Continental Western v. Jim's Hardwood Fl., No. 98CA1576.

• Decision Date: 03 February 2000
• Docket Number: No. 98CA1576.
• Citation: 12 P.3d 824
• Parties: CONTINENTAL WESTERN INSURANCE CO., Plaintiff-Appellant and Cross-Appellee, v. JIM'S HARDWOOD FLOOR COMPANY, INC., a Colorado corporation, and Progressive Casualty Insurance Company, Defendants-Appellees and Cross-Appellants, and Susan Aukema, Defendant-Appellee.
• Court: Colorado Court of Appeals

12 P.3d 824

CONTINENTAL WESTERN INSURANCE CO., Plaintiff-Appellant and Cross-Appellee, v. JIM'S HARDWOOD FLOOR COMPANY, INC., a Colorado corporation, and Progressive Casualty Insurance Company, Defendants-Appellees and Cross-Appellants, and Susan Aukema, Defendant-Appellee.

No. 98CA1576.

Colorado Court of Appeals, Div. IV.

February 3, 2000.

As Modified on Denial of Rehearing May 18, 2000.

Certiorari Denied October 30, 2000.

Miller & Welch, L.L.C., Carol M. Welch, Denver, Colorado; Campbell, Latiolais & Ruebel, P.C., Jeffrey C. Ruebel, Denver, Colorado, for Plaintiff-Appellant and Cross-Appellee.

Frank & Finger, P.C., Terrence P. Murray, Evergreen, Colorado, for Defendant-Appellee and Cross-Appellant Jim's Hardwood Floor Company, Inc.

Hall & Evans, L.L.C., Alan Epstein, Michael W. Jones, Denver, Colorado, for Defendant-Appellee and Cross-Appellant Progressive Casualty Insurance Company.

The Leventhal Law Firm, P.C., James M. Leventhal, Natalie Brown, Beth L. Krulewitch, Denver, Colorado, for Defendant-Appellee.

Opinion by Judge MARQUEZ.

In this declaratory judgment action to determine coverage for a motor vehicle accident under a business automobile policy, plaintiff, Continental Western Insurance Co. (Continental), appeals the trial court's judgment entered in favor of defendants, Jim's Hardwood Floor Company, Inc. (Jim's Hardwood), Susan Aukema, and Progressive Casualty Insurance Co. (Progressive). Jim's Hardwood and Progressive conditionally cross-appeal concerning the issue of late notice. We affirm.

In April 1994, Aukema was involved in a motor vehicle accident with a vehicle owned by Jim's Hardwood and driven by an employee of Jim's Hardwood. At the time of the accident, Jim's Hardwood was insured by business automobile policies issued by Continental and Progressive. To recover for her injuries, Aukema sued Jim's Hardwood and the employee, and the matter was set for a jury trial. Continental did not provide a defense.

On February 4, 1997, Continental filed this action alleging it had no duty to defend or indemnify or pay any judgment under its policy because Jim's Hardwood had breached the notice provisions of the policy, Jim's Hardwood had breached the notice provisions of the policy, because any coverage available was on an excess basis, and because the employee was not a permissive user.

According to the order on defendants' motions for summary judgment, on March 27, 1997, the jury returned a verdict in favor of Aukema against Jim's Hardwood for $770,000.

On April 3, 1997, Continental amended its complaint for declaratory judgment asserting for the first time that due to a clerical error, a mutual mistake had been made in issuing the business auto policy and that it was entitled to reformation. The trial court entered summary judgment in favor of defendants on the issues of late notice and permissive use, but denied summary judgment on the request for reformation. However, during the second day of trial on the reformation issue, the trial court terminated proceedings and ruled that Continental was estopped from reforming its policy.

I.

Plaintiff contends that the trial court erred in ruling that it was estopped from seeking reformation. We reject this contention.

Generally, the purpose of reformation of an insurance contract is to make the policy express the true intent of the parties. Thompson v. Budget Rent-A-Car Systems, Inc., 940 P.2d 987 (Colo.App.1996). A court may not reform an insurance contract absent proof of a mutual mistake between the parties. Simon v. Truck Insurance Exchange, 757 P.2d 1123 (Colo.App.1988). An essential prerequisite to a court's power to reform a contract on the ground of mutual mistake is the existence of a prior agreement that represents the actual expectations of the parties and provides the basis upon which a court orders reformation. Maryland Casualty Co. v. Buckeye Gas Products Co., 797 P.2d 11 (Colo.1990).

Here, the covered auto designation of the policy issued by Continental in 1992 contains a liability symbol of "1," meaning that the policy covered any auto owned or used in the business of Jim's Hardwood. While Continental sought to reform the policy on the basis that coverage should have been under a symbol "7," which would indicate that the policy covers only specifically described autos, it did not do so until after the jury had returned a verdict in the Aukema suit.

