Mt. Hawley Insurance Co. v. Casson Duncan Construction, Inc.

COLORADO COURT OF APPEALS 2016COA164

Court of Appeals No. 15CA1996
Arapahoe County District Court No. 14CV32329
Honorable Charles M. Pratt, Judge

Mt. Hawley Insurance Company, a Illinois corporation,

Plaintiff-Appellant,

v.

Casson Duncan Construction, Inc., a Colorado corporation,

Defendant-Appellee.

JUDGMENT AFFIRMED

Division II
Opinion by JUDGE DAILEY
Furman and Harris, JJ., concur

Announced November 3, 2016

Moye White, LLP, David A. Laird, James Belgum, Denver, Colorado; Quilling,
Selander, Lownds, Winslett & Moser, PC, Greg K. Winslett, Dallas, Texas, for
Plaintiff-Appellant

Markusson, Green & Jarvis, H. Keith Jarvis, Daniel R. Coombe, Denver,
Colorado; BatesCarey, LLP, John E. Rodewald, Chicago, Illinois, for Defendant-
Appellee
¶1 In this insurance dispute, plaintiff, Mt. Hawley Insurance Co.

(Mt. Hawley), appeals the district court’s entry of partial summary

judgment in favor of defendant, Casson Duncan Construction, Inc.

(Casson Duncan). We affirm.

I. Background

¶2 A homeowners association (HOA) sued developer Mountain

View Homes III (MVH III) and general contractor Casson Duncan on

claims concerning defective construction of a condominium project.

In ensuing arbitration proceedings, MVH III’s insurer, Mt. Hawley,

defended MVH III under a reservation of rights. The arbitration

proceedings resulted in awards of damages and taxable costs to the

HOA. Casson Duncan paid the $1.2 million costs award, for which

it and MVH III were jointly liable, and thereafter sought

contribution from MVH III and its insurer, Mt. Hawley.

¶3 Mt. Hawley initiated the present action against its insured,

MVH III, the HOA, and Casson Duncan, requesting a declaration

that there was no coverage under its commercial general liability

policies with MVH III for either the damages or costs awarded in the

arbitration proceedings. As pertinent here, Casson Duncan filed a

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counterclaim for declaratory and monetary relief against Mt. Hawley

for payment of MVH III’s portion of the costs award.

¶4 The parties filed cross-motions for summary judgment as to

“coverage” issues. The district court denied summary judgment on

all but one of those issues. Based on the language in the insurance

policies, however, the district court determined that Mt. Hawley

was, as a matter of law, responsible for paying MVH III’s portion of

the cost award, regardless of whether it was also responsible for

paying MVH III’s portion of the damages award. Consequently, the

district court entered partial summary judgment for Casson

Duncan on its counterclaim.

¶5 The district court certified its partial summary judgment

ruling under C.R.C.P. 54(b) as “final” for purposes of permitting

appellate review at this time.

II. Analysis

¶6 Mt. Hawley contends that the district court erroneously

granted Casson Duncan a partial summary judgment because,

contrary to the court’s ruling, Mt. Hawley’s responsibility for

payment of costs was, under the policies, inextricably linked to the

question whether the policies provided MVH III with coverage for the

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HOA’s claims. Because the “coverage” issues had not been

determined, Mt. Hawley asserts, the “costs” issue could not be

determined either. We are not persuaded.

A. Mt. Hawley’s Settlement with the HOA

¶7 Subsequent to the court’s summary judgment rulings, Mt.

Hawley agreed to pay the HOA an undisclosed amount to settle

MVH III’s liability in connection with the claims adjudicated in the

arbitration proceeding. Initially, Casson Duncan asserted that the

settlement removed the coverage issues from the case, and,

consequently, “Mt. Hawley has not [established], and never will be

able to establish” the premise upon which it refuses to pay MVH

III’s part of “taxable” costs. In other words, that Mt. Hawley had “no

indemnity obligation in this case.” We are not persuaded.

