KF-103 v. American Family Mutual Insurance: Tenth Circuit Upholds the “Complaint Rule”

In Colorado, the “complaint rule” requires insurance carriers to provide a defense to its insured when the allegations contained in the complaint allege any set of facts that may fall within an insurance policy.  Some insurers have pushed back on this rule arguing that it may cause an insurer to exercise its duty to defend although the underlying facts ultimately do not fall within the policy.

In KF 103-CV, LLC v. American Family Mutual Insurance Company, 2015 WL 6517782, the Tenth Circuit of the United States Court of Appeals upheld the complaint rule.  In its decision, the Tenth Circuit cited several Colorado state court rulings recognizing the courts’ intent to incentivize insurers to defend policies that may facially fall within the terms of the policy.  Where there is uncertainty about coverage, the Tenth Circuit cited a Colorado Supreme Court case stating, “[t]he appropriate course of action for an insurer who believes that it is under no obligation to defend, is to provide a defense to the insured under the reservation of its rights.” 

KF 103 v. American Family arose out of an underlying easement dispute.  KF 103 purchased a piece of property from the Infinity Group and, as a condition of the purchasing agreement, KF 103 required the Infinity Group to make improvements to an intersection near the property.  Several neighbors complained, contending that the improvements interfered with their easements adjacent to the property.

KF 103 brought a quiet title action and, on October 13, 2010, the state district court ruled that the improvement was trespass and intentional damage to the easement, ordering KF 103 to restore the easement.  In a second hearing to determine remedies, the El Paso County Court held KF 103 liable for trespass, conspiracy to trespass, and negligence.  KF 103 requested that American Family reimburse it for its attorney’s fees and defense costs, which it refused.  KF 103 then brought suit against American Family alleging breach of contract and bad faith for its refusal to defend.  The case was removed to federal district court where American Family was found to have no duty to defend KF 103 because the claims did not fall within the coverage.  KF 103 appealed.

The Tenth Circuit opined that, to date, neither the Colorado Supreme Court nor the Colorado Court of Appeals have recognized any exceptions to the complaint rule.  The Court explained that Colorado courts are reluctant to do so to protect an insured party’s reasonable expectation that “[b]y purchasing insurance … he will not be required to furnish the cost of defending actions that facially fall within the terms of the policy.”  Cotter Corp v. Am. Empire Surplus Lines Ins. Co., 90 P.3d 814, 828 (Colo. 2004) (en banc).  The Tenth Circuit further stated that Colorado courts acknowledge the purpose of insurance coverage and place the burden on the insurer, rather than the insured, to “accommodate the uncertainty of what the underlying litigation might reveal regarding the duty to defend.”    

Specific to KF 103, its general liability insurance policy with American Family covered damages that KF 103 “becomes legally obligated to pay” because of “property damage” resulting from an “occurrence.”  Additionally, the policy excluded damages “expected or intended from the standpoint of the insured.”  To determine whether American Family had a duty, the Tenth Circuit analyzed only “the factual allegations in the complaint, and not the legal claims …” Gerrity Co. v. CIGNA Prop. & Cas. Ins. Co., 850 P.2d 606, 607 (Colo. App. 1993). 

American Family argued that the claims, like trespass, brought against KF 103 are intentional torts and therefore, excluded from the policy.  However, the Tenth Circuit found that volitional acts do not always have “expected or intended” damages.  Trespass only requires the intent to do the act that itself constitutes, or inevitably causes—the intrusion; intent to violate property rights is not required.  Burt v. Beautiful Savior Lutheran Church, 809 P.2d 1064, 1067 (Colo. App. 1990).  Thus, KF 103 could be liable for trespass because it intended to alter the property but still covered by the policy because it did not intend to harm the neighbors’ easement rights. 

Furthermore, the Tenth Circuit found that where the allegations asserted KF 103 was deliberate in its actions, they also asserted KF 103 was reckless as an alternative.  Recklessness is not necessarily conduct causing damage that is “expected or intended” from the standpoint of the insured.  Because there is some doubt as to whether the damage to the easement rights was “expected or intended,” the Tenth Circuit held that the allegations are arguably covered by the policy as an occurrence.  It stated that terms of an insurance policy should be construed broadly in favor of a duty to defend.  The district court decision was reversed and remanded finding that American Family had a duty to defend.

The complaint rule remains the general rule.  Developments in KF 103 v. American Family indicate that some Colorado courts view intentional claims as exclusions to insurance policies.  However, the Tenth Circuit challenges such courts to place the burden on the insurer regarding the duty to defend, then conduct a more in-depth analysis of exclusions of intentional claims.

For more information regarding the KF 103 decision or Colorado construction litigation, you can reach Adria Robinson by e-mail at robinson@hhmrlaw.com or by telephone at (303) 987-9814.