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					 Case 1:02-cv-02216-WYD-KLM             Document 485         Filed 01/07/2008       Page 1 of 11




                        IN THE UNITED STATES DISTRICT COURT
                            FOR THE DISTRICT OF COLORADO

Civil Action No. 02-CV-2216-WYD-KLM

ROYAL INDEMNITY COMPANY, a Delaware corporation,

       Plaintiff,

vs.

AMERICAN FAMILY MUTUAL INSURANCE COMPANY, a Wisconsin corporation; and
AMERICAN STATES INSURANCE COMPANY, an Indiana corporation.

      Defendants.
______________________________________________________________________________

  DEFENDANT AMERICAN STATES’ REPLY IN SUPPORT OF ITS MOTION FOR
                            SUMMARY JUDGMENT
______________________________________________________________________________

       Defendant American States Insurance Company (“American States”), by its attorneys,

Jaudon & Avery, LLP, pursuant to Fed.R.Civ.P. 56, submits this Reply in Support of its Motion

for Summary Judgment.

                                       INTRODUCTION

       American States moved for summary judgment based on four alternative grounds: (1)

that it owed no duty to defend because Torino and CR-LLLP were not additional insureds under

its policy; (2) that Royal’s and CUIC’s claims are barred by the applicable statute of limitations

based on Judge Johnson’s earlier legal rulings in this case; (3) that Royal and CUIC cannot seek

equitable contribution from American States because they do not insure the same parties or risks;

and (4) that CUIC’s equitable claims are barred by the doctrine of unclean hands.

       In its Response, Royal focuses mainly on American States’ statute of limitations defense

and incorporates by reference its other briefs on the remaining issues. To avoid duplication,

American States likewise relies on arguments already made in its Response to Royal’s Combined
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Motion for Summary Judgment on the additional insured issue, and incorporates by reference

American Family’s Reply in Support of its Motion for Summary Judgment on the equitable

contribution issue. This Reply will simply address the statute of limitations defense and the

unclean hands doctrine.

                                             ARGUMENT

A.      ROYAL’S AND CUIC’S CLAIMS ARE BARRED BY THE APPLICABLE
        STATUTES OF LIMITATIONS.

        Royal makes a number of alternative arguments in support of its position that Royal’s and

CUIC’s claims are not barred by the statute of limitations. Specifically, Royal asserts that their

claims did not accrue in 1999, that the equitable tolling doctrine should apply, that the six-year

statute of limitations should apply, or that the statute of limitations should apply to each defense bill.

There is no merit to any of these arguments.

        1.      Royal’s And CUIC’s Claims Accrued By The Summer of 1999.

        Royal contends that Royal’s and CUIC’s claims did not accrue in June of 1999 when

“American States failed to respond to a June 19, 1999 letter tendering Torino’s defense.” Response

at p. 4. Royal misapprehends the nature of a “duty to defend” action. All of Royal’s and CUIC’s

claims are based on American States’ alleged failure to defend Torino and CR-LLLP when the

Canyon Ranch Complaint was filed on April 1, 1999. “An action for breach of a duty to defend in

an insurance contract arises when a third party makes a claim against the insured alleging facts that

might fall within the policy's coverage.” Daugherty v. Allstate Ins. Co., 55 P.3d 224, 226 (Colo. Ct.

App. 2002). “Therefore, a duty to defend action arises, at the latest, when the insured has been

named in a formal complaint making such allegations.” Id. Thus, “a cause of action for breach of

contract [i.e., failure to defend under an insurance contract] accrues on the date the breach is


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discovered or should have been discovered by the exercise of reasonable diligence.” Id. at 225

(quoting Colo. Rev. Stat. § 13-80-108(6)).

