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

Heading: Royal's Right to Raise Coverage Defenses

Text: 28 Signature contends that because Royal failed to adequately defend under a reservation of rights, Royal is estopped from challenging coverage under the policy. Colorado subscribes to the majority view that an insurer who believes that it is under no obligation to defend must provide a defense if the allegations in the underlying complaint might fall within coverage of the policy. Hecla Mining Co., 811 P.2d at 1089. 29 As discussed above, an insurer may provide a defense subject to a reservation of rights to seek reimbursement should the facts at trial provide that the incident resulting in liability was not covered by the policy. Id.; see Employers' Fire Ins. Co., 924 P.2d at 1113 (stating that insurer's letter was sufficient to reserve insurer's right to contest insured's claim for payment of defense costs). The duty to defend continues until the insurer can establish that the allegations in the complaint are solely and entirely within the exclusion in the insurance policy. Hecla Mining Co., 811 P.2d at 1090. An insurer is not excused from its duty to defend unless there is no factual or legal basis on which the insurer might eventually be held liable to indemnify the insured. Id. at 1090. 30 Although Colorado courts have stressed the distinction between the duty to defend and the duty to indemnify, they have not specifically addressed whether an insurer who breaches its duty to defend is consequently estopped from challenging the duty to indemnify. Signature contends that we should follow the minority view, and hold that Royal is estopped from challenging coverage See, e.g., Underwriters at Lloyds v. Denali Seafoods, 927 F.2d 459, 462-65 (9th Cir. 1991) (applying Washington law and holding that insurer who breaches duty to defend cannot contest coverage); St. Paul Fire & Marine Ins. Co. v. Vigilant Ins. Co., 919 F.2d 235, 240 (4th Cir. 1990) (same, applying North Carolina law); Flannery v. Allstate Ins. Co., 49 F. Supp.2d 1223, 1227 (D. Colo. 1999) (considering majority and minority viewpoints as to ability of an insurer to contest coverage when it has breached duty to defend). Royal argues that we should adopt the majority view that a breach of the duty to defend is a breach of contract separate and apart from the duty to indemnify. See, e.g., Western Alliance Ins.Co. v. Northern Ins. Co. of N.Y., 176 F.3d 825, 828 (5th Cir. 1999) (applying Texas law, noting that [e]ven if an insurer breaches the broad duty to defend, it is not in all respects estopped from challenging the duty to indemnify and the duty to indemnity may turn on the facts in the underlying lawsuit, not the allegations of the complaint). 31 We consider state court decisions, decisions of other states, federal decisions, and the general weight and trend of authority in anticipating how the Colorado Supreme Court will address an issue. Armijo v. Ex Cam, Inc., 843 F.2d 406, 407 (10th Cir. 1988). Colorado has repeatedly recognized the separate and distinct nature of the duties to defend and indemnify. We are inclined to agree with the District Court of Colorado's analysis and conclusion in Flannery, 49 F. Supp.2d at 227, that Colorado will likely join the majority of jurisdictions in holding that an insurer who breaches its duty to defend may contest coverage. This approach is consistent with the doctrinal distinction between the duty to defend and the separate duty to indemnify. See, e.g., Hecla Mining Co., 811 P.2d at 1086; Flannery, 49 F. Supp.2d at 1228-29 (noting that Colorado law suggests that an insurer does not forfeit its right to contest coverage when it has breached its obligation to defend the insured); Colorado Farm Bureau Mut. Ins. Co. v. Snowbarger, 934 P.2d 909, 911 (Colo. Ct. App. 1997) (Moreover, a liability insurer has no duty either to defend or to indemnify if it can establish that the factual allegations in the underlying complaint that is solely and entirely within the policy's exclusions.). Thus, when an insurer breaches its duty to defend, the insured is entitled to receive compensation for any prejudice the insured may have suffered as a result of the breach. Hamlin, Inc. v. Hartford Accident & Indem. Co., 86 F.3d 93, 94-95 (7th Cir. 1996) (giving example of prejudice suffered by insured and stating If the lack of a defender causes the insured to throw in the towel in the suit against it, the insurer may find itself obligated to pay the entire resulting judgment or settlement even if it can prove lack of coverage.); see Denali Seafoods, Inc., 927 F.2d at 464 (offering instances in which insured might be able to establish prejudice based upon insured's reliance of insurer's defense). 32 Because we hold that Royal may raise coverage defenses where there exists a duty to defend, we next consider the district court's grant of summary judgment to Royal based upon the absence of evidence that any damages occurred during Royal's policy period. 33