A.

Continental first contends that only Jim's Hardwood has standing to raise affirmative defenses to its reformation claim. We are not persuaded.

Under Colorado's Uniform Declaratory Judgments Law, §§ 13-51-101 to XX-XX-XXX, C.R.S.1999, persons with legally cognizable interests are entitled to seek a declaration of rights and obligations under a contract. An allegedly injured party in the underlying action may defend an anticipatory declaratory judgment as long as the action is properly initiated by a party with a legally cognizable claim. Constitution Associates v. New Hampshire Insurance Co., 930 P.2d 556 (Colo.1996).

Here, Aukema argued in her motion for summary judgment that Continental was estopped from reforming the policy. Also, she is an allegedly injured party, and the declaratory judgment action was initiated by Continental naming Aukema and Progressive as defendants.

Further, Aukema has a legally cognizable interest in the subject of Continental's declaratory judgment action because her claim has been reduced to a judgment. See Colard v. American Family Mutual Insurance Co., 709 P.2d 11 (Colo.App.1985)

(once liability was established against insured, plaintiffs became subrogated to rights of insured and were entitled to determination and enforcement of their rights under the contract); cf. Farmers Insurance Exchange v. District Court, 862 P.2d 944 (Colo.1993).

Similarly, as Jim's Hardwood's insurer in the underlying litigation, Progressive is subrogated to its rights. See Porter v. Castle Rock Ford Lincoln Mercury, Inc., 895 P.2d 1146 (Colo.App.1995)

(insurer paying insured's claim is subrogated to the insured's rights against the wrongdoer).

Continental, however, contends that because Constitution Associates v. New Hampshire Insurance Co., supra,

involved a declaratory action, not an equitable claim for reformation, the applicability of that case is minimal. Essentially, it argues that an insurance policy is a contract between the insured and insurer and that Aukema is not sufficiently in privity to raise a defense. We disagree.

The issue here is not whether Continental is entitled to reformation; rather it is whether Continental may assert a claim of reformation after it has denied coverage and Aukema has proceeded to trial under the good faith belief that coverage was available under Continental's policy. Stated another way, the issue is not whether Aukema could herself initiate proceedings to reform the policy. The question is whether she may now defend against Continental's attempt to reform the policy so as to eliminate coverage. Having been made a party to the declaratory judgment action, Aukema, an injured party with a legally cognizable claim, has standing to contend that Continental is estopped from asserting a claim for reformation at this late date. See Constitution Associates v. New Hampshire Insurance Co., supra.

Consequently, we conclude that Aukema and Progressive have standing to assert equitable defenses to Continental's claim for reformation of the insurance policy.

B.

We also reject Continental's contention that a fact issue remains as to whether Aukema relied on the business automobile policy it issued to Jim's Hardwood.

Continental's assertion is based in part on its assumption that Aukema relied on a general liability policy it issued to Jim's Hardwood and that Aukema would have opted to go to trial even if she had recognized that there was no coverage under the business automobile policy. Preliminarily, we note that Continental has raised this contention regarding reliance on the general liability policy for the first time on appeal. Thus, we do not address it here. See Diamond Back Services, Inc. v. Willowbrook Water & Sanitation District, 961 P.2d 1134 (Colo.App.1997)

(contentions not raised in trial court are not properly preserved for appellate review).

As to Aukema's reliance on the business automobile policy, the trial court in the present case did not resolve the issue of reformation on a summary judgment basis. Rather, it denied defendants' motions, received evidence on that issue, and made findings implicitly determining that Aukema had relied on the Continental policy.

Evidence was presented that before trial, Aukema had knowledge of the policy and that Continental had denied coverage. Further, at trial, when asked if it would have been determined that there was no additional coverage outside of the Progressive Policy she would have spent the money to go to trial, Aukema answered, "Absolutely not." On cross-examination, she also testified that her attorney believed that there was coverage under the automobile policy and not under the general liability policy.

Thus, no fact issue remains as to whether Aukema relied on the Continental business automobile policy. See Federal Life Insurance Co. v. Wells, 98 Colo. 455, 56 P.2d 936 (1936).

C.

Continental asserts that Aukema (1) was aware of statements that Continental did not provide coverage and that the change from a "7" to a "1" should not have been made; (2) was aware that a non-waiver agreement was in existence; (3) was aware of existing case law; and (4) lacked knowledge of the policy. For these reasons, it contends that Aukema's reliance, if any, on the terms of the written policy was not reasonable. We disagree.

Estoppel requires that a person, by words, by conduct, or by silence when he or she has a duty to speak, induce another to change position detrimentally in reasonable reliance on his or her actions. Margason v. Roberts, 919 P.2d 818 (Colo.App.1995).

The...