August 16, 2017

Colorado Supreme Court Rejects Expansion of Notice Prejudice Rule

In an opinion that can have a significant impact on insureds’ ability to settle claims, the Colorado Supreme Court ruled that policyholders will lose coverage if they strike a deal without their insurer’s consent. Travelers Prop. Cas. Co. v. Stresscon Co., No. 13SC815 (Colo. S. Ct. April 25, 2016).

Specifically, the Colorado Supreme Court ruled that the notice-prejudice rule does not extend to “voluntary-payments” provisions in insurance policies. In other words, insurers may rely on their “voluntary-payments” provisions to deny coverage, without showing prejudice arising from an insured’s unilateral settlement of a third-party claim.

In Stresscon, the insured, a subcontractor, settled directly with a general contractor over a dispute about project delays. The insured did not notify the insurer before settling, or get the insurer’s permission to settle. The insured then sought indemnification from its insurer. The insurer refused to pay, citing a “no-voluntary-payments” provision in its policy. The insured argued that the insurer had to show prejudice to rely on the “no-voluntary-payments” provision; the district and appellate courts agreed with the insured. Unfortunately, the Colorado Supreme Court disagreed. The Court reasoned that there was no express prejudice requirement, and creating one would “essentially rewrite the insurance contract itself and effectively create coverage where none previously existed.”

Stresscon is an important decision, addressing the dangers that insureds face when they settle claims without their insurer’s express consent. Moving ahead, insureds with Colorado operations should be cautious when evaluating early settlements if they expect their insurer to indemnify later. Particularly, Colorado insureds should communicate with their insurer in advance of settling in an effort to reach an agreement that will avoid forfeiting coverage.