On Monday, April 25, 2016, the Supreme Court of Colorado ruled that policyholders could not be indemnified for a settlement incurred before providing their insurers of notice of the claim—even if the insurer did not suffer any prejudice from lack of notice. In a 4-3 decision in Travelers Prop. Cas. Co. v. Stresscon Co., No. 13SC815 (Colo. Apr. 25, 2016) (“Stresscon”) the court held that “no-voluntary-payments” provisions (or “consent-to-settle” provisions) would excuse an insurer’s duty to indemnify settlement amounts of which the insured had not provided notice.
The question before the court was whether the notice-prejudice rule it had applied to occurrence-based liability policies in Friedland v. Travelers Indem. Co., 105 P.3d 639 (Colo. 2005) (“Friedland”) prevented an insurer from avoiding indemnification under the “no-voluntary-payments” provision. In Friedland, the Colorado Supreme Court agreed with jurisdictions that require an insurer to show prejudice before denying a claim if notice was untimely. The court stated in Friedland that notice provided after a claim had settled did not necessarily preclude a policyholder’s recovery of insurance benefits, but created a presumption that the insurer suffered prejudice. If the policyholder adequately rebutted the presumption of prejudice, then the insurer would be permitted to deny coverage only if it proved actual prejudice. The court did not address the question of how the notice-prejudice rule interacted with a no-voluntary-payments provision.
This question was answered Monday in Stresscon. In Stresscon, a concrete subcontractor (the policyholder) was sued by its contractor to recover damages incurred as a result of construction delays caused by the policyholder. Before any suit had been filed, the policyholder entered into a settlement with the contractor without consulting its insurance company. Several months later, the policyholder sued its insurer (and other entities) and ultimately recovered a jury verdict for bad faith breach of contract.
Prior to trial, the insurer moved for summary judgment against the policyholder, asserting that it owed no duty of indemnification for the settlement because the no-voluntary-payments provision precluded coverage for payments made without the insurer’s consent. The district court denied the insurer’s motion, applying the notice-prejudice rule to require the insurer to show that it suffered prejudice before enforcing the no-voluntary-payments provision. The court held that the question of the insurer’s prejudice was a dispute of fact, and therefore it could not be resolved by summary judgment. The insurer renewed its position by a motion for directed verdict at trial and a motion for a judgment notwithstanding the verdict following the verdict. The appellate court affirmed the district court’s ruling, relying on Friedland, and extended the notice-prejudice rule to require insurers to show prejudice before enforcing a no-voluntary-payments provision.
The Colorado Supreme Court reversed, finding that the no-voluntary-payments provision unambiguously excluded from coverage any payments made or obligations assumed without the insurer’s consent. The court reasoned that payments made without the insurer’s consent fell outside the scope of coverage. Thus, courts could not create coverage where none existed by applying the notice-prejudice rule to settlement obtained without notice. The court determined that the lower courts’ decisions were erroneous, requiring reversal of the jury verdict and entry of judgment in favor of the insurer (because no other basis for non-enforcement of the “no-voluntary-payments” provisions had been asserted).
The dissent argued that no-voluntary-payments provisions served the same interests as the prompt notice provision interpreted in Friedland. The dissent did not agree that the no-voluntary-payments provision set forth the scope of coverage, and contended that these provisions were analogous in form and purpose to prompt notice provisions. Therefore, the dissent argued that the notice-prejudice rule articulated in Friedland requires an insurer to show prejudice resulting from a policyholder’s late notice, even if provided after settlement. The dissent adopted the burden-shifting framework articulated in Friedland, and provided the insurer a presumption of prejudice where, as here, the insured had not provided notice of a claim until after settlement.
Policyholders should take note. No-voluntary-payment and consent-to-settle provisions are standard in Commercial General Liability policies. Although a policyholder may obtain coverage if notice is provided prior to settlement in jurisdictions applying the notice-prejudice rule, courts that follow the ruling in Stresscon will not permit recovery of losses incurred in a settlement if the insurer has not been notified of the claim. A policyholder seeking coverage for a claim should consider this decision when considering reaching a settlement of a claim before notifying its insurer.