Extends Notice-Prejudice Rule to Voluntary Payments under Liability Policies, Finds “Other Insurance” Clauses Curb Double Damages Penalties and Leaves Pertinent Bad Faith Question Unanswered
The Colorado Court of Appeals entered an order on September 12, 2013, finding that an insured’s voluntary, pre-suit settlement of a claim without its insurer’s consent was subject to the “notice-prejudice rule.” Stresscon Corporation v. Travelers Property Casualty Company of America, 2013 COA 131. Nos. 11CA1239 & 11CA1582. Pursuant to that rule, there is a rebuttable presumption of prejudice to the insurer under such circumstances. If the insured introduces evidence to rebut the presumption of prejudice, the insurer is then required to present specific facts demonstrating prejudice in order to negate coverage. While Colorado courts have applied this notice-prejudice rule in the context of first-party uninsured motorist coverage and in situations where an insured provided untimely notice of a claim, this is the first time the rule has been applied to a liability policy where an insured violated a provision prohibiting it from making voluntary payments or settling a case without the carrier’s knowledge or authorization.
This development is not entirely surprising, given that Colorado courts have already imposed it under analogous circumstances. See Friedland v. Travelers Indemn. Co., 105 P.3d 639, 643 (Colo. 2005) (untimely notice under a liability policy); Lauric v. USAA Cas. Ins. Co., 209 P.3d 190,193 (Colo. Ct. App. 2009) (violation of a consent to settle clause under an uninsured motorist policy). Nevertheless, allowing an insured to overcome the presumption of prejudice for a pre-suit settlement of which a liability carrier had no knowledge broadens the rule. This is because settlement of a liability claim against an insured, unlike a settlement of an insured’s affirmative claims against a tortfeasor in the uninsured motorist arena, can impose indemnity obligations on carriers without their ability to assess risk and potential exposure. Indeed, carriers may now be concerned that an insured and a claimant will negotiate inflated settlements without the carrier’s knowledge, based solely on the claimant’s assessment of liability and calculation of damages because there is less risk that the carrier will ultimately be allowed to deny a claim based solely on the basis that it did not consent to the settlement.
Bad Faith Damages
Despite this development, which could potentially have an adverse impact on insurers, Stresscon also applied reasoning that restricts the bad faith damages insureds may recover under C.R.S. § 10-3-1116(1). This statute allows for an award of double damages if an insured proves its carrier’s denial or delay of the payment of insurance benefits was unreasonable. The court essentially eliminated these statutory double damages in situations where the applicable policies’ “other insurance” clauses limit recovery to the amount of the loss, even where there is a finding of unreasonable delay or denial.
This new limitation may be a significant ruling for cases where an insured has already been made whole by other carriers, particularly in additional insured cases where a general contractor seeks to recover from its subcontractors’ policies on a joint and several basis. In the event the general contractor has already been made whole by its own or other carriers’ policies (and assuming the policies contain similar “other insurance” provisions), the covered loss is not doubled. For example, if an additional insured claims one carrier delayed payment of defense costs in the amount of $500,000, the additional insured would only be entitled to the $500,000 penalty, not $500,000 x 2. This analysis could have considerable impact on risk assessment, settlement negotiations and damages awards because plaintiffs’ lawyers have consistently used the threat of double damages to negotiate more lucrative settlements.
Another issue the Stresscon trial court had resolved in the insured’s favor was a finding that liability policies give rise to “first-party” policy rights such that liability carriers are subject to the double damages and attorney’s fees imposed by C.R.S. §§ 10-3-1115 and 1116 for an unreasonable withholding of policy benefits. A federal district court judge ruled to the contrary in New Salida Ditch Co. v. United Fire & Cas. Ins. Co., 2009 WL 5126498 (unpublished opinion). Due to these conflicting opinions and lack of a definitive interpretation of the statutes by a Colorado court, Travelers initially appealed the trial court’s conclusion that these statutes apply to liability policies. Obviously, the defense bar was eager to see how the state appellate court would resolve this question. Yet, Travelers withdrew its appeal of this issue. Thus, whether C.R.S. §§ 10-3-1115 and 1116 apply to liability policies has yet to be resolved by a Colorado appellate court.
On balance, the Stresscon decision provided both encouraging and troubling points for insurance carriers and insureds. Application of the notice-prejudice rule to settlements made in violation of a consent-to-settle clause may give insureds and claimants the incentive to enter into settlements that could prove costly to insurers. On the other hand, the court’s use of “other insurance” clauses as an offset against double damages diminishes the potential exposure and correlating bargaining power for overstated settlements of such claims. Of course, this decision is not the last word on these issues as we anticipate both sides will appeal them to the Colorado Supreme Court.