Nonparty Insurer May Invoke Colorado Issue Preclusion to Defeat Coverage Based on a Dismissed Underlying Claim; Duty to Defend Ends When the Only Covered Claim Is Voluntarily Dismissed

Case: State Farm Fire & Casualty Company v. Webb, No. 24-1096 (10th Cir. Mar. 24, 2025) (unpublished Order and Judgment)

Court: United States Court of Appeals for the Tenth Circuit

Panel: Judges Hartz, Kelly, and Bacharach

Disposition: Affirmed (summary judgment for State Farm)

Precedential Status: Nonprecedential but citable for persuasive value under Fed. R. App. P. 32.1 and 10th Cir. R. 32.1

Introduction

This insurance coverage appeal arises from a long-running neighborhood and homeowners’ association (HOA) dispute in Colorado. State Farm sought a federal declaration that it owed no duty to defend or indemnify David Webb and Nicholas Webb (individually and as trustee of the Spirit Mountain Trust) with respect to counterclaims brought against them in a parallel state-court action by a neighbor, Robin Gregory. The linchpin of coverage was a fiduciary-duty counterclaim asserted against David Webb in his capacity as an HOA director and volunteer. State Farm initially defended David Webb under the HOA’s liability policy, reserving the right to withdraw if that fiduciary-duty claim were dismissed. After Gregory filed a voluntary dismissal of that claim, State Farm withdrew.

In the district court, and again on appeal, the Webbs argued that the fiduciary-duty counterclaim was never validly dismissed—contending, among other things, that a prior pro se answer barred voluntary dismissal under Colorado Rule of Civil Procedure 41. The Tenth Circuit affirmed summary judgment for State Farm on a single, decisive ground: under Colorado issue preclusion (collateral estoppel), the Webbs were barred from relitigating the state trial court’s determination that the fiduciary-duty counterclaim had in fact been dismissed, and thus could not reanimate coverage dependent on that claim.

The opinion crystallizes two practical holdings with broad relevance beyond this HOA dispute:

A nonparty insurer may defensively invoke Colorado issue preclusion to foreclose relitigation of a dispositive procedural ruling in the underlying case (here, dismissal of the only claim that could trigger a defense under an HOA liability policy).
When the insured premises coverage solely on a claim that has been dismissed in the underlying action, the insurer may withdraw a reserved defense and obtain declaratory relief of noncoverage; attendant breach-of-contract and bad-faith counterclaims necessarily fail.

Summary of the Opinion

Applying Colorado preclusion law (per Marrese), the Tenth Circuit held that all four elements of issue preclusion were met with respect to whether the fiduciary-duty counterclaim had been dismissed in state court:

Identical issue actually and necessarily decided: The state trial court expressly held the fiduciary-duty counterclaim was dismissed at the pleadings stage and “not at issue” at trial. That determination was necessary; if the claim remained live, the court could not have entered final judgment.
Same party (or privity) on the opposing side: The parties against whom preclusion is asserted—the Webbs—were parties in the state action. Mutuality is not required for defensive issue preclusion; the insurer need not have been a party there.
Final judgment on the merits: The bench-trial judgment resolved all remaining claims. Any interlocutory order (including the dismissal ruling) merged into the final judgment, which the Webbs appealed without challenging the dismissal ruling.
Full and fair opportunity to litigate: The state proceedings afforded standard procedural protections, and the Webbs had incentive and opportunity to challenge the dismissal (via a later “motion for clarity” and by appeal) but did not prevail and did not appeal that issue.

Because the Webbs’ coverage theory depended exclusively on resurrecting the dismissed fiduciary-duty counterclaim, issue preclusion doomed their position. The court therefore affirmed the district court’s declaratory judgment of noncoverage and summary judgment on the Webbs’ breach-of-contract and bad-faith counterclaims, which “flowed from” the denial of coverage.

