Obligation of Commercial General Liability insurance carrier when the insured has settled a claim without notice to, or involvement of, insurance carrier. Travelers Property Casualty Company v. Stresscon Corporation. Supreme Court of Colorado. (2016), by Hugh Anderson

Summary: After a serious crane accident on a construction project, the general contractor, Mortenson, sought delay damages from its concrete subcontractor, Stresscon. Stresscon notified its Commercial General Liability insurance carrier, Travelers. After a period of inaction, Mortenson and Stresscon agreed to a settlement, and Stresscon paid Mortenson the settlement amount. Stresscon subsequently sought damages from its crane subcontractor, and indemnification of the settlement amount against Travelers.

Traveler’s moved for summary judgment based on a fundamental clause in the insurance policy, the “no voluntary payment” clause. That provision states that an insured must secure the insurance company’s consent before making a payment or taking on an expense with respect to the claim at issue—the policy states that if such a payment is made voluntarily, without the insurance company’s consent, it is at the insured’s cost and will not be covered by insurance.

The trial court and Colorado’s intermediate court of appeals both held that a recent Colorado insurance case, Friedland, had created a requirement that the insurance company establish that it had in fact been prejudiced by the voluntary payment, and thus refused to grant Traveler’s motion for summary judgment. Traveler’s appealed to the Supreme Court of Colorado.

Decision: The Supreme Court of Colorado reversed the lower court rulings. The high court stated that its Friedland decision applied only to the issue of an insured’s failure to give timely notice of a claim to its insurer. In such a situation, the court must determine whether there was actual prejudice to the insurer as a result of not receiving prompt notice. With respect to the no-voluntary-payments clause, a violation goes to basic contractual (policy) rights of the insurance company: the right to defend against third-party claims, and the right to negotiate settlements. The court held that the no-voluntary-payment clause affected the scope of coverage: voluntary payments are not covered. For that reason, the issue of prejudice was not relevant.

Another distinction drawn by the Colorado Supreme Court was that failure to give timely notice of a claim will often occur as the result of inadvertence, whereas making a settlement payment is an affirmative act that cannot happen as an accident or innocent omission.

Comment: The insured subcontractor in this case may have been frustrated that the matter was not being resolved promptly, or that it was not receiving help and cooperation from the insurer; and the sub may also have been concerned about its relationship with Mortenson, or about other project issues or payments. Taking direct action to negotiate a settlement, possibly a favorable settlement, was understandable, but obviously placed the recovery of insurance proceeds at risk.