Thursday, April 17, 2014

Introduction of the Construction Defects Bill Has Been Stalled! Call or Email Senate & House Leadership Today!

Defenders of the failed status quo are fighting common-sense legislation that would take a first step to protect condominium and townhome owners from unexpected, costly and burdensome litigation – that they want no part of but get swept up into.  They are attacking improvements to the current legal environment that has caused construction of attainably-priced condos & townhomes to grind to a halt.
If you want:
  • Attainable for-purchase condominiums and townhomes to be built in Colorado
  • Existing homeowners to have the right to be informed and to vote on potential lawsuits affecting their home
  • An end to homeowners being unable to refinance or sell their condominiums because the unit is involved in litigation without their knowledge or consent
  • To keep less-costly solutions in place to solve construction defects issues short of lawsuits
Please contact:
House Speaker Mark Ferrandino
       
  303-866-2346 or mferrandino@yahoo.com 
 AND
Senate President Morgan Carroll
         
303-866-4879 or morgan.carroll.senate@state.co.us
And tell them to support Senator Jesse Ulibarri’s Homeownership Opportunity Act of 2014!

Wednesday, January 15, 2014

Colorado Court of Appeals Decides the Triple Crown Case

In an earlier blog post, I discussed the case of Triple Crown Observatory Village Assn., Inc. v. Village Homes of Colorado, Inc., et al (2013 WL 5761028) because it presented the rare case where the Colorado Court of Appeals accepted an interlocutory appeal. Notably, the interlocutory appeal resulted from dismissal of the HOA case in which the trial judge directed the parties to arbitrate in lieu of a jury trial, under the declaration of covenants, conditions, and restrictions that governed the community. The Court of Appeals decided the case on its merits on November 7, 2013, and its decision can be found at 2013 WL 6502659. (Note: this presently unpublished opinion may be subject to further appeal to the Colorado Supreme Court.)

The case resulted from an attempt by the HOA’s counsel to amend the mandatory arbitration provisions of the declarations before it filed suit.  This amendment process took the form of soliciting signature votes of homeowners on a revocation resolution to repeal the specific provisions of the declarations that provided mandatory, binding arbitration as the sole remedy for disputes between the HOA and the developer and/or general contractor. The declarations required that 67% of homeowners vote in favor of amendment in order to modify the declarations. 

After 60 days of soliciting such written signatures, the HOA was only able to get 48% of homeowners to vote for the modifications, which was not enough to pass the amendment.  However, within another 60 days (120 days after beginning to obtain signatures), the HOA had the required 67% of signatures on the amendment resolution.
 
The questions on appeal were whether, as argued by the declarant developer and general contractor, the HOA was governed by the time limits for such a process under the procedures of the Colorado Revised Non-Profit Corporation Act (CRNCA). Declarant argued that those procedures only allowed the HOA 60 days to gather all of the required homeowner signatures, after which time the amendment would fail if there were insufficient signatures.

In contrast, the HOA argued that the Colorado Common Interest Ownership Act (CCIOA) was the relevant governing authority, and that the lack of any stated time limits for gathering such homeowner signatures for modification of the declarations meant that the HOA had successfully amended the declarations using a period of more than 60 days.  Accordingly, the HOA argued that through its actions over 120 days, the arbitration provisions of the declarations had been repealed.  The HOA then argued that it had a right to a jury trial on its claims against the declarant developer and general contractor, as well as other related parties.

In a lengthy and analytical opinion, the Colorado Court of Appeals held that both statutory authorities were potentially applicable.  However, it determined that there is a provision in CCIOA which makes that statute the greater and final authority where the two statutes may be in conflict.  However, the appellate court found that the time limit issues raised by the parties were not addressed to any degree by CCIOA, and instead that such time limits were addressed by the provisions of CRNCA. 

Because there were no timing-related conflicts found between the statutes, the court determined that it had a duty to harmonize the statutes if possible. Since the time limits for such actions were found in CRNCA, and these requirements were not expressly or impliedly contradicted by the terms of CCIOA, the Court determined that the governing authority was the CRNCA.  Since that statute provided time limits that were not met by the HOA, the Court determined that the HOA failed to amend the declarations.  Accordingly, the HOA was required to submit to binding arbitration in lieu of a jury trial, as ordered by the trial court. Significantly, the Court also held that the HOA’s Colorado Consumer Protection Act (CCPA) claims were subject to the same arbitration process, and could not be separately asserted in a jury trial.

