The Colorado Court of Appeals recently handed down an opinion dulling the teeth of the “no voluntary payment” clauses found in many contractors’ insurance policies. In the case of Stresscon Corporation v. Travelers Property Casualty Company of America, 2013 WL 4874352 (Colo. App. 2013), the Court of Appeals found that an insured’s breach of the “no voluntary payment” clause does not always bar the insured from receiving benefits from its insurance company.
In July 2007, at a construction project run by Mortenson (the “GC”), a partially erected building collapsed, killing one worker and gravely injuring another. The collapse was caused by a crane hook pulling a concrete component off of its supports. The GC contracted with Stresscon Corporation (“Stresscon”) to build pre-cast concrete components for the project, and in turn Stresscon hired two sub-subcontractors, RMS and Hardrock (the “Crane Team”) to work together to erect those concrete components. Stresscon and the Crane Team had liability insurance, and Stresscon was insured by Travelers Property Casualty Company of America (“Travelers”).
The accident led to three separate lawsuits: 1) one brought by the deceased worker; 2) one brought by the injured worker; and 3) one brought by the GC against Stresscon claiming it was entitled to contract damages incurred because the project was delayed. The first two personal injury cases were settled. The third case relates to the Stressconcase and its resolution.
Initially, the GC notified Stresscon that it expected to be reimbursed for the damages resulting from the delay to the project caused by the accident. Stresscon then informed Travelers of the claim, to which Travelers responded by sending two reservation of rights letters stating that Stresscon’s insurance policy might not cover the delay damages sought by the GC. Travelers also sent a later letter to the GC on behalf of Stresscon denying that it was liable to the GC. At this time, the GC entered into settlement discussions with Stresscon.
After negotiations, the GC settled its dispute with Stresscon. The settlement reimbursed the GC for delay damages caused by the accident and other unrelated damages resulting from the accident that were clearly not covered by Stresscon’s insurance policy. The settlement was not allocated between categories of covered by insurance and not covered by insurance. Before entering into the settlement, Stresscon did not inform Travelers or obtain its consent.
Once Stresscon settled with the GC, it initiated a case against the Crane Team and Travelers. The lawsuit alleged the Crane Team owed Stresscon indemnification for the delay damages paid to the GC. Stresscon also alleged that Travelers had, in bad faith, breached its duty to Stresscon, violating C.R.S. § 10-3-1115(1)(a), by unreasonably delaying or denying a claim for benefits. The case was bifurcated into two phases, the first between Stresscon and the Crane Team to determine liability and damages, the second against Travelers on contractual bad faith claims.
The jury in the first phase found the Crane Team was liable to Stresscon for $678,826, the amount the GC, and thus Stresscon, had suffered as a result of the accident. One insurer for a member of the Crane Team settled with Stresscon and paid it $678,826. The first phase was not appealed.
The second phase involved only Stresscon and Travelers. In this phase, the jury was asked: 1) to decide whether Travelers had acted unreasonably in denying Stresscon’s claim for benefits to cover the amount that it had paid to the GC; 2) to decide whether Travelers had suffered prejudice as a result of Stresscon’s settlement with the GC; and 3) to apportion the first jury’s award among categories of damages, some of which were not covered by the insurance policy. The jury found Travelers had unreasonably denied Stresscon’s claim, Travelers had not been prejudiced by the settlement, and that $546,899 of the first phase award represented damages that were covered by the insurance policy.
Travelers appealed several aspects of the trial court’s ruling, as did Stresscon. Here, we will only discuss Travelers’ appeal of the trial court’s ruling that it was not prejudiced by Stresscon’s breach of the “no voluntary payment” clause.
Travelers argued that the notice-prejudice rule adopted in Friedland v. Travelers Indemnity Co., 105 P.3d 639 (Colo. 2005), does not apply to “no voluntary payment” clauses. Travelers also argued that insurers are prejudiced as a matter of law whenever an insured settles with a third-party claimant before that third party has filed a lawsuit. The Court of Appeals disagreed and upheld the trial court’s ruling.
