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Stresscon Corporation v. Travelers Property Casualty Company of America

In Stresscon Corporation v. Travelers Property Casualty Company of America, — P.3d —, 2013 WL 4874352 (Colo.App.), the primary question the court addressed on Traveler’s appeal was whether an insured’s breach of a “no voluntary payment” clause in a liability insurance policy necessarily bars the insured from receiving benefits under the policy. The court held that the notice-prejudice rule adopted in Friedland v. Travelers Indemnity Co., 105 P.3d 639, 643 (Colo. 2005), applies to a “no voluntary payment” clause. In addressing Stresscon’s cross-appeal, the court held that trial court erred by denying Stresscon’s request under C.R.S. § 10-3-1116 for attorney fees incurred in bringing its request for fees, in other words its “fees-on-fees.”

The case arose out of a construction accident in July 2007 at the Fort Carson Army Base near Colorado Springs. A crane hook caught a safety stanchion and pulled a concrete building component off a support beam, causing a partially erected building to collapse and kill one construction worker and injure another. Lawsuits brought by the injured worker and the heirs of the deceased worker were not involved in this appeal. In addition to these suits, the general contractor, Mortenson, brought an action against Stresscon, the concrete subcontractor, claiming it was entitled to contract damages because the project was delayed by the accident. Travelers was Stresscon’s general liability insurer.

Travelers sent Stresscon two reservation-of-rights letters stating that the policy might not cover damages for the alleged delay. Travelers also sent a letter to Mortenson denying that Stresscon was liable to Mortenson. Mortenson then entered into settlement negotiations with Stresscon, which resulted in a settlement after an exchange of letters. Stresscon did not inform Travelers of the settlement or obtain its consent to settle. Under the settlement, Stresscon paid Mortenson for the delay damages and for other damages resulting from the accident that clearly were not covered by Traveler’s policy.

Thirteen months after the settlement, Stresscon sued Travelers and two of Stresscon’s subcontractors, RMS and Hardrock (known as “the crane team”), as well as their insurers. Stresscon asserted that Travelers breached the insurance contract and that crane team had a duty to indemnify Stresscon for the payment of the delay damages. In addition, Stresscon asserted claims against Travelers for common law bad faith and for violation of C.R.S. § 10-3-1115(1)(a) for unreasonably delaying or denying payment of insurance benefits. Stresscon claimed it was entitled to the statutory penalty of attorney fees, court costs and two times the covered benefit.

The case was bifurcated, and in the first trial the jury determined that the crane team owed Stresscon $678,826, the amount of the general contractor’s damages paid by Stresscon. In the second trial between Stresscon and Travelers, the jury found that Travelers unreasonably denied payment of insurance benefits, that Travelers had not been prejudiced by Stesscon’s settlement with Mortenson, and that damages in the amount of $546,899 out of the $678,826 awarded by the first jury were damages covered by Traveler’s policy.

Although it found that ordinarily Travelers would be required to pay Stresscon two times the covered benefit, or $1,093,798, the trial court ruled that Travelers only had to pay Stresscon $546,899 because Stresscon had already recovered that amount from the crane team’s insurers, and a clause in the insurance policies barred Stresscon from recovering from both insurers. While the trial court also awarded Stresscon its attorney fees, it refused Stresscon’s request for its “fees-on-fees,” or the fees incurred in making the fee request. Because of settlement between the crane team and Stresscon, this appeal only involved issues between Stresscon and Travelers.

Travelers appealed the denial of its motion for directed verdict and for a judgment notwithstanding the verdict. Travelers first argued that the notice-prejudice rule does not apply to breach of a “no voluntary payment” clause. Travelers’ second argument was that it was prejudiced as a matter of law by Stresscon’s settlement with Mortenson. Travelers also argued that because it no duty to pay benefits to Stresscon, it could not have unreasonably delayed or denied payments due under the policy. The court of appeals rejected all of Travelers’ arguments, finding that the notice-prejudice rule should apply to these circumstances; that the settlement without Travelers’ knowledge or participation did not conclusively establish prejudice; and that there was sufficient evidence at trial to sustain the jury’s finding that Travelers was not prejudiced. 2013 WL 4874352, *4.

In addressing the applicability of the notice-prejudice rule, the court of appeals pointed out that in Lauric v. USAA Casualty Ins. Co., 209 P.3d 190, 193 (Colo.App. 2009), another division of the court of appeals, relying upon Friedland, held in a UIM case that the notice-prejudice rule applies to “consent to settle” clauses that are similar to “no voluntary payment” clauses.

The court noted that in insurance cases where the issue is only one of untimely notice, the insurer has the burden of proving prejudice. However, under Friedland, when a liability insurer does not receive notice of a claim until after a liability case is settled, there is a presumption of prejudice to the insurer. If the insured then presents evidence to dispel the presumption, the presumption loses any probative force, and the insurer must prove the existence of actual prejudice. 2013 WL 4874352, *5. If the insured rebuts the presumption, the insurer must prove the precise manner in which its interests have been prejudiced, not just the possibility of prejudice. Id. Factors showing prejudice include the “substantial likelihood of avoiding or minimizing the covered loss, such as that the insurer could have caused the insured to prevail in the underlying action, or that the insurer could have settled the underlying case for a small sum or smaller sum that that for which the insured ultimately settled the claim.” Id.

In holding that the notice-prejudice rule applied to the breach of a “no voluntary payment” clause, the court of appeals found that “Friedland contemplated the situation we face here.” Id. at *6. The policyholder in Friedland settled an environmental lawsuit without the insurer’s consent, violating both notice-of-claim and “no voluntary payment” clauses. In addition, the court found that, although this was not a UIM case, the court’s reasoning in Lauric applied equally here “because both ‘consent-to-settle’ and ‘no voluntary payment’ clauses impose essentially the same duty on the insured: to obtain the insurer’s consent before it enters into any settlement or voluntary payment that implicates coverage.” Id.

