The Colorado Supreme Court encountered issues regarding the insured’s duty to cooperate and the exhaustion requirements in auto policies. USAA v. Wenzell, 2026 Colo. LEXIS 283 (Colo. April 27, 2026).

In 2017, Anthony Wenzell was rear-ended while driving. He had also been involved in a more serious crash in 2014 and required back surgery. After the 2017 accident, Wenzell filed claims under three policies; the tortfeasor’s liability policy, Wenzell’s auto policy with State Farm, and a policy with United Services Automobile Association (USAA) issued to Wenzell’s brother which covered family members. The USAA policy contained an excess “other insurance” clause. Wenzell claimed that all policies were triggered because his damages would exceed the limits of the tortfeasor’s liability policy and his own policy.

USAA and State Farm asked Wenzell on several occasions to release his medical records so they could apportion his damages between those attributable to the 2017 accident and those attributable to his prior injuries. Wenzell, however, failed to comply with these requests.

Wenzell sued USAA and State Farm for breach of contract and for bad faith delay or denial of insurance benefits. On the insurers’ motions for summary judgment, the trial court dismissed Wenzell’s claims The trial court concluded that Wenzell’s failure to provide a comprehensive medical release was a condition precedent to compensation under the policies.

Wenzell appealed. The court of appeals reversed the trial court’s summary judgment orders. The court found that a Colorado statute, section 1118, set forth procedures on how insurers could assert a common-la failure-to-cooperate defense. The court concluded that section 1118’s procedural requirements applied to all defences when an insurer asserted that a policyholder failed to comply with a policy provision, not just those based in the general cooperation clause. The court of appeals also decided that the trial court erred by granting partial summary judgment in USAA’s favor based on Wenzell’s failure to exhaust his State Farm policy. An insurer could not require an insured to “exhaust” his primary insurance – meaning, the policyholder could not be required to receive a policy-limits payment from the primary insurer before the excess insurer adjusted his claim. Both insurers appealed.

The Supreme Court first found there was a distinction between a policyholder’s common-law duty to cooperate and a policyholder’s duty to satisfy the conditions precedent in the policy. To succeed on a failure-to-cooperate defense, the insurer had to show that the policyholder’s failure to cooperate materially and substantially disadvantaged the insurer. The insurer had to prove actual prejudice from the insured’s failure to cooperate, a showing not required to succeed on a failure-to-satisfy-condition-precedent defense.

Section 1118 imposed mandatory procedures that an insurer had to follow before it could advance a failure-to-cooperate defense. The statute required an insurer to give the policyholder written notice of the failure to cooperate within sixty days of the alleged failure, and the notice had to give the policyholder sixty days to cure. The statute did not define the word “cooperate.” The common dictionary understanding of “cooperate” was “to act or work with another” or to “act together or in compliance.” But in insurance policies, it was common for the policy to assign a narrower meaning to “cooperate” under the terms of the policy. Section 1118’s use of “cooperate” was equally susceptible to two meanings: (1) a colloquial meaning consistent with the dictionary definition or (2) a technical meaning that limited “cooperation” to the definition in the policy. Therefore, the statutory text was ambiguous. The statutory term “cooperate” could refer to a policyholder’s general duty to cooperate, or it could also include compliance with any specifically enumerated conditions precedent.

The court determined that section 1118 did not abrogate the common law. The failure-to-cooperate defense remained distinct from condition-precedent defences, and only the former was subject to section 1118’s procedure. If Wenzell failed to provide a suitable medical release, it was a breach of the enumerated conditions precedent in the policies, not the policies’ general cooperation clause. Accordingly, section 1118’s requirements did not apply and the court of appeals was reversed.

Turning to the exhaustion issue, the USAA policy stated that only coverage for “[a] vehicle {Wenzell’s brother] does not own . . . will be excess over any collectible insurance,” making the USAA policy excess over State Farm’s primary UIM coverage of Wenzell. Because Wenzell had not collected up to the limits of his primary coverage with State Farm, USAA maintained that its coverage was not triggered.

The court of appeals rejected USAA’s argument because it concluded that if any insurer, through an exhaustion clause, conditioned excess coverage on the primary insurer making a coverage-limits payment, then the clause was unenforceable under Colorado law and public policy. Instead, the court of appeals determined that an excess UIM policy was triggered when the policyholder claimed damages exceeding the maximum policy limits of all the underlying policies.

The underlying insurance was exhausted when (1) it was determined that damages would exceed the underlying limits – the undisputed damages approach; or (2) the primary insurer had tendered payment up to its limits – the payment-limit approach USAA proposed the court adopt the payment-limit approach.

The court adopted the undisputed damages standard. If Wenzell presented undisputed evidence that his damages would necessarily exceed all underlying policy limits – the tortfeasor’s coverage and his primary UIM coverage with State Farm – then he would exhaust “collectible” insurance and USAA would be in bad faith if it did not investigate, adjust, and pay out undisputed portions of Wenell’s claim that exceeded those limits.

There was still a dispute, however, because without a proper medical release and the opportunity for the insurers to provide their own assessment of Wenzell’s medical records, the insurers disputed whether the costs arose from the 2017 accident or from complications related to the 2014 accident. As long as that dispute exhausted, there were material issues of fact regarding whether USAA’s coverage was triggered. Therefore, USAA was not entitled to partial summary judgment based on the policy’s exhaustion provision. USAA had no obligation to investigate, adjust or pay out Wenzell’s claim until he presented undisputed evidence that his damages would exceed all underlying policy limits.

The judgment of the court of appeals was reversed in part, affirmed in part, with instructions to remand the case to the trial court.