¶8 Following a settlement, coverage issues can still be determined

between an insurer and its insured or a judgment creditor of the

insured. See Nikolai v. Farmers All. Mut. Ins. Co., 830 P.2d 1070,

1073 (Colo. App. 1991) (“An insurer . . . does not ordinarily waive

its policy defenses by payment of settlement proceeds to a

claimant. . . . Here, Alliance did not waive its policy defenses when

it settled the claims after issuing a reservation of rights letter.”); see

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also Bohrer v. Church Mut. Ins. Co., 965 P.2d 1258, 1261-67 & n.7

(Colo. 1998) (declaratory judgments and garnishment proceedings

are appropriate contexts for resolving coverage issues in third-party

victim insurance cases); Horace Mann Ins. Co. v. Peters, 948 P.2d

80, 84-85 (Colo. App. 1997) (settlement of underlying litigation did

not render coverage issues moot, as between insured and insurer).

¶9 Consequently, Mt. Hawley’s settlement with the HOA would

not preclude it from litigating “coverage” issues with MVH III or, as

pertinent here, its potential judgment creditor, Casson Duncan. If

we were to agree that Mt. Hawley’s responsibility for paying part of

MVH III’s costs depends on whether Mt. Hawley’s policies provided

coverage for the HOA’s claims against MVH III’s acts, the case

would have to be remanded to the trial court for a final

determination of coverage.

B. Interpreting the Policies

¶ 10 Turning to the merits of Mt. Hawley’s appeal, the issue is

whether the costs taxed against MVH III are payable by Mt. Hawley

even if MVH III’s misconduct was not covered under the policies. As

the district court recognized, the resolution of this issue depends

upon an interpretation of the policies.

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¶ 11 “An insurance policy, like any written contract, presents a

question of law and, therefore, is appropriate for summary

judgment.” Tynan’s Nissan, Inc. v. Am. Hardware Mut. Ins. Co., 917

P.2d 321, 323 (Colo. App. 1995).

¶ 12 An insurance policy must be interpreted using well-settled

principles of contract interpretation. Chacon v. Am. Family Mut. Ins.

Co., 788 P.2d 748, 750 (Colo. 1990). Thus, an insurance policy

should be construed to give effect to the intent of the parties, and,

when possible, the parties’ intent should be determined by the

language of the policy alone. Compton v. State Farm Mut. Auto. Ins.

Co., 870 P.2d 545, 547 (Colo. App. 1993).

¶ 13 In construing an insurance policy, we give words their plain

meanings according to common usage. In re Estate of Heckman, 39

P.3d 1228, 1231 (Colo. App. 2001). Unless there is an ambiguity,

an insurance policy should be enforced as written. Id. If an

insurance policy is ambiguous — that is, if it is susceptible of more

than one reasonable meaning — it must be construed against the

insurance company. Hyden v. Farmers Ins. Exch., 20 P.3d 1222,

1224 (Colo. App. 2000).

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¶ 14 The policies at issue here have standard “coverages” and

“exclusions” sections. A separate section, entitled “supplementary

payments,” provides, in pertinent part:

1. We will pay, with respect to any claim we
investigate or settle, or any “suit” against an
insured we defend:
....
e. All costs taxed against the insured in
the “suit.”
....
These payments will not reduce the limits of
insurance.1

¶ 15 Like the district court, we perceive no ambiguity in these

provisions.

¶ 16 Colorado law recognizes a distinction between an insurer’s

duty to indemnify and its duty to defend. The duty to indemnify

depends upon the existence of coverage under the policy; the duty

to defend does not. See Cotter Corp. v. Am. Empire Surplus Lines

Ins. Co., 90 P.3d 814, 827 (Colo. 2004); Hecla Mining Co. v. N.H. Ins.

Co., 811 P.2d 1083, 1089 (Colo. 1991).

1There is no question that the arbitration proceeding was a “suit”
within the meaning of the policies, as “suit” is defined by the
policies to include “[a]n arbitration proceeding in which [property]
damages are claimed and to which the insured must submit or does
submit with [Mt. Hawley’s] consent . . . .”

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¶ 17 In the policies at issue here, the obligation to pay costs is

linked not to coverage, but to the defense of the case. Further, the

costs/defense provision is physically separated (in the

“supplementary payments” part of the policies) from the “coverage”

and “exclusions” parts of the policies. The language and structure

of the policies imply that the cost provisions “are separate from and

in addition to the basic policy coverage, and, therefore, that [the

insurer’s] obligation to pay such costs is unaffected by the fact that

the policy does not cover [the insured’s] . . . conduct.” Mut. of

Enumclaw v. Harvey, 772 P.2d 216, 219 (Idaho 1989).

