Bainbridge, Inc. v. Travelers Cas. Co.

• Decision Date: 02 November 2006
• Docket Number: No. 05CA0361.,05CA0361.
• Citation: 159 P.3d 748
• Parties: BAINBRIDGE, INC., n/k/a Birchwood Homes, Inc., a Colorado corporation, Plaintiff-Appellant, and David L. Ray and Elizabeth A. Ray, Intervenors-Appellants v. TRAVELERS CASUALTY COMPANY OF CONNECTICUT, f/k/a Aetna Casualty Company of Connecticut, a Connecticut corporation, and Travelers Indemnity Company, a Connecticut corporation, Defendants-Appellees.
• Court: Colorado Court of Appeals

159 P.3d 748

BAINBRIDGE, INC., n/k/a Birchwood Homes, Inc., a Colorado corporation, Plaintiff-Appellant, and David L. Ray and Elizabeth A. Ray, Intervenors-Appellants v. TRAVELERS CASUALTY COMPANY OF CONNECTICUT, f/k/a Aetna Casualty Company of Connecticut, a Connecticut corporation, and Travelers Indemnity Company, a Connecticut corporation, Defendants-Appellees.

No. 05CA0361.

Colorado Court of Appeals, Div. VI.

November 2, 2006.

As Modified on Denial of Rehearing November 30, 2006.

Shughart Thomson & Kilroy, P.C., Joseph J. Mellon, Bennett L. Cohen, Megan E. Harry, Denver, Colorado, for Plaintiff-Appellant and Intervenors-Appellants.

Montgomery, Kolodny, Amatuzio, Dusbabek, LLP, Keven F. Amatuzio, John R. Chase, Olivia C. DeBlasio, Denver, Colorado, for Defendants-Appellees.

Opinion by Chief Judge DAVIDSON.

In this action concerning an insurance company's duty to defend, plaintiff, Bainbridge, Inc., and intervenors, Elizabeth Ray and David Ray, appeal from the summary judgment entered in favor of defendants, Travelers Casualty Company and Travelers Indemnity Company (collectively Travelers). We reverse and remand.

I. Background

Bainbridge is a builder of luxury custom homes. Between March 31, 1995 and March 31, 1998, Bainbridge maintained policies of comprehensive general liability (CGL) insurance and umbrella insurance policies with four insurance companies, including Travelers. The Travelers CGL policies provided Bainbridge with one to two million dollars of coverage.

In 1996, Bainbridge built a house and sold it to the Deals. Shortly after the Deals moved in, evidence of structural damage appeared. Bainbridge investigated and attempted to repair the damage. The Deals then sold the house to the Goshas in 1997. Several months later, evidence of structural damage reappeared. In early 1998, Bainbridge again attempted to repair the damage. Two months later, on March 31, 1998, Bainbridge's policies with Travelers expired. In August 1998, the Goshas sold the house to the Rays for $920,000, the value at which it was appraised. Less than two years later, structural damage again reappeared, but Bainbridge made no further repairs to the house. The cost to repair the damage was estimated at approximately $904,000.

The Rays sued Bainbridge, claiming negligent construction and violation of the Colorado Consumer Protection Act (CCPA). Bainbridge promptly tendered the lawsuit to Travelers and its other CGL insurers. Travelers denied coverage and refused to defend Bainbridge because the tender letter (but not the underlying complaint) indicated that the Rays had purchased the house after Travelers's CGL policy expired. Bainbridge then filed this action against Travelers, alleging violations of the CCPA, breach of insurance contract, and bad faith breach and seeking indemnification.

While the suit against Travelers was pending, after trial, the court entered judgment in favor of the Rays in the Rays' action against Bainbridge. Pursuant to Northland Insurance Co. v. Bashor, 177 Colo. 463, 494 P.2d 1292 (1972), Bainbridge assigned to the Rays its claims against Travelers and another insurance company in exchange for the Rays' promise not to execute on the judgment against Bainbridge. The Rays then intervened in the action here.

Travelers moved for summary judgment on the breach of the duty to defend claim, the willful and bad faith breach of the duty to defend claims, and the CCPA claim against it. Travelers (and another insurer that is not a party on appeal) also moved for partial summary judgment on the issue of coverage of the Rays' CCPA claim against Bainbridge. In separate orders, the trial court granted the motions. The court concluded first that there was no coverage for the Rays' CCPA claim. Subsequently, the court concluded that Travelers was entitled to refuse to defend Bainbridge based on information found in the tender letter supplied by Bainbridge in that the Rays could not recover for damages because they did not own the house during the coverage period of Travelers's policies. Later, Travelers moved for and was granted an award of attorney fees for its defense against Bainbridge's CCPA claim.

The dispositive issue on appeal is whether the trial court correctly determined that Travelers did not breach its contractual duty to defend. We conclude that the trial court's ruling was error and that Travelers breached its contractual duty to defend as a matter of law.

II. Standard of Review

Summary judgment should be granted when there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. C.R.C.P. 56; Compass Ins. Co. v. City of Littleton, 984 P.2d 606, 613 (Colo.1999). We review a grant of summary judgment de novo. Cyprus Amax Minerals Co. v. Lexington Ins. Co., 74 P.3d 294, 298-99 (Colo.2003).

