No one likes to get sued. It’s unnerving, unpredictable, and at times, uncontrollable. Unfortunately, it’s just become a part of doing business. In order to hedge against losses, businesses obtain commercial general liability (“CGL”) insurance in the event they are sued. It is widely described that CGL policies are not just liability insurance – they’re also litigation insurance in the event of being sued. What this means is that, not only will the insurance company cover any liability associated with a plaintiff’s claim, but it will also provide its insured with a legal defense. As you might imagine, this is very expensive for the insurance companies. Not only are they on the hook for payments up to the limits of the insurance, but they also have to cover the mounting costs of litigation that can be outside the policy limits depending on the terms of the insurance contract. Accordingly, insurance companies may try to avoid this exposure by denying coverage.
Colorado, as well as many other states across the nation, has enacted a “bad-faith” law that states where “[a] first-party claimant . . . whose claim for payment of benefits has been unreasonably delayed or denied may bring an action in a district court to recover reasonable attorney fees and courts costs and two times the covered benefit.” By the terms of this statute, however, the definition of “first-party claimant” is the statutory lynchpin. In Colorado, the definition for “first-party claimant” is “an individual, corporation . . . asserting an entitlement to benefits owed directly to or on behalf of an insured under an insurance policy.”
Recently, the U.S. District Court in Colorado in D.R. Horton, Inc.- Denver v. Mountain States Mutual Casualty Co., 2013 WL 674032 (D. Colo. 2013) handed down a decision addressing a long-running conundrum of whether an additional insured seeking reimbursement of defense costs falls within the statute. Horton, a residential developer and an additional insured on five of his sub-contractors CGL policies, was sued by the homeowners’ association asserting construction defects. Horton tendered his defense to the underlying lawsuit to each of these five insurers, all of which accepted the tender. Despite this acceptance, the insurers refused to pay the defense costs billed to them, which amounted to nearly $1,000,000.00.
Horton then brought suit in the U.S. District Court asserting that it was a first-party claimant in seeking reimbursement under the CGL policy at issue, that the insurers were acting in bad faith, and that it should be entitled to two-times the covered benefit, attorney fees and costs. The insurers took the position that Horton was a third-party claimant, because the litigation itself was brought by an independent party (here, the homeowner’s association), and the statute does not apply to claims and suits brought against the defendant by third parties.
The Court agreed with Horton, finding that “where the claim is brought by the insured seeking to recover its own defense fees and costs . . . the benefits are owed directly to or on behalf of the insured, and thus is a first-party claim.” The Court continued to say that that, where multiple insurers are involved, their liability for defense costs is joint-and-several. The Court noted that “the allocation of defense costs is a matter to be worked out among the insurers and, if they cannot do so, then by a court. The insured does not have to go without a defense or fund its own defense while the insurers argue amongst themselves.”
In short, this holding effectively extends to insureds who are defendants in litigation the right to bring bad-faith denial claims against its insurer for failing to pay litigation defense fees. As demonstrated in Horton, those defense fees can escalate in to the seven figure (or even eight figure) range. Additionally, this stands for the concept that multiple insurers who cover a single insured do not have the right to make that insured wait to figure out “who’s on first” as far as obligations for defense costs. The insurers are obligated to make such payments and then can later fight amongst themselves – in court or otherwise – to determine from who’s account are the defense funds actually owed.
While the Horton decision is directly contrary to many other earlier decisions, it does solidify a minority view that insured-defendants can bring such claims under first-party bad faith statutes. Accordingly, this brings new light and hope to insureds that have been wrongfully denied, or delayed, defense costs and gives them an effective new tool to demand payment.
Frank Cragle is a trial lawyer and a member of Hirschler Fleischer’s Insurance Recovery Team. He handles a variety of commercial business disputes, including insurance recovery and policyholder claims. Frank also devotes a substantial portion of his time to business tort litigation and intellectual property claims. For more information, contact Frank at 804.771.9515 or email@example.com.
Kristen M. Chatterton