Court Opinion

ID: 9760844
Source: CourtListenerOpinion
Date Created: 2023-08-29 01:19:24.619537+00
Date Added: 2024-06-11T07:29:18.015473
License: Public Domain

Justice EID,
dissenting.
Today, the majority permits an insured, while he is being actively defended by his insurance company against a suit brought by the plaintiff, to stipulate to a $4 million judgment in exchange for a promise from the plaintiff that she will never enforce that judgment against him, but rather pursue a bad faith action against his insurance company to recover the amount of the judgment. From the standpoint of the insured, there is every reason to enter into such an agreement; he avoids substantial personal liability at no cost to himself. But that is precisely why such a stipulated judgment cannot bind the insurer. Indeed, such an agreement violates a bedrock principle of insurance law-namely, that an insured must cooperate with, rather than work against, his insurer while the insurer is actively defending him. Because the majority erroneously upholds the validity of such stipulated judgments, I respectfully dissent.
In Colorado, we have recognized a broad duty to defend: an insurance company must defend where the complaint against the insured "alleges any facts that might fall within the coverage of the policy, even if allegations only potentially or arguably fall within the policy's coverage." Thompson v. Maryland Cas. Co., 84 P.3d 496, 502 (Colo.2004) (emphasis added) (internal quotation marks and citation omitted). The duty to defend "must be construed liberally with a view toward affording the greatest possible protection to the insured." Id. (internal quotation marks and citation omitted). We have explained that an insurer seeking to avoid its duty to defend bears a "heavy burden," which "comports with the insured's legitimate expectation of a defense." Id. (internal quotation marks and citation omitted). There is no dispute that the insurance company in this case, Mid-Century, was providing an active defense of its insured, James, at its own expense at the time he entered into the stipulated judgment with the plaintiff, Nunn. Maj. op. at 118.
But this broad duty to defend is accompanied by a corresponding duty on the insured, imposed by an insurance policy's cooperation clause, to cooperate with the insurer in mounting a defense.1 Farmers Auto. Inter-Ins. Exch. v. Konugres, 119 Colo. 268, 275-76, 202 P.2d 959, 962-63 (1949). In fact, an insured may forfeit her insurance coverage if, in violation of a cooperation clause, she fails to cooperate with the insurer "in some material and substantial respect." Konugres, 119 Colo. at 276, 202 P.2d at 963 (internal quotation marks and citations omitted). The purpose of a cooperation clause is to "protect the insurer in its defense of claims by obligating the insured not to take any action intentionally and deliberately that would have a substantial, adverse effect on the insurer's defense, settlement, or other handling of the claim." State Farm Mut. Auto. Ins. Co. v. Secrist, 33 P.3d 1272, 1275 (Colo.App.2001) (citation omitted). See also Konugres, 119 Colo. at 276, 202 P.2d at 963; Couch on Inswrance § 199:4 (8d ed.2010). For example, an insured violates his duty of cooperation when he fires the insurance company's attorneys and admits that an accident was *125his fault and that the injured party suffered damages exceeding $100,000, Secrist, 83 P.3d at 1274-75, or when he "fraudulently collude[s] and connivels] with [the injured party] and her attorneys, to enable her to obtain the judgment against him, in order that he in turn might collect the same for her from [his insurance policy]." Bagley v. Lumbermens Mut. Cas. Co., 99 Colo. 300, 301-02, 62 P.2d 469, 470 (1986). As long as an insurer has agreed to defend its insured, "the insurer retains the absolute right to control the defense of actions brought against the insured, and the insured is therefore precluded from interfering with the investigation and negotiation for settlement." Farmers Grp., Inc. v. Trimble, 691 P.2d 1138, 1141 (Colo.1984).
Applying these principles to the stipulated judgment in this case, we should hold that it is not enforceable against Mid-Century because it was entered into while Mid-Century was providing James with a defense. The California Supreme Court came to the same conclusion in Hamilton v. Maryland Casualty Co., 27 Cal.4th 718, 117 Cal.Rptr.2d 318, 41 P.3d 128 (2002), in which it held that an insurer is not bound by an agreement between the plaintiff and defendant insured, entered into while the insurer is defending the insured, in which the insured stipulates to a substantial judgment against him in exchange for a promise from the plaintiff that she will not enforce that judgment against him, but rather pursue a bad faith action against his insurance company in his stead. When an insurer has agreed to defend its insured, it is "entitled to control the defense and to decide whether to litigate" the plaintiff's claim or settle. Safeco Ins. Co. v. Superior Ct., 71 Cal.App.4th 782, 84 Cal.Rptr.2d 43, 47 (1999). If an insurer wrongfully refuses to settle the claim, the insured may bring a bad faith action against it. Hamilton, 117 Cal.Rptr.2d 318, 41 P.3d at 132. However, that bad faith action based on failure to settle does not acerue until an excess judgment is entered against him. Id. at 184. Until "judgment is actually entered, the mere possibility or probability of an excess judgment does not render the refusal to settle actionable"; rather, the insurer is "allowed to proceed through trial to judgment." Id. at 134, 137 (internal quotation marks and citation omitted). By entering into a stipulated judgment while the insurer is defending, the insured wrests control of the litigation from the insurer and deprives the insurer of the opportunity to determine the insured's liability through trial. Id. at 133.
The Hamilton court refused to bind the insurer to the stipulated judgment entered into while the insurer was defending its insured because "the judgment provide[d] no reliable basis to establish damages resulting from [the insurer's] refusal to settle." Id. As the court pointed out, the insured entered into the stipulated judgment knowing that he would be "exeuse[d] ... from bearing any actual liability from the [agreement]." Id. In other words, the concern is "whether [the] insured too easily is admitting liability, or is agreeing to pay more than its proportionate share of the plaintiff's loss." Id. at 185 (emphasis, internal quotation marks, and citation to the court of appeals omitted). Under such cireumstances, the court concluded that the stipulated judgment simply could not serve as a benchmark for its insured's liability. Id.
