Another district court weighs in on the impact of HB 10-1394.

Recently, United States District Court Judge Miller ruled in favor of a motion for partial summary judgment in the case of Continental Western Insurance Company v. Shay Construction, Inc. Continental Western Insurance Company v. Shay Construction, Inc., 2011 WL 3236102 (D. Colo. 2011). Judge Miller’s order ruled on arguments between the insurance carrier (“Continental Western”) and the subcontractor (“Shay”) regarding the application of HB 10-1394, codified as C.R.S. § 13-20-808. It is important to review the underlying case before digging into Judge Miller’s order.

 

Milender White Construction Company (“Milender White”) was a general contractor on a project in Grand County, CO and in early 2008 entered into several contracts with Shay for the framing, siding, and related work on the project. Shay was insured by Continental Western under a commercial general liability (“CGL”) insurance policy. Continental Western canceled the policy on or about April 27, 2009 for non-payment.

 

 

Shay hired Wood Source, Inc. and Chase Lumber Company (collectively, the “Subcontractors”) to furnish materials, labor, and equipment for construction on the project. The Subcontractors filed suit against Shay alleging non-compensation for work and materials, seeking to enforce a mechanic’s lien. Both Milender White and Shay were named as defendants. In its answer, Milender White asserted cross-claims against Shay for breach of the contracts entered into in 2008. Milender White asserted many claims of breach, but there were four important claims to note: (1) Shay’s failure to perform work to the quality standards and requirements of the subcontract and contract documents; (2) Shay's performance of defective work, not in compliance with the requirements of the subcontract and contract documents and failing and/or refusing to correct deficiencies; (3) Shay’s failure to pay the Subcontractors; and (4) Shay’s failure to hold harmless and indemnify Milender White from claims originated by Shay’s Subcontractors.

 

 

The motion for summary judgment at issue, came about after Continental Western filed its complaint seeking declaratory judgment that the insurance policy does not cover Shay’s dispute with the Subcontractors or Milender White, particularly Milender White’s cross-claims. Continental Western was seeking summary judgment on the issue that the terms of the insurance policy did not include and/or expressly exclude coverage for the damages claimed by Milender White. Continental Western was also seeking summary judgment on Shay’s counterclaims (breach of contract, bad faith breach under insurance contract, and statutory bad faith) arguing that Shay was not entitled to a defense or indemnity in the underlying lawsuit brought by the Subcontractors.

 

 

The insurance policy stated, “We will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.” Coverage also applied to an “occurrence” defined in the policy as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The insurance policy also excluded several things, such as contractual liability, damage to property, and damage to your work.

 

 

Continental Western’s first argument essentially stated the insuring language, “those sums that the insured becomes legally obligated to pay as damages,” only applies to damages resulting from tort actions, not claims of breach of contract. Judge Miller denied this argument because Colorado courts have not spoken on the issue and the language could arguably be ambiguous, which must be construed against the insurer.

 

 

Continental Western’s second argument, however, received favorable support from Judge Miller. Continental Western argued that the claims in the underlying lawsuit are not born from property damage resulting from an “occurrence” (defined as an “accident”), but rather allege the failure to provide services as promised under a contract. The damage alleged is Shay’s own defective work and damage to work of other trades resulting from repair of Shay’s deficient work. Continental Western argued that generally, poor workmanship is not a covered occurrence under a GCL policy. General Security Indemnity Co. of Arizona v. Mountain States Mutual Casualty Co., 205 P.3d 529 (Colo. App. 2009). Despite being effectively overruled by HB 10-1394, C.R.S. § 13-20-808 signed into law on May 21, 2010, Judge Miller found the General Security case was persuasive law because the policy was canceled roughly a year earlier, and not in force on May 21, 2010. Because the policy had been cancelled before the statute's effective date, Judge Miller effectively found that the statute does not apply retroactively.

 

 

Judge Miller did concede that even with the application of General Security, the cross-claims may allege an occurrence under the policy. Milender White’s cross-claims allege that Shay’s defective work required repair, resulting in damage to work of other trades. Shay’s poor workmanship also brought on damage to a third party, which arguably falls within the definition of occurrence and thus within the scope of the insurance policy.

