Opinion ID: 160332
Heading Depth: 3
Heading Rank: 2

Heading: Damages from Royal's Breach of its Duty to Defend

Text: 25 Having determined that Royal breached its duty to defend, we turn now to what damages Signature has incurred. As determined above, the presence of another insurer will not protect Royal from breach of its duty to defend. Again we are faced with a issue that Colorado courts have not squarely addressed. Royal reminds us that Signature received a competent defense and it voluntarily entered an apparently favorable and reasonable settlement agreement. See, e.g., Employers' Fire Ins. Co. v. Western Guar. Fund Servs., 924 P.2d 1107, 1113 (Colo. Ct. App. 1996) (holding where insureds were not undefended, alternate insurer's refusal to defend... caused the [insureds] no harm). Signature's acceptance of a portion of Travelers' right to attorneys' fees from Royal is not evidence of damages flowing from Royal's breach. When Signature accepted the assignment, it had already received the reservation of rights, and was aware that Royal might be entitled to reimbursement had Royal paid any fees. 26 However, to hold that Royal is insulated from contributing any defense costs because Royal notified Signature of its reservation of rights to seek reimbursement should we determine that the events were covered by Royal's policy would amount to permitting the insurer to do indirectly what it cannot do directly. See National Cas. Co., 833 P.2d at 747 (stating that to find insurer not responsible for contribution would be to reward insurer for refusing to honor its contractual obligations by failing to defend a lawsuit brought against the insured that falls within the terms of the policy). Hecla Mining Co. demands that an insurer notify the insured of its reservation of rights and requires the insurer to provide a defense. 811 P.2d at 1089; see also State v. Pacific Indem. Co., 63 Cal. App. 4th 1535, 1546-47 (1998) (The insurer must preserve its right to seek reimbursement by undertaking the defense of its insured upon an express reservation of rights, a reservation the insurer may unilaterally impose.) (emphasis added). 27 Signature had a contract right to have actions against it defended by Royal, at Royal's expense, subject to Royal's reservation of its rights. A reservation of rights agreement serves to furnish temporary protection to an insured, even though [as in this case] it may turn out that the insured was not entitled to such protection. 14 Couch on Ins. § 202:38. We have held Royal in breach of that contractual duty because Royal offered little or no protection to its insured. Further, Royal did not seek a declaratory judgment as to its duty after the underlying litigation was resolved. See Hecla Mining Co., 811 P.2d at 1089 (The 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 a reservation of its rights 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.). We cannot allow Royal to benefit from its breach, for to do so compels the insured to bear the expense of the litigation, and Signature is actually no better off financially that if it never had the contract right of a defense from Royal. See National Cas. Co., 833 P.2d at 747; cf. Willis Corroon Corp. v. The Home Ins. Co., 203 F.3d 449, 453 (7th Cir. 2000) (en banc) (holding that, under Illinois law, where insurer mishandled a defense which it undertook under a reservation of rights and left [insured] in the lurch to allow insurer to blatant[ly] manipulat[e] the law and file a twelfth-hour declaratory judgment action would encourage the worst possible behavior.). A natural and proximate result of Royal's breach was the participation by Traveler's as the only insurer in the continued litigation and settlement proceedings. Traveler's subsequently assigned its rights to seek contribution from Royal to Signature. We hold that Signature is therefore entitled to receive from Royal a pro rata portion of attorney fees, costs and expenses incurred in reaching settlement in the underlying litigation. See National Cas. Co., 833 P.2d at 747-48.