In ruling against Travelers, the Court of Appeals relied on the notice-prejudice rule, described in the Friedlandcase. The notice-prejudice rule comes with a burden shifting procedure, which provides that (1) if an insured does not provide the insurer with notice of a claim until after the insured has settled; then (2) the insured will lose benefits after the settlement based on a presumption of prejudice; unless (3) the insured rebuts the presumption that the insurer’s interests were prejudiced by the lack of notice; and (4) the insurer does not then prove that it was actually prejudiced by the lack of notice.
Despite Friedland addressing an insured’s failure to give notice of a claim, the Court of Appeals found that another case, Lauric v. USAA Casualty Insurance Co., 209 P.3d 190 (Colo. App. 2009), relied on Friedland to conclude that the notice-prejudice rule applied to “consent to settle” clauses. The Court of Appeals in the present case found that such “consent to settle” clauses are similar to the “no voluntary payment” clauses at issue.
The notice-prejudice rule’s burden shifting procedure allows an insured to rebut the presumption of prejudice caused by the breach of the policy by introducing evidence contrary to that prejudice. The Friedland case provided some examples of such evidence, including proof that: 1) the insured obtained all material information that could have been obtained in the course of reaching a settlement; 2) the insured raised all legitimate defenses; 3) the insured’s liability was reasonably clear under the facts and the law; and 4) the insurer, had it received notice, could not have obtained any materially better outcome than the insured achieved without the insurer’s assistance.
It was undisputed that Stresscon breached the “no voluntary payment” clause, meaning there was a presumption that Travelers was prejudiced. Stresscon then had to overcome that presumption by presenting evidence similar to that laid out in Friedland. The Court of Appeals noted that Stresscon presented evidence that: 1) its liability to the GC was reasonably clear because it owed damages to the contractor for the project’s delay under the parties’ construction contract; 2) Stresscon was responsible for the disruption, the effect on the plan, and the flow of the work; 3) the GC incurred costs associated with the accident such as securing the site, evidence preservation, moving the evidence to a new location, dealing with OSHA, adding a scheduler, legal representation, demolishing the site, demolishing parts of the foundations and rebuilding the foundations, and delay to progress of the work; 4) the GC had written Stresscon identifying the type of damages being incurred; 5) Stresscon was responsible for supervising the Crane Team at the time of the accident; 6) Travelers’ second vice-president of complex claims testified that the contract between the GC and Stresscon created legal obligations; 7) Stresscon obtained all material information necessary to analyze the claim; 8) Stresscon asked for backup documentation of the costs of the delay; 9) Stresscon received a claim document containing breakouts detailing the costs the GC incurred; 10) the GC designated an employee who provided Stresscon with information in every different form and style it asked for; 11) the settlement was reasonable; 12) Travelers would not have achieved a result that was materially better; 13) the settlement amount was significantly less than the amount of the delay plus accident claims; 14) Travelers’ second vice-president of complex claims testified that he had no idea if Travelers could have reached a better settlement; and 15) that Travelers had it been asked, by Stresscon, to represent it in the settlement negotiations would have refused.
The Court of Appeals found this evidence sufficient to shift the burden back to Travelers to prove that it was actually prejudiced. To prove prejudice, a party must establish the precise way in which its interests were damaged. The Court of Appeals noted that such a standard does not contemplate the mere possibility of prejudice. In denying Travelers’ appeal, the Court of Appeals found that its assertions of prejudice were questions of fact determined by the jury. Because Travelers’ assertions were determined by the jury, the Court of Appeals reviewed the evidence and found that there was enough sufficient probative force to support the jury’s findings. Of particular interest to the Court of Appeals was the evidence that Stresscon’s liability was “reasonably clear;” the settlement was “reasonable;” and that Travelers would not have achieved a result that was “materially better.”
In the end, the Court of Appeals was not persuaded by Travelers and found that Stresscon should not lose its benefits automatically because it breached its “no voluntary payment” clause. However, it does appear that the case has been appealed and is awaiting a decision from the Colorado Supreme Court about whether the case will be heard. Until then, some of the teeth of the “no voluntary payment” clause have been removed.