Policyholder settlement without consent of insurer is barred, even if the insurer cannot show prejudice.

The Colorado Supreme Court, applying Colorado law, refused to extend the “notice-prejudice” rule, which requires insurers to demonstrate that they suffered prejudice from late notice of a claim before they can deny coverage on that basis, to a policyholder’s settlement without insurer consent where the policy contains a “no-voluntary-payments” clause.

Stresscon Corporation (“Stresscon”), a subcontracting concrete company, entered into a settlement agreement with its general contractor, Mortenson, relating to delay damages that resulted from a serious accident on the job site.  Stresscon entered into its settlement agreement with Mortenson without consulting its insurer at the time, Travelers.  Stresscon ultimately sued Travelers, claiming that Travelers had a duty to indemnify Stresscon for the Mortenson settlement.

Travelers argued that it had no obligation to indemnify the Mortenson settlement, based on the “no-voluntary-payments” provision of the policy, which stated:  “No insured will, except at the insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense…without our consent.”  The district and appellate courts rejected Travelers’ argument, “finding by analogy to the so-called ‘notice-prejudice’ rule…with regard to an insured’s failure to give timely notice of a claim…that the policy’s no-voluntary-payments provision could relieve Travelers of indemnification only if Travelers suffered prejudice from Stresscon’s settlement….”

The Colorado Supreme Court disagreed with the lower courts and held that the no-voluntary-payments provision must be applied as written.  The court held that the public policy considerations that led to the “notice-prejudice” rule do not justify expansion to the “no-voluntary-payments” clause.  The “notice-prejudice” rule resulted from the court’s concern that, absent any resulting prejudice, insurers would “reap a windfall” if timely notice requirements in occurrence-based policies were strictly enforced.  In contrast, “far from amounting to a mere technicality imposed upon the insured in an adhesion contract, [the no-voluntary-payments provision is] a fundamental term defining the limits or extent of coverage…The insurance policy emphatically [states] that [voluntary]…payments would be made or assumed at the insured’s own cost….”  “[D]epriving the insurer of its choice to defend or settle in the first instance ‘has important practical implications for the risks that insurers undertake and the premiums that insureds pay.’”

In addition, the court held that failure to enforce the no-voluntary-payments provision would “ignore the competing interests and risks of collusion or fraud…and would effectively deny insurers the ability to contract for the right to defend against third-party claims or negotiate settlements in the first instance.  Public policy demands no such restriction on the right to contract.”  Travelers Prop. & Cas. Co. of Am. v. Stresscon Corp., No. 13SC815, (Colo. Apr. 25, 2016).