The lesson to be taken from this case is obvious, regardless of whether it is further appealed to the Colorado Supreme Court.  The application of technical procedures under the CRNCA and CCOIA must be part of overall case evaluation, and early in the case.  If there are arbitration provisions which arguably govern the dispute, they must be followed. If those provisions have been amended, the amendment requirements must also be strictly followed, or the amendments may not be successful.  In the end, that analysis will decide whether the case proceeds to jury trial or mandatory binding arbitration.


For additional information regarding the Triple Crown case or construction litigation in Colorado, you can reach Buck Mann by e-mail at mann@hhmrlaw.com or by telephone at (303) 987-7143.

Wednesday, January 8, 2014

The Economic Loss Rule and the Disclosure of Latent Defects: In re the Estate of Carol S. Gattis

In a recent case of first impression, the Colorado Court of Appeals determined that the economic loss rule does not bar a nondisclosure tort claim against a seller of a home, built on expansive soils which caused damage to the house after the sale.  The case of In re the Estate of Carol S. Gattis represents a new decision regarding the economic loss rule.  Because it is a case of first impression, we must wait to see whether the Colorado Supreme Court grants a petition for certiorari.

Until then, we will analyze the decision handed down on November 7, 2013.  The sellers of the home sold it to an entity they controlled for the purpose of repairing and reselling the home.  Before that purchase, Sellers obtained engineering reports including discussion of structural problems resulting from expansive soils.  A structural repair entity, also controlled by Sellers, oversaw the needed repair work.  After the repair work was completed, Sellers obtained title to the residence and listed it for sale.

Sellers had no direct contact with Gattis, who purchased the residence from Sellers.  The purchase was executed through a standard-form real estate contract, approved by the Colorado Real Estate Commission: Contract to Buy and Sell Real Estate, to which no changes were made.  Several years after taking title to the residence, Gattis commenced action, pleading several tort claims alleging only economic losses based on damage to the residence resulting from expansive soils.

Sellers argued, in a pretrial motion for summary judgment, that Gattis’ claims should be precluded by the economic loss rule.  Sellers also raised the economic loss rules through an oral motion to dismiss at the end of Gattis’ case-in-chief at trial.  The trial court denied all of Sellers’ attempts to invoke the economic loss rule.  Sellers appealed on the basis that the economic loss rule should have barred Gattis’ tort claims.

Pursuant to the economic loss rule, “a party suffering only economic loss from the breach of an express or implied contractual duty may not assert a tort claim for such a breach absent an independent duty of care under tort law.”  Town of Alma v. AZCO Constr., Inc., 10 P.3d 1256, 1264 (Colo. 2000).  The source of the underlying duty determines whether the economic loss rule applies.  Id. at 1262.  For a claim to escape the economic loss rule, the duty must arise independently of any contractual obligation.  Id. at 1262.

The trial court held Sellers liable for nondisclosure of material facts.  The trial court explained that Sellers falsely represented in the contract that they had no personal knowledge of the property, including the presence of expansive soils which already had caused serious structural damage to the residence.  On appeal, Sellers did not dispute the trial court’s finding that before the sale closed: no reference was made to “expansive soil;” no person or entity ever informed Gattis, or Gattis’ representatives, that the Sellers were principals of the structural repair entity; and, neither Gattis, nor Gattis’ representatives, were ever made aware of the various engineering reports that Sellers had reviewed when debating their purchase of the residence. 

The Court of Appeals relied on past cases to conclude that an independent duty exists between home sellers and home buyers, as well as residential builders and subcontractors.  The Gattis court relied on Mid Valley Real Estate Solutions V, LLC v. Hepworth-Pawlak Geotechnical, Inc., 2013 WL 3943215, a negligent construction case involving a residence.  In that case, several policy considerations were identified favoring an independent duty to protect homeowners: preventing overreaching by builders, who are comparatively more knowledgeable to determine structural conditions of a house than most buyers; ordinary purchasers of a home are not qualified to determine when or where a defect exists; purchasers of homes rarely have access to make any inspection of the underlying structural work, as distinguished from the merely cosmetic features; magnitude of the investment made when purchasing a home; foreseeability that a house will be sold to someone who is not the original owner; foreseeability that a construction professional’s work on a home is for the benefit of the homeowners, and that harm to the homeowners from negligent construction is foreseeable; and, an independent duty discourages misconduct and provides an incentive for avoiding preventable harm.

