Settlement snafu: Insured settles suit without insurer's approval
A court has reinstated litigation after a policyholder agreed to pay damages in a case without their insurer's knowledge.
The U.S. Court of Appeals for the 10th Circuit has reinstated litigation filed by an insurer against its policyholder for settling a case without the insurer’s permission.
Bolt Factory Lofts Owners Association Inc. sued six contractors for alleged construction defects at a Denver condo development. Two of the contractors then brought third-party claims for negligence and breach of contract against three subcontractors, including Sierra Glass, which had a commercial general liability (CGL) policy through Auto-Owners Insurance, and a second CGL policy through AMCO. Both insurers agreed to defend and indemnify Sierra Glass for any damages covered under the policies. Before the trial, Sierra Glass agreed to pay Bolt Factory $350,000 and to confess judgment by not presenting a defense at trial.
Auto-Owners attempted to intervene in the suit to stop the trial and contest the settlement agreement, arguing that Sierra Glass settled the case without Auto-Owner’s knowledge or consent. The state trial court denied the motion and went on to a two-day bench trial. Sierra Glass failed to put up a defense and judgment was entered for Bolt factory.
Auto-Owners appealed the state court’s denial of its motion to intervene, which the Colorado Court of Appeals affirmed.
Although Auto-Owners appealed the state court judgment, it filed separate litigation in the 10th District seeking a declaration that the settlement agreement violated Sierra Glass’s contractual duty of cooperation under its CGL policy, thus relieving Auto-Owners of its obligations to provide coverage. Because of the related state court appeal, the 10th Circuit dismissed the declaratory action as premature. A unanimous three-judge appeals court panel reinstated the litigation, determining that the insurer’s claims did not depend on the state court suit, which involved the denial of the motion to intervene to defend, while the declaratory judgment action involved Sierra Glass’s alleged breach of contract.
The panel said that the two suits do have overlapping facts, but the federal declaratory judgment action does not depend on the outcome of the state court appeal. The panel reversed the lower court and remanded the case for further proceeding.
The case is Auto-Owners Insurance Co. v. Bolt Factory Lofts Owners Assn., Inc.; Sierra Glass Co., Inc. D.C. No. 1:18-CV-01725-RBJ.
Editor’s Note: Almost every insurance policy contains a clause that gives the insurer the right to defend against third-party claims asserted against the insured. By agreeing to settle without the knowledge or consent of the insurer, an insured essentially took away the insurers’ ability to exercise its right to defend.
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