¶ 18 Indeed, as was the case in Harvey, the

[l]anguage in the policy of this case does not
indicate that payment of costs is conditioned
upon a final determination that the policy
covers the insured’s conduct. The language of
the policy says that the [insurer] will pay all
costs taxed against the insured in any suit
defended by the [insurer].
Id.

¶ 19 To the same effect, in Pacific Employers Insurance Co. v. Alex

Hofrichter, P.A., 670 So. 2d 1023 (Fla. Dist. Ct. App. 1996), the

Florida District Court of Appeals said, in a closely analogous

situation:

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[W]e need go no further than the clear
language of the insurance policy to conclude
that in light of the insurer’s undertaking of
[the insured’s] defense, it was obligated to pay
the cost judgment which followed. This court
has already held that the supplementary
payments provision of a policy applies
independent of whether or not there is
coverage. The policy at issue contains no
restrictions or limitations on that promise. . . .
Once [the insurer] defended, substantive
coverage was not necessary to trigger the
obligation to pay costs taxed against the
insured in any suit.

Id. at 1025 (citations omitted); see Prichard v. Liberty Mut. Ins. Co.,

101 Cal. Rptr. 2d 298, 312-13 (Cal. Ct. App. 2000) (“The cost claim

is not . . . a substantive replay of the indemnity issue. The policy,

in essence, obligates the insurer to pay the costs in any lawsuit it

defends. . . . [T]he supplementary payments provision providing all

‘costs taxed’ is a function of the insurer’s defense obligation, not its

indemnity obligation.”).2

2 These decisions were rendered in jurisdictions which, like
Colorado, recognize that the duty to defend is broader than the duty
to indemnify and depends on the allegations of a complaint. See,
e.g., Certain Underwriters at Lloyd’s of London v. Superior Court, 16
P.3d 94, 102 (Cal. 2001); Fun Spree Vacations, Inc. v. Orion Ins. Co.,
659 So. 2d 419, 421 (Fla. Dist. Ct. App. 1995); Hoyle v. Utica Mut.
Ins. Co., 48 P.3d 1256, 1264-65 (Idaho 2002).

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¶ 20 Persuaded by this rationale, we, like the district court,

conclude that, having conducted MVH III’s defense in the

arbitration proceedings, Mt. Hawley was, under the terms of the

policies, obligated to pay MVH III’s portion of taxable costs.

¶ 21 In so concluding, we reject Mt. Hawley’s assertion that the

policies’ cost provisions were superseded by Mt. Hawley’s

“reservation of rights” letter. Ordinarily, “a reservation of rights

letter can only preserve rights already agreed to by the parties.”

Huntsman Advanced Materials LLC v. OneBeacon Am. Ins. Co., No.

1:08-CV-00229-BLW, 2012 WL 480011, at *10-11 (D. Idaho Feb.

13, 2012); see also Harvey, 772 P.2d at 220 (A reservation of rights

“is not a destruction of the insured’s rights nor a creation of new

rights for the [insurer]”; rather, “[i]t preserves that to which the

parties had originally agreed.”).

¶ 22 There is, under Colorado law, an exception to this principle.

In Hecla Mining, the supreme court stated that

[t]he appropriate course of action for an
insurer who believes that it is under no
obligation to defend, is to provide a defense to
the insured under a reservation of its rights to
seek reimbursement should the facts at trial
prove that the incident resulting in liability
was not covered by the policy, or to file a

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declaratory judgment action after the
underlying case has been adjudicated.

811 P.2d at 1089. This remedy, the supreme court said in Cotter,

“allowed insurers . . . to seek reimbursement for defense costs if

coverage ultimately did not exist under their policies.” 90 P.3d at

8283; see Valley Forge Ins. Co. v. Health Care Mgmt. Partners, Ltd.,

616 F.3d 1086, 1093 (10th Cir. 2015) (characterizing Hecla Mining

and Cotter as “unmistakably indicat[ing] that Colorado law would

allow an insurer to recover defense costs from its insured where it

reserved the right to do so by letter, regardless whether the insurer

also reserved that right in the underlying insurance policy itself”).

