Chapter 3 - § 3.17 • DECLARATORY JUDGMENT ACTIONS

• Jurisdiction: Colorado

§ 3.17 • DECLARATORY JUDGMENT ACTIONS

§ 3.17.1—Where Insurer Unsuccessfully Brings Declaratory Judgment Action Against Insured, Language of Liability Policy May Require Insurer to Pay Insured's Attorney Fees in Defense of Such Action

Where insurer brought a declaratory judgment action against its insured to determine that no liability coverage existed for accident in which insured was involved with a third person, and insurer lost such action and coverage was found to exist, and liability policy contained provision stating that insurer would reimburse insured for all reasonable expenses incurred at insurer's request, insurer was liable to pay insured's attorney fees incurred in defending the declaratory judgment action. Allstate Insurance Co. v. Robins, 597 P.2d 1052 (Colo. App. 1979).

In Allstate Insurance Co. v. Robins, 597 P.2d 1052 (Colo. App. 1979), Allstate brought a declaratory judgment action against its insured, Jack Robins, to determine that no liability coverage existed for an accident in which Robins was involved with a third party. Robins asserted a counterclaim that he was entitled to attorney fees under a policy provision that stated that Allstate would "'reimburse the Insured for all reasonable expenses, other than loss of earnings, incurred at the Company's request.'" Id. at 1052. The trial court entered judgment in favor of Robins on the coverage issue and awarded him the attorney fees on his counterclaim. Allstate appealed, asserting that the trial court erred or abused its discretion in awarding Robins attorney fees he incurred in defending the declaratory judgment action. The court of appeals found no error.

In reviewing this issue, the court of appeals examined several cases from other jurisdictions involving the interpretation of similar policy provisions. For instance, in Upland Mutual Insurance, Inc. v. Noel, 519 P.2d 737 (Kan. 1974), the court concluded that an insurer that lost a declaratory judgment action was obligated to reimburse its insured's attorney fees since the filing of the suit constituted a "request" by the insurer. 597 P.2d at 1053. The court of appeals also cited a well-known treatise, which supported the conclusion that it was unfair for an insurer that unsuccessfully pursued a declaratory judgment action to require the insured to pay his or her own attorney fees, since the insured would be no better off financially than if he or she had no insurance contract. Id.

Thus, the court of appeals adopted the interpretation of the "request" language in cases from other jurisdictions, including Upland. In these cases, the courts had allowed the insureds to recover their attorney fees as a matter of contract. The court concluded that "[t]his result merely restores the insured to the position he would have occupied had the company honored its contract in the first instance, and we adopt it as the applicable principle." Id.

§ 3.17.2—Anticipatory Declaratory Judgment Actions in Colorado

a—Declaratory judgment actions in Colorado

Colorado has adopted a series of statutes that govern declaratory judgment actions, known as the Uniform Declaratory Judgments Law (UDJL). C.R.S. §§ 13-51-101, et seq. The purpose of the UDJL "is to settle and to afford relief from uncertainty and insecurity with respect to rights, status, and other legal relations," and to effectuate this purpose the UDJL "is to be liberally construed and administered." C.R.S. § 13-51-102.

C.R.S. § 13-51-105 grants Colorado courts the "power to declare rights, status, and other legal relations whether or not further relief is or could be claimed." C.R.S. § 13-51-106 specifies who may obtain declaratory relief as follows:

Any person interested under a deed, will, written contract, or other writings constituting a contract or whose rights, status, or other legal relations are affected by a statute, municipal ordinance, contract, or franchise may have determined any question of construction or validity arising under the instrument, statute, ordinance, contract, or franchise and obtain a declaration of rights, status, or other legal relations thereunder.

