Friday, October 11, 2019

Insurance Company’s Reservation of Rights Letter Negates its Interest in the Litigation


The Colorado Court of Appeals held that an insurance company, which issues a reservation of rights letter to its insured, loses its interest in the litigation, pursuant to C.R.C.P. 24(a)(2), when the insured settles the claims and assigns the bad faith action against the insurance company to the plaintiff.  Bolt Factory Lofts Owners Association, Inc. v. Auto-Owners Insurance Company, 2019WL 3483901(Colo. App. 2019).

In a 2016 lawsuit in Denver District Court, 2016CV3360, the Bolt Factory Loft Owners Association, Inc. (“Association”) asserted construction defect claims against six contractors.  Two of those contractors then asserted claims against other subcontractors, including Sierra Glass Co., Inc. (“Sierra Glass”).  After multiple settlements, the only remaining claims were those the Association, as assignee of the two contractors, asserted against Sierra Glass.

Auto-Owners Insurance Company (“AOIC”) issued policies to Sierra Glass and defended it under a reservation of rights.  The policy afforded AOIC the right to defend Sierra Glass, and it required Sierra Glass to cooperate in the defense of the legal action.  The Association presented a settlement demand of $1.9 million to Sierra Glass, which AOIC refused to pay.  To protect itself from an excess judgment that AOIC might not have paid, Sierra Glass entered into an agreement with the Association whereby Sierra Glass would refrain from offering a defense at trial and assign its bad faith claim against AOIC to the Association in exchange for the Association’s promise that it would not pursue recovery against Sierra Glass of any judgment entered against it at trial.  Such agreements, known as Bashor or Nunn Agreements, are allowed in Colorado.  Nunn v. Mid-Century Insurance Co., 244 P.3d 116 (Colo. 2010).  Therefore, Sierra Glass was entitled to protect itself in the face of AOIC’s potential denial of coverage and refusal to settle.  Bolt Factory Lofts, at 15.

AOIC learned of the Sierra Glass agreement with the Association the day before the trial was to begin.  The fifteen-day jury trial was reduced to a two-day bench trial as Sierra Glass would no longer put on any defense against the Association’s claims.  AOIC moved to intervene, continue the trial, contest the settlement agreement, and protect its rights under the insurance policies.  The trial court held that the agreement was valid under Nunn and denied AOIC’s motion to intervene.  Following the two-day trial, the trial court entered judgment in favor of the Association, and against Sierra Glass, for $2,489,021.91.

On July 27, 2018, AOIC timely appealed the trial court’s judgment, discussed below.  Prior to that, on June 18, 2018, the Association obtained a writ of garnishment against AOIC in the Denver District Court, which AOIC removed to the U.S. District Court of Colorado, 18CV01725, on July 9, 2018.  AOIC sought a declaration in the garnishment action that that Sierra Glass breached the policy by failing to cooperate with AOIC and that the judgment obtained in the underlying lawsuit was not enforceable against AOIC.  In response, the Association asserted counterclaims against AOIC for: 1) breach of contract; 2) statutory unreasonable denial of payment of a benefit; and 3) common law bad faith.  AOIC argued that the Association’s counterclaims were contingent on the outcome of the appeal in the underlying lawsuit and must be dismissed because they were not ripe.    Judge Brooke Jackson agreed, however, he also found that AOIC’s claims were not ripe as they also relied, in large part, on the trial court’s judgment.  Judge Jackson noted that the ripeness doctrine asks whether a controversy is certain and not contingent on future events.  He found that if AOIC prevailed on the appeal by successfully vacating the judgment, part of the declaratory relief it requested would no longer be necessary.  Thus, the claims were not ripe for AOIC or the Association, and this case was dismissed in its entirety, without prejudice.

With respect to the appeal of the trial court’s judgment, the Colorado Court of Appeals, Division VI (18CA1201), affirmed the trial court’s denial of AOIC’s motion to intervene.  C.R.C.P. 24(a)(2) provides for intervention as a matter of right when:

1.         The applicant claims an interest in the subject matter of the litigation;
2.         Disposition of the action may impair or impede the applicant’s ability to protect that interest; and
3.         The applicant’s interest is not adequately represented by existing parties.

Failure to satisfy one element of this rule precludes a motion to intervene as of right.  Bolt Factory Lofts, at 10.[1]  The appellate court found that AOIC failed to satisfy the first element and affirmed the trial court’s order without considering the other two elements. 

It was undisputed that AOIC reserved the right to deny coverage.  Id. at 15.  Thus, its interest in the litigation was contingent on the liability phase of the proceedings.  While the existence of an interest should be determined in a liberal manner, if the interest is contingent, it may be insufficient to warrant intervention.  Id. at ¶¶ 12-13.[2]  Where an insurer reserves the right to deny coverage, “the insurer’s interest in the liability phase of the proceeding is contingent on the resolution of the coverage issue.”  Id. at 14.[3]

Allowing AOIC to intervene to protect its contingent interest would allow it to interfere with and in effect control the defense.  Such intervention would unfairly restrict Sierra Glass, which faced the very real risk of an uninsured liability, and grant AOIC a double bite at escaping liability.  Id.[4]

Conclusion

An insurance company must consider the risks when it has a reservation of rights and denies a settlement for its insured within the policy limits.  AOIC lost control of the defense because it lost its interest in the litigation with its reservation of rights.  Once the claims were assigned, the judgment increased from a potential $1.9 million settlement to a $2.4 million judgment.  If there is a finding the insurance company denied the Sierra Glass claim in bad faith, compensatory, economic, and noneconomic damages are available, as well as punitive damages, not to exceed the amount of actual damages, to punish the insurer and deter wrongful conduct by other insurers.  C.R.S. § 13-21-102(1)-(3).  If bad faith is found, AOIC could pay as much as $4.8 million.  This type of reward creates an incentive for plaintiffs, like the Association, to accept an assignment of a claim, as contemplated by Nunn, which protects the insured from an excess judgment.


[1] Citing Diamond Lumber, Inc. V. H.C.M.C., Ltd., 746 P.2d 76, 78 (Colo. App. 1987).
[2] Citing Feigin v. Alexa Group., Ltd., 19 P.3d 23, 28 (Colo. 2001).
[3] Citing Travelers Indem. Co., v. Dingwell, 844 F.2d 629, 628 (1st Cir. 1989).
[4] Citing Dingwell, supra, at 639.



For additional information regarding Bolt Factory Lofts Owners Association, Inc. v. Auto-Owners Insurance Company or about construction defect litigation in Colorado, generally, you can reach Frank Ingham by telephone at (303) 653-0046 or by e-mail at ingham@hhmrlaw.com.

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The information contained in this blog is provided for informational purposes only. It is not legal advice and should not be construed as providing legal advice on any subject matter.