The “no-voluntary payments” condition of an insurance policy was violated by an insured subcontracting concrete company, when it entered into a settlement with its prime contractor and paid damages for contractual liability for construction delays as well as for an accident, without first notifying its insurance carrier and obtaining prior approval to settle the dispute. When the subcontractor subsequently sought indemnification from its insurance carrier to be reimbursed the amount it had paid in damages, the carrier denied coverage. The issue of whether the coverage denial was appropriate was litigated and then appealed through several levels. The appellate court decision held that the subcontractor’s complaint against the carrier should have been dismissed on a motion for summary judgment without regard to whether the subcontractor might be able to demonstrate that the carrier was not prejudiced or harmed by the unauthorized settlement. Travelers Property Casualty Company v. Stresson Corporation, 370 P.3d 140 (Colorado 2016).
The requirement that an insured contractor must provide notice of a claim as required by the terms and conditions of a policy is a “fundamental terms of the contract,” and it is not necessary for a carrier to prove that it was prejudiced due to the failure of the claim to be timely reported. In fact, the court stated that “applying the notice-prejudice rule to excuse an insured’s noncompliance with such a contractual [policy] provision would essentially rewrite the insurance contract itself and effectively create coverage where none previously existed.” Here, the court explained that the “no voluntary payments” clause clearly excluded from coverage any payments voluntarily made or obligations voluntarily assume by the insured without consent…. The insurance policy emphatically stated that any such obligations or payments would be made or assumed at the insured’s own cost rather than by the insurer.
Comment: This case demonstrates the dire consequences of failing to comply with the terms and conditions of an insurance policy, particularly when it comes to providing the carrier with timely notice of a claim, and when it comes to obtaining prior approval before doing anything that might compromise or settle the claim.
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 18, No. 7 (December 2016).
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