On April 25, 2016, the Colorado Supreme Court overturned a decision by the Colorado Court of Appeals and Colorado District Court in what is believed to be a seminal victory for insurers. In Travelers Prop. Cas. Co. of Am. v. Stresscon Corp., 2016 CO 22, the Supreme Court held that insurers need not demonstrate prejudice in order to enforce the “no-voluntary-payments” provision of insurance policies that would result in the denial of insurance coverage. The opinion significantly limits an earlier holding of the Colorado Supreme Court in which a “notice-prejudice rule” was applied to the enforceability of this provision and effectively pushes back on a tide of coverage litigation seeking to impose higher barriers to denial of coverage by carriers.

Background

Stresscon Corporation, a subcontracting concrete company, filed suit against its insurance carrier, Travelers Property Casualty Company of America, alleging bad faith and unreasonable delay or denial of its claim for insurance benefits related to a third-party claim that was made under a Travelers insurance policy. The underlying facts of that claim were related to a construction accident caused by one of Stresscon’s subcontractors. The general contractor of that construction project sought contractual damages from Stresscon for construction delay, and Stresscon in turn sought indemnification from Travelers under its insurance policy. Amid some delay and dispute over liability and coverage issues, Stresscon and the general contractor independently entered into a settlement agreement. Significantly, however, Stresscon failed to consult with or obtain the consent of Travelers, despite there being a requirement to do so in the Travelers policy pursuant to the “no-voluntary-payments provision.” 

In the ensuing coverage action, Travelers moved for summary judgment on the basis that it did not owe Stresscon a duty of indemnification for the settlement amount because Stresscon had violated the no-voluntary-payments provision of the policy. The trial court disagreed, holding that Travelers was not relieved of indemnification under that provision unless it could demonstrate that it suffered prejudice as a result of the Stresscon settlement, a matter of fact to be determined by the jury. Travelers put forward the same argument when it moved for a directed verdict. However, Stresscon ultimately obtained a favorable jury verdict against Travelers, including a factual finding that there had been no prejudice to Travelers when Stresscon failed to provide it with notice before entering into the settlement agreement with the general contractor. Travelers appealed the judgment.

Colorado Court of Appeals Decision

The Colorado Court of Appeals framed the question on appeal as whether an insured’s breach of a no-voluntary-payments clause will always bar the insured from receiving benefits. Relying exclusively on the notice-prejudice rule, the appellate court agreed with the trial court that before a no-settlement or no-voluntary-payments provision can be found unenforceable, a prejudice determination must first be made. See Friedland v. Travelers Indem. Co., 105 P.3d 639, 643 (Colo. 2005); see also Clementi v. Nationwide Mutual Fire Ins. Co., 16 P.3d 223 (Colo. 2001).

In Stresscon, Travelers argued on appeal that it had been prejudiced by the settlement agreement as a matter of law because (1) the settlement denied Travelers its status as an excess insurer, (2) the unallocated settlement exceeded the amount of the insured’s liability and (3) the settlement was an attempt to “maximize a payout by the insurer.” The Court of Appeals rejected Travelers’ arguments and found that the record contained sufficient evidence that the jury could find that Stresscon’s liability was reasonably clear, the settlement was reasonable and the insurer would not have achieved a result that was “materially better.” 

Following the Colorado Court of Appeals judgment affirming the district court’s denial of its motion for a directed verdict, Travelers appealed for review by the Colorado Supreme Court.

Analysis of the Colorado Supreme Court Opinion

The Supreme Court reversed the judgment of the Court of Appeals, holding that Friedland did not overrule any existing no-voluntary-payments jurisprudence. The Court emphasized that the Friedland decision merely reversed the trial court’s order of summary judgment, which had been granted on the sole ground that the insured failed to give timely notice of a claim under the policy. The Supreme Court pointed out that it left to the trial court’s determination any remaining grounds of summary judgment, including those that could be based on violation of the no-voluntary-payments provision in the policy.

