In Landmark American Insurance Co. v. VO Remarketing Corp., No. 14-1270, 2015 WL 4569612 (10th Cir., July 30, 2015), the United States Court of Appeals for the Tenth Circuit in a split decision applied Colorado law to affirm a trial court judgment in favor of a general liability carrier. Specifically, the appellate court stated that the carrier was allowed to look beyond the underlying complaint when determining whether a defense obligation existed. Id. at *5-6. The appellate court also found that the complaint’s legal conclusions were not relevant to that determination. Id.at *7. Relying partly on these findings, the appellate court ruled that the carrier in Landmark had properly denied a defense based upon the exclusion for liability arising from “use” of a vehicle. Id.at *5-9.
The dispute in Landmark arose from an incident that occurred while the policyholder’s employees were delivering gym equipment to the underlying plaintiff. Id. at *2. The employees had unloaded the equipment from their vehicle and were carrying it to the second floor of the underlying plaintiff’s home when they dropped it, seriously injuring the underlying plaintiff. Id. The underlying plaintiff filed suit against the policyholder, who then sought liability coverage from its general liability carrier. Id. The carrier responded by bringing a declaratory judgment action denying coverage. Id. Specifically, the carrier cited its policy’s exclusion for bodily injuries arising from the “use” of a vehicle, including “unloading.” Id. at *3. The exclusion defined “unloading” as the movement of property from the vehicle “to the place where it is finally delivered.” Id. at *1.
In its decision, the appellate court found that underlying complaint’s failure to refer to a vehicle did not bar application of the vehicle “use” exclusion. Id. at *3-9. The court stated that an insurer may deny a defense based upon a fact outside the underlying complaint if such fact is “indisputable” and “is not an element of either the cause of action or a defense in the underlying litigation.” Id. at *4-5. The court further stated that this is especially the case where consideration of such fact does not prejudice the policyholder’s defense in the underlying action or disturb the policyholder’s reasonable expectations of a defense. Id.
The appellate court concluded that the foregoing doctrine permitted the carrier to deny the policyholder a defense based on the use of a vehicle during the delivery. Id. at *5-6. In the answer that it filed in the coverage action, the policyholder had admitted that its employees employed a vehicle to make the delivery, and therefore this fact was “indisputable.” Id. at *6. In addition, use of a vehicle was not an issue in the underlying action, reference in the coverage action to the vehicle’s use would not undermine the policyholder’s underlying defense, and such reference would also not disturb the policyholder’s reasonable expectations of a defense. Id. Accordingly, the appellate court found that the underlying complaint’s failure to refer to a vehicle did not prevent application of the “use” exclusion.
The appellate court also found that the underlying complaint’s legal conclusions did not determine the carrier’s defense obligation. Id. at *7. The complaint expressly stated that the gym equipment was fully “delivered” when the policyholder’s employees first brought it into the underlying plaintiff’s home, i.e., before the injury occurred. Id. The appellate court denied that this characterization was binding on the insurer, stating that only the complaint’s facts – and not its legal conclusions – were relevant to the duty-to-defend determination. Id.
Landmark is significant because it describes limits to the general rule that allegations in an underlying complaint determine the duty to defend. Facts outside the complaint may affect that duty if undisputed and not relevant to resolution of the underlying action. Additionally, the complaint’s legal conclusions are not determinative of the defense obligation. Counsel would be well advised to consider the potential applicability of these two exceptions when considering the duty to defend.