Courts Continue To Split On Whether Defense Obligation Is A First Party Benefit Under Colorado Law, But Agree Duty To Defend Is A Joint And Several Obligation

In D.R. Horton, Inc.—Denver v. Mountain States Mutual Casualty Co., No. 12-cv-01080 (February 25, 2013), another U.S. District Court judge for the District of Colorado determined a liability insured seeking defense costs from its insurer may qualify as a "first-party claimant" for purposes of Colorado's Unfair Claim Settlement Practices Act, potentially entitling the insured to recover unpaid defense costs, attorneys' fees in prosecuting the recovery action and two times the unpaid defense costs as a penalty.

D.R. Horton, Inc. — Denver and D.R. Horton, Inc. (collectively Horton) developed a residential community in Arapahoe County, Colo., known as Windemere. Following construction, the homeowners' association sued Horton based upon alleged construction defects resulting from work performed by subcontractors. Each of Horton's subcontractors was insured under a liability insurance policy provided by one or more of the defendant-insurers and each policy named Horton as an additional insured. Although the defendant-insurers had allegedly accepted Horton's tender of the underlying suit, they had either refused to pay or only paid a small portion of defense costs billed to them. Consequently, Horton filed suit, asserting three claims: (1) declaratory judgment of the respective rights and obligations of the parties; (2) breach of contract on the basis that each insurer had a joint and several contractual obligation to defend; and (3) bad faith liability under C.R.S. § 10-3-1116, Colorado's Unfair Claim Settlement Practices Act.

The Court initially addressed whether an insured or additional named insured qualified as a first-party claimant vis-à-vis its liability insurer for purposes of C.R.S. §§ 10-3-1115 and 10-3- 1116 with respect to unpaid defense costs. C.R.S. 10-3-1116 provides, in relevant part:

A first-party claimant as defined in section 10-3- 1115 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 court costs and two times the covered benefit.

C.R.S. § 10-3-1115 defines a first-party claimant as:

"First-party claimant" means an individual, corporation, association, partnership, or other legal entity asserting an entitlement to benefits owed directly or on behalf of an insured under an insurance policy.

On its face, the statute does not address whether an insured under a "third-party" liability policy qualifies as a first-party claimant...