The Gattis court drew analogies between a home builder’s common law duty to act with ordinary care, as discussed in the Mid Valley case, and a home seller’s common law duty to disclose known but latent defects in the property.  Both of those duties are long standing, with the Gattis court pointing out that for over 50 years Colorado has required sellers to disclose latent soil defects of which they are aware.  Another analogy was drawn between a builder’s position of superior knowledge related to the structural condition of a home and a seller who has actual knowledge of a latent defect.  The Gattis court then stated that where a disparate knowledge exists, a person has a duty to disclose to another with whom he deals facts that in equity or good conscience should be disclosed.  In contrast, where an original homeowner or a later buyer, both parties have a similar difficulty in learning of a latent defect.

Furthermore, according to the Gattis court, a buyer cannot not afford to suddenly find a latent defect in his or her home, whether it is caused by a negligent home builder or a seller who remains silent despite knowledge of a latent defect.  Typically, this is because a home purchase is the biggest purchase and most important investment, and done on a limited budget.  Such harm to the home and homeowner are also equally foreseeable, whether caused by a latent defect arising from negligent construction or nondisclosure of any latent defect known by the seller.

The final analogy the Gattis court drew between the home builder’s common law duty to act with ordinary care and a home seller’s common law duty to disclose known but latent defects in the property, relates to enforcing the duty of the sellers to disclose the known latent defects.  Just as enforcing the duty to build with ordinary care avoids preventable harm to innocent parties, the Gattis court concludes so will enforcing the duty of the sellers to disclose the known latent defects.  Limiting its holding somewhat, the Gattis court did state that the burden to disclose latent but known defects is minor because the seller’s duty to disclose latent but known defects would only apply to material defects.

We have to wait and see if Gattis will be upheld by the Colorado Supreme Court.  But until then, Colorado home sellers have a new independent tort duty for disclosure of latent but known defects.

For additional information regarding the In re the Estate of Carol S. Gattis case or construction law in Colorado, you can reach Brady Iandiorio by e-mail at iandiorio@hhmrlaw.com or by telephone at (303) 987-9816.

Friday, January 3, 2014

A Bill for an Act Concerning Workers’ Compensation – 2014 Edition

Workers’ compensation (“WC”) costs are a significant portion of the labor costs experienced by construction companies.  These costs have typically risen over time due to the “experience modification factor.” This term means the amortized cost of past claims recovered through future premiums charged by an insurer to an employer. As a company’s claims go up in both number of claims and total expense of claims over time, the experience modifier increases as a multiplier of the base WC premium.  As with other general medical costs, the question is not whether the cost of claims with a medical component will go up, but rather the rate at which they will increase from year to year.

It is with these facts of life in mind that it is reported that the Colorado legislature will take up a bill concerning WC benefits in the 2014 session. This bill, if passed, will have the likely effect of dramatically increasing the cost of WC claims to the construction industry - along with all other Colorado employers.

The draft bill has three distinct changes for the current law, each of which serves to change the delicate balance of rights and obligations of employers and employees under existing law. 

1.      The Changed Choice of WC Primary Physician

The first change allows the injured employee to select his own attending primary doctor for the first three days after the injury occurs.  Existing law gives this right of appointing the primary physician to the employer, and it is a key to (1) getting appropriate, cost-conscious care to the employee; (2) getting the employee released to light duty and/or the earliest reasonable physician-approved return to regular work; and (3) getting the doctor’s reasonable determination of when the employee has reached “maximum medical improvement,” after which medical care either ceases, or tapers to a lesser degree of “maintenance care.” In other words, it is as important to an employer to have a middle-of-the road physician to serve as the medical “umpire” of what is reasonable for the nature, extent, and duration of WC medical care.

