Colorado Supreme Court: No Prejudice Required to Deny Coverage for Settlement Without Consent

The Colorado Supreme Court has held that an insurer had no duty to cover a settlement entered into by an insured regardless whether the insured’s failure to obtain the insurer’s consent prejudiced it in any way. Travelers Prop. Cas. Co. v. Stresscon Co., 2016 WL 1639565 (Colo. Apr. 25, 2016). Wiley Rein represented an amicus curiae in support of the insurer.

The insured, a concrete subcontractor, caused a serious construction accident. The general contractor sought damages from the insured, and the insured and the general contractor entered into a settlement agreement without consulting with the insurer. The insured later sought to obtain reimbursement for that settlement from the insurer.

In the trial court, the insurer argued that the insured’s settlement—without the insurer’s consent—was not covered. The policy stated that “[n]o insured will, except at the insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.” The trial court concluded that the insurer was required to show, and had not shown, that it suffered prejudice from the settlement. That decision was affirmed by an intermediate appellate court.

On appeal, the Colorado Supreme Court reversed, and it held that the lower courts erred by imposing a prejudice requirement on the policy’s voluntary payment provision. The court observed that such provisions have important implications for the risks insured and that the consent requirement is not “a mere technicality imposed upon an insured in an adhesion contract.” The court also found that imposing a prejudice requirement in the settlement context 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.”