Insurer Must Consider Allegations in Parallel Action to Determine Duty to Defend

Sunday, February 28, 2010

APARTMENT INVESTMENT & MANAGEMENT COMPANY v. NUTMEG INSURANCE COMPANY (10^thCir. Feb. 2, 2010)

Apartment Investment & Management Company (AIMCO) is a self-managed real estate investment trust that provides property management services. Part of these services included risk management which entailed the selection and procurement of the necessary insurance coverage for managed properties. AIMCO retained an independent contractor to create and manage its insurance program. Under the independent contractors direction, AIMCO retained and worked with several brokers and firms in placing property and general liability insurance. However, at least one of these brokers, allegedly without AIMCO’s knowledge, used AIMCO’s program as part of a Ponzi scheme by adding unaffiliated companies to the policies and then retaining their premiums as well as using these companies to fraudulently obtain additional premium financing.

Within a year of the scheme being discovered AIMCO was sued as a defendant or counterclaim defendant in a number of actions. Several of the lawsuits alleged either AIMCO’s direct involvement with the scheme or liability for the actions of AIMCO’s independent contractor. AIMCO sought coverage under two insurance policies issued by Nutmeg Insurance Company. The policies provided coverage for claims arising out of wrongful acts but excluded coverage arising out of the policyholder’s performance or failure to perform services as an insurance broker.

Subsequent to Nutmeg’s denial of coverage for the underlying actions, AIMCO brought the instant coverage action. The trial court compared the various complaints individually with the language of the policy and determined two of the complaints did not trigger coverage and the other five actions fell within the scope of the insurance broker exclusion. Accordingly, the trial court dismissed AIMCO’s complaint.

On appeal, the Circuit Court stated that the dispositive issue in determining the duty to defend here was whether an insurer was required to consider extraneous information beyond the four corners of the complaint. The court acknowledged that generally, an insurer is limited to considering the allegations in the complaint, i.e., the complaint rule. This principle serves two interests: first, to protect the insured’s expectation of a defense; and to prevent the insurer from compromising the insured’s defense in the underlying action while litigating the duty to defend in a declaratory judgment action.

This rationale does not specifically address whether an insurer should or can consider extraneous facts in determining whether the duty to defend has been triggered. Here, the insurer was aware of other complaints and facts that could establish coverage. The court held that an insurer should not be able to escape its defense obligation by ignoring true facts and relying on either erroneous allegations in the complaint or the absence of certain material allegations in the complaint. This was especially true in the instant matter where a number of complaints arose from a common core of operative facts. In such a case, the insurer must consider the totality of facts and complaints to make a good faith determination of its duty to defend.

Turning to the exclusions relied upon by the insurer, the court noted that there were no allegations in the underlying complaints that AIMCO was working as an agent for insurance companies or that it received commissions in connection with insurance services. Accordingly, the court concluded that the exclusion did not apply. In light of the court’s determination, the matter was remanded back to the trial court for further proceedings.

Impact: This decision is notable in that it appears that this is the first decision interpreting Colorado law that considered whether an insurer must consider facts beyond the four corners of the complaint in determining the duty to defend. Here, the Tenth Circuit adopted the view of most jurisdictions that the insurer cannot simply ignore facts it knows to be true in determining the duty to defend. To do so would render the scope of coverage under the policy dependent solely upon a third party, i.e. the suing claimant.

For a copy of this decision, click here: http://tinyurl.com/GS-PLM-Fed-Ed