Analysis

Precedents Cited and Their Influence

Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373 (1985): The court reiterated that federal courts must apply the rendering state’s preclusion law to determine a state judgment’s preclusive effect. Here, Colorado law governs collateral estoppel.
In re Tonko, 154 P.3d 397 (Colo. 2007): Provides Colorado’s four-part test for issue preclusion: identical issue actually and necessarily decided; same party or privy opposing preclusion; final judgment; full and fair opportunity to litigate. This framework drove the entire analysis.
Foster v. Plock, 394 P.3d 1119 (Colo. 2017): Confirms mutuality is not required for defensive issue preclusion in Colorado. The insurer’s nonparty status in the underlying action does not defeat preclusion so long as the party being estopped was a party there.
Huffman v. Westmoreland Coal Co., 205 P.3d 501 (Colo. App. 2009) and McLane W., Inc. v. Dep’t of Revenue, 199 P.3d 752 (Colo. App. 2008): Issue preclusion may apply across different claims and even where the later case involves distinct legal theories, so long as the specific issue was actually litigated and determined previously.
Natural Energy Resources Co. v. Upper Gunnison River Water Conservancy District, 142 P.3d 1265 (Colo. 2006): Defines finality: a judgment is final when it fully resolves the parties’ rights. The trial court’s determination that the fiduciary-duty claim was dismissed became final upon entry of the bench-trial judgment on the remaining claims.
Mulberry Frontage Metropolitan District v. Sunstate Equipment Co., LLC, 537 P.3d 391 (Colo. App. 2023): Merger doctrine: interlocutory orders merge into the final judgment and thereby become final for preclusion purposes.
E. Cherry Creek Valley Water & Sanitation Dist. v. Greeley Irrigation Co., 348 P.3d 434 (Colo. 2015): A final judgment must resolve all claims; the fact of final judgment itself supports the necessity finding that the dismissed counterclaim could not have remained pending.
Bebo Construction Co. v. Mattox & O’Brien, P.C., 990 P.2d 78 (Colo. 1999) and Crocog Co. v. Reeves, 992 F.2d 267 (10th Cir. 1993): Outline the “full and fair opportunity” inquiry and confirm Colorado’s state-court procedures satisfy due-process baselines for preclusion purposes.
Clean Energy Collective LLC v. Borrego Solar Systems, Inc., 394 P.3d 1114 (Colo. 2017): Clarifies Colorado trial courts’ general jurisdiction and limits under the state long-arm statute and due process—used to dismiss appellants’ collateral attack on state-court jurisdiction.
Boulter v. Noble Energy Inc., 74 F.4th 1285 (10th Cir. 2023): Notes the practical equivalence between federal and Colorado issue-preclusion elements, rendering harmless the district court’s application of federal terminology in a diversity case.
New Hampshire Ins. Co. v. TSG Ski & Golf, LLC, 128 F.4th 1337 (10th Cir. 2025): Supports the conclusion that when there is no coverage, derivative breach-of-contract and bad-faith claims “flowing from” the denial of coverage must also fail.

Legal Reasoning

The court’s reasoning is tightly organized around Colorado’s collateral estoppel elements:

Identical, actually-decided, and necessary issue: The very question the Webbs sought to relitigate—whether the fiduciary-duty counterclaim persisted—was decided in state court. The state trial judge denied a “motion for clarity,” confirming that the fiduciary-duty claim had been voluntarily dismissed at the pleadings stage and was “not at issue” thereafter. That determination was necessary because the court could not have reached a final judgment with the claim still pending.
Party against whom estoppel is asserted: Only the party opposing preclusion must have been a party in the prior case. The Webbs were parties; State Farm’s nonparty status in the underlying case is immaterial under Colorado’s acceptance of defensive nonmutual collateral estoppel.
Final judgment: Following a bench trial, the state court issued a final judgment for Gregory and reiterated that the fiduciary-duty claim had been dismissed before trial. On appeal, the Webbs did not challenge that point; the final judgment thus encompassed and finalized the dismissal ruling via merger.
Full and fair opportunity: Colorado’s civil process, discovery, and appellate rights satisfy due process. The Webbs had both incentive and opportunity to contest the dismissal—particularly because State Farm’s defense hinged on the presence of that claim. They later litigated the point via a “motion for clarity” but lost, and then declined to raise the issue on appeal.

Having established preclusion, the remainder follows succinctly. The Webbs’ only coverage theory was that the fiduciary-duty counterclaim remained live and triggered defense/indemnity. Because that premise is foreclosed, State Farm was entitled to declaratory judgment of noncoverage as a matter of law. And because the breach-of-contract and bad-faith counterclaims “flowed from” the supposed coverage obligations, those claims also fail.

The court addressed and rejected several collateral arguments:

Mutuality objection: Colorado does not require mutuality for defensive preclusion; State Farm need not have been a party in the underlying case.
Finality objection: The absence of a state-court order specifically addressing State Farm’s obligations is irrelevant; the precluded issue is the procedural reality that the fiduciary-duty claim was dismissed, not the insurer’s duties at some prior moment.
Jurisdictional attack on the state court: The Webbs offered no developed argument that the state court exceeded Colorado’s long-arm statute or due process limits. Federal diversity jurisdiction (28 U.S.C. § 1332) does not constrain state-court jurisdiction.
Colorado Rule 41 argument: The Webbs argued in the coverage case that Rule 41(a)(1) permits voluntary dismissal only of an entire “action,” not a single claim. The Tenth Circuit noted they could have raised that argument in the state case when dismissal was noticed or in their later motion. Their failure to timely do so does not defeat preclusion.

Finally, although the district court referenced federal preclusion principles, the Tenth Circuit deemed any error harmless because federal and Colorado tests are materially the same in this posture.

