No Prejudice Needed When an Insured Settles Without the Insurer’s Consent
In Travelers Prop. Cas. Co. of Am. v. Stresscon Corp., 2016 Colo. LEXIS 419 (Colo. April 25, 2016), Colorado was faced with a choice: enforce the plain and unambiguous terms of an insurance policy or extend the requirement that an insurer prove it was prejudiced by its insured’s breach of the policy’s conditions before denying coverage. The Colorado Supreme Court choose the former and held that an insurer seeking to deny coverage for a breach of the no-voluntary-payments provision does not need to prove that it was prejudiced by the breach.
The case involved a subcontractor who was sued by its general contract for delay damages allegedly caused by the subcontractors work at the job site. The subcontractor sought coverage from Travelers, who reserved rights. The subcontractor then settled the general contractor’s claim before suit was filed and without Travelers’ approval.
Travelers argued that it had no obligation to indemnify the policyholder for the settlement because the policyholder violated the terms of the no-voluntary-payments provision of the policy. The no-voluntary-payments provision 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 insurer’s consent. The trial court and appellate court found that the no-voluntary-payments provision of the policy would relieve the insurer of its duty to indemnify the policyholder only if the insurer suffered prejudice from the policyholder’s settlement. The trial and appellate courts relied on Colorado Supreme Court precedent that an insurer had to prove it was prejudiced in order to deny coverage on the grounds that an insured breached the policy’s notice provision.
The Colorado Supreme Court declined to extend the notice-prejudice rule to the no-voluntary-payments provision. The court reasoned that the justification for requiring prejudice where a notice provision had been breached did not apply with the same force to the enforcement of the no-voluntary-payments provision. Importantly, the court rejected the idea that an insured resorting to self-help “by confessing third-party claims in order to maintain ongoing business relationships” could alter an insurer’s obligations beyond the express terms of an insurance policy.
The decision is a win for insurers in Colorado. It will foreclose a policyholder from forcing an insured to indemnify it for a settlement when the insured has neither denied coverage nor consented to the settlement. Also, it alleviates insurers from undertaking the often factually intensive process of proving prejudice due to the policyholder’s violation of a policy provision.