Chapter 3 - § 3.9 • OBLIGATION OF INSURER TO PAY PREJUDGMENT INTEREST

• Jurisdiction: Colorado

§ 3.9 • OBLIGATION OF INSURER TO PAY PREJUDGMENT INTEREST

§ 3.9.1—Under "Additional Payments Clause," Insurer Is Not Obligated to Pay Prejudgment Interest in Excess of Policy Limit

Policy provision (additional payments clause), which stated that insurer was liable to pay all costs taxed against insured and all interest on any judgment entered against insured, did not require insurer to pay prejudgment interest in excess of policy limit. Interest accruing before entry of judgment was not interest on a judgment. Prejudgment interest was a form of compensatory damages, and insurer's obligation to pay prejudgment interest was found in the liability coverage for bodily injury. Allstate Insurance Co. v. Starke, 797 P.2d 14, 18-19 (Colo. 1990), reversing Starke v. Allstate Insurance Co., 771 P.2d 3 (Colo. App. 1988).

The question presented in Allstate Insurance Co. v. Starke, 797 P.2d 14 (Colo. 1990), was whether Allstate was "obligated under an automobile insurance policy to pay interest accruing prior to judgment on bodily injury damages assessed by a jury against Allstate's insured to the extent that the damages and interest exceed Allstate's policy limit for bodily injury liability." Id. at 15. In a garnishment proceeding, the trial court had held that Allstate had no such obligation, but in Starke v. Allstate Insurance Co., 771 P.2d 3 (Colo. App. 1988), the court of appeals reversed. The supreme court, in turn, reversed the court of appeals and remanded the case with directions to reinstate the judgment in favor of Allstate.

Mary Starke died in a September 1985 accident with Allstate's insured, Bernard Lutter. Within 10 days of the accident, Allstate tendered its $100,000 policy limit to Starke's family in exchange for a release of all claims. Starke's family rejected the offer and brought a wrongful death action against Lutter. On July 30, 1986, Starke's family obtained a judgment of $241,555.44 against Lutter, plus costs and statutory interest of 9 percent from the date of the accident. Allstate then paid $100,000 to the Starkes and later paid the costs.

After these payments, the Starkes obtained a writ of garnishment requiring Allstate to declare whether it held additional personal property belonging to Lutter. Allstate denied that it held any such property, and the Starkes traversed Allstate's answer. The Starkes asserted that Allstate was liable for prejudgment interest on the damages awarded against Lutter, even though this would require payment in excess of the policy limit. The policy clause at issue was the "additional payments" provision. This clause stated that Allstate was liable for payment of "all court costs taxed against the insured" and "all interest on any judgment entered [against the insured] until Allstate has paid, tendered or deposited in court that part of the judgment which does not exceed the limit of Allstate's liability thereon." 797 P.2d at 16.

The trial court found that this provision required Allstate to pay costs and post-judgment interest in excess of the $100,000 policy limit, but did not require Allstate to pay prejudgment interest over and...