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 Stresscon
case 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 Friedland
case. 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.
For additional information regarding Colorado
construction litigation, please contact David M. McLain at (303) 987-9813 or by
e-mail at mclain@hhmrlaw.com.
