Keep it Simple with Nunn-Agreements in Colorado

On May 24, 2021, the Colorado Supreme Court published its decision in Auto-Owners Ins. Co. v. Bolt Factory Lofts Owners Ass’n.[1] There, the Colorado Supreme Court was tasked with answering whether an insurer, who is defending its insured under a reservation of rights, is entitled to intervene as of right under C.R.C.P. 24(a)(2) where the insured enters into a Nunn agreement with a third-party claimant, but rather than entering into a stipulated judgment, agrees with the third party to proceed via an uncontested trial to determine liability and damages. Interestingly, however, while the Court ultimately answered the above question in the negative, the real lesson from the Colorado Supreme Court’s decision is that Colorado litigants should not seek a trial court’s blessing as to liability and damages through non-adversarial proceedings when using Nunn-Agreements. Or, as articulated in Justice Carlos Samour’s vociferous dissenting opinion, Colorado litigants desiring to enter into a Nunn-Agreement should not proceed with a non-adversarial hearing, as doing so is “offensive to the dignity of the courts,” constitutes a “bogus,” “faux,” “sham” and “counterfeit” proceeding, and the hearing provides “zero benefit.”

By way of background, the case arrived in front of the Colorado Supreme Court 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. The other claims between the additional parties settled. On the eve of trial involving only the Association’s assigned claims against Sierra, the Association made a settlement demand to 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.

Sierra informed AOIC about the existence of the Nunn-Agreement for the first time 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 pursuant to C.R.C.P. 24(a)(2). The trial court denied AOIC’s motion. The Colorado Court of Appeals upheld the trial court’s decision, AOIC petitioned for certiorari, and the Colorado Supreme Court granted certiorari.

In evaluating the above issues, the Colorado Supreme Court ultimately concluded that AOIC was not entitled to intervene under C.R.C.P. 24(a)(2) because AOIC’s interest was not impaired by the Nunn-Agreement. Namely, AOIC could “sufficiently protect its interests in a subsequent declaratory judgment action regarding coverage.” The Colorado Supreme Court further noted that AOIC could also protect its interest by raising its claims and defenses in any bad faith action that the Association may bring against AOIC pursuant to the assignment of claims under the Nunn-Agreement.

More interesting, though, the Colorado Supreme Court also held that the proceeding in which AOIC had attempted to intervene, in the first instance, was unnecessary. The trial court could have insisted that the parties simply proceed with a stipulated judgment instead of allowing the proceeding to take place. In the words of the Colorado Supreme Court: “It is not clear from the record, why, rather than stipulate to the amount of damages as permitted by Nunn[2], [the parties] chose to have the trial court determine those damages as well as [Sierra’s] liability. Doing so was not required under Nunn. . . Although the district court here agreed to this process, we note that courts are not required to do so. Faced with such an agreement, a court may instead require the parties to enter into a standard Nunn agreement – that is, a court may require the parties to agree to a stipulated judgment, rather than proceed to an uncontested trial. . .”

Considering this holding, Justice Samour noted in his dissenting opinion, that after the Supreme Court’s ruling, he “[could not] imagine that any attorney will be able to do what [Sierra and the Association] insisted upon here. Had the trial court in this case been aware that it didn’t have to agree to the pretend trial, it may have refused to do so. . .” because there is “no reason why [Sierra and the Association] would have opted for a trial to accomplish the same thing a simple signature would have.”

In summary, while the Colorado Supreme Court ultimately clarified the situations in which insurers may seek intervention pursuant  C.R.C.P. 24(a)(2), the real takeaway from the Colorado Supreme Court’s decision is three-fold: (1) it is entirely unnecessary to proceed with a non-adversarial proceeding to prove liability and damages when entering into a Nunn-Agreement; (2) Colorado courts have no obligation to allow such non-adversarial proceedings, and are unlikely to allow such hearings in the future; and (3) non-adversarial proceedings are looked upon by Colorado courts with extreme contempt.

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.