I’ve never seen this issue addressed before.  Those are always cases that I like to include in CO.

Elizabeth Rocha was allegedly sexually assaulted at a party at the home of Jason and Andrea Rusco.  The Ruscos were insured under a homeowner’s policy issued by American Economy.  Counsel for Ms. Rocha sent a letter to American Economy stating that the Ruscos were liable for the injuries sustained by Ms. Rocha and demanded payment of policy benefits.

American Economy filed an action against the Ruscos seeking a declaration that, for a variety of reasons, no coverage was owed under its policy.  The Ruscos filed a motion to dismiss, arguing that there was no legal controversy between the parties.

The court in American Economy Ins. Co. v. Rocha, No. 23-1367 (D. Colo. Oct. 11, 2023) granted the Ruscos’ motion, agreeing that “without any underlying lawsuit, this declaratory judgment action does not present an actual controversy; instead, it involves uncertain or contingent future events that may not occur as anticipated, or indeed may not occur at all.  The mere possibility that proceedings might be commenced against an insured regarding an act of the insured’s as to which the insurer might contest coverage, is not sufficient to create a controversy within the meaning of either the Declaratory Judgment Act or Article III of the Constitution.” (citations and internal quotes omitted).

But besides basing its decision on the Declaratory Judgment Act and Article III of the Constitution, the court also found guidance in Colorado’s duty to defend law: “Colorado law provides that an insurer’s duty to defend arises solely from the complaint in the underlying action.  Thus, to determine whether a duty to defend exists, the Court would need to examine the four corners of a not-yet-filed underlying complaint.  The lack of an underlying complaint in this case—and specific knowledge of the possible claims alleged in relation to the accident—is fatal to [the Court’s] ability to render a decision in this action seeking anticipatory declaratory relief on the issue.” (citations and internal quotes omitted).   

I can’t help but think that allowing declaratory judgment actions, based solely on underlying demand letters, and not suits, would not benefit insurers.  As the court in Rocha noted, the demand letter identified “only potential theories of liability, rather than claims of fixed and final shape.”

Consider the various rules that most states have that benefit insureds in duty to defend cases – the duty to defend is broad, there need only be a potential for coverage, if there are doubts the insurer should defend.  So, if a demand letter is brief or vague and the claims are not in fixed and final shape -- as is often the case; and was here – it would seem that the pro-policyholder standards, for determining a duty to defend, would inure to their benefit.