       Here, Royal and CUIC were aware of the Canyon Ranch action because they agreed to

defend Torino and CR-LLLP. Jt. Statement at p. 2, ¶¶6-7. They were also aware of American

States’ alleged duty to defend in June 1999, because they jointly, through Godin Baity, sent a

letter to American States tendering the defense at that time. Id. at p. 12, ¶49; p. 14, ¶55. They

further were aware of the alleged breach of the duty to defend by the summer of 1999 because

American States failed to respond to the June 19, 1999 letter tendering the defense. See

Daugherty, 55 P.3d at 227 (holding that “plaintiff's claim . . . based on the failure to defend

accrued, at the latest, in December 1996 when the Sauters filed their complaint against plaintiff

and plaintiff was on notice that Allstate was denying all coverage under the policy.”). Thus,

Royal’s and CUIC’s claims accrued by the summer of 1999, more than three years and five months

before the lawsuit was filed.

       This conclusion is further supported by the admissions of Royal’s 30(b)(6) representative,

who admitted that she was aware of American States’ alleged breach of duty to defend at the

time the June 19, 1999 letter was tendered. She testified as follows:

       Q.      So do you believe American States owed a duty to defend as of the date
               that it was tendered [June 18, 1999]?
       A.      Yes.
       Q.      And do you believe that American States breached its obligation to
               defend?
       A.      Yes.
       Q.      From the date of the tender?
       A.      From the date of the tender.

Id. at pp. 12-13, ¶51. Thus, Royal had actual knowledge in the summer of 1999 of the alleged

breach of duty to defend when it tendered the defense to American States.


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       2.       Royal’s Proposed Date of Accrual Is At Odds With Colorado Law.

       Royal asserts that “its cause of action against American States and American Family did

not accrue until such time as it paid in excess of its fair share of Torino’s defense costs.”

Response at p. 4. In support of this position, Royal claims that “if Torino’s defense costs were

$1.5 million and American Family and American States are ultimately determined to owe 1/3 or

$500,000 each, then it was not until Royal paid more than $500,000 that its cause of action

accrued.” Id. at p. 7. Under this bizarre reasoning, Royal posits that “its cause of action . . . may

have accrued in the summer of 2004 when the Canyon Ranch Action was settled”—almost two

years after Royal filed this lawsuit on November 26, 2002. Id. at p. 8.

        Royal’s argument was rejected by the Court of Appeals in Daugherty. In that case, the

plaintiff, as here, argued that his cause of action based on the failure to defend did not accrue

until the underlying lawsuit was completely resolved. Rejecting this argument, the Court of

Appeals held:

       A contention similar to plaintiff's argument that his claim for breach of contract
       based on Allstate's duty to defend did not arise until the final judgment was
       entered against him, was rejected in Farmers Insurance Exchange v. American
       Manufacturers Mutual Insurance Co., supra. We likewise reject this argument.

       Further, plaintiff's reliance on Vanderloop v. Progressive Casualty Insurance Co.,
       769 F. Supp. 1172 (D. Colo. 1991), is misplaced. There, the court concluded that
       the plaintiff's claim against an insurance company for failure to settle did not
       accrue until final judgment was entered because it was only then that the
       plaintiff's injuries became known. That case has no application here because
       plaintiff's claim is for failure to defend, not for failure to settle.

Daugherty, 55 P.3d at 227.

       Furthermore, Colorado courts have consistently held that “uncertainty as to the precise

extent of damages neither precludes the filing of a suit nor delays the accrual of a claim for



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purposes of the statute of limitations.” See Palisades Nat'l Bank v. Williams, 816 P.2d 961, 964-

65 (Colo. Ct. App. 1991); Broker House Int'l v. Bendelow, 952 P.2d 860, 863 (Colo. App. 1998).

In Grant v. Pharmacia & Upjohn Co., 314 F.3d 488, 493 (10th Cir. 2002), for instance, the

Tenth Circuit determined that the plaintiffs' claim for breach of fiduciary duty accrued on the

date the plaintiffs learned of the breach. The Court rejected the plaintiffs’ argument that the

claim did not accrue until damages later accrued because “uncertainty as to the precise extent of

damage neither precludes the filing of a suit nor delays the accrual of a claim for purposes of the

statute of limitations.” Grant, 314 F.3d at 493.

