By Jean Meyer
On May 30, 2019, Judge Richard Brooke Jackson of the United States District Court for the District of Colorado offered an insightful lesson to the parties in Auto-Owners Insurance Co. v. Bolt Factory Lofts Owners Association, Inc.[1] on the importance of ripeness in declaratory judgment insurance actions and bad faith counterclaims. The case arrived in front of Judge Jackson based on the following fact pattern.
A homeowner association (Bolt Factory Lofts Owners Association, Inc.) (“Association”) brought construction defect claims against a variety of prime contractors and those contractors subsequently brought third-party construction defect claims against subcontractors. One of the prime contractors assigned their claims against a subcontractor by the name Sierra Glass Co., Inc. (“Sierra”) to the Association and all the other claims between all the parties settled. On the eve of trial involving only the Association’s assigned claims against Sierra, the Association made a settlement demand on Sierra for $1.9 million. Sierra asked its insurance carrier, Auto-Owners Insurance, Co. (“AOIC”), which had been defending Sierra under a reservation of rights letter, to settle the case for that amount, but AOIC refused. This prompted Sierra to enter into a “Nunn-Agreement” with the Association whereby the case would proceed to trial, Sierra would refrain from offering a defense at trial, the Association would not pursue any recovery against Sierra for the judgment, and Sierra would assign any insurance bad faith claims it may have had against AOIC to the Association. (“Nunn-Agreement”)
Sierra informed AOIC about the existence of the Nunn-Agreement for the first time on the Friday before the trial was set to commence. On the following Monday, AOIC petitioned the trial court to intervene in the lawsuit and continue the trial in the hopes of protecting its rights under its insurance policy. A hearing was held, and the trial court judge held that the Agreement was valid under Nunn v. Mid-Century Ins. Co., 244 P.3d 116 (Colo. 2010). A two-day bench trial followed, and the court awarded the Association $2,489,021.91 (“Judgment”).
Two months after the trial, AOIC filed a declaratory action in the United States District Court for the District of Colorado seeking a declaration that AOIC did not owe any obligations or payments to Sierra or the Association, a declaration that Sierra breached the relevant insurance policy by failing to cooperate with AOIC, and a declaration that the Judgment was not enforceable against AOIC (“Declaratory Action”). Shortly after filing the Declaratory Action, AOIC also filed an appeal with the Colorado Court of Appeals asking the Court of Appeals to reverse the trial court’s denial of its petition to intervene and asked the Appellate Court to vacate the Judgment. Adding to the mix, the Association and Sierra contemporaneously answered the Declaratory Action and filed counterclaims alleging that AOIC was liable for breach of contract and statutory and common law bad faith claims.
AOIC thereafter moved to dismiss Sierra and the Association’s counterclaims in the Declaratory Action arguing that the claims were not ripe for review considering the pending appeal. After providing a thorough review of relevant authorities, Judge Jackson concluded that not only were the counterclaims premature considering the pending appeal, the Declaratory Action itself was also untimely and he dismissed the Declaratory Action in its entirety without prompting by either Sierra or the Association.
Judge Jackson reasoned that because the ripeness doctrine asks whether a controversy is certain and not contingent on future events, the Declaratory Action counterclaims were premature considering the pending appeal. If the Appellate Court were to overturn the trial court’s decision and vacate the Judgment, the Declaratory Action counterclaims would be rendered moot. In his own words, “[b]ecause the injury will remain speculative until the final decision of Colorado’s appellate court is issued, these counterclaims are unripe.” Because the grounds for Sierra and the Association’s counterclaims was the imposition of excess judgment, which remained uncertain until the Appellate Court ruled on AOIC’s petition to vacate the Judgment, any claims that relied on that Judgment were premature. Similarly, because AOIC filed an appeal seeking a ruling that the Judgment was not enforceable against AOIC, if AOIC were to be successful in its appeal, part of the relief requested in the Declaratory Action would no longer be necessary.
In summary, practitioners should neither rush to file insurance bad faith claims nor declaratory judgment actions following a Nunn-Agreement and subsequent judgment before the time for filing an appeal has expired. Parties should not file either claim where there is a pending appeal challenging the underlying judgment.
For additional information regarding Nunn-Agreements or about construction defect litigation in Colorado, generally, you can reach Jean Meyer by telephone at (303) 987-9815 or by e-mail at meyer@hhmrlaw.com.
