In
Colorado, the “complaint rule,” also known as the “four corners rule,” requires
an insurer to provide a defense when an underlying complaint alleges any set of
facts that may fall within an insurance policy. This can result in a situation
where an insurer has a duty to defend although the underlying facts ultimately do
not fall within the policy.
In
KF-103 v. American Family Mutual Insurance, 2014 WL 4409876, District
Court Judge Richard P. Matsch recognized an exception to the complaint rule. In doing so, Judge Matsch determined that a
court may look beyond the complaint to judicial orders preceding the filing of the
complaint to determine whether an insurer has a duty to defend. Therefore, a
party may not be able to assert unsupported facts in a complaint for the sole
purpose of triggering an insurance policy.
KF
103 v. American Family arose out of an underlying easement dispute. In the
underlying case, KF 103-CV, LLC (“KF 103”) purchased a piece of property from
the Infinity Group. As a condition of the purchase agreement, Infinity Group
was required to complete improvements to boundary streets and the intersection
of Ski Lane and Sorpresa Lane. Several
adjoining property owners (the “neighbors”) objected to the modification of the
intersection because it violated an express easement (the “easement”) that provided
access to their properties.
On
October 13, 2010, the district court judge issued oral rulings and findings,
holding that the neighbors’ easement had been impaired by the modification of
the intersection and that KF 103 had not sought to relocate the easement. The Court
found that KF 103 acted intentionally, although not with malice, and in direct
violation of Colorado common law. In October 2012, the Court ruled in favor of
the neighbors on claims for trespass, civil conspiracy, and negligence, awarding
damages accordingly.
During
the relevant time period, American Family insured KF 103. KF 103 first notified
American Family of the underlying easement dispute in January 2011. American
Family denied KF 103’s initial request for coverage and subsequent requests
claiming that the neighbors’ claims were all based on KF 103’s intentional
conduct, which was not covered under its policy. On September 10, 2013, KF 103 sued American
Family seeking declaratory relief and damages. KF 103 asserted that the factual
allegation in the neighbors’ negligence, negligent misrepresentation, and
trespass claims triggered coverage under the complaint rule.
The
Court found that the neighbors’ claims all involved intentional conduct on the
part of KF 103. The fact that claims alleged by the neighbors’ were categorized
as “negligent” and used such terms as “negligence,” “negligent failure,” and
“legal duty” did not change the fact that the well-pleaded allegations were really
claims arising out of KF 103’s intentional actions. Even if those facts pleaded
unintentional actions, the Court already found that KF 103 knowingly violated
the neighbors’ easement rights.
KF
103 argued that the complaint rule prevents the Court from considering earlier
rulings and that the Court must rely on the claims as pleaded, therefore
American Family owed KF 103 a defense. The
Court disagreed with KF 103, finding that it may consider its earlier rulings because
they preceded the filing of the claims and do not undercut the purpose of the
complaint rule. If the Court were to agree with KF 103’s argument, it would
allow any plaintiff to merely recite language in a complaint that would trigger
insurance coverage.
While
the complaint rule is still the general rule, a court may look outside the four
corners of a complaint when there have been prior judicial determinations. It
is important when determining the extent of insurance coverage to consider
whether any prior court rulings have been issued in the case and how they may
contradict the claims or counterclaims asserted.
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