       Royal is also incorrect in claiming that it “could not have paid in excess of its equitable

share of Torino’s defense only a few months into the Canyon Ranch Action.” Response at p. 7.

Royal’s policy states that when more than one insurer covers the same loss, “each insurer

contributes equal amounts until it has paid its applicable limit of insurance” or “each insurer’s

share is based on the ratio of the applicable limit of insurance to the total applicable limits of

insurance of all insurers.” Jt. Statement, Exhibit A at ROY 00529. If American States had owed

a duty to defend, it would have been required to share equally or proportionally with other

insurers in paying for defense costs from the date the Canyon Ranch lawsuit was filed. See

Empire Cas. Co. v. St. Paul Fire & Marine Ins. Co., 764 P.2d 1191, 1199-1200 (Colo. 1988).

That is especially true for CUIC’s claim because it contends that its coverage was excess to

American States’ coverage. Under that theory, CUIC, as the excess insurer, would not be

obligated to pay for any defense costs until American States’ coverage had been exhausted.

Allstate Ins. Co. v. Avis Rent-A-Car Sys., Inc., 947 P.2d 341, 346 (Colo. 1997).

       Therefore, there was no question that Royal and CUIC incurred some damages in the form



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of attorney fees by the summer of 1999 when they began paying those bills. Both Royal and CUIC

admit that they jointly retained lawyers to represent Torino and CR-LLLP when the Canyon Ranch

action was filed on April 1, 1999. Jt. Statement at p. 2, ¶¶6-7. Both Royal and CUIC began

paying for defense costs by the summer of 1999. Id. at p. 13, ¶52; p. 14, ¶54. Contending that they

either paid too much or should not have paid at all, Royal and CUIC now seek contribution from

American States and American Family for the defense costs that they incurred beginning on April 1,

1999. The fact that Royal was unable to calculate the precise extent of those damages until much

later does not delay the accrual of Royal’s and CUIC’s claims. Thus, Royal’s and CUIC’s claims

are time barred.

       3.      The Six-Year Statute of Limitations Does Not Apply To This Case.

       Royal contends that if any statute of limitations were to apply to this case, the six-year

statute set forth in Colo. Rev. Stat. § 13-80-103.5(1)(a) would apply. Response at pp. 9-11. This

argument was already rejected by Judge Johnson. See Exhibit 3 attached American States’

Motion for Summary Judgment. In Colorado, there are two statutes of limitations for breach of

contract claims. Colo. Rev. Stat. § 13-80-101(1)(a) establishes a general three-year period within

which to initiate any contract action, except for those claims otherwise provided in Colo. Rev.

Stat. § 13-80-103.5. In turn, Colo. Rev. Stat. § 13-80-103.5(1)(a) provides a six-year statute of

limitations for "all actions to recover a liquidated debt or an unliquidated, determinable amount

of money due to the person bringing the action.”

       Colorado courts have applied the six-year statute of limitation only when the amount

owed is determinable from the contract itself. See, e.g., Trustees of the Carpenters and

Millwrights Health Benefit Trust Fund v. Lillard & Clark Construction Co., Inc., 780 F. Supp.



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738, 741-42 (D. Colo. 1990) (applying §13-80-103.5 where Plaintiffs sought to recover an

amount of money which was provided for in, and calculable from, the collective bargaining

agreement signed by the parties); Aull v. Cavalcade Pension Plan, 988 F. Supp. 1360, 1368 (D.

Colo. 1997) (applying §13-80-103.5 where Plaintiff seeks to recover an amount which is

provided for, and calculable from, the pension plan); Mortgage Inv. Corp. v. Battle Mountain

Corp., 70 P.3d 1176, 1181 (Colo. 2003) (an action for default on a promissory note falls within

the six-year statute of limitations period); Tafoya v. Perkins, 932 P.2d 836, 838 (Colo. Ct. App.

1996) (“Because the amount due from the accounting was not capable of ascertainment by

reference to he partnership agreement or by a simple computation derived from the agreement.”).

       However, Colorado courts have repeatedly held that the general three-year statute of

limitations applies to breach of insurance contract claims. See Farmers Ins. Exchange v.

