A New Exception to the Complaint Rule for Determining an Insurer’s Duty to Defend in Colorado

On February 2, 2010, the Tenth Circuit Court of Appeals issued its decision in AIMCO v. Nutmeg Ins. Co., 593 F.3d 1188 (10th Cir. 2010).  While not a construction defect case, this case is very interesting and will certainly have an impact on the determination of coverage (and in particular duty to defend cases) for construction defect claims. 

In AIMCO, Nutmeg Insurance Company moved for summary judgment that it had no duty to defend the claims against AIMCO based on the allegations contained in the specific complaints against it.  The Tenth Circuit described Colorado’s complaint rule like this:
“Under Colorado law, ‘when an insurer refuses to defend and the insured brings an action for defense costs,’ the duty to defend is determined by application of the complaint rule.  Under this rule, a duty to defend arises when the underlying complaint ‘alleges any facts that might fall within the coverage of the policy.’  The insured’s actual liability is not considered; instead, the duty is based on ‘allegations in the complaint, which if sustained, would impose a liability covered by the policy.’  This duty arises even when it is ‘not apparent from the pleadings in the case against the insured, but the allegations do state a claim which is potentially or arguably within the policy coverage, or there is some doubt as to whether a theory of recovery within the policy coverage has been pleaded.’  An insurer seeking to avoid its duty faces a ‘heavy burden’ of proving that the underlying claim cannot fall within the policy coverage.”  (Citations omitted).

The question addressed by the Tenth Circuit Court of Appeals was “whether, under Colorado law, a court may also consider evidence outside the complaints in making this determination.”  In answering this question in the affirmative, the court held that an insurer may not, in determining its duty to defend, disregard its knowledge of facts outside an individual complaint but contained in related complaints and known to the insured.

In so holding, the court acknowledged the existence of an exception to the complaint rule requiring an insurer to consider facts of which it is aware in parallel complaints that tend to show a duty to defend.  The court then discussed this generally accepted exception to the complaint rule, stating:

“The generally accepted rule on this issue by those states that have considered it seems to be that, if at the time an insurer determines whether it has a duty to defend, the insurer is aware of ‘information from which it appears that there might be coverage for any of the damages sought from the insured, [it] has a duty to defend even if the allegations of the complaint themselves would not give rise to such a duty.'”

“Indeed, ‘the logic behind this rule is unassailable. An insurer should not be able to escape its defense obligation by ignoring the true facts and relying on either erroneous allegations in the complaint or the absence of certain material allegations in the complaint.'”

The application of this exception to the complaint rule to construction defect claims is quite clear. Under the recent cases of General Security and Greystone, courts have been going out of their way, it seems, to limit their analysis to the four corners of the complaints in finding that there was no allegations pertaining to covered claims.  I wonder if those decisions would be the same if the courts had considered documents such as expert reports, which undoubtedly covered all aspects of resultant damge caused by the construction defects. I find it hard to imagine that the results would not have been different.

In construction defect cases in which carriers will be determining their defense obligations, after the AIMCO decision, it will be very important for counsel to incorporate by reference extraneous documents into the complaints and to provide the carriers with the organic documents referenced so as to demonstrate the covered claims.

If you have any questions regarding the AIMCO case, or anything else pertaining to construction law or insurance coverage issues in Colorado, please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.  For a more full explanation of construction law in Colorado please visit our website or request a copy of our Overview of Construction Defect Litigation in Colorado.


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