This proposed change would alter the present procedures, and allow the employee to select a Level II accredited WC physician of the employee’s choosing within three days of the accident/injury. Note: Level II accreditation is not significantly less difficult to obtain than a driver’s license.  It involves limited and brief attendance of classes held on weekends, and successful completion of a multiple-choice examination on WC procedures and benefits.  

Interestingly, or coincidentally, the present law also gives the employee up to three days to report the accident/injury to the employer.  Practically speaking, this means that the employee has two and a half days not to report the accident/injury, but within which to find a lawyer who will typically direct the employee to a doctor who is generously claimant-oriented. Then, both the accident and the chosen doctor will be made known to the employer by the end of the third day.  If the accident/injury was not witnessed and understood for what it was (which is surprisingly often the case), the employer may not know that there is a WC situation brewing.

Odds are that the claimant-chosen physician may be significantly less of an honest broker when it comes to (1) making decisions about referrals to other medical providers for additional care; (2) deciding work restrictions during recovery from the injury; (3) allowing the employee to return to regular duty; (4) deciding when “maximum medical improvement” has been reached; and (5) determining the nature of future care and disability benefits.  These are the key decisions that drive claim costs, claim duration, and overall WC benefits to the employee – which will return as later premium costs to the employer.  Clearly, the proposed change which would allow the employee to make the key cost-driving decisions at the front of the WC claim.

2.      The 50% Increase in Benefits if the Injury Was Due to an “Unsafe Workplace”
3.       
The second proposed legislative change involves the right of the employee to claim a 50% increase in the statutory WC benefits if the employer “willfully placed the employee in an unsafe work environment.”  Little needs to be said about the vagueness of this new provision which appears to lack any objective standards.

More importantly, this potential change would create an opportunity for claimants to increase their benefits by 50%, if the Administrative Law Judge (ALJ) who decides the case as a sole fact-finder decides that the facts of any particular case meet this nebulous and potentially subjective standard.  Bluntly stated, it is designed to create new, ancillary claims for a 50% increase in WC benefits in exchange for merely asking for a hearing on the matter before an ALJ.

The proposed change in override benefit liability is akin to an injured worker being given a lottery ticket at the time of the injury. Most importantly, it is philosophically contrary to the 100-year historical legislative policy that the Colorado WC system was created as a no-fault area of the law, with benefits being awarded solely on the basis of the injury, not the causal fault of the employee or the employer.

Notably, ALJ fact-finding is generally not subject to any meaningful appeal. Once an ALJ decides the facts of the case, they are presumptively written in stone. 

Once again, these new 50% override benefit exposures will be translated (even prospectively and pre-emptively) into steeply climbing premium costs. This is particularly likely in construction environments, where safety can be inherently difficult to control during multi-trade activity.

3.      The Change in “At Will” Employment for WC Claimant Employees

The third change proposed by next year’s draft bill is that a WC claimant’s resignation of current employment may only be “voluntary,” rather than decided by the employer in the present Colorado “at will” employment environment.  While this leaves open the possibility that the employment resignation of the WC claimant will be “negotiated” by the parties for an exchange of dollars, it gives the WC claimant employee an effective right of veto over the employer’s decision to terminate that employment.  In a worst case scenario, this means that a WC-injured employee who cannot do the job that they were doing before the injury is potentially an employee for life of the WC employer by statute.  In the hypothetical alternative, the employer can make the employee an offer of settlement that is so lucrative that it is an “offer that cannot be refused.”

The practical and legal problem for employers is that insurers will potentially say that this termination prohibition is a non-insured employment law issue, rather than a covered WC insurance issue. The potential result may be that such settlements will not be paid – or will be only partially paid – by the WC insurer, if at all. The uninsured “resignation” balance will potentially need to be paid by the employer without the benefit of WC insurance.  The alternative is that no resignation is ever negotiated, and the disabled employee must be continued on the payroll. This scenario assumes that the employee may be paid a pre-injury salary or wage that is not driven by the (diminished) ongoing value of the employee’s work for the employer.

4.      Action and Communication are Needed – NOW

These proposed legislative alterations in the present fabric of WC law and employment law are problematic to say the least. That they will dramatically raise employer costs – with significant impact on construction costs, in particular, is not debatable.  In fact, this assessment is probably superficial in identifying the mischief that will be done with such changes. 

