Opinion ID: 160332
Heading Depth: 3
Heading Rank: 1

Heading: Breach of Duty to Defend.

Text: 18 Under Colorado law, an insurer's duty to defend arises when the underlying complaint against the insurer alleges any facts that might fall within the coverage of the policy. Hecla Mining Co. v. New Hampshire Ins. Co., 811 P.2d 1083, 1089 (Colo. 1991) (en banc). The duty to defend is separate from and broader than the duty to indemnify. See id. Furthermore, where the insurer's duty to defend is not clear from the pleadings, but the allegations do state a claim which is potentially or arguably within the policy coverage, the insurer must abide by its duty to defend the claim. Id. 19 As to its duty to defend, Royal's policy stated: We will have the right and duty to defend any `suit' seeking [those sums that the insured becomes legally obligated to pay as damages]. Rec. vol. III at R01053. The allegations in the Wernli and Long litigations were based on Signature's negligence and breach of warranty, which might be occurrences under Royal's policy as defined therein. An occurrence could include negligence and breach of warranty. See id. at R01051. The district court concluded that Signature produced no evidence that Royal refused to defend it. Rec. vol. I, tab 7, at 7-8 (Dist. Ct. Order filed July 22, 1999). 20 Signature contends, however, that Royal did not uphold its duty to defend or to participate in settlement proceedings. First, Signature states that Royal had agreed to split defense costs and yet ignored subsequent written demands for those costs. Colorado law recognizes that primary coverage insurers are duty bound to defend the insured and are required to contribute their pro rata share to the defense costs. National Cas. Co. v. Great S.W. Fire Ins. Co., 833 P.2d 741, 747-48 (Colo. 1992). Signature, relying in part on Lujan v. Gonzales, 501 P.2d 673, 677 (N.M. Ct. App. 1972), also contends that Royal may not rely on the defense provided by Travelers and may not as a result shirk from its defense costs obligations. See id. (holding that insurer's refusal to defend was breach of its duty to defend, notwithstanding the defense rendered by the other insurer). Finally Signature contends that Royal failed to complete a reasonable and prudent investigation of all aspects of the underlying case, as required by Aetna Cas. & Sur. Co. v. Kornbluth, 471 P.2d 609, 612 (Colo. Ct. App. 1970). 21 Royal counters Signature's argument by stressing the relevance of its reservation of rights under Colorado law. Royal does not dispute that its duty to defend was triggered and argues that it agreed to defend Signature as to property damages that occurred while Royal was Signature's carrier. In fact, Royal acknowledged its duty to defend, but undertook the duty subject to a reservation of rights. See Hecla Mining Co., 811 P.2d at 1089 (stating [t]he 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). 22 Royal asserts that it upheld its defense obligation: it appointed the law firm of Long & Jaudon, and conducted a thorough and diligent internal investigation as to its duty to indemnify. Royal argues that the record indicates that it was prepared to reimburse Travelers for its defense costs as required under Colorado law. See Rec. vol. 2, tab 11.2 (Depo. of Donalee Pelovsky, Royal claims adjuster supervisor); National Cas. Co., 833 P.2d at 747-48. Royal set up a reserve for the claim and avers it was prepared to contribute its share of defense costs and indemnity payment to the extent Signature's claims fell within the coverage of Royal's policy. Royal contends it paid no bills because Travelers paid defense counsel's bills. Royal received no invoices until they were produced in this litigation. 23 But we agree with Signature that although Royal pursued the above actions, these actions do not amount to an active independent defense of Signature's claims. We disagree with the district court's conclusion, and hold that Royal breached its duty to defend by not fully discharging its duty. Rather than discharging its duty to defend, Royal was non-responsive to settlement overtures, failed to communicate with its insured, and failed to fully cooperate in settlement negotiations. See Kornbluth, 471 P.2d at 612. Although Colorado courts have not specifically addressed the issue, we agree that [t]he fortuitous existence of another insurer who [wa]s willing to meet its own obligations did not excuse Royal from discharging its duty to defend. Aetna Cas. & Sur. Co. v. Coronet Ins. Co., 358 N.E.2d 914, 917 (Ill. Ct. App. 1976); see Lujan, 501 P.2d at 677. Finally, the district court's determination of noncoverage as to Royal's policy might have been a defense to the claims in the underlying action, but the district court's noncoverage ruling did not excuse Royal from fully defending the claims in the first instance. 24