Colorado Supreme Court Refuses to Extend Notice-Prejudice Rule to No-Voluntary-Payments Clause

The Colorado Supreme Court, reversing an intermediate appellate court’s decision, has refused to extend the “notice-prejudice rule” to a case involving the insured’s breach of an insurance policy’s no-voluntary-payments clause.

Background

After an accident at a construction site in July 2007, the project’s general contractor sought damages from Stresscon Corporation, a subcontractor.

Stresscon reached a settlement agreement with the general contractor on December 31, 2008, without consulting Stresscon’s insurance carrier, Travelers Property Casualty Company of America.

In March 2009, Stresscon sued Travelers.

Travelers moved for summary judgment, arguing that it didn’t have to indemnify Stresscon for the settlement because Stresscon had breached the policy’s no-voluntary-payments provision.

The trial court denied Travelers’ motion. Analogizing to the “notice-prejudice” rule for late notice, it found that the no-voluntary-payments provision in the Travelers policy could relieve Travelers of its duty to indemnify only if Travelers had suffered prejudice from Stresscon’s settlement.   The court held that the question of prejudice involved disputed matters of fact that could not be resolved by summary judgment.

An intermediate appeals court affirmed, and the case reached the Colorado Supreme Court.

The Colorado Supreme Court’s Decision

The court reversed.

In its decision, the court observed that it previously had adopted the notice-prejudice rule in the uninsured motorist context and in a case involving an occurrence-based insurance policy in which it held that the insurer could not be absolved of its coverage obligations by the insured’s failure to comply with the policy’s notice provision in the absence of a showing of prejudice resulting from the failure of notice.

The court said, however, that it would not extend the notice-prejudice rule to the enforcement of the no-voluntary-payments provision in the Travelers policy. It reasoned that the no-voluntary-payments clause in the Travelers policy was “a fundamental term defining the limits or extent of coverage” that “clearly excluded from coverage any payments voluntarily made or obligations voluntarily assumed by the insured without consent, for anything other than first aid.” The insurance policy, the court said, “emphatically stated that any such obligations or payments would be made or assumed at the insured’s own cost rather than by the insurer.”

In the court’s view, the no-voluntary-payments clause in the Travelers policy did “not purport to impose a duty on the insured to do anything, whether for the purpose of assisting in the insurer’s investigation or defense of a claim, or otherwise” and did not impose a duty on the insured “to refrain from doing something the doing of which would violate the terms of the contract and call for an appropriate remedy.” Rather, the no-voluntary payments clause “goes to the scope of the policy’s coverage” and makes clear that coverage does not extend to voluntary payments “in the first place.”

To extend the notice-prejudice rule to no-voluntary-payments or no-settlement provisions would treat those clauses “as nothing more than a technicality, unenforceable in the absence of prejudice,” the court said. It would also ignore the competing interests and risks of collusion and deny insurers the ability to contract for the right to defend and settle claims against the insured.  Accordingly, it refused to adopt such a rule.

The case is Travelers Property Cas. Co. of America v. Stresscon Corp., No. 13SC815 (Colo. April 25, 2016).