No per se prejudice to insurers in Colorado when an insured settles with a third party without the insurer’s consent and before the third party files a lawsuit, says the Colorado Court of Appeals


In Stresscon Corp. v. Travelers Prop. Cas. Co. of Am., 2013 COA 131, 2013 WL 4874352 (Colo. Ct App. Sept. 12, 2013),, the Colorado Court of Appeals addressed the question of whether an insured’s breach of a “no voluntary payment” clause will always bar the insured from receiving benefits and ruled that under Colorado’s notice-prejudice rule, the answer is no.

Stresscon began with a construction accident on the Fort Carson Army Base where sections of a partially erected building collapsed after a crane hook caught on a safety stanchion and pulled a concrete component off its support beams. Bodily injury claims were settled and the general contractor sought indemnity from its concrete subcontractor for delay damages on the project. The concrete subcontractor tendered the claim to its insurer. After the insurer issued two reservation of rights letters and a letter to the general contractor denying the subcontractor’s liability, the general contractor and the insured subcontractor reached a settlement, which included delay and other damages but no allocation between the types of damages settled. The subcontractor did not obtain the insurer’s consent for the settlement.

Thereafter, the subcontractor sued its insurer for bad faith under Colorado statute, C.R.S. §10-3-1116, which carries a statutory penalty of reasonable attorneys fees and two times the covered benefit that was wrongfully denied. The subcontractor also sued the crane team (its sub-subcontractors on the project) and their insurers for indemnity for the settlement with the general contractor. In the first of two trials, the jury first found the crane subcontractors liable. In the second trial, the jury found that the insurer had unreasonably denied the delay claim and that the insurer was not prejudiced by the insured’s failure to obtain the insurer’s consent to the settlement. It also made an allocation of the settlement to reflect the amount of covered versus uncovered damages.

On appeal, the insurer argued that the trial court erred in denying its motion for directed verdict in which it had asserted that Colorado’s notice-prejudice rule applies only to late notice and not to an insured’s violation of a “no voluntary payment” clause and also that an insurer is prejudiced as a matter of law when an insured settles with a third party claimant before that third party has filed a lawsuit.

In addressing the issue, the court of appeals first explained that under Colorado’s notice-prejudice rule courts do not strictly enforce notice-of-claim language unless the lack of notice prejudiced the insurer. Discussing Friedland v. Travelers Indemnity Co., 105 P.3d 639, 645-646 (Colo.2005), the court reported that the rule addresses three public policy concerns: “(1) the adhesive nature of insurance contracts, (2) the public policy objective of compensating tort victims, and (3) the inequity of an insurer receiving a windfall … due to a technicality.” Where notice is not given until after the insured has settled, the law presumes prejudice to the insurer. If the insured rebuts the presumption, the burden shifts to the insurer to prove actual prejudice. As there was sufficient evidence at trial for the jury to find that the insurer was not prejudiced, in particular that the insured had obtained all material information necessary to analyze the claim and that the insurance company would not have achieved a materially better result, the court affirmed this aspect of the judgment.
In applying the rule here, the court rejected the insurer’s argument that the notice-prejudice rule only applies to violations of notice of claim clauses. “The supreme court [in Friedland] made clear that the insured’s settlement was the reason for the creation of a presumption of prejudice in favor of the insurer.” It also rejected the insurer’s second argument that an insurer is prejudiced as a matter of law if the settlement occurs before the third party claimant files suit in favor of case-by-case analysis, observing that “[n]othing about the pre-suit nature of a settlement renders it any less trustworthy than the post-lawsuit settlement.” The court continued, “Even assuming, for the purposes of argument, that, without a bright-line rule, policyholders and third parties will be tempted to collude to “set up” insurers, we conclude that the presumption of prejudice, and the insurer’s opportunity to prove prejudice if the insured overcomes the presumption of prejudice, provide ample protection against this putative risk.”

On cross appeal, the appellate court, affirmed the trial court’s ruling that the concrete company’s repair and replacement costs for its concrete components damaged in the accident were excluded under the policy. In particular, as the losses at issue were to “that particular part” of the construction project on which the subcontractor and its sub-subcontractors were actively working, they fell within the policy’s (j)(1), (j)(5) and (j)(6) exclusions.

Also on cross appeal, the court affirmed the trial court’s reduction of the award against the insurer by the amount paid by one of the crane subcontractors to satisfy the judgment in the first trial.

Lastly, the court took up the issue of whether an insured is entitled to its attorneys fees for bringing a motion for attorney’s fees under the statute. The trial court had denied those fees to the concrete company reasoning that the statutory penalty already awarded sufficiently compensated the insured for its “fees-on-fees.” The appellate court reversed reporting that “If a fee-shifting provision in a statute is part of a larger remedial scheme, appellate courts in Colorado have upheld awards of “fees-on-fees” based on the compensatory purpose of fee-shifting.” As the court further explained, C.R.S. § 10-3-1116(1) states that an insured may bring an action to recover “attorney fees and court costs and two times the covered benefit.” The trial court’s action of denying fees-on-fees “effectively turned the statutory ‘and’ into ‘or.'”