Constitution Associates: Approval of the Use of Anticipatory Declaratory Judgment Actions

• Publication year: 1997
• Pages: 93
• Citation: Vol. 26 No. 8 Pg. 93

26 Colo.Law. 93 Colorado Lawyer 1997.

1997, August, Pg. 93. Constitution Associates: Approval of the Use of Anticipatory Declaratory Judgment Actions

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93

Vol. 26, No. 8, Pg. 93

The Colorado Lawyer
August 1997
Vol. 26, No. 8 [Page 93]

Specialty Law Columns
Tort and Insurance Law Reporter
Constitution Associates: Approval of the Use of Anticipatory Declaratory Judgment Actions
by Jack D. Robinson, Brendan O. Powers

The Colorado Supreme Court recently made an important clarification concerning the use of declaratory judgment actions in first- and third-party insurance cases and added to the criteria the trial court must apply in determining whether the filing of a declaratory judgment is proper. The court's holding in Constitution Associates v. New Hampshire Insurance Co.1 should alleviate some of the trepidation caused by its earlier, now-famous holding in Hecla Mining Co. v. New Hampshire Ins. Co., wherein the court appeared to hold that where a complaint against an insured alleges facts that potentially fall within the coverage provisions of the policy, the insurer must defend under a reservation of rights and could not proceed with a declaratory judgment action until after the underlying liability case had been fully adjudicated.2

In Constitution Associates, the Supreme Court clarified the broad language of its Hecla opinion and gave sanction to the use of anticipatory declaratory judgment actions where certain specific criteria are met.3 An anticipatory declaratory judgment action is that which is initiated before the underlying litigation has come to an end. In essence it requires the insured or claimant to appear before the appropriate trial court and respond to coverage questions even though the underlying litigation that gives rise to the insurance claim has not been resolved. The court's clarification and approval of the use of anticipatory declaratory judgment actions re-establishes an important procedural tool that can assist insurers in resolving difficult coverage questions

The insurer's claims professional and legal counsel must analyze the circumstances to determine whether a declaratory judgment action should be instituted, when it should be instituted, where it should be instituted, and against whom it should be instituted. This article discusses the process by which a claims professional and an attorney must handle a first-party or third-party insurance claim if coverage is not granted unconditionally. It also explores the advantages and disadvantages of instituting a declaratory judgment action in order to obtain a judicial determination of coverage

Where Coverage Question Exists

Determination of Coverage

One of the first steps an insurer takes on receiving notice of a claim is to determine whether the claim is covered under the terms of the particular insurance policy. Once the insurer has made its coverage determination, it must make one of three basic choices: (1) accept coverage and notify the insured that the claim is covered; (2) advise the insured that the claim is being investigated (first-party context) or defended (third-party context) under a specific reservation of rights to later deny coverage under; or (3) deny coverage because either the claim is not covered under the terms of the policy or the insured has breached one or more policy conditions, such as the duty to cooperate or late notice

If the insurer chooses options two or three, it should consider carefully whether to proceed with the filing of a declaratory judgment action against the insured (and possibly the injured party) to have the court determine whether the insurer is liable to its insured for the defense and payment of a judgment (third-party claim),4 or whether the insurer is liable to its insured under the insurance policy (first party claim).5

Reservation of Rights Letters

If the issue of coverage is anything but certain, it is advisable that the insurer provide a defense for its insured under a reservation of rights and, if appropriate, institute a declaratory judgment action to determine the insurer's obligations.6 A reservation of rights letter should be sent as soon as a coverage question is recognized, and it must inform the insured in detail of all the potential defenses to coverage the insurer has discovered from its investigation and analysis of the claim or suit.

Defenses known to the insurer, or those that the insurer reasonably should have known, that are omitted from the reservation of rights letter may be waived by the insurer.7 However, if additional grounds come to the knowledge of the insurer during its continued investigation of the claim or during discovery in the underlying lawsuit, the insurer can supplement its reservation of rights letter to add the newly discovered coverage defenses.8

The reservation of rights letter should make specific reference to the insurance policy and should quote from the actual policy provisions that are the basis for the insurer's decision to reserve the right to assert that there is no coverage for the claim under the policy. The reservation of rights letter should be sent to each person or entity that may assert a right to be considered a named insured or additional insured under the policy. Additionally, because an insured is entitled to know the excess insurer's position regarding coverage, the excess insurer should issue a reservation of rights letter to preserve the right to deny coverage.9

Finally, the insurer should include in the reservation of rights letter a statement that it is reserving any and all rights that it might have under the pertinent insurance policy. This phrase was recently scrutinized in Employers' Fire Ins. v. Western Guaranty Fund,10 in which the court held that while Employers' participated in the defense of its insured, it expressly reserved "any and all rights" which it might have under the policy to later contest the existence of any duty it may have to provide a defense. While the court refused to determine whether such language was sufficient to allow Employers' to seek reimbursement from the insured for defense costs, it found that the reservation of rights letter made it clear that the insurer's participation in the defense of its insured could not be construed as a waiver of its right to contest its duty to defend under the policy.11

A reservation of rights is an insurer's means to suspend the operation of waiver and estoppel.12 If the insurer assumes the defense of its insured without expressly reserving its right to deny coverage for specific reasons, the insurer may be precluded from raising any policy defenses it was on notice of at the time it assumed the defense.

Denial of Coverage

A denial of coverage letter is just that--a letter that informs the insured that no coverage exists for the claim under any provisions of the policy or that no coverage exists because the insured has breached one or more of the conditions of the policy.

The denial letter should be...