Opinion ID: 2634716
Heading Depth: 4
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Heading: General Analysis to Determine an Insurer's Duty to Defend

Text: In this case, the trial court and court of appeals collapsed the determination of the primary insurers' duty to defend with the determination of the insurers' duty to indemnify. As a result, these courts based the determination of the primary insurers' duty to defend on facts revealed over the course of the Boughton and Dodge litigation. The trial court and court of appeals appear to have relied on language in Hecla Mining Co. v. New Hampshire Insurance Co. that suggests that once underlying litigation is resolved, the analysis to determine the duty to defend is the same as to determine the duty to indemnify. 811 P.2d 1083 (Colo.1991). As we explain, however, when an insurer refuses to defend its insured, the determination of the insurer's duty to defend is separate from the determination of the duty to indemnify, and is based solely on factual allegations contained in the underlying complaint. We have consistently held that an insurer's duty to defend arises solely from the complaint in the underlying action. Thompson v. Md. Cas. Co., 84 P.3d 496, 502 (Colo.2004); Cyprus Amax Minerals Co. v. Lexington Ins. Co., 74 P.3d 294, 299 (Colo.2003); Compass Ins. Co. v. City of Littleton, 984 P.2d 606, 613 (Colo.1999); Constitution Assocs. v. N.H. Ins. Co., 930 P.2d 556, 563 (Colo.1997); Hecla, 811 P.2d at 1089. Therefore, we have described the duty to defend as broader than the duty to indemnify, which depends on the ultimate determination of coverage as decided by the trier of fact. Hecla, 811 P.2d at 1089. We have held that a duty to defend exists when a complaint includes any allegations that, if sustained, would impose a liability covered by the policy. Id. In Hecla, however, we noted a circumstance in which courts may rely on facts outside of the complaint to determine an insurer's obligation to defend. There, we outlined the procedure that an insurer should follow when it believes it has no obligation to defend its insured. We explained that such an insurer should defend but reserve its rights either to seek reimbursement should the facts at trial prove that the incident resulting in liability was not covered by the policy, or to file a declaratory judgment action after the underlying case has been adjudicated. Id. (emphasis added). Therefore, we allowed insurers that provide a defense to rely on facts outside of the complaint to determine whether they could recover costs of defense from the insured. Here, the trial court and the court of appeals appear to have interpreted the language in Hecla as permitting them to collapse the determinations of the duty to defend and the duty to indemnify because the underlying litigation had concluded. The trial court and court of appeals relied on various statements by Cotter made over the course of the Boughton and Dodge litigation to conclude that Cotter expected seepage from the tailings ponds. See Cotter Corp. v. Am. Empire Surplus Lines Ins. Co., 64 P.3d 886, 891-92 (Colo.App. 2002). These courts reasoned that because Cotter expected such seepage, the qualified pollution exclusion clauses excluded coverage and the insurers had no duty to either defend or indemnify Cotter. The insurers urge that Hecla sanctions the trial court's result and point to a decision in which the court of appeals interpreted Hecla as allowing an insurer that refuses to defend to rely on the ultimate determination of coverage to defeat such a duty. The court of appeals explained that an insurer which contracts to defend the insured and fails to do so runs a calculated risk. If there is an ultimate finding . . . of no coverage, the insurer will not be liable for the litigation expenses of its insured since it would have been entitled to reimbursement. Wheeler v. Reese, 835 P.2d 572, 577 (Colo.App.1992) (citing Hecla, 811 P.2d at 1089). In Hecla, however, we did not attempt to shift the basis for determining the duty to defend upon conclusion of the underlying litigation from the complaint alone to facts outside of the complaint. Rather, in Hecla, we addressed a specific situation in which an insurer believes it is under no obligation to defend. See Hecla, 811 P.2d at 1089. We allowed insurers in such a situation to seek reimbursement for defense costs if coverage ultimately did not exist under their policies. See id. We attempted to balance the interests of both the insurers and the insureds by ensuring that the broad rule basing the duty to defend on the complaint will not require insurers to pay defense costs if coverage ultimately does not exist under the policies. Additionally, we created an incentive for insurers to defend by allowing them to subsequently seek reimbursement. See Stewart McNab, The Duty to Defend in Colorado After Hecla Mining, 20 Colo. Law.2095, 2097 (1991). Thus, we did not modify the general determination of the duty to defend, but instead merely attempted to create a remedy for insurers that provided defenses to insureds when coverage ultimately did not exist. In contrast, when an insurer refuses to defend and the insured brings an action for defense costs after the underlying litigation has been resolved, we apply the general rule that the duty to defend is determined from the factual allegations contained in the complaint. Determining the duty to defend from the face of the complaint in this circumstance serves two purposes: first, it ensures that insurers that refuse to defend do not gain an advantage over insurers that determine their obligations before the underlying litigation concludes and, second, it protects an insured's reasonable expectation of a defense. We determine the duty to defend on the same basis both before and after the completion of the underlying litigation to ensure that insurers that refuse to defend do not gain an advantage over insurers that establish their obligations before the litigation has completed. When resolving an insurer's obligations in an anticipatory declaratory action brought before the conclusion of the underlying dispute, an insurer's duty to defend is determined from the face of the complaint. Constitution, 930 P.2d at 563; see also Hartford Ins. Group v. Dist. Court, 625 P.2d 1013, 1016 (Colo.1981) (acknowledging that the trial court found a duty to defend on the basis of the complaint before the underlying litigation was completed but postponing a determination of coverage until the completion of the litigation). Therefore, for insurers that refuse to defend, we similarly base their duty to defend on the face of the complaint. To allow them to use the ultimate determination of coverage to establish that no duty existed would create an advantage over insurers seeking anticipatory declaratory judgments. We do not intend to create an incentive for insurers to refuse to defend in the hope that litigation will reveal that no duty to defend exists. [8] Therefore, to ensure that insurers that refuse to defend face the same duty to defend standard as those that resolve the issue through anticipatory declaratory judgments, we base such insurers' duty to defend on the face of the complaint. Additionally, basing the determination of the duty to defend on the complaint when an insurer refuses to defend protects the insured's legitimate expectation of a defense. Hecla, 811 P.2d at 1090. By purchasing insurance, the insured reasonably expects that he will not be required to furnish the cost of defending actions that facially fall within the terms of his policy. Hartford, 625 P.2d at 1017; see also Hecla, 811 P.2d at 1090. Therefore, allowing insurers to refuse to defend, and requiring insureds to seek reimbursement of defense costs after coverage has been determined, would defeat the basic reason for the purchase of the insurance. See Hartford, 625 P.2d at 1017 (quoting Gray v. Zurich Ins. Co., 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168, 178 (1966)). Thus, we base the determination of an insurer's duty to defend on the allegations contained in the underlying complaint when such insurer refuses to defend his insured. [9] In this case, because Cotter's primary insurers refused to defend, the issue of their duty to defend does not hinge on the ultimate determination of coverage. Therefore, the trial court and court of appeals improperly collapsed the duty to defend and duty to indemnify analysis. Instead, to determine whether the primary insurers had a duty to defend Cotter, we look to the allegations contained in the complaints from the Boughton and Dodge actions.