Southwest Insurance Coverage & Bad Faith Newsletter - November 2021

Auto-Owners Ins. Co. v. Bolt Factory Lofts Owners Ass’n (Colorado)

(November 2021) - The Colorado Supreme Court recently determined that an insurer defending under a reservation of rights has the right to intervene in the litigation after its insured assigns its rights to bad faith claims against the insurer. Auto-Owners Ins. Co. v. Bolt Factory Lofts Owners Ass’n, 2021 CO 32, 487 P.3d 276.

In the underlying Bolt Factory litigation, the insurer defended its insured in construction defect litigation, subject to a complete reservation of rights. The insurer rejected a settlement offer that was within its insured’s policy limits. The insured retained independent counsel and negotiated an agreement whereby the insured assigned its claims against the insurer to the plaintiff in exchange for the plaintiff’s agreement not to execute the judgment against the insured. This type of agreement is known as a Nunn agreement, permitted by the court’s prior decision in Nunn v. Mid-Century Ins. Co., 244 P.3d 116 (Colo. 2010). However, unlike Nunn, the parties in Bolt Factory did not enter into a stipulated judgment, choosing instead to proceed with an uncontested trial to determine liability and the amount of damages.

Upon discovering the Nunn agreement, the insurer filed a motion to intervene in the litigation to prevent an uncontested trial. The insurer argued that it was entitled to intervene in order to protect its rights. The trial court denied the motion to intervene, which was affirmed on appeal to the Colorado Court of Appeals.

On further appeal, the Colorado Supreme Court reached several important holdings:

  • An insurer does not lose its “absolute right” to control the insured’s defense merely by defending under a reservation of rights. The court reaffirmed its policy of encouraging insurers to defend under a reservation of rights where there are coverage questions.
  • A valid Nunn agreement assigning an insured’s bad faith claims to a plaintiff requires an insurer to have either refused to defend or refused a settlement offer within policy limits. The existence of a reservation of rights alone is insufficient to support a Nunn agreement.
  • An insured may agree to participate in an uncontested trial as part of a Nunn agreement. However, the trial court is not required to allow an uncontested trial and may instead require the parties to enter into a stipulated judgment.
  • A judgment resulting from an uncontested trial under a Nunn agreement is akin to a stipulated judgment, which “is not binding on the insurer until after an adversarial proceeding before a neutral factfinder, providing the insurer with an opportunity to advance its defense.” Thus, whether a judgment results from an uncontested trial or a stipulation, the insurer may challenge the reasonableness of the judgment in subsequent litigation.
  • An insurer defending under reservation does not have a right to intervene in the face of its insured’s decision not to contest the trial as part of a Nunn agreement. The insurer’s interests can be adequately protected in either a declaratory judgment action against the insured or by raising its defenses in a bad faith action.

The dissenting justice believed that the parties should have either entered into a true Nunn agreement in the form of a stipulated judgment or vetted the claims in a true, adversarial trial. These still remain viable options.

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