The majority rejects the Hamilton rule essentially on two grounds. First, it "recognize[s] ... legitimate concerns regarding the possibility of fraud or collusion [between the plaintiff and the insured], as 'the existence and amount of the [insured's] lability is determined by the parties rather than by a neutral factfinder.'" Maj. op. at 123 (quoting Old Republic, 180 P.3d at 434). However, the majority finds that such concerns can be dealt with during the trial on whether the insurer refused to settle in bad faith, as the insurer may claim that the stipulated judgment was collusive or that the amount was unreasonable. Maj. op. at 122-28. The cases cited by the majority for this proposition, however, involve stipulated judgments entered into after the insurer refused to defend its insured or while the insurer was disputing coverage.2 Under these cireum-*126stances, the insured may enter into a settlement with the plaintiff to protect his own interests, as the insurer has essentially abandoned him and forfeited its right to demand that the lability case go to trial, See Old Republic, 180 P.3d at 433 (citing Hamilton, 117 Cal.Rptr.2d 318, 41 P.3d at 135); Note, Judicial Approaches to Stipulated Judgments, Assignments of Rights, and Covenants Not to Execute in Inswrance Litigation, 47 Drake L.Rev. 858, 874-75 (1999). But "where, as here, the insurer has accepted defense of the claim, and might have prevailed at trial had the insured and the claimants not settled without the insurer's participation," the stipulated judgment cannot serve as a reliable measure of the insured's liability to the plaintiff. Hamilton, 117 Cal.Rptr.2d 318, 41 P.3d at 185 (emphasis omitted). Although the issues of reasonableness and collusion may be explored at the insurer's bad faith trial, maj. op. at 122-123, such a trial is not a substitute for a trial on the insured's liability. Cf. Hamilton, 117 Cal.Rptr.2d 318, 41 P.3d at 135 (finding that despite the fact that the stipulated judgment had been found to have been made in good faith, such a finding "cannot transform an agreed judgment ... into a determination of the existence and extent of the insured's liability").
Second, the majority notes that "although California only recognizes the validity of settlement agreements involving stipulated judgments where an insurer breaches its duty to defend, and not when it breaches its duty to settle, ... we have made no such distinction in Colorado." Maj. op. at 122 (citing Old Republic, 180 P.3d at 433-34, for the proposition that Colorado requires "only that the insurer be found in breach of a duty to act in good faith toward its insured") {emphasis added). This statement is a mis-characterization of Colorado law. Not only does it ignore our duty-to-cooperate cases discussed above, it misstates our discussion in Old Republic. There, we described Hamilton's distinction between cases in which the insurer has agreed to defend its insured and where it has "abandon[ed]" its insured as "cogen[t]." Old Republic, 180 P.3d at 433. We went on to hold that the insurer could not be bound by the stipulated judgment because the insurer "conceded coverage and defended its insured" and because there were no bad faith claims pending against it. Id. at 433-34. While it was not necessary to rest our holding in Old Republic solely on the fact that the insurer was defending its insured, we certainly did not imply, contrary to the majority's suggestion, that such a distinction was not present in Colorado law or that we would find such a distinction unimportant in the future.3
Finally, I note that the majority addresses at length the issue of damages in a case such as this, adopting the "majority" rule that "an excess judgment alone is sufficient to establish actual damages for a claim of bad faith breach of the duty to settle." Maj. op. at 121-283 (relying heavily on Carter v. Pioneer Mut. Cas. Co., 67 Ohio St.2d 146, 423 N.E.2d 188 (1981)). But the distinction between the "judgment rule" and the "prepayment rule," id., is simply not relevant here. In Carter, the case had gone to trial and an excess judgment had been entered against the insured; there was no stipulated judgment, pretrial or otherwise. 423 N.E.2d at 190. Thus, the issue of whether a stipulated judgment could be enforced against an insurer who was defending the claim at the time was not raised or addressed. The majority's extensive discussion of damages does not answer the question of whether the stipulated judgment can be enforced against Mid-Century in the first place. I would hold that it cannot.
Today the majority holds that even if an insurer actively defends its insured, it is bound by a stipulated judgment entered into by the insured for which he will never be *127liable. Because this holding contravenes Colorado law, I respectfully dissent.
I am authorized to say that Justice RICE and Justice COATS join in this dissent.

. The insurance contract at issue here between James and Mid-Century is not part of the record. However, insurance policies generally include a cooperation clause, see Couch on Insurance § 199:3 (3d ed.2010) (also noting that some states have implied a duty to cooperate as a matter of law), and there is no claim that the insurance policy in this case did not contain one.

. Red Giant Oil Co. v. Lawlor, 528 N.W.2d 524, 527 (Iowa 1995) (insurer "willfully failed and refused to defend" its insured); Miller v. Shugart, 316 N.W.2d 729, 733 (Minn.1982) (insured did not violate his duty to cooperate by entering into a settlement with the plaintiff while insurer was *126disputing coverage); Six v. Am. Family Mut. Ins. Co., 558 N.W.2d 205, 206 (Iowa 1997) (insurer disputed coverage based on whether defendant was "additional insured" under policy).

. There is no question here that the stipulated judgment would not fall within the confines of a so-called Bashor agreement, named after Northland Insurance Co. v. Bashor, 177 Colo. 463, 494 P.2d 1292 (1972). As the majority concedes, the agreement in Bashor was made after trial, and did not involve an assignment of claims against the insurer. Maj. op. at 117 n. 1.