Impact and Practical Significance

While nonprecedential, the decision is likely to be persuasive authority in the Tenth Circuit and in Colorado federal courts on several recurring issues in insurance and civil procedure:

Nonparty insurers can leverage state-court procedural rulings through defensive issue preclusion. When an underlying claim that uniquely triggers coverage is dismissed, insurers may invoke preclusion in subsequent coverage litigation to bar attempts to re-open that claim’s status.
Duty to defend can end upon dismissal of the only potentially covered claim—if properly reserved. The opinion tacitly validates a common reservation-of-rights practice: defend because of one potentially covered count; withdraw when that count is dismissed; seek declaratory relief if the insured later disputes coverage.
Strategic imperatives for insureds and their counsel. If coverage turns on a particular claim’s continued vitality, insureds must promptly and properly challenge any voluntary dismissal in the underlying court (and on appeal). Substituting pleadings that acknowledge a dismissal, and failing to appeal, can cement preclusion.
Preclusion applies to “issues,” not whole claims. Parties cannot avoid estoppel by reframing the litigation. Here, even though the federal action involved coverage and bad-faith claims and the state action involved property and HOA disputes, the dispositive “issue” (whether the fiduciary claim was dismissed) was identical.
Merger of interlocutory orders into final judgment matters. Procedural rulings that might appear nonfinal during the case become final and preclusive when incorporated into a final judgment on remaining claims.
Bad faith and contract claims “rise and fall” with coverage. Echoing New Hampshire Ins. Co. v. TSG Ski & Golf, once coverage is properly denied, derivative claims premised on the existence of coverage generally fail at summary judgment.

The decision also serves as a useful caution: in diversity coverage actions, courts should look first to the rendering state’s preclusion law; yet, when the tests substantially align, mislabeling the source of preclusion law may be harmless.

Complex Concepts Simplified

Issue preclusion (collateral estoppel) vs. claim preclusion (res judicata): Issue preclusion stops parties from relitigating specific issues that were actually decided and necessary to a prior judgment, even in a different lawsuit. Claim preclusion bars entire claims that were or could have been raised in the prior action between the same parties or their privies.
Defensive nonmutual collateral estoppel: A defendant who was not a party to the prior case can prevent a plaintiff from relitigating an issue the plaintiff previously lost. Colorado permits this, so the insurer can use it even if it wasn’t a party in the underlying suit.
Finality and merger: Interlocutory rulings (e.g., a determination that a claim was dismissed) become part of the final judgment once the court enters judgment on all remaining claims, making those earlier rulings final for preclusion purposes.
Reservation of rights: An insurer’s notice that it will defend while reserving the right to later deny coverage if facts or rulings negate coverage. Here, State Farm reserved the right to withdraw if the only potentially covered claim (fiduciary duty) was dismissed—and it did so after the dismissal.
Duty to defend vs. duty to indemnify: The duty to defend is broader and triggered by potential coverage alleged in the pleadings; the duty to indemnify requires actual coverage for the proven liability. If the only potentially covered claim disappears, the duty to defend generally ends.
Voluntary dismissal (Colorado R. Civ. P. 41): Allows dismissal without a court order in certain conditions. Whether it applies to individual claims vs. entire actions can raise nuances, but parties must timely raise such challenges in the underlying case; failure to do so can lead to preclusion.

Contextual Notes on the Policies and Underlying Findings

HOA liability policy (directors/officers/volunteers): Triggered when an insured is acting in an official capacity. State Farm initially defended David Webb under this policy because of the fiduciary-duty counterclaim alleging HOA-related conduct, reserving the right to withdraw if that claim was dismissed.
HOA businessowners policy: Covered certain damages when officers, employees, or volunteers acted within official duties. State Farm denied a defense under this policy because the allegations did not fit the policy’s grant.
Homeowners policy for the Webb property: Covered bodily injury/property damage but excluded willful and malicious acts. The state court later found intentional obstruction and misconduct not authorized by the HOA—facts that, if reached, would at least raise serious exclusion issues. The Tenth Circuit did not need to reach alternative grounds given its preclusion holding.

Conclusion

The Tenth Circuit’s decision in State Farm Fire & Casualty Co. v. Webb offers a clear, procedural path for insurers facing “single-claim” coverage disputes tied to the existence of a particular count in the underlying litigation. By applying Colorado’s collateral estoppel doctrine, the court held that an insured cannot relitigate a state court’s determination that the only potentially covered claim was dismissed. Once that procedural reality is preclusively established, any duty to defend premised solely on that claim evaporates, and derivative breach-of-contract and bad-faith claims collapse with it.

Beyond its immediate outcome, the opinion underscores:

The importance of timely, substantive challenges in the underlying forum to procedural events (like voluntary dismissals) that bear on insurance coverage.
The acceptability, under Colorado law, of nonmutual defensive collateral estoppel invoked by an insurer that was not a party to the underlying case.
The merger of interlocutory determinations into final judgments, and the consequent preclusive effects of those determinations.

While designated nonprecedential, the reasoning will likely prove influential in insurance coverage disputes and more broadly in federal diversity cases where the preclusive effect of state-court judgments on discrete procedural issues can resolve the entire controversy.