If action is to be taken to avoid these developments, it should be taken now.  Contacting your state senator and representative is an important means to this end.  Testifying before the committee with responsibility for the bill is equally important.  Talking to your colleagues and even your competitors in the world of construction – now – has seldom been this important.


For additional information regarding next year’s draft workers’ compensation bill, you can reach Buck Mann by e-mail at mann@hhmrlaw.com or by telephone at (303) 987-7143.

Wednesday, December 18, 2013

The Need to Be Specific and Precise in Drafting Settling Agreements

The case of Bituminous Casualty Corp. v. Hartford Casualty Insurance Corp., 2013 WL 452374 (D. Colo. February 6, 2013) is instructive as an example of both the confusion and resulting escalation of litigation that can result from a lack of clarity in settlement negotiations. This is particularly true where parties settle outside of their insurance coverage, and/or without notifying their insurer(s), which have denied coverage.

The case involved coverage litigation following settlement of a multi-party construction defect case involving the Rivergate multi-family residential development in Durango, Colorado. The condominium owners association sued, among others, the developer (Rivergate Lofts Partners, hereafter “RLP”) and the general contractor (Genex Construction, LLC, hereafter “Genex”).  This follow-on case involved the insurers for RLP (“Hartford”) and Genex (“Bituminous”).  The coverage dispute was complicated by the Bituminous allegations that Hartford insured Genex in its alleged role as a manager for RLP, as part of Hartford’s insurance of RLP more generally.

The underlying facts were that Hartford denied insurance coverage and defense to Genex/Bituminous. The underlying construction defect case went to mediation, with the COA, RLP, and Genex all in attendance with their respective insurer representatives, and coverage counsel.  While the evolving facts of that mediation were later disputed as to their motives, intentions, and the contemporaneous knowledge of the parties, the facts reflected in documents were fairly clear.

Before multi-party mediation, Bituminous had tendered the defense of Genex to Hartford for purposes of its management role, and Hartford denied insurance coverage to Bituminous/Genex for all purposes. Litigation followed, in which it was alleged by the COA that Genex was an alter ego of RLP for purposes of numerous roles that Genex performed in the course of construction.

At mediation, Bituminous agreed to pay $6.9 million to have Genex (and its principal, “Kneller”) released from any liability under the Bituminous insurance policy, including the alleged role of Genex and its principal as alter egos of RPL. Notably, this settlement did not settle the underlying case, and was only a “policy release” between Bituminous and its named insured. Under this policy release settlement, Genex and Kneller assigned to Bituminous their “rights or claims” in any way connected to the (ongoing) COA litigation and the project generally. While it was claimed in the coverage case that the facts of Bituminous/Genex’s settlement/assignment of claims was communicated to Hartford, that state of Hartford’s knowledge was later vehemently disputed.  

Within a short period of time later, Hartford settled all of the separate COA claims against RPL and entered into a further settlement agreement between itself and its named insured, RLP.  Most important to this coverage/contribution case, Genex was included as a releasing party in this Hartford release, and putatively released Hartford from all claims involving the case. This Hartford release was later in time than Genex’s release of Bituminous that arguably assigned those same claims to Bituminous.  What followed was a battle of escalating allegations between the insurers involving the two Genex “settlement” documents – one with Bituminous, and a later one with Hartford.

Each of the Bituminous and Hartford policies for the respective parties contained similar provisions that transferred the insured’s’ rights to recover settlement amounts paid by the respective insurers. In short, when a party settled its claims, there was a right of potential subrogation granted to the paying insurer.  This became metaphysically (if not concretely) problematic when Bituminous settled insurance coverage of alter ego claims with Genex that were arguably also insured by Hartford. 

When Bituminous later filed suit against Hartford, it initially claimed equitable contribution against Hartford under the co-existing Hartford policy for the alleged benefit of Genex.  When Hartford answered the complaint and argued the (later) release by Genex of all potential claims against Hartford, Bituminous added tort claims against Hartford to their suit.  Those further claims included: intentional interference with the contract of Bituminous and Genex; civil conspiracy; and damages from the wrong of another. 

