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The Colorado Court of Appeals limits the power of insurance companies to intervene in litigation when the insurer defends under a reservation of rights.

Posted by Raj Chohan | Aug 17, 2019 | 0 Comments

The central question is whether an insurance company which has chosen to defend under a reservation of rights to deny coverage can then intervene in litigation between the injured party and the insured. In the case of Bolt Factory v. Auto Owners Insurance, 2019 COA 121, the Colorado Court of Appeals upheld the trial court's denial of an insurer's motion to intervene as a matter of right.

This issue comes up frequently in the context of personal injury and insurance litigation since Nunn v. Mid-Century Insurance Co. was decided by the Colorado Supreme Court in 2010. This is the first Colorado appellate court decision to provide specific direction on this problematic question.

Background

The Bolt Factory Loft Owners Association, Inc. (“the Association”) sued a half-dozen contractors for construction defects at a Denver condo project. Most of the claims settled. The only remaining claims were against contractor Sierra Glass.

Sierra Glass had an insurance contract with Auto-Owners Insurance Company (“Auto-Owners”). Auto-Owners defended Sierra Glass under a reservation of rights which means the insurer reserved the right to deny coverage.  When the Association made a settlement demand to Sierra Glass for $1.9 million, Auto-Owners refused to settle for that amount. To protect itself from further exposure to liability, Sierra-Glass entered into a settlement agreement with the Association. The agreement required Sierra Glass to lay down at trial and not offer a defense in exchange for a promise by the Association not to seek recovery from Sierra Glass.  Sierra Glass then assigned (to the Association) its right to pursue bad faith insurance claims against Auto-Owners.

When Auto-Owners realized what was happening, it attempted to intervene on the first day of trial. Auto-Owners sought, among other things, to challenge the agreement between the Association and Sierra Glass and to protect its rights under the insurance contract.

Trial court validates the Nunn agreement and denies the motion to intervene

The trial court validated the settlement agreement pursuant to Nunn v. Mid-Century Insurance Co., 244 P.3d 116 (Colo. 2010). The Nunn case holds that when an insurance company refuses a settlement offer that would avoid excess liability for its insured, the insured may protect itself by assigning its right to sue the insurance company for bad faith in exchange for an agreement by the injured party to pursue the insurance company for an excess judgment rather than the insured.

The trial court denied Auto-Owners' motion to intervene because the insurer had only a contingent interest in the outcome of the trial. That is, Auto-Owners' interest would vest only after a determination had been made that the insurer was required to cover the loss. Further, the trial court concluded that Auto-Owners had other avenues to protect its interests including the ability to bring a declaratory action to determine the coverage issues.

Court of Appeals Affirms

The Colorado Court of Appeals affirmed the trial court's reasoning. The appellate panel discussed Rule 24(a)(2) which 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 the existing parties. While Colorado law requires Rule 24 to be liberally interpreted to allow intervention, it also requires all three elements to be satisfied. If one element fails, there is no intervention as a matter of right.

Here, the Court of Appeals concluded that Auto-Owners did not satisfy the first element because the insurer had only a contingent interest in the litigation. When an insurer defends under a reservation of rights, the insurer's interests are not implicated until there has been a determination that the insurer is required to cover the loss. The appellate panel adopted reasoning from Travelers v. Dingwell, 884 F.2d 629, 639 (1st Cir. 1989), which observed that a reservation of rights is typically a contingent interest because an insurer who reserves the right to deny coverage cannot control the defense of a lawsuit brought against its insured by an injured party. Id. Allowing the insurer to intervene to protect its contingent interest would allow it to control the defense and unfairly restrict the insured who faces a real risk uninsured liability. Id.

What happened at trial?

After a scaled down bench trial, in which Sierra Glass did not present a defense, the court entered judgment in favor of the plaintiff for $2,489,021.91.

What about Collusion?

Auto-Owners raised the concern that without the ability to intervene the litigants were free to collude to the detriment of the insurer. The appellate panel, however, agreed with the trial court that the insurer could adequately protect its interests through use of a declaratory judgment action regarding coverage. Not only can the question of coverage be litigated in a declaratory action, Auto-Owners could also raise and litigate the alleged collusion. The Nunn case holds that an insurer is not bound by a settlement agreement produced through fraud or collusion.

About the Author

Raj Chohan

Raj Chohan is a personal injury attorney with a passion for helping injured Coloradans seek the compensation they deserve and the justice their cases demand. He is a former prosecutor with extensive jury trial experience in some of the most complex and serious cases that exist under Colorado law...

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