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Duty to Defend in Colorado: An Exception to the Four Corners Rule

Builders and developers in Colorado are often a first-party insured or an additional insured when required by contracts with subcontractors.  In Colorado, whether a duty to defend exists has been based solely on the four corners of the complaint. The complaint rule can afford coverage to a builder or developer when the facts as pled trigger coverage, but it can also limit coverage when an unsophisticated plaintiff’s counsel does not plead actual property damage. 

The Colorado Supreme Court has articulated two reasons for adopting the complaint rule.  The first reason is to protect the insured’s legitimate expectations of a defense.  That is, the insured should not have to bear the burden of advancing defense costs because a possibility exists that future developments in the case will establish there is no insurance coverage.  The second reason is to prevent the insured’s defense in the underlying action from being compromised by a declaratory-judgment action brought by the insurer while the underlying action is in progress.  Despite Colorado courts’ frequent admonishments to “solely” consider the allegations of the complaint, the Tenth U.S. Circuit Court of Appeals, the federal appellate court for the circuit to which Colorado is assigned, has twice predicted that the Colorado Supreme Court would recognize narrow exceptions to this general rule. 

A “widely recognized exception” includes considering extrinsic evidence constituting “an indisputable fact that is not an element of either the cause of action or a defense in the underlying action,” i.e., a judicially noticeable fact.  See Pompa v. Am. Family Mut. Ins. Co., 520 F.3d 1139, 1147 (10th Cir. 2008).  This is based on the expectation that the Colorado Supreme Court would recognize an exception to the complaint rule if a claimant’s complaint contained allegations made in bad faith and framed to trigger an insurance policy. Another exception includes considering extrinsic evidence in the form of an allegation contained in several separate but factually related complaints. See Apartment Inv. & Mgmt. Co. (AIMCO) v. Nutmeg Ins. Co., 593 F.3d 1188, 1194 (10th Cir. 2010).

While Colorado state courts have not addressed these exceptions, the U.S. District Court for the District of Colorado recognized an exception to the complaint rule in KF 103-CV, LLC v. American Family Mutual Insurance Co., 2014 U.S. Dist. LEXIS 124048, 2014 WL 4409876 (D. Colo. Sept. 5, 2014).  In KF 103, the U.S. District Court concluded a court may look beyond the complaint to judicial orders preceding the filing of the complaint to determine whether an insurer has a duty to defend.  Thus, a party may not be able to assert unsupported facts in a complaint for the sole purpose of triggering an insurance policy.

KF 103 arose out of an underlying easement dispute.  In the underlying case, KF 103 purchased property from Infinity Group, which agreed to complete improvements to boundary streets adjoining the property (intersection).  Adjoining property owners (the neighbors) objected to modifying the intersection because it violated an express easement providing access to their properties.  Infinity Group subsequently transferred the property underlying the intersection to a metropolitan district.  Thereafter, KF 103 and the metropolitan district filed a quiet title action seeking a determination of rights. 

On October 13, 2010, the trial court judge issued oral rulings, concluding the neighbors’ easement rights had been impaired and KF 103 did not comply with Colorado law to relocate the easements.  The court concluded KF 103 intentionally violated Colorado law, but did not act with malice.  The neighbors subsequently filed several counterclaims.  In October 2012, the trial court confirmed the prior ruling and decided in favor of the neighbors on their claims for trespass, civil conspiracy, and negligence. 

KF 103 first notified American Family of the underlying easement dispute in January 2011.  American Family denied KF 103’s initial request for coverage and subsequent requests because the neighbors’ claims were based on KF 103’s intentional conduct – i.e., that KF 103 knowingly violated the neighbors’ easement rights – which was not covered under the policy.  In September 2013, KF 103 sued American Family seeking declaratory relief and damages, alleging that the neighbors’ claims for negligence, negligent misrepresentation, and trespass triggered coverage under the complaint rule. 

The court in KF 103 concluded the neighbors’ claims against KF 103 involved intentional conduct.  While the claims were for negligence and the complaint used terms such as “negligence,” “negligent failure,” “recklessly,” and “legal duty,” the phrases were merely conclusory and it was evident from the well-pleaded allegations that the claims were really for trespass, premised on intentional conduct.  Additionally, even if the allegations pleaded unintentional actions, such an interpretation was unwarranted because of previous court rulings finding KF 103 knowingly violated the neighbors' easement rights.

KF 103 argued the complaint rule precluded the court from considering earlier rulings and that, based on the claims pled, American Family owed a duty to defend.  The court disagreed stating that the consideration of prior rulings does not undercut the purposes of the complaint rule as the orders preceded the filing of the counterclaims.  Noting that a purpose of the complaint rule is to protect an insured’s legitimate expectation, KF 103 could not have had a legitimate expectation that American Family would fund its defense in subsequent proceedings when prior rulings established KF 103 acted intentionally. 

In its holding, the U.S. District Court noted Tenth Circuit decisions predicting the Colorado Supreme Court would recognize an exception to the complaint rule when doing so would not undercut the rule’s purposes.  Namely, the court focused on “judicially noticeable facts” that are incorporated into a complaint and, therefore, appear within the four corners of the complaint.  See Pompa, 520 F.3d at 1148 (“an insured can have no reasonable expectation of a defense when an indisputable fact, known to all parties, removes the act in question from coverage.”)  Moreover, if the court agreed with KF 103’s argument, a plaintiff would only need to recite language in a complaint to trigger insurance coverage.  Accordingly, American Family had no duty to defend.

While the court in KF 103 used prior rulings outside the four corners of the complaint to deny coverage, the exception espoused in the decision may provide coverage if there are facts of defects and resultant damage that can be established outside of the complaint.  For example, if the facts developed in a multiparty construction defect case are undisputed or capable of judicial notice, these facts may trigger a duty to defend even though outside of the complaint.  As such, it is important to consider any prior court rulings in the case or judicially noticeable facts to determine whether a duty to defend exists.