Colorado’s Federal District Court Finds Carriers Have Joint and Several Defense Duties

An issue that has plagued builders in Colorado construction defect litigation is the difficulty of getting additional insured carriers to fully participate in the builder’s defense, oftentimes leaving the builder to fund its own defense during the course of the litigation. 

Many additional insurers offer a variety of positions regarding why they will not pay for fees and costs during the course of a lawsuit.  Some insurers argue that, until after trial, it is impossible to determine its proper share of the defense, and therefore cannot make any payments until the liability is determined as to all of the potentially contributing policies. (This is often referred to as the “defense follows indemnity” approach.)  Others may make an opening contribution to defense fees and costs, but fall silent as fees and costs accumulate.  In such an event, the builder may be forced to fund all or part of its own defense, while the uncooperative additional insured carrier waits for the end of the lawsuit or is faced with other legal action before it makes other contributions. 

Recent orders in two, currently ongoing, U.S. District Court cases provide clarity on the duty to defend in Colorado, holding that multiple insurers’ duty to defend is joint and several.  The insured does not have to go without a defense while the various insurers argue amongst themselves as to which insurer pays what share. 

In D.R. Horton, Inc. – Denver v. Mountain States Mut. Cas. Co., et al., Civil Action No. 12-CV-01080, the Honorable R. Brooke Jackson issued an order on February 25, 2013, ruling on two motions for determination of a question of law.  That case arose out of an earlier construction defect lawsuit against D.R. Horton, Inc. (“DRH”), involving the work of several subcontractors.  DRH was named as an additional insured on several of the subcontractors’ policies. Those insurance carriers agreed to defend DRH, but then refused to pay or paid only a small portion of DRH’s defense costs. DRH subsequently filed a lawsuit against the carriers, in part, for breach of contract for failing to defend, and bad faith liability under C.R.S. § 10-3-1116. 

The first issue before Judge Jackson was whether or not DRH was a “first party claimant” under C.R.S. § 10-3-1115 and entitled to benefits owed directly to it under an insurance policy.  Mountain States argued that since the underlying litigation arose from claims against DRH, that DRH was not a “first party claimant.”  The Court disagreed, and held that the policies entitled DRH to the benefits of a defense.  Therefore, as a “first party claimant,” DRH was able to maintain an action against the insurers under C.R.S. § 10-3-1116, arising from an unreasonable delay or denial of a claim, and could seek recovery of reasonable attorney fees, court costs, and two times the covered benefit.

DRH also sought a ruling as to whether the multiple accepting insurance carriers each had joint and several duties to defend. The U.S. District Court held in favor of DRH, stating, “the allocation of defense costs is a matter to be worked out among the insurers and, if they cannot do so, then by a court.  The insured does not have to go without a defense or fund its own defense while the insurers argue amongst themselves.” 

Judge Jackson cited an order in the similar matter of D.R. Horton, Inc. – Denver, et al. v. Travelers Indem. Co. of America, et al., Civil Action No. 10-CV-02826, 2012 WL 5363370 (D. Colorado).  That case, now settled, also involved litigation between DRH, an insurance carrier, and several subcontractors that had agreed to obtain additional insured coverage for DRH.  There, the Honorable William J. Martinez issued an order on October 31, 2012, concerning numerous dispositive motions.  Both DRH and Travelers moved for summary judgment on the issue of whether an insurer’s duty to provide a defense is a joint and several obligation.  Judge Martinez stated that while Colorado courts have not affirmatively resolved this issue, sufficient authority indicates that the Colorado Supreme Court, “would hold that each liability insurer has a duty to provide a complete defense, such that a liability insurer who breaches this duty can be found liable for the entire amount of defense fees and costs (and that insurer can then seek equitable contribution from any co-insurer).”  The Court granted DRH’s motion with respect to joint and several liability, holding that DRH was entitled to recover from Travelers its full, uncollected defense fees and costs.

Another issue in Judge Martinez’ order denied a motion for summary judgment brought by a subcontractor, seeking to limit a broad duty to defend arising from a failure to procure insurance as it had agreed. Travelers brought claims for contribution against several of DRH’s subcontractors on the underlying project.  One of the subcontractors, Ark Construction (“Ark”), moved for summary judgment, arguing that (1) it was not a “co-insurer” of the builder; and (2) if it was, it did not insure the same risk as the insurance carrier.  The subcontract required Ark to carry insurance naming DRH as an additional insured, but Ark failed to do so.  The U.S. District Court held that, due to Ark’s breach, Ark assumed a complete duty to defend DRH (resulting in potential joint and several liability for each insurer).  Here, the Court relied on Steamboat Dev. Corp. v. Bacjac Indus., Inc., 701 P.2d 127 (Colo. App. 1985), and Richmond v. Grabowski, 781 P.2d 192, 194 (Colo. App. 1989), which held, “In general, the party who agrees to procure the insurance and fails to do so assumes the position of the insurer and, thus, the risk of loss.”

Judge Martinez’s order also discusses the majority view in other jurisdictions, which holds that the duty of an insurer to defend extends to a defense of the entire case, and that each of multiple insurers is severally liable to the insured for the entire cost of the defense.  These recent U.S. District Court orders clarify that the law in Colorado follows the majority view.

For additional information regarding this or any construction law issues in Colorado, you can reach Bret Cogdill by e-mail at Cogdill@hhmrlaw.com or by telephone at (303) 653-0046.