The Duty to Defend in Colorado After Hecla Mining
| Publication year | 1991 |
| Pages | 2095 |
| Citation | Vol. 10 No. 1991 Pg. 2095 |
1991, October, Pg. 2095. The Duty to Defend in Colorado After Hecla Mining
On May 13, 1991, the Colorado Supreme Court for the first time defined the scope of an insurance company's duty to defend its policyholders under standard liability insurance policies. In Hecla Mining Co. v. New Hampshire Insurance Company,(fn1) the court set forth several guidelines for determining when an insurer must defend its policyholder.(fn2) Lawyers representing both insurers and policyholders should become familiar with these guidelines before advising clients concerning the defense obligation and coverage litigation.
Until Hecla Mining, no Colorado case had even enunciated the basic tenet of hornbook insurance law that the duty to defend is broader than the duty to indemnify.(fn3) Those Colorado cases which had ruled on an insurer's defense obligation did so in conjunction with findings concerning the insurer's obligation to indemnify.(fn4)
Generally, there are two recognized rules defining when an insurer must defend a lawsuit brought against its insured. The first, often called the "four corners of the complaint test,"(fn5) simply requires a comparison of the allegations of the complaint with the language of the policy. If there is the potential for coverage under the facts alleged in the complaint, the insurer must defend.(fn6)
The second rule allows the insurer to base its coverage determination on facts beyond those appearing in the underlying complaint.(fn7) In a further refinement of this rule, some states require the insurer to defend if it discovers facts that would take the action outside of coverage.(fn8) In Hecla Mining, the Colorado Supreme Court seemingly placed Colorado in the "four corners" camp. However, the court added its own twist, allowing the duty to defend to be litigated based on facts not in the complaint, after the underlying case is completed.
Hecla Mining is an offshoot of a case filed in the U.S. District Court for the District of Colorado under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA").(fn9) The case was filed against three mining companies for the discharge of pollution from the Yak Tunnel into California Gulch near Leadville. The defendants brought third-party complaints against more than 200 other companies and individuals, including Hecla. Hecla requested a defense from its comprehensive general liability insurance carriers, Industrial Indemnity Company and New Hampshire Insurance Company. Industrial denied coverage and sued Hecla in Denver District Court for a declaratory judgment on its defense and indemnity obligations. After agreeing initially to defend Hecla, New Hampshire denied coverage and intervened in Industrial's declaratory judgment action.
Hecla refused to respond to discovery and brought a summary judgment motion, arguing there was a duty to defend based solely on comparison of the third-party complaint and the policies. The trial court found that the insurers had to defend Hecla and that the issue of indemnification was not ripe for resolution. The Colorado Court of Appeals reversed.(fn10)
The Court of Appeals found that because Hecla knew or should have known that its activities would result in environmental damage, that damage was expected. Thus, according to the court, there was no "occurrence" as defined in the policies.(fn11) In the absence of an occurrence, the Court of Appeals held the insurers had neither a duty to defend nor a duty to indemnify Hecla.(fn12) The court did not rule on the effect of the pollution exclusion contained in both the New Hampshire and Industrial policies.
In Hecla Mining, the Colorado Supreme Court reversed the Court of Appeals
and found that Hecla was entitled to a defense. The Supreme Court disagreed with the Court of Appeals about what must be intended by a policyholder to exclude damage from the occurrence definition. Rather than the fore-seeability formulation of the Court of Appeals, the Supreme Court held that for damages to be expected or intended, the insured would have to know that those damages "would flow directly and immediately from its intentional act."(fn13) Because there was no allegation in the third-party complaint that Hecla intended or expected environmental damage, the Supreme Court held there was an occurrence for purposes of determining the duty to defend.
The Supreme Court next focused on the effect of the pollution exclusion. Paraphrased, the pollution exclusion removes from coverage all bodily injury and property damage arising out of the discharge of pollutants unless the discharge is "sudden and accidental."(fn14) The court construed "sudden and accidental" to mean unexpected and unintended.(fn15)
Applying the four corners test, the court noted that the third-party complaint did not allege that Hecla expected or intended the discharge. Therefore, the court held, the pollution exclusion did not relieve Hecla's insurers from their defense obligation.
Colorado insurance policyholders now can rest assured that, consistent with the many other jurisdictions which have ruled on this issue, the duty to defend is broader than the duty to indemnify.(fn16) According to Hecla Mining, the insurer's obligation to defend in Colorado first must be determined based on a comparison of the policy and the facts alleged in the underlying complaint. In a novel twist...
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