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(Article from Insurance Law Alert, April 2016)

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The Colorado Supreme Court ruled that an insurer need not establish prejudice in order to deny coverage based on a policyholder’s violation of a voluntary payments provision.  Travelers Prop. Cas. Co. of Am. v. Stresscon Corp., 2016 WL 1639565 (Colo. Apr. 25, 2016).

Stresscon, a subcontractor, sought coverage from Travelers for an underlying claim arising out of a construction accident. Travelers issued a reservation of rights.  Thereafter, Stresscon settled the underlying claim without consulting Travelers.  Among numerous issues in dispute was whether Travelers was obligated to pay for the settlement given Stresscon’s violation of the policy’s voluntary payments provision.  A Colorado trial court applied a notice-prejudice rule, finding that in order to deny coverage, Travelers must establish that it was prejudiced by Stresscon’s violation of the voluntary payments provision.  An appellate court affirmed.  See October 2013 Alert.  The Colorado Supreme Court reversed, ruling that the notice-prejudice rule that governs late notice defenses does not extend to a breach of a voluntary payment provision.

In refusing to impose a prejudice requirement in this context, the Colorado Supreme Court reasoned that a voluntary payments provision is not a “mere technicality,” but rather “a fundamental term defining the limits or extent of coverage.”  The court cited Craft v. Philadelphia Ins. Co., 2015 WL 658785 (Colo. Feb. 17, 2015) (discussed in our February 2015 Alert), in which the court ruled that the notice-prejudice rule does not apply to violations of date-certain notice requirements in claims-made policies.  The court stated, “[l]ike the notice of claim requirement of the claims-made policy at issue in Craft, the no-voluntary payments clause of the contract at issue here goes to the scope of the policy’s coverage.”  Therefore, “applying a notice-prejudice rule to excuse an insured’s noncompliance with such a contractual provision would essentially rewrite the insurance contract itself and effectively create coverage where none previously existed.”  Because the trial court denied Travelers’ motion for directed verdict solely on the basis of the notice-prejudice rule, and because it was undisputed that Stresscon voluntarily settled the underlying claim without Travelers’ consent, the court reversed the jury verdict in favor of Stresscon and remanded the case with directions to issue a directed verdict in Travelers’ favor.