Chapter 20 - § 20.4 • ATTORNEY FEES AS AN ELEMENT OF STATUTORY DAMAGES

• Jurisdiction: Colorado

§ 20.4 • ATTORNEY FEES AS AN ELEMENT OF STATUTORY DAMAGES

§ 20.4.1—Insured May Be Entitled to Recover Attorney Fees on Claim for Recovery of Attorney Fees

In Stresscon Corp. v. Travelers Property Casualty Co. of America, 2013 COA 131, rev'd, Travelers Property Casualty Co. of America v. Stresscon Corp., 2016 CO 22M, the primary question the court addressed on Travelers' appeal was whether an insured's breach of a "no voluntary payment" clause in a liability insurance policy necessarily barred 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 the 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, killing one construction worker and injuring another. Lawsuits brought by the injured worker and the heirs of the deceased worker were not involved in the 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 the Travelers 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 the crane team had a duty to indemnify Stresscon for payment of the delay damages. In addition, Stresscon asserted claims against Travelers for common law bad faith and 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. 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 Stresscon's settlement with Mortenson, and that $546,899 out of the $678,826 awarded by the first jury were damages covered by Travelers' policy.

Although it found that ordinarily Travelers would be required to pay Stresscon twice 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 the settlement between the crane team and Stresscon, the appeal involved only issues between Stresscon and Travelers.

Travelers appealed the denial of its motion for directed verdict and for 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 had 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; the settlement without Travelers' knowledge or participation did not conclusively establish prejudice; and there was sufficient evidence at trial to sustain the jury's finding that Travelers was not prejudiced. Stresscon, 2013 COA 131.

In addressing the applicability of the notice-prejudice rule, the court of appeals pointed out that in Lauric v. USAA Casualty Insurance 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 only issue is 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. 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. Stresscon, 2013 COA 131. 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 than that for which the insured ultimately settled the claim." Id. at ¶ 33.

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 ¶ 35. 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 "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. at ¶ 40.

While the court noted that some cases from other jurisdictions hold that violations of "no...