Luke Mecklenburg and Anna Adams | Snell & Wilmer
In a 4-3 decision in Auto-Owners Insurance Co. v. Bolt Factory Loft Owners Association, Inc., the Colorado Supreme Court held that an insurer who is defending under a reservation of rights is not entitled to intervene where the insured has entered into a Nunn-type Agreement to assign its bad faith claims to a third party and then proceeds to an uncontested trial. The majority affirmed the Colorado Courts of Appeals’ decision, but on different reasoning.
The dispute at issue began when Bolt Factory Loft Owners Association sued contractors over construction defects. The contractors in turn filed third-party claims against subcontractors, including Sierra Glass Company, which was insured by Auto-Owners Insurance Company. The insurance company accepted its obligation to defend Sierra Glass subject to a reservation of rights.
Bolt Factory settled with all parties except Sierra Glass. Auto-Owners declined Bolt Factory’s $1.9 million settlement offer—an amount within the policy limits. Sierra Glass then retained its own counsel and entered into a pre-trial agreement with Bolt Factory. This agreement, generally known as a Nunn Agreement in Colorado, provided that Sierra Glass assigned its bad faith claim to Bolt Factory and, in exchange, Bolt Factory agreed to pursue Auto-Owners directly for payments of the excess judgment. But unlike most Nunn Agreements, where parties typically enter into a stipulated judgment and potentially agree to have the amount of damages determined by an independent factfinder, Bolt Factory and Sierra Glass proceeded to a two-day trial at which Sierra Glass contested none of Bolt Factory’s claims. During a pretrial conference, Bolt Factory stated it planned to call four witnesses to testify on liability and damages during the trial, and Sierra Glass said it “will probably not be posing a defense to those claims or assertions that are made in this case.”
When it learned of this plan, Auto-Owners moved to intervene to protect its interests and contest liability and damages—essentially to put on the defense Sierra Glass wouldn’t. But the district court denied the motion to intervene, reasoning that Auto-Owner’s interest in the matter was contingent on its obligation to defend under its policy and it would have a chance to challenge its liability under that policy in later suits. At the bench trial, Sierra Glass presented no defense. The district court entered judgment in favor of Bolt Factory and against Sierra Glass for nearly $2.5 million.
A division of the Colorado Court of Appeals affirmed the district court’s decision denying Auto-Owners’ motion to intervene. The court of appeals reasoned that based on its reservation of rights, Auto-Owners lacked sufficient interest in the litigation to satisfy Rule 24’s requirements.
A majority of the Colorado Supreme Court affirmed, but on different reasoning than the court of appeals. First, the court affirmed that the agreement between Bolt Factory and Sierra Glass was a permissible Nunn Agreement even though it was unclear from the record why the parties conducted a one-sided trial instead of just stipulating to judgment on Bolt Factory’s claims.
Second, the court concluded that even though Auto-Owners was proceeding under a reservation of rights, it retained a broad duty to defend under Colorado law. But the court agreed that Auto-Owners ability to defend itself was not impaired by denying it the chance to intervene because it could still challenge its liability in subsequent suits. Indeed, as the state court appeals were pending, Auto-Owners filed a declaratory judgment action in the United States District Court seeking a declaration that it did not owe any obligations or payments to Sierra Glass under the insurance policy and that Sierra Glass had breached the policy.
Third, the Supreme Court concluded that allowing an insurer like Auto-Owners to intervene would undermine the purpose of the Nunn Agreement, which provides an insured an opportunity to “protect itself in the face of an insurer’s unreasonable refusal to settle within policy limits.” According to the court, allowing the insurer to intervene could create potential conflicts based on information the insurer could discover about its insured in the case and use in a later declaratory judgment action regarding coverage.
On these bases, the Supreme Court affirmed the propriety of this modified Nunn Agreement and the district court’s refusal to allow Auto-Owners to intervene in the uncontested trial that arose from that agreement. Of note, however, the majority emphasized that (1) the judgment in the uncontested trial was no more binding on Auto-Owners than a stipulated judgment would have been, and (2) although this approach was permissible, “courts are free to require the use of a stipulated judgment” such as that considered in Nunn, “rather than proceed with an uncontested trial.” Hence, as the dissent observed, it is unclear why anyone would use this procedure again rather than simply stipulating to judgment and proceeding to assert bad faith claims against the insurer, as approved in Nunn. But with all that said, Bolt Factory remains an interesting case study in the extent to which Colorado courts will condone and/or expand upon the types of agreements first approved in Nunn.