In the meantime, the underlying construction defects case went to jury trial between Genex/Bituminous and RLP and the jury allocated the amount of $1 million of the Bituminous settlement with the COA as representing Genex’s liability as the manager of the project for RLP.   The decision issued in this opinion addressed Hartford’s motion to dismiss, which became a motion for summary judgment after affidavits were submitted to oppose the motion.

The first of the claims dealt with by the court was the Bituminous’ claim for tortious interference with contract.  Because of conflicting affidavits from counsel for the parties, and based on the inferences available from the very documents of release between Hartford and Genex, the court determined there to be a conflict of interest which precluded summary judgment.  While the facts of intentional interference with contract were not indisputably proven by such evidence, the court found that there was a triable claim on this issue, based on what was characterized as admissible “constructive knowledge” of the insurance contract terms between Bituminous and Genex.  Interestingly, this constructive knowledge was inferred by the court primarily on the basis of the undisputed fact that Hartford was told of the Bituminous-Genex settlement, even if the terms were not explicitly communicated.  In other words (not used by the court), Hartford’s knowledge of a settlement put it on inquiry notice about the terms of that same settlement – without actual knowledge of detailed notice of the terms of the agreement.

In a further discussion, the court noted that Section 773 of the Restatement (Second) of Torts required that the actions of Hartford required affirmative proof of its “good faith,” in acting to protect its own legal interests when it settled with Genex.  The court held that within the context of the summary judgment motion, there was sufficient evidence to allow a finding that the Hartford did not meet the “good faith” requirement that was pled as an affirmative defense to the Bituminous tort claim.

The court noted in its separate discussion of Hartford’s motion to dismiss the Bituminous civil conspiracy claim that this claim was derivative of the above-discussed interference with contract claim. The court denied the motion partially for that reason, but also because there were disputed issues of fact concerning the “wrongful act” requirement of the claim. The wrongful act alleged by Bituminous was Hartford’s act of settlement with Genex.  Under its previous discussion, the court had determined that this could be a wrong that would potentially serve as the foundation for a triable case. In the analysis of the court, the (potential, triable) wrong was the interference with the insurance contract between Bituminous and Genex (to which Hartford was not a party), even though Genex was a party to both the Bituminous insurance contract and the Hartford settlement agreement. 

In the last section of its opinion, the court analyzed the third Bituminous claim for “damages resulting from the wrong of another.”  The court agreed with Hartford that this claim was not a separate cause of action recognized under Colorado law. The case relied upon by Bituminous in making this claim was one which recognized the recoverability of attorneys’ fees in some contexts, but the court held that it was not an independent claim for relief.

This case presents a number of complexities that may not soon occur again in a single matter. However, it presents a cautionary tale for parties and insurers involved in (among other things) denials of coverage, additional insured issues, and settling claims that are assigned by contract or by settlement agreement.  One would do well to survey the landscape of potential problem scenarios for this purpose before either (1) denying defense or coverage to a colorable insured; and/or (2) settling with a party that has claimed coverage, but which has given a policy release to its own primary insurer.   Mistakes in this regard will potentially be followed by tort litigation against and/or between insurers.  Note: the attorneys involved in the denial and/or settlement transactions may become witnesses, which is seldom a desirable result.

To learn more about the Bituminous v. Hartford case or construction law in Colorado, generally, you can reach W. Berkeley Mann, Jr. by telephone at (303) 987-7143 or by e-mail at mann@hhmrlaw.com.

Wednesday, December 11, 2013

Settlement Payment May Preclude Finding of Policy Exhaustion: Scottsdale v. National Union

In the last year, the U.S. District Court for the District of Colorado found that a settlement payment from an excess insurance carrier to another primary insurance carrier precluded a finding of vertical exhaustion sufficient to trigger the primary carrier’s duty to indemnify.  See Scottsdale Ins. Co. v. National Union Fire Ins. Co. of Pittsburgh, 2012 WL 6004087 (D. Colo. 2012).  The Scottsdale case arose out of the construction of a 507-unit apartment complex in Arapahoe County, Colorado in which a number of defects became apparent during construction.  As a result, the owner of the project sued the general contractor and/or the construction manager, seeking to recover more than $22 million for various construction deficiencies.  Id. at *1. 

