Notice-Prejudice Rule to the No-Voluntary-Payments Provision Not Extended

 

June 13, 2016

 

The insured claims the insurer delayed or denied a claim for benefits in bad faith after the insured settled a claim against it without contacting the insurer. The case is Travelers Prop. Cas. Co. of Am. v. Stresscon Corp., 370 P.3d 140 (Colo. 2016).

 

This case involves a subcontractor who was sued by its general contractor for delay damages caused by the subcontractors work. The subcontractor had an insurance policy through Travelers Property and Casualty Co. of America. The policy included a “no-voluntary-payment” provision among many other provisions. The no-voluntary-payments provision of the policy provides that the insured, except at its own cost, will not voluntarily make a payment, assume any obligation, or incur any expense covered by the policy without the consent of the insurer.

 

The insurance claim is based on an incident that occurred on a construction site where one construction worker was killed and another was gravely injured when a partially erected building collapsed on them. The building collapsed when a crane hook caught a safety stanchion and pulled a concrete component off of its support beams.

 

The subcontractor sought coverage from Travelers for the lawsuit for delay damages, and Travelers reserved rights to later deny coverage for the claim. Before suit was filed, and without Travelers approval, the subcontractor settled the claim with the general contractor.

 

Travelers argued that it owed no duty to indemnify the subcontractor for the settlement with the general contractor because when the subcontractor agreed to settle with the general contractor, it violated the no-voluntary-payment provision of the policy. Both the trial court and the appellate court found that the no-voluntary payments-provision relieved the insurer of its duty to indemnify the subcontractor only if the insurer suffered prejudice from the settlement. The Colorado Supreme Court had previously established the precedent that an insurer had to prove they were prejudiced in order to deny coverage due to a breach of the policy's notice-prejudice rule. The notice-prejudice rule provides that an insurer must demonstrate prejudice in order to deny a claim on grounds of late notice. In the case at hand, the Colorado Supreme Court declined to extend the notice-prejudice rule to the no-voluntary-payments provision.

 

Editors Note: When the Colorado Supreme Court declined to extend the notice-prejudice rule to the no-voluntary-payments provision, the decision had the effect of preventing policyholders from being able to force an insured to indemnify it for a settlement when the insured has not consented to the settlement. This decision also keeps insurers from going through the arduous process of proving that they were prejudiced by their insured violating a policy provision.