Yesterday, the construction and insurance communities received much sought-after guidance from the Colorado Court of Appeals regarding Colorado's recently adopted bad faith statute in the highly anticipated decision, Stresscon Corporation v. Travelers Property Casualty Company of AmericaThe Court affirmed a jury verdict in favor of the insured, Stresscon, and clarified Colorado law concerning an insured's right to protect itself when it has been abandoned by its insurer.
The case arose from a construction accident on a Fort Carson construction project. Stresscon, the precast concrete subcontractor, faced a claim for delay and damages from the general contractor when a crane accident caused damage and delays to the project. The general contractor asserted a claim against Stresscon who, in turn, tendered the claim to its liability insurer, Travelers, its subcontractors responsible for the accident, and their respective liability insurers.
Stresscon's insurer, Travelers, responded with a reservation of rights stating, among other things, its policy might not cover the delay damages sought by the general contractor. Later, Travelers sent a letter to the general contractor denying that Stresscon was liable to the general contractor. Based on these and other communications, as well as Travelers' failure to investigate or adjust the claim, Stresscon concluded Travelers had abandoned it and that it had no choice but to settle with the general contractor or face costly and protracted arbitration. Following the settlement, Stresscon sued Travelers for common law and statutory bad faith breach of the insurance policy; its subcontractors involved in the accident for breach of contract arising from their failure to indemnify Stresscon for the accident-related damages; and the subcontractors' liability insurers for common law and statutory bad faith. Upon learning of the earlier settlement, Travelers asserted Stresscon had violated the provision of the policy that treats a settlement without Travelers' consent as a voluntary payment, without coverage.
Following a jury trial, the Court awarded Stresscon damages from its subcontractor. The subcontractor's liability insurer paid the judgment and was dismissed from the case. Stresscon's claims against Travelers proceeded to a second jury trial. The Jury returned a verdict in Stresscon's favor and against Travelers under the bad faith statute based on Travelers' failure to indemnify Stresscon, finding: (1) Travelers unreasonably denied Stresscon's claim; (2) Travelers had not been prejudiced by Stresscon's settlement with the general contractor without Travelers' consent; and (3) Travelers' policy covered a substantial portion of the damages awarded during the subcontractor trial. The trial court ordered the insurance company to pay the damages, the statutory penalty, and awarded Stresscon attorneys' fees and interest.
In its opinion, the Court of Appeals addressed a number of issues, including:
- The Notice-Prejudice Rule Applies To Pre-Litigation Settlements
The Court first addressed whether an insured's breach of the no voluntary payments clause is a per se bar on enforcing the policy in the context of a pre-suit settlement. The no voluntary payments clause appears in many policies and generally prohibits insureds from settling claims without the insurer's consent.
The Court of Appeals confirmed an insured's violation of the voluntary payments provision does not void coverage unless the insurer suffers prejudice from the settlement. Under the notice prejudice rule, if an insured does not notify its insurer of a claim until after the insured has settled the claim, then the insurer is presumed to be prejudiced and excused from coverage. The insured may present evidence to rebut that presumption, however, in which case (if successful) the burden shifts back to the insurer to prove it was actually prejudiced by the lack of notice.
The Court confirmed the notice-prejudice rule applies to the voluntary payments provision and held "(1) the notice-prejudice rule should apply in these circumstances; (2) an insured's pre-litigation settlement with a third party does not conclusively establish that an insurer was prejudiced; and (3) sufficient evidence was presented at trial to support the jury's finding that the insurance company was not prejudiced." The Court further concluded that allocation of the settlement between covered and uncovered claims is not required.
- Travelers Unreasonably Delayed or Denied the Claim
The Court also affirmed the jury's verdict finding Travelers had unreasonably delayed or denied the claim, despite the fact that Stresscon settled with the general contractor before any lawsuit was filed. As support, the Court cited to (1) Travelers' reservation of rights letters; (2) Travelers' inaction to determine the amount of Stresscon's liability; (3) Travelers failure to adjust the claim; (4) Stresscon's statement that it felt "abandoned" by Travelers; (5) Travelers' refusal to adjust or pay the claim upon receipt of notice of the settlement; and (6) Stresscon's expert's testimony that a reasonable insurer would have determined the covered amount of the settlement and paid that amount within sixty days of learning of the settlement.
- A Prevailing Party Is Entitled To "Fees-on-Fees"
The trial court awarded Stresscon attorneys' fees under Section 10-3-1116, C.R.S., (the bad faith statute) as the prevailing party, but failed to award Stresscon the fees it incurred in bringing the fee request ("fees-on-fees"). The Court of Appeals reversed this decision, holding "a request for ‘fees-on-fees' in connection with a section 10-3-1116(1) claim would be, like requests for ‘reasonable attorney fees and court costs and two times the covered benefit,' a request for damages." The Court further concluded the trial court erred when it reduced Stresscon's fee award in ruling Stresscon was not entitled to its fees-on-fees associated with the fee hearing. The Court remanded the action to the trial court to determine and award Stresscon its reasonable "fees-on-fees" and to determining a reasonable amount of fees and costs incurred by Stresscon in defending the statutory bad faith judgment on appeal.
Judge Jones issued a special concurring opinion on the fees-on-fees issue. Analyzing the distinctions between attorneys' fees as damages versus attorneys' fees as costs, Judge Jones determined the bad faith statute is ambiguous on this point. Ultimately, Judge Jones concluded "that subsection 10-3-1116(1) provides for an award of attorneys fees (and costs) incurred in the statutory action against the insurer - that is, those fees incurred as costs." Thus, "[i]t follows that the concrete company is entitled to an award of fees-on-fees."
The Stresscon opinion represents a significant victory for policy holders in Colorado. Stay tuned for a more detailed analysis of the Court's holdings on the various issues it address, which will be the subject of future client advisories.