III. Breach of Duty to Defend

An insurer's duty to defend arises when allegations in the underlying complaint, if sustained, would impose a liability potentially or arguably covered by the policy. An insurer looks to the four corners of the complaint, together with the policy, to determine its right and duty to defend. Constitution Assocs. v. N.H. Ins. Co., 930 P.2d 556 (Colo. 1996); Hecla Mining Co. v. N.H. Ins. Co., 811 P.2d 1083, 1089 (Colo.1991).

Generally, the appropriate course of action for an insurer who believes it has no duty to defend is to provide a defense to the insured under a reservation of its rights to seek reimbursement, or to file a declaratory judgment action after the underlying case has been adjudicated. Hecla Mining Co. v. N.H. Ins. Co., supra, 811 P.2d at 1089.

Bainbridge and the Rays contend that the trial court erred in determining that Travelers did not breach its duty to defend. Citing the rule established in Hecla Mining, supra, they argue that Travelers improperly relied on facts outside the four corners of the Rays' underlying complaint in refusing to defend Bainbridge, specifically the Rays' purchase of the home after the policy had expired. Alternatively, they contend that, even if Travelers properly relied on these extrinsic facts, it nevertheless breached its duty to defend because, under the doctrine of equitable subrogation, the Rays' complaint states a possible claim that could arguably fall within the policy coverage. We do not address the former contention because we agree with the latter.

A. Equitable Subrogation Generally

"Subrogation occurs when one person is substituted in the place of another with reference to a lawful claim, demand or right of the other in relation to the debt or claim and its rights, remedies or securities." Browder v. U.S. Fid. & Guar. Co., 893 P.2d 132, 136 n. 4 (Colo.1995) (quoting Black's Law Dictionary 1427 (6th ed.1990)). Thus, there must first exist a valid claim, right, or debt in order for another to become subrogated to it. See Union Ins. Co. v. RCA Corp., 724 P.2d 80, 82 (Colo.App.1986) (explaining derivative nature of subrogation). Subrogation can occur by contract or through application of the principles of equity. See Ruppel v. Life Investors Ins. Co., 969 P.2d 725, 728 (Colo.App.1998).

If stated in terms of a debt, one becomes an equitable subrogee by paying the debt of a third party, entitling the payor (subrogee) to collect against the liable third party by stepping into the shoes of its creditor (subrogor). See Cotter Corp. v. Am. Empire Surplus Lines Ins. Co., 90 P.3d 814, 834 (Colo.2004) ("Subrogation allows a party who discharges another's debt to `stand in the shoes' of the subrogor [creditor]."). Similarly, if stated in terms of a claim, one becomes an equitable subrogee by paying to a claimant (subrogor) the value of the claim, entitling the subrogee to recover from the liable third party by stepping into the shoes of the claimant. See Union Ins. Co. v. RCA Corp., supra, 724 P.2d at 82 ("Subrogation . . . gives the [subrogee] the right to prosecute against responsible third parties whatever rights [the subrogor] possesses against them." (quoting 16 G. Couch, Cyclopedia of Insurance Law §§ 61:3637 (R. Anderson ed., 2d ed.1983))), abrogated on other grounds by Mile Hi Concrete, Inc. v. Matz, 842 P.2d 198, 207 n. 17 (Colo.1992); Cedar Lane Invs. v. Am. Roofing Supply, 919 P.2d 879, 884 (Colo.App. 1996) ("[T]he plaintiff is permitted to stand in the shoes of [the party holding the right] and enforce the claim which [that party] had." (quoting 1 D. Dobbs, Law of Remedies § 4.3(4), at 606 (2d ed.1993))).

Furthermore, because it is an equitable doctrine, no additional actions are needed before equitable subrogation can occur. Thus, unlike in an assignment, a subrogor need not intend to equitably subrogate the claims to a subrogee. Cf. Lookout Mountain Paradise Hills Homeowners' Ass'n v. Viewpoint Assocs., 867 P.2d 70, 73 (Colo.App. 1993) (intent required for assignment); Ford v. Summertree Lane Ltd. Liab. Co., 56 P.3d 1206, 1209 (Colo.App.2002) (same). It arises "because it is imposed by courts to prevent unjust enrichment." Cedar Lane Invs. v. Am. Roofing Supply, supra, 919 P.2d at 884 (quoting 1 Dobbs, supra, § 4.3(4), at 604). It is "a creature of equity having for its purpose the working out of an equitable adjustment between the parties by securing the ultimate discharge of a debt by the person who in equity and good conscience ought to pay it." In re Estate of Boyd, 972 P.2d 1075, 1077 (Colo.App.1998) (quoting United Sec. Ins. Co. v. Sciarrota, 885 P.2d 273, 277 (Colo.App. 1994); 16 Couch, supra, § 61:18).

B. Equitable Subrogation and Browder

Colorado has long recognized the doctrine of equitable subrogation in the common situation where an insurer pays its insured the value of the insured's claim (thereby discharging the liable third party's debt), and then seeks recovery against the third party. See, e.g., Mid-Century Ins. Co. v. Travelers Indem. Co., 982 P.2d 310, 315 (Colo.1999). However, the parties here disagree whether, conversely, a third party can...