By Jean Meyer
On May 30, 2019, Judge
Richard Brooke Jackson of the United States District Court for the District of
Colorado offered an insightful lesson to the parties in Auto-Owners
Insurance Co. v. Bolt Factory Lofts Owners Association, Inc.[1] on the importance of
ripeness in declaratory judgment insurance actions and bad faith counterclaims.
The case arrived in front of Judge Jackson based on the following fact pattern.
A homeowner association
(Bolt Factory Lofts Owners Association, Inc.) (“Association”) brought
construction defect claims against a variety of prime contractors and those
contractors subsequently brought third-party construction defect claims against
subcontractors. One of the prime contractors assigned their claims against a
subcontractor by the name Sierra Glass Co., Inc. (“Sierra”) to the Association
and all the other claims between all the parties settled. On the eve of trial
involving only the Association’s assigned claims against Sierra, the
Association made a settlement demand on Sierra for $1.9 million. Sierra asked
its insurance carrier, Auto-Owners Insurance, Co. (“AOIC”), which had been
defending Sierra under a reservation of rights letter, to settle the case for
that amount, but AOIC refused. This prompted Sierra to enter into a
“Nunn-Agreement” with the Association whereby the case would proceed to trial,
Sierra would refrain from offering a defense at trial, the Association would
not pursue any recovery against Sierra for the judgment, and Sierra would
assign any insurance bad faith claims it may have had against AOIC to the
Association. (“Nunn-Agreement”)
Sierra informed AOIC
about the existence of the Nunn-Agreement for the first time on the Friday
before the trial was set to commence. On the following Monday, AOIC petitioned
the trial court to intervene in the lawsuit and continue the trial in the hopes
of protecting its rights under its insurance policy. A hearing was held, and
the trial court judge held that the Agreement was valid under Nunn v.
Mid-Century Ins. Co., 244 P.3d 116 (Colo. 2010). A two-day bench trial
followed, and the court awarded the Association $2,489,021.91 (“Judgment”).
Two months after the
trial, AOIC filed a declaratory action in the United States District Court for
the District of Colorado seeking a declaration that AOIC did not owe any
obligations or payments to Sierra or the Association, a declaration that Sierra
breached the relevant insurance policy by failing to cooperate with AOIC, and a
declaration that the Judgment was not enforceable against AOIC (“Declaratory
Action”). Shortly after filing the Declaratory Action, AOIC also filed an
appeal with the Colorado Court of Appeals asking the Court of Appeals to
reverse the trial court’s denial of its petition to intervene and asked the
Appellate Court to vacate the Judgment. Adding to the mix, the Association and
Sierra contemporaneously answered the Declaratory Action and filed
counterclaims alleging that AOIC was liable for breach of contract and
statutory and common law bad faith claims.
AOIC thereafter moved to
dismiss Sierra and the Association’s counterclaims in the Declaratory Action
arguing that the claims were not ripe for review considering the pending
appeal. After providing a thorough review of relevant authorities, Judge
Jackson concluded that not only were the counterclaims premature considering
the pending appeal, the Declaratory Action itself was also untimely and he
dismissed the Declaratory Action in its entirety without prompting by either
Sierra or the Association.
Judge Jackson reasoned
that because the ripeness doctrine asks whether a controversy is certain and
not contingent on future events, the Declaratory Action counterclaims were
premature considering the pending appeal. If the Appellate Court were to
overturn the trial court’s decision and vacate the Judgment, the Declaratory
Action counterclaims would be rendered moot. In his own words, “[b]ecause the
injury will remain speculative until the final decision of Colorado’s appellate
court is issued, these counterclaims are unripe.” Because the grounds for
Sierra and the Association’s counterclaims was the imposition of excess
judgment, which remained uncertain until the Appellate Court ruled on AOIC’s
petition to vacate the Judgment, any claims that relied on that Judgment were
premature. Similarly, because AOIC filed an appeal seeking a ruling that the
Judgment was not enforceable against AOIC, if AOIC were to be successful in its
appeal, part of the relief requested in the Declaratory Action would no longer
be necessary.
In summary, practitioners
should neither rush to file insurance bad faith claims nor declaratory judgment
actions following a Nunn-Agreement and subsequent judgment before the time for
filing an appeal has expired. Parties should not file either claim where there
is a pending appeal challenging the underlying judgment.
For additional
information regarding Nunn-Agreements or about construction defect litigation
in Colorado, generally, you can reach Jean Meyer by telephone at (303) 987-9815
or by e-mail at meyer@hhmrlaw.com.
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