Pursuant to C.R.S. § 13-51-107, "[a] contract may be construed either before or after there has been a breach thereof." A court "may refuse to render or enter a declaratory judgment or decree where such judgment or decree, if rendered or entered, would not terminate the uncertainty or controversy giving rise to the proceeding." C.R.S. § 13-51-110. A jury trial may be obtained in a declaratory judgment action if the issue of fact is one that ordinarily would be tried by a jury in a civil action. C.R.S. § 13-51-113; Baumgartner v. Schey, 353 P.2d 375 (Colo. 1960). Under C.R.S. § 13-51-115, "all persons shall be made parties who have or claim any interest which would be affected by the declaration, and no declaration shall prejudice the rights of persons not parties to the proceeding."

b—Basic requirements for a declaratory judgment action — Standing and a justiciable controversy

Two requirements for a court to exercise jurisdiction to hear a declaratory judgment action are that a justiciable controversy exist and that the party initiating the action have standing to do so. These basic principles are briefly discussed below.

In American Family Mutual Insurance Co. v. Bowser, 779 P.2d 1376 (Colo. App. 1989), the court addressed the justiciable controversy issue in the context of an insurance dispute. The case arose from a fire that occurred on January 5, 1986. The fire damaged a house owned by Jerry and Carla Bowser and insured by American Family. The Bowsers submitted a proof of loss and requested payment under the policy. American Family began an investigation, but never issued a formal statement as to whether coverage would be admitted or denied. Instead, on April 19, 1986, it filed a complaint for declaratory relief, asserting that no coverage existed because the Bowsers had misrepresented material facts in the application for insurance and the fire was the result of arson by the Bowsers. The Bowsers brought counterclaims against American Family for breach of contract, bad faith, and outrageous conduct. The jury returned a verdict in favor of American Family on all issues, and the Bowsers appealed.

The Bowsers first argued that the trial court abused its discretion by failing to dismiss the declaratory judgment action for lack of jurisdiction. They asserted that a declaratory judgment action should not have been permitted, since the case did not involve the interpretation of a written instrument, but rather the resolution of factual questions. In rejecting this argument, the court noted that the UDJL must be liberally construed to provide speedy and efficient resolution of controversies. Id. at 1379. The court held that "jurisdiction may be assumed over a declaratory judgment action brought by an insurance company to determine its liability under a policy, even if the determinative issues are solely factual, as long as a judgment or decree will terminate the controversy or remove an uncertainty." Id.

The court also rejected the Bowsers' argument that the district court abused its discretion in accepting jurisdiction because no justiciable controversy existed. Id. at 1380. The Bowsers asserted that when the declaratory judgment action was initiated, there was no justiciable controversy because American Family had not yet denied coverage. Whether a justiciable controversy exists depends upon "'whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.'" Id. The court pointed out that "[i]t is not necessary that the controversy have ripened into litigation before the declaratory judgment action is filed, but only that there be an existing state of facts concerning the legal rights of the parties that indicates threatened litigation in the immediate future." Id. "'Such a controversy exists where the court is asked to determine an insurer's liability' after the insured has requested payment." Id. In this case, the Bowsers had requested payment and American Family had sufficient evidence to show that the fire was caused by arson. Therefore, the court held that a justiciable controversy existed because "the parties had adverse legal interests based on a completed set of facts . . . ." Id.

In Farmers Insurance Exchange v. District Court, 862 P.2d 944 (Colo. 1993), the court discussed the issue of standing in relation to an insurance dispute. In 1990, Patricia Neely and Earl Bryant were involved in an automobile accident. In September 1991, Neely filed suit against Bryant, claiming that she suffered injuries in the accident due to Bryant's negligence. At the time of the accident, Bryant was driving a vehicle owned by Kenneth Twyford, which was insured by Farmers. Potential insurance coverage also existed under a policy issued by American States to Bryant's mother.

During settlement negotiations, Farmers argued that its liability was limited to the statutory minimum of $25,000 based upon an "other insurance" clause in the policy. Id. at 946. In October 1992, the attorney retained by Farmers to defend Bryant made an offer of settlement in the amount of $25,000. In February 1993, Neely's attorney filed a complaint for declaratory judgment against Farmers and American States, asking the court to rule that Farmers would be obligated to pay up to $100,000 if Neely obtained a judgment against Bryant. Neely's attorney argued that an actual controversy had arisen that necessitated the intervention of the court because it was impossible to give proper advice to Neely whether to accept or decline the offer of settlement until the insurance contract was judicially construed. Id. Farmers and American States moved to dismiss the declaratory judgment action on the ground...