 2.  The Court specifically stated that Friedland “did not . . . also implicitly extend our newly minted notice-prejudice rule to no-voluntary-payments or consent-to-settle provisions, as the court of appeals believed.”  Id. at ¶ 9.  The Court noted that, in Friedland, it had declined to decide issues that had not been addressed in the trial court, including the no-voluntary-payments issue.  Id.  It clarified that Friedland was limited to “extending the notice-prejudice rule announced in Clementi to liability policies . . . and tailoring the prejudice determination to the situation in which notice of a claim was given only after settlement.”  Id.

In Craft v. Philadelphia Indem. Ins. Co., 343 P.3d 951 (Colo. 2015), decided by the Colorado Supreme Court last year, the court distinguished Clementi and Friedland in holding that the notice-prejudice rule does not apply to the requirement in a claims-made policy that the claim be reported during the policy period (or within a designated time period after).  In Stresscon, the Court stated that: “Much of that discussion also explains why we similarly decline to judicially impose a prejudice requirement upon the enforcement of the no-voluntary payments clause of the policy in this case.”  Id. at ¶ 11.  The Court in Stressconnoted that, like the reporting requirement in a claims-made policy, the no-voluntary-payments provision “far from amounting to a mere technicality imposed upon an insured in an adhesion contract, was a fundamental term defining the limits or extent of coverage.”  Id. at ¶ 13.  The Court further stated that the no-voluntary-payments provision “actually goes to the scope of the policy’s coverage” and “makes clear that coverage under the policy does not extend to indemnification for such payments or expenses in the first place.”  Id. at ¶ 14.  The Court distinguished enforcement of this provision from enforcement of the notice provision, which it has said would be “reap[ing] a windfall by invoking a technicality to deny coverage.”  Id. at ¶ 15 (citing Friedland and Clementi).

The Colorado Supreme Court remanded the case with directions that the jury verdict be vacated and that a verdict be entered in Travelers’ favor.  Id. at ¶ 23.

By holding that an insurer need not demonstrate prejudice to enforce a no-voluntary-payments provision, Colorado joins the majority of jurisdictions that have so found.