American Mfrs. Mut. Ins. Co., 897 P.2d 880, 882-83 (Colo. Ct. App. 1995) (applying the general

three-year limitation to a breach of insurance contract claim where the insurance company

sought to recover defense costs paid to the insured); Union Pacific Railroad Co. v. Certain

Underwriters at Lloyd’s London, 37 P.3d 524, 525-26 (Colo. Ct. App. 2001) (applying the

general three-year limitations to a breach of insurance contract claim because the insurance

policy does not provide a specific method of calculating the amount due); State Farm Mut. Auto

Ins. Co. v. Springle, 870 P.2d 578, 579 (Colo. Ct. App. 1993) (applying the three-year limitation

period to a declaratory judgment action where the insurance company sought to determine

whether there was coverage for an underinsured motorist benefits).

       Here, Royal is wrong in claiming that the six-year statute of limitations applies. As

Judge Johnson explained, “[t]his is not an action in which Royal and CUIC are seeking to



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recover a liquidated debt or an unliquidated, determinable amount of money due to the person

brining the action.” Order at p. 15. American States’ policy provides no method of calculating

the defense costs because it does not delineate whether attorney fees should be calculated by

hourly rate, flat rate, or some other method. It merely states that it is only liable for those

damages arising from California Framing’s ongoing operations and that “We will have the right

and duty to defend any “suit” seeking those damages.” Given that Colorado courts have always

applied a three-year statute of limitations to breach of insurance contract claims, Judge Johnson

correctly ruled that “the six year statute of limitations is not applicable in this action.” Id.

        4.      The Doctrine of Equitable Tolling Does Not Apply to This Case.

        Royal argues that if Royal’s and CUIC’s claims had accrued in the summer of 1999, this

Court should apply the doctrine of equitable tolling because Royal and CUIC “could not sue for

defense fees” until “the adjudication of the underlying action so as to avoid the risk of prejudice

to the insured.” Response at p. 9. This argument is at odds with Colorado law. Under Colorado

law, the doctrine of equitable tolling is limited to situations in which either the defendant's

wrongful conduct prevented the plaintiff from asserting the claims in a timely manner or truly

exceptional circumstances prevented the plaintiff from filing the claim despite diligent efforts.

Brodeur v. American Home Assurance Co., 169 P.3d 139, 149 (Colo. 2007). The Colorado

Supreme Court explained that the doctrine does not toll the statute of limitation until the

completion of the underlying proceeding:

        [W]e have repeatedly held that awaiting the result of another case or another legal
        proceeding is not the type of "extraordinary circumstance" necessary to equitably
        toll the statute of limitations. For example, in Dean Witter Reynolds, the
        explanation that the plaintiffs delayed filing suit while awaiting results of an
        appeal of an underlying case did not support equitable tolling, even when during
        that period of time the plaintiffs would not have had any damages pending


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        resolution of the underlying claim. Id. In Morrison v. Goff, we held that the statute
        of limitations for legal malpractice is not tolled pending appeal of an underlying
        criminal case, even when the client filed a complaint with the Supreme Court
        Disciplinary Council alleging negligence and then, more than two years later,
        sued the attorney for malpractice based on the same facts. 91 P.3d 1050, 1058
        (Colo. 2004). Similarly, the court of appeals concluded in Noel v. Hoover that
        delaying the filing of a malpractice claim against an accountant to await the
        outcome of IRS proceedings did not toll the statute of limitations for a
        professional negligence claim. 12 P.3d 328, 330-31 (Colo. App. 2000).

Id. at 150 (emphasis added). Therefore, there is basis to apply the equitable tolling doctrine here.

        6.      Each Defense Bill Does Not Trigger A Separate Statute of Limitations.

        Finally, Royal is wrong in claiming that each defense bill triggers a separate statute of

limitations. The case Royal relies upon was based on the interpretation of Colo. Rev. Stat. § 13-

80-103.5(1)(a) governing “a liquidated debt or an unliquidated, determinable amount of money”

where the promissory note itself required the debt to be paid in installments. In re Church, 833

P.2d 813, 814 (Colo. Ct. App. 1992). In that case, the Colorado Court of Appeals held that the

statute of limitation does not run against each installment until it becomes due. Id. In contrast,

American States’ policies do not require defense costs to be paid in installments. Nor is Colo.