¶ 23 “Defense” costs are not, however, the same as “costs taxed

against the insured.” Compare, e.g., Gelman Scis., Inc. v. Fireman’s

Fund Ins. Cos., 455 N.W.2d 328, 330 (Mich. Ct. App. 1990)

(“Defense is defined as that which is alleged by the party proceeded

against in a suit as a reason why plaintiff should not recover or

establish what he seeks. Thus, defense costs are monies expended

3 The remedy balanced “the interests of both the insurers and the
insureds by ensuring that the broad rule basing the duty to defend
on the complaint will not require insurers to pay defense costs if the
coverage ultimately does not exist under the policies.” Cotter Corp.
v. Am. Empire Surplus Lines Ins. Co., 90 P.3d 814, 828 (Colo. 2004).

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to develop and put forth a theory that the defendant is not liable or

only partially liable for the plaintiff’s injuries.”) (citation omitted),

and Domtar, Inc. v. Niagara Fire Ins. Co., 563 N.W.2d 724, 738

(Minn. 1997) (“[D]efense costs” are “those expenses reasonably

necessary either to defeat liability or to minimize the scope or

magnitude of such liability.”),4 with AXA Versicherung AG v. N. H.

Ins. Co., 769 F. Supp. 2d 623, 625 (S.D.N.Y. 2011) (“Taxable costs

are available to the prevailing party.”), and Barry v. Ariz. Dep’t of

Econ. Sec., 542 P.2d 1138, 1139 (Ariz. Ct. App. 1975) (“[I]mposition

of Taxable costs [are] for authorized expenses normally allowable to

a prevailing party as taxable court costs.”), and Cross v. Elliot, 69

Me. 387, 388 (1879) (“The law assumes that, all things considered,

the taxable costs shall indemnify the prevailing party for his

expenses and losses in the litigation.”). The Hecla Mining remedy of

recouping “defense” costs would not extend, then, to recouping (or

not, in the first instance, having to pay) “costs taxed against the

insured.”

4 Mt. Hawley understood “defense costs” in the same manner: it
reserved the right “to seek and to pursue reimbursement from its
insureds or any of them of the attorneys’ fees and costs it may incur
in the future in providing a defense under reservation of rights.”

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¶ 24 Finally, we reject Mt. Hawley’s assertion that our

interpretation of the policies leads to absurd results. See Harvey,

772 P.2d at 219 (“[I]t is arguable that since the [insurer] has the

right to control the defense, including the power to refuse

settlement, it should also bear the consequences of its case

management decisions, including the consequence that the trial

court may tax the opponent’s costs against the insured.”).

¶ 25 Mt. Hawley agreed in its policies to pay all costs taxed against

MVH III in any suit in which it defended MVH III. If Mt. Hawley

wished to retain a right to seek reimbursement of those costs “in

the event it later is determined that the underlying claim [was] not

covered by the policy, [it was] free to include such a term in its

insurance contract.” Gen. Agents Ins. Co. of Am. v. Midwest Sporting

Goods Co., 828 N.E.2d 1092, 1103 (Ill. 2005) (emphasis added);

accord Blue Cross of Idaho Health Serv., Inc. v. Atl. Mut. Ins. Co., 734

F. Supp. 2d 1107, 1113 (D. Idaho 2010); Harvey, 772 P.2d at 220.

Mt. Hawley did not do so here, and this court “cannot now ride to

the rescue.” Aetna Cas. & Sur. Co. v. Pintlar Corp., 948 F.2d 1507,

1513 (9th Cir. 1991) (noting that “[i]f an insurer intends the term

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‘damages’ to be construed in a legal technical way, it should

indicate that in the policy”).5

III. Conclusion

¶ 26 The judgment is affirmed.

JUDGE FURMAN and JUDGE HARRIS concur.

5 Mt. Hawley’s reliance on Bohrer v. Church Mutual Insurance Co.,
12 P.3d 854 (Colo. App. 2000), as grounds for a contrary conclusion
is misplaced. In Bohrer, the division did not interpret the provisions
of an insurance policy. Instead, it dealt with a punitive damage
award, which would be against public policy for the insurer to
cover. Id. at 856. The division concluded that, even assuming the
policy’s language required the insurer to do something, it would be
unenforceable on these grounds. Id. at 856-57. Unlike the
situation in Bohrer, we perceive no public policy that would be
violated as a result of our interpretation of the policies at issue
here.

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