While the court noted that some cases from other jurisdictions hold that violations of “no voluntary payment” clauses do not require any showing of prejudice before an insurer may deny payment of benefits, the court rejected this line of authority and instead found the rationale of Roberts Oil Co. v. Transamerica Ins. Co., 833 P.2d 222, 229 (N.M. 1992), to be persuasive. 2013 WL 4874352, *8.

The court of appeals next held that there was sufficient evidence to support the jury’s finding that Travelers had not been prejudiced by the settlement between Stresscon and Mortenson. This evidence included the fact that Stresscon’s liability to Mortenson was “reasonably clear”; there was substantial evidence the delay would result in a great deal of extra expense; the accident was a breach of the contract between Stresscon and Mortenson; the settlement was an “arm’s length” transaction after negotiations and Travelers could not have achieved a materially better settlement; and the amount of the settlement was reasonable and Stresscon did not overpay Mortenson. Id. at *10-12.

The court of appeals then rejected Travelers’ claim that there was insufficient evidence to support the jury’s conclusion that Travelers had unreasonably delayed or denied payment of benefits in violation of C.R.S. §§ 10-3-1115 & 1116. The court found there was ample evidence of unreasonable delay or denial of benefits. Id. at *14-15.

In its cross-appeal, Stresscon argued that trial court erred by reducing the amount of its damages by the amount that one of the insurers of the crane team paid to satisfy the judgment in the first trial. Stresscon argued that the reduction was not permitted under the collateral source rule, as modified by statute in C.R.S. § 13-21-111.6. However, the court found that the unambiguous language of the “other insurance” clauses in the applicable insurance policies, including the Travelers’ policy, indicated that Stresscon had “contracted away its right to recover benefits from both [Travelers] and the insurer of the member of the crane team.” 2013 WL 4874352, *17.

Stresscon also asserted in its cross-appeal that the trial court had erred by granting summary judgment to Travelers’ by finding that the policy excluded coverage for damages Stresscon suffered to its own property, for which Stresscon sought $261,447.48. These damages arose out of the cost of demolishing and removing the damaged concrete, installing new concrete and safety rails, and engineering and legal costs incurred in responding to the accident. In disputing coverage, Travelers relied upon the (j)(5) and (j)(6) exclusions in the CGL policy. The court of appeals agreed with Travelers and held that the policy expressly excluded coverage for Stresscon’s faulty workmanship. 2013 WL 4874352, *19. The court concluded that losses fell within both the (j)(5) and (j)(6) exclusions, and within the (j)(1) exclusion as well. Id. at *20.

However, the court of appeals did agree with Stresscon’s contention in its cross-appeal that the trial court erred by rejecting its request for “fees-on-fees” under C.R.S. §10-3-1116(1). The court recognized that under §10-3-1116(1), “an insured ‘whose claim for payment of benefits has been unreasonably delayed or denied may bring an action in a district court to recover reasonable attorney fees and court costs and two times the covered benefit.’” Id. at *22. This language “neither permits nor disallows ‘fees-on-fees.’” Id.

In addressing this issue, the court of appeals noted that in Hall v. American Standard Ins. Co. of Wisconsin, 292 P.3d 1196, 1200 (Colo.App. 2012), another division of the court held that attorney fees awarded under § 10-3-1116(1) are damages rather than costs. The court agree with the court’s reasoning in Hall and held that “a request for ‘fees-on-fees’ in connection with a section 10-3-1116(1) claim would be, like requests for ‘reasonable attorney fees and court costs and two times the covered benefit,’ a request for damages.” 2013 WL 4874352, *22. The court found that “because this request for damages is part of a remedial statutory scheme, the trial court erred when it (1) ruled that the concrete company was not entitled to its ‘fees-on-fees’ associated with the fee hearing; and (2) reduced the concrete company’s attorney fee and cost award by $132,928 for that reason.” Id.

In a specially concurring opinion, Judge Jones agreed with the majority’s ruling in all but one respect. Judge Jones reasoned that “the relevant statutory provision, subsection 10-3-1116(1), C.R.S. 2012, provides for an award of attorney fees as ‘costs,’ not ‘damages.” Id. at *25. Judge Jones noted that attorney fees that may be awarded fall into two categories: fees that may be awardable as damages as the legitimate consequence of a tort or breach of contract, and those awardable as costs, as a result of a fee-shifting provision in law or in contract, providing for an award of fees to the prevailing party. Id. at *25-26. As Judge Jones noted, this distinction has an important consequence. “[I]f attorney fees are sought as damages (and properly fit within that category), they ‘must be determined by the trier of fact and proven during the damages phase.’” Id. at *26, citing Ferrell v. Glenwood Brokers, Ltd., 848 P.2d 936, 941 (Colo. 1993). [Emphasis added.]

If attorney fees are indeed damages, as the courts held in both Hall and Stresscon, and as Judge Jones recognized, then the determination of the amount of attorney fees must be made by the trier of fact, and an insurer defending a claim for double damages and attorney fees under § 10-3-1116(1) would be entitled to a jury trial on this claim. See C.R.C.P. 38. This will present significant difficulties for the plaintiff and her attorney in pursuing a claim against an insurer under § 10-3-1116(1) because the plaintiff and her attorney will be required to present evidence of the amount of attorney fees incurred in pursuing the action, and the reasonableness of those fees, during the damages phase of the case, as opposed to the post-trial phase.

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