Insurance Law Update:  Colorado Supreme Court Clarifies That the “Notice-Prejudice” Rule Does Not Apply to “No Voluntary Payments” Provisions

Insurance Law Update: Colorado Supreme Court Clarifies That the “Notice-Prejudice” Rule Does Not Apply to “No Voluntary Payments” Provisions

A recent Colorado Supreme Court decision has important ramifications for policyholders, insurance companies, and insurance counsel. On April 25th, the Court held in Travelers Prop. Cas. Co. v. Stresscon Co. that the “notice-prejudice” rule does not provide insured parties an opportunity to claim reimbursement for payments made, or expenses incurred, in violation of an insurance policy’s “no voluntary payments” provision by demonstrating the insurer was not actually prejudiced by the payments or expenses.

The “no voluntary payments” (NVP) provision in the insurance policy at issue 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 [the insurer’s] consent.”

In the trial court, Travelers moved for summary judgment on the ground that it owed no duty of indemnification to its insured, Stresscon, for a settlement payment Stresscon made without its consent in violation of the policy’s NVP provision.  The court denied the motion, reasoning that the “notice-prejudice” rule adopted by the Colorado Supreme Court in the 2005 Friedland case, under which an insured’s breach of a policy’s notice requirement does not result in loss of benefits if the insured can show that the insurer was not prejudiced by the breach, applied to a breach of a NVP provision as well.  The court of appeals agreed and affirmed the trial court’s ruling.

The Supreme Court reversed and provided several reasons why the notice-prejudice rule should not be extended to NVP provisions.  First, it stated that “far from amounting to a mere technicality imposed upon an insured in an adhesion contract, [the policy’s NVP provision] was a fundamental term defining the limits or extent of coverage.”  Unlike a notice provision, the Court continued, the NVP provision at issue did not impose a duty on the insured to do or refrain from doing anything in order to preserve coverage, but rather simply made clear that payments made without the insurer’s consent were not covered in the first place, and so would not be reimbursed.  Finally, the Court observed that “depriving an insurer of its choice to defend or settle in the first instance has important practical implications for the risks that insurers undertake and the premiums that insureds pay.”

The practical import of this decision is that your insurance company might refuse to reimburse you if you make any payments or incur any expenses without its consent. If you have questions regarding your rights and obligations under your insurance policy, consult with an insurance lawyer.

This article is intended to provide general information and, therefore, should not be treated as legal advice. If you have questions about a specific legal issue, you should seek the advice of a qualified attorney.

Authors: Benjamin Wilson and Rudy Verner