The general contractor was insured under policies issued by several carriers.  Scottsdale Insurance Co. (“Scottsdale”) and National Union Fire Ins. Co. (“National Union) provided umbrella coverage, and CNA and American Zurich Ins. Co. (“Zurich”) provided primary insurance under commercial general liability policies.  About five years later, the construction defect case settled for $8.5 million dollars.  The settlement was funded by CNA, Scottsdale, and Zurich.  CNA contributed $4 million, Scottsdale contributed $4,350,000, Zurich contributed $75,000, and the insured contributed $75,000.  National Union did not contribute to the settlement.  In a related agreement, Scottsdale agreed to pay CNA $500,000 to facilitate the resolution of related coverage disputes involving CNA. 

Subsequently, Scottsdale commenced a declaratory judgment action against National Union seeking reimbursement for at least $2,283,911 of the funds Scottsdale paid to settle the construction defect action.  Scottsdale asserted four claims for relief, including equitable contribution and contractual subrogation.  National Union answered, denied liability, and eventually moved for summary judgment.  According to National Union, Scottsdale could not show that the primary insurance policies underlying the National Union umbrella policies had been fully exhausted.  Id. at *2.  National Union argued that Scottsdale payment of $500,000 precluded Scottsdale from showing that the policy limits under a certain CNA policy had been fully exhausted.  National Union characterized Scottsdale’s $500,000 payment as replenishment of policy limits under the CNA policy limits.  Although Scottsdale attempted to argue that the $500,000 payment applied to only one CNA policy, the court disagreed. 

In commenting on testimony offered by a Scottsdale representative limiting that payment to a certain CNA policy, the court stated “[t]his evidence does not satisfy Scottsdale’s evidentiary burden with respect to the exhaustion requirement.”   Id. at *3.  Notably, the court indicated that the relevant factual inquiry is how CNA allocated the $500,000, and that Scottsdale had not presented any evidence on that subject.  As a result, the court found that Scottsdale’s response lacked the requisite evidentiary support to preclude summary judgment on the question of vertical exhaustion.  The court granted National Union’s motion for summary judgment, dismissed all of Scottsdale’s claims, and awarded National Union its costs.  The takeaway from this case is to be extremely cautious when considering the possibility of settlement with one of several potential carriers who may be liable for defense and/or indemnity.  You may be impairing and/or precluding coverage.                

To learn more about the Scottsdale case or construction law in Colorado, you can reach Heather Anderson by telephone at (303) 653-0044 or by e-mail at anderson@hhmrlaw.com

Wednesday, December 4, 2013

A New Trend Emerging Regarding the Definition of Ongoing Operations: Jaynes Corp. v. ASIC

The term “ongoing operations” has appeared in construction insurance policies for many years.  Here in Colorado, that phrase has had a particular meaning when applied to an insurer’s coverage of liability arising out of an insured’s work, i.e. liability arising during an insured’s work on a specific project.  The case of Jaynes Corporation v. American Safety Indemnity Company illustrates a new trend in other jurisdictions where courts are loosening the coverage application of an “ongoing operations” clause.

In December 2012, in U.S. District Court in Nevada, Judge Miranda M. Du ruled on cross motions for summary judgment filed by Jaynes Corporation (“Jaynes”) and American Safety Indemnity Company (“ASIC”).  ASIC’s argument that the “ongoing operations” provision precludes coverage for Jaynes is the pertinent issue to this article.

The background facts of the case are pretty standard for construction litigation. A subcontractor entered into written agreement with Jaynes, the general contractor, for site concrete work at a residential housing project.  In the contract, the subcontractor agreed to name Jaynes as an additional insured on policies issued by ASIC.  The damages in the original construction litigation, between the homeowners association and the developer, were alleged to have occurred during the policy periods.  The subcontractor performed its work on the project in 2003 and 2004.

ASIC asserted that the “ongoing operations” provision in the policies, issued to the subcontractor, precludes coverage for the construction defect claims in the underlying lawsuit because those claims involved completed operations.  ASIC argued that the claims involved completed work and not works in progress.  Jaynes countered-argued that the “ongoing operations” provision does not restrict coverage to damage that occurred during the subcontractor’s ongoing operations, but it also covers claims for damages that occurred after completed operations but was caused by ongoing operations.

