2016 CO 22
Colo.2016Background
- Stresscon (insured subcontractor) settled with Mortenson (general contractor) for accident-related claims without notifying or obtaining consent from its insurer, Travelers.
- Travelers denied indemnification based on the policy's no-voluntary-payments clause: insureds may not voluntarily make payments or assume obligations without insurer consent (except first aid).
- Stresscon sued Travelers for bad faith and sought statutory penalties, costs, and fees; a jury returned verdict for Stresscon, and the insurer pursued directed verdict/JNOV/appeal arguing the clause barred recovery.
- The Colorado Court of Appeals affirmed the trial court's denial of Travelers' motions, applying this court's notice-prejudice rule from Friedland to require proof of insurer prejudice before enforcing the no-voluntary-payments clause.
- The Colorado Supreme Court granted certiorari to decide whether Friedland's notice-prejudice rule extends to no-voluntary-payments/consent-to-settle provisions.
- The Supreme Court reversed the court of appeals: it declined to extend Friedland's notice-prejudice rule to the no-voluntary-payments clause, treating that clause as defining coverage (and thus enforceable as written).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether an insured's unauthorized settlement bars indemnity unless insurer proves prejudice | Stresscon: Friedland requires a rebuttable presumption of prejudice and an opportunity to show lack of prejudice before denying coverage | Travelers: The no-voluntary-payments clause excludes such payments from coverage; no prejudice proof required to enforce it | Court: Held clause defines scope of coverage; Friedland's notice-prejudice rule does not apply; insurer need not show prejudice to invoke clause |
| Whether Friedland implicitly overruled prior "no-voluntary-payments" jurisprudence and should be extended to consent-to-settle provisions | Stresscon: Friedland's rationale and policy considerations apply similarly to protect insurer's opportunity to defend/settle | Travelers: Friedland limited to notice provisions and did not address voluntary-payment clauses; extending it would rewrite contracts and create moral-hazard risks | Court: Friedland did not address or overrule no-voluntary-payments rules; extension is inappropriate because clause is a fundamental contractual coverage term |
Key Cases Cited
- Friedland v. Travelers Indem. Co., 105 P.3d 639 (Colo. 2005) (adopts notice-prejudice rule for certain occurrence-policy notice failures and tailors a presumption of prejudice where notice comes after settlement)
- Clementi v. Nationwide Mut. Fire Ins. Co., 16 P.3d 223 (Colo. 2001) (origin of notice-prejudice approach in uninsured motorist context)
- Craft v. Philadelphia Indem. Ins. Co., 343 P.3d 951 (Colo. 2016) (distinguishes claims-made date-certain notice provisions from occurrence-policy notice rules; warns against rewriting contracts)
- Nunn v. Mid-Century Ins. Co., 244 P.3d 116 (Colo. 2010) (permits assignment/stipulated excess-judgment recovery in limited circumstances where insurer wrongfully exposes insured to excess judgment)
- Old Republic Ins. Co. v. Ross, 180 P.3d 427 (Colo. 2008) (discusses tolerance for stipulated judgments when insurer wrongfully refuses settlement)
- Charter Oak Fire Ins. Co. v. Color Converting Indus. Co., 45 F.3d 1170 (7th Cir. 1995) (upholds no-voluntary-payments clause; warns of collusion and moral-hazard concerns)
- Lauric v. USAA Cas. Ins. Co., 209 P.3d 190 (Colo. App. 2009) (court of appeals decision addressing no-settlement/voluntary-payment provisions and prejudice questions)