Colo. Supreme Ct. Ruling Expands Use of Side Agreements by Policyholders

An insurer cannot intervene in a construction defects case where the insured had assigned its rights to collect under its policy to the plaintiff, a divided Colorado Supreme Court ruled.

The 4-3 decision gives policyholders a method of protecting themselves in situations where their insurer refuses to settle a claim and exposes them to damages that potentially could exceed policy limits. The Supreme Court majority said it decided that policyholders have a right to make side agreements with plaintiffs in a 2010 case, Nunn v. Mid Century Ins. Co.

Auto-Owners Insurance Co. had refused to pay a $1.9 million settlement offer by Bolt Factory Loft Owner’s Association in a construction-defects lawsuit against Sierra Glass. The insurer sought to intervene when it learned that Sierra Glass had agreed to transfer to Bolt Factory its right to pursue a bad-faith action against its insurer.

A Denver district court judge refused to allow the intervention and entered a $2,489,021.90 judgment against Sierra Glass. The “Nunn agreement” signed by Sierra Glass required Bolt Factory to seek collection of the award from Auto-Owners.

The Supreme Court, in a majority opinion written by Justice Monica M. Márquez, said it found nothing wrong with the arrangement. The ruling is dated May 24.

“Faced with Auto-Owners’ refusal to settle within policy limits, Sierra Glass took steps to protect itself by entering into an agreement with Bolt Factory—an agreement that included both an assignment of claims and a covenant not to execute, the opinion says. “Such an agreement falls squarely within the ambit of Nunn.”

Sierra Glass was one of numerous contractors and subcontractors that were ensnared in construction-defect litigation filed by the Bolt Factory owners’ association in 2016.

Auto Owners’ defended Sierra Glass under a reservation of rights. After the carrier refused a settlement offer, Sierra Glass retained independent counsel and signed a “Nunn agreement” with the homeowners’ group.

In such agreements “the insured assigns its bad faith claims to the third party, and in exchange the third party agrees to pursue the insurer directly for payment of the excess judgment rather than the insured,” the opinion says.

During oral arguments, defense attorney Terence Ridley of Spencer Fane in Denver argued that Auto-Owners had been treated unfairly during the trial that determined Sierra Glass’ liability. He said in the side agreement with Bolt Factory, Sierra Glass had agreed to a “lay-down” defense where there was no jury, no objections and no right to appeal.

“The lay-down defense implicates a district court judge to preside basically as a potted plant over one-sided evidence,” Ridley said.

“The final outcome is a big judgment which is imbued with legitimacy that can be used in a follow-on case and I submit to you that it is not right and this is not consistent with the law of this state.”

Plaintiff’s attorney Nelson Boyd countered that the agreement did not prejudice Auto-Owners any more than a stipulated judgment would. He said the Supreme Court in Nunn established that stipulated judgments are appropriate, and in any case subsequent litigation is necessary before Auto-Owners would be required to pay the claim.

Three of the Supreme Court justices agreed with Ridley’s arguments. Justice Carlos A. Samour Jr. wrote in a dissenting opinion that the agreement between Sierra Glass and Bolt Factory resulted in a “bogus proceeding” where the defendant called no witnesses, did not cross-examine the witnesses called by the plaintiff, made no objections or even a closing argument.

“Nowhere in Nunn did we sanction an agreement to conduct a sham trial,” he said.

About the photo: This photo from Zillow.com shows one of the condominiums at Bolt Factory Lofts in Denver, a one-bedroom, one-bathroom unit listed for sale at $540,000.