Judge Du discarded ASIC’s arguments and agreed with Jaynes, determining that the “ongoing operations” clause applies to damage on work performed by the subcontractor caused by its ongoing operations.  Judge Du cited two cases, from Arizona and California, which analyzed similar “ongoing operations” clauses.  Those two cases, Tri-Star Theme Builders, Inc. v. OneBeacon Insurance Co., 426 Fed.Appx. 506 (9th Cir. 2011) and McMillin Construction Services, L.P. v. Arch Specialty Insurance Co., 2012 WL 243321 (S.D. Cal. Jan. 25, 2012), determined that the policies at issue covered liability performed by a subcontract caused by that subcontractor’s ongoing operations.  In those cases, the specific language, “arising out of,” in the “ongoing operations” clause was vital to the courts’ rulings.

Judge Du noted that Nevada courts, like those of Arizona for Tri-Star and California for McMillan, review insurance policy terms from the perspective of a layman not trained in law or insurance, and the contract language viewed in its plain, ordinary, popular meaning.  Judge Du found compelling the Tri-Star’s Court’s discussion of the phrase “arising out of,” “this language does not state that injury must occur, or liability must arise, during the name insured’s ongoing operations, but rather requires only that the liability arise “out of” the ongoing operations.”   Tri-Star, 426 Fed.Appx. at 510 (9th Cir. 2011).

Judge Du also addressed ASIC’s arguments and supportive cases contrary to Tri-Star and McMillan.  One of the cases ASIC cited was a Colorado case, Weitz Co., LLC v. Mid-Century Ins. Co., 181 P.3d 309 (Colo. App. 2007).  Judge Du stated that those contrary cases relied not on the plain language of the provisions at issue, i.e. “ongoing operations,” but rather, the drafting history of the clause by the insurance company.  Judge Du went further stating that such history lessons are not persuasive in the face of the plain language of the “ongoing operations” clause.  Judge Du then let the Tri-Star case speak for her one more time:

Such evidence might be persuasive if the controversy . . . were between two insurers, or if it suggested that the language reflected the mutual intent of the parties. This evidence is wholly lacking here. Indeed, . . . the only court to construe the additional insured endorsement, without reference to the industry’s drafting history, held that it provided coverage for damages occurring after the completion of operations.

Tri-Star, 426 Fed.Appx. at 512 (9th Cir. 2011).

The Weitz case has a similar factual background to the Jaynes case: A general contractor, sued by a homeowner, brought an action against an insurer that issued a policy to a subcontractor to which the general contractor was an additional insured.  The district court granted the insurer’s summary judgment motion asserting that coverage was limited to “ongoing operations” and there was no coverage for claims arising out of subcontractor’s completed work or operations.  Weitz, the general contractor, appealed the order and the Colorado Court of Appeals affirmed the district court’s ruling.

In coming to its decision, the Colorado Court of Appeals found persuasive an analysis of the ISO’s history of drafting the additional insured endorsement (CG 20 10 1993) in another case.  The Weitz court found their construction of the phrase and the coverage it affords to be in line with the views of commentators addressing the history of the ongoing operations clause.  Ultimately, the Weitz court found that no ambiguity existed and the “ongoing operations” clause would not cover any work that had been previously completed.

The analysis by the Weitz court is exactly what Judge Du found unpersuasive as it failed to dissect the plain language of the clause, instead relying on the history of the clause within the insurance industry.  While the Jaynes case is not authority in Colorado, the fact is a trend is emerging in courts of neighboring jurisdictions and soon Colorado courts may be faced with a similar analysis.  We have to wait and see if Weitz will be challenged soon.  Using these mounting cases as support for an extension of coverage under the “ongoing operations” clause seems imminent in Colorado courts.

For additional information regarding the Jaynes v. ASIC case or construction law in Colorado, you can reach Brady Iandiorio by e-mail at iandiorio@hhmrlaw.com or by telephone at (303) 987-9816.

Disclaimer

The information contained in this blog is provided for informational purposes only. It is not legal advice and should not be construed as providing legal advice on any subject matter.