Cooperation Clause and Underlying Exhaustion – Colorado

United Servs. Automobile Assoc. v. Wenzell
--- P.3d ---, 2026 WL 1130206 (Colo. April 27, 2026)

The Colorado Supreme Court reversed, in part, the Colorado Court of Appeals’ decision and remanded to the trial court for entry of summary judgment in favor of United Services Automobile Association (USAA) and State Farm Mutual Automobile Insurance Company (State Farm) as to Wenzell’s claims against them. First, the Supreme Court held that the notice requirement in section 10-3-1118, Colorado Revised Statutes (2025) (“section 1118”), did not apply to Wenzell’s claims because the insurers’ defenses were not based on a breach of a general cooperation clause, but instead on Wenzell’s breach of specifically enumerated conditions precedent; namely, his failure to provide medical release authorizations. Second, with respect to USAA’s excess Underinsured-Motorist (UIM) coverage, the Supreme Court held that exhaustion clauses in an insurance policy are enforceable and satisfied only when a policyholder demonstrates undisputed damages exceeding all underlying policy limits, rather than requiring actual payment by the primary insurer.

This coverage dispute arose after Wenzell was injured in a motor vehicle accident in 2017. Wenzell filed claims under three insurance policies: the tortfeasor’s liability policy, his own UIM policy with State Farm, and a policy with USAA taken out by Wenzell’s brother that covered family members and contained an excess “other insurance” clause. However, because Wenzell was previously injured in a more serious accident in 2014 that required back surgery, both USAA and State Farm repeatedly asked Wenzell to sign medical release authorizations so that they could apportion his damages between the two accidents. The insurers asserted that Wenzell either failed to return the tendered medical release forms or offered deficient releases. In 2021, Wenzell sued USAA and State Farm for breach of contract and bad-faith delay or denial of insurance benefits.

The trial court granted summary judgment for the insurers, concluding that Wenzell’s failure to provide a comprehensive medical release was a failure to satisfy a condition precedent and that his bad-faith claim against USAA failed because he had not exhausted his primary coverage with State Farm. The Colorado Court of Appeals, Division II, reversed, holding that section 1118 applies to all defenses based on a policyholder’s failure to comply with any policy provision and that exhaustion clauses conditioning coverage on the primary insurer’s payment were void as against public policy.

On the cooperation-defense issue, the Colorado Supreme Court reversed. The appellate court recognized a longstanding common-law distinction between a policyholder’s general duty to cooperate and the duty to satisfy enumerated conditions precedent and found that the undefined term “cooperate” in section 1118 was ambiguous. Turning to the legislative history, the Supreme Court concluded that section 1118 did not abrogate this common-law distinction. Accordingly, section 1118’s procedural requirements — requiring insurers to provide written notice to a policyholder within 60 days of an alleged failure to cooperate and to allow the policyholder 60 days to cure before asserting the defense — apply only to defenses arising from a policy’s general cooperation clause, not to defenses based on a failure to satisfy enumerated conditions precedent. Because the insurers’ defenses rested on Wenzell’s failure to provide medical releases required as conditions precedent, the Supreme Court held that section 1118 did not apply to Wenzell’s claims against them.

On the second issue, the Supreme Court held that an exhaustion clause in an excess UIM policy is satisfied when a policyholder demonstrates that its undisputed damages exceed all underlying policy limits, and not when the primary insurer tenders payment up to its limits. The Supreme Court reasoned that conditioning excess coverage on the primary insurer’s payment would impermissibly dilute statutorily mandated UIM coverage. The Supreme Court also reversed the appellate court’s conclusion that exhaustion clauses violate section 10-4-609(1)(c), holding that such clauses are enforceable when exhaustion is measured by undisputed damages. The Supreme Court, however, affirmed the appellate court’s finding that USAA had an independent duty to evaluate Wenzell’s claim, but that duty would not arise until Wenzell could demonstrate undisputed damages exceeding all underlying policy limits. 

The Supreme Court remanded the case to the trial court to enter an order granting State Farm’s and USAA’s cross-motions for summary judgment based on Wenzell’s failure to comply with the policies’ enumerated conditions precedent.

By Amy L. Diviney