Rev. Stat. § 13-80-103.5(1)(a) applicable to this case. Because this case is not one to recover

installment payments due under a promissory note, each defense bill does not trigger a separate

statute of limitations.

        Instead, Royal’s claims arose when American States did not defend Torino. Colorado

law is clear that the statute of limitations begins to run “once some injury has occurred, . . .

notwithstanding that further injury continues to occur.” Duell v. United Bank of Pueblo, N.A.,

892 P.2d 336, 340 (Colo. App. 1994) see also Farmers Ins. Exchange v. American Mfrs. Mut.

Ins. Co., 897 P.2d 880, 883 (Colo. Ct. App. 1995) (“because the cause of action arose out of a



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non-performance of contractual duties [the failure to defend], it accrued at the latest on April 30,

1988, when Farmers first expended monies to defend the named driver.”). In other words, “The

most that is required is that some damages have been sustained, so that the claimants know that

they have a claim for some amount.” Palisades Nat’l Bank, 816 P.2d at 965. For all of these

reasons, Royal’s and CUIC’s claims are barred by the statute of limitations.

B.        CUIC’S CLAIMS ARE BARRED BY THE UNCLEAN HANDS DOCTRINE.

          Royal asserts that CUIC’s claims are not barred by the unclean hands doctrine because

there has been no judicial determination that CUIC breached its duty to defend even though

Royal made an admission that it did. Nothing in Hocker v. New Hampshire Ins. Co., 922 F.2d

1476 (10th Cir. 1991) suggests that American States needs to obtain a legal determination before

moving for summary judgment based on the unclean hands doctrine. This Court can determine

that CUIC breached its duty to defend based on the undisputed facts. It is undisputed that CUIC

originally agreed to defend Torino and CR-LLLP. Jt. Statement at p. 2, ¶¶6-7. It is further

undisputed that CUIC withdrew its defense in the middle of litigation even though the

subcontractors’ insurers refused to defend Torino and CR-LLLP. Id. at 3, ¶8; p. 9, ¶32; p. 11,

¶¶46; Hocker, 922 F.2d at 1486 (finding that defendant-excess carrier breached its duty to drop

down and defend plaintiffs once the primary carrier refused to provide a defense). Under these

circumstances, CUIC breached its duty to defend and cannot come to court seeking equitable

relief.

                                          CONCLUSION

          For the foregoing reasons, American States requests that this Court enter summary

judgment in its favor and against Royal and CUIC.



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               Dated this 7th day of January, 2008.



                                                      JAUDON & AVERY, LLP


                                                      /s/ David H. Yun
                                                      David H. Yun
                                                      600 Grant Street, Suite 505
                                                      Denver, CO 80203
                                                      (303) 832-1122

                                                      Attorneys for Defendant American States
                                                      Insurance Company



                                 CERTIFICATE OF MAILING

       I certify that on this 7th day of January, 2008 a true and complete copy of the foregoing
DEFENDANT AMERICAN STATES’ REPLY IN SUPPORT OF ITS MOTION FOR
SUMMARY JUDGMENT was deposited in the United States mail, first-class postage prepaid,
addressed to each of the following:

Laurence M. McHeffey, Esq.
Jonathan A. Decker, Esq. jdecker@mdmlawco.com
McElroy, Deutsch & Mulvaney, LLP
1700 Broadway, Suite 1900
Denver, CO 80290-1901
Counsel for Plaintiff Royal Indemnity Co.

L. Kathleen Chaney, Esq. lchaney@lclae.net
Lambdin & Chaney, LLP
4949 South Syracuse Street, Suite 600
Denver, CO 80237
Attorneys for American Family Mutual Ins. Co.



                                                      /s/ Bruny Larsen




                                                11

				
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