Likening the no-voluntary-payments provision to the notice-of-claim provision in the claims-made insurance policy in Craft v. Philadelphia Indemnity Ins. Co., 2015 CO 11 (Colo. Feb. 17, 2015), the Supreme Court reminded the parties that an insurance policy is a contract, the unambiguous terms of which must be enforced as written unless doing so would violate public policy. The Court further observed that, unlike the timely notice requirements of the occurrence policies at issue in Clementiand Friedland, the violation of which could lead insurers to reap a windfall, in Craft the notice provision of the claims-made policy was a fundamental term of the contract that defined the scope of coverage.

Similarly, the Court reasoned, the no-voluntary-payments provision inStresscon was a fundamental term defining the limits or extent of coverage. Further, the no-voluntary-payments clause did not purport to impose a duty on the insured to do or not do anything. Like Craft, the Supreme Court reasons that the no-voluntary-payments clause goes to the scope of the policy's coverage because it makes clear that coverage under the policy does not extend to indemnification for such payments or expenses in the first place, and specifies that as uncovered expenses they will not be borne by the insurer. The Court further noted that depriving an insurer of its choice to defend or settle in the first instance has important practical implications for the risks that insurers undertake and the premiums that insureds pay, citing a Seventh Circuit decision written by Judge Posner. See Charter Oak Fire Ins. Co. v. Color Converting Indus. Co., 45 F.3d 1170, 1174 (7th Cir. 1995).

Taking this logic one step further, the Court reasoned that to hold otherwise would permit or encourage insureds to resort to self-help by agreeing to out-of-court settlements with third parties to maintain ongoing business relationships. The Court observed that such a practice should not be the impetus for expanding coverage beyond the express terms of an insurance policy, especially when Colorado permits so-called Bashor agreements, through which an insured may assign to the third-party claimant any claim it may have against its insurer for breach of the insurer’s duty of good faith and fair dealing.

In sum, the Supreme Court found that because the notice-prejudice rule is inapplicable in the context of a no-voluntary-payments clause, the trial court and the appellate court erred in finding that the no-voluntary-payments clause was unenforceable unless Travelers was prejudiced by the unauthorized settlement. The Supreme Court reversed and remanded the judgment, with directions that Travelers’ motion for directed verdict be granted and judgment entered in Travelers’ favor.

Dissenting View

The dissenting opinion was critical of the majority’s holding, reasoning that the no-voluntary-payments provision at issue in Stresscon served the same interests as the prompt notice provision in Friedland, and that the similarities pointed out by the majority to the claims-made policy in Craftwere not striking. However, the dissent emphasized that it would hold that there was a rebuttable presumption of prejudice arising from an insured’s breach of a no-voluntary-payments clause, and that the insured should bear the burden of going forward with evidence to dispel that presumption. If such evidence is presented, the presumption is overcome and the burden then shifts to the insurer to show by a preponderance of the evidence that it suffered actual prejudice from the voluntary payment or settlement.

Practice Pointer

With Craft, and now Stresscon, the Colorado Supreme Court limited any far-reaching consequences Clementi and Friedland were believed to have had on other standard provisions of insurance policies. The majority opinion here also suggests that when the policy provision in question contains a “fundamental term” that defines the limits or extent of coverage, the notice-prejudice rule, or any similar inquiry into the prejudice suffered by the insurer as a direct result of the breach of that term, is inappropriate. Of course, as the dissent points out, there are differences of opinion and interpretations as to whether a provision is “fundamental” to the scope of coverage determination. Thus, the next phase of court cases challenging the contours of the notice-prejudice rule could well rest on just that question.

The Supreme Court noted that the lower court had been improperly influenced by other jurisdictions, including a state within the Tenth Circuit, in reaching its holding. See, e.g., Roberts Oil Co. v. Transamerica Ins. Co., 113 N.M. 745, 748 (1992). The Supreme Court explained that any comparison with those other jurisdictions is unhelpful because their holdings arise in different insurance contexts, involve differently worded provisions or are justified by different rationales unique in the historical context of the specific jurisdiction. Although not a point belabored in the opinion, the Colorado Supreme Court’s holding in Stresscon is actually in accord with other jurisdictions across the country. See, e.g., Tenneco Inc. v. Amerisure Mut. Ins. Co., 281 Mich. App. 429, 468 (2008); Augat, Inc. v. Liberty Mut. Ins. Co., 410 Mass. 117, 123 (1991).