 

 

Judge Miller did, however, agree with Continental Western’s argument that the asserted claims which allege property damage and were not breach of contract claims, are excluded under the “damage to property” exclusion mentioned above. The policy’s specific language called for exclusions related to: “(j) Damage to Property . . . (5) that particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the “property damage” arises out of those operations; or (6) that particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.”

 

 

It is important that Milender White gave notice to Shay of the deficiencies during construction and that Shay damaged the work of other trades while repairing is own work. Judge Miller found that exclusion (j)(5) applied to both Shay’s allegedly defective work and the damage allegedly caused to other trades when Shay performed repairs to its work. Furthermore, Judge Miller found that the (j)(6) exclusion regarding “your work” (defined as any work or operations performed by you or on our behalf) also applied to both Shay’s defective work and the damage it directly inflicted on other subcontractor’s work in its repair of its poor workmanship. Accordingly, Judge Miller found that the policy did not cover claims asserting breach of contract that do not involve property damage and the policy excluded the claims alleging property damage under exclusions (j)(5) and (6).

While Judge Miller’s finding is only an order in the district court and not an appellate court decision, it is sure to garner some attention. In the future, we will be following the issues as they are sure to reach the Colorado Courts sooner rather than later.

 

 

For more information about this case, contact Brady Iandiorio at iandiorio@hhmrlaw.com or by telephone at (303) 987-9816.

Higgins, Hopkins, McLain & Roswell Promotes Derek J. Lindenschmidt to Partner

Higgins, Hopkins, McLain & Roswell is pleased to announce the promotion to partner (with effect from January 1, 2012) of Derek J. Lindenschmidt.

Since joining the firm in 2006, Derek’s practice has focused on representation of construction professionals in a wide variety of both litigated and non-litigated matters, including the defense of developers and general contractors in complex construction defect lawsuits. He has defended against claims in all phases of development, from initial design through post-construction, and has been very successful in recovering from subcontractors in subrogation.

“Derek’s singular dedication to our clients has resulted in favorable outcomes in mediated, arbitrated, and litigated cases. His work ethic and drive has helped us further the firm’s continuing mission to reimagine the way construction claims are defended. I am delighted to have Derek as a partner,” said founding member David M. McLain.  Co-founder Sheri Roswell added, “Whether a client or a colleague, Derek is the one you want in your corner.  Personally and professionally, we are truly fortunate to have Derek on our team.”

“I am very excited and honored. HHMR prides itself on providing its clients with smart, yet aggressive representation. I am proud to be a part of a team whose number one goal is to look out for Colorado’s builders and developers in some very trying times,” commented Derek on his promotion.

ISO Rolls Out Colorado-Specific Insurance Forms in Response to the Colorado Anti-Indemnity Statute.

If you take a look at the bottom of any page of your (or your client’s) insurance contract, it is most likely a copyrighted form issued by Insurance Services Office, Inc. (ISO). ISO develops standardized insurance policy language and forms that most insurer companies use in order to create insurance policies for consumers. 

ISO has recently released several Colorado-specific forms with policy language that takes into account Colorado’s 2007 anti-indemnity legislation, C.R.S. § 13-21-111.5. The Colorado anti-indemnity law limits a defendant’s liability to “the degree or percentage of the negligence or fault attributable” to the defendant. Pursuant to this law, the forms limit liability coverage to injury or damage caused by the insured, or by those acting on the insured’s behalf.

What does this mean for you or your clients?

We previously discussed on this blog that it is more important than ever to procure the proper insurance for your construction business. You can find that entry here. Many general contractors and developers have relied on a few of their subcontractors to procure the correct insurance that pays for the defense of, and indemnifies, the general contractor and/or developer from any suits. However, C.R.S. § 13-21-111.5 limits each subcontractor’s indemnity share to the degree of fault they are held liable.

For example, it is not uncommon for one subcontractor to be found 70% at fault in a construction defect action. If this subcontractor did not procure the correct additional insurance in favor of the general contractor or developer, those parties would lose the ability for the AI carrier to pick up 70% of the costs of defending the suit.

What should you or your clients do?

If you are a general contractor or developer, you need to ensure every subcontractor[1] working on your projects is procuring both ongoing and completed operations coverage that includes you as an additional insured for both coverages. To do so, you should speak with your insurance coverage attorney and ensure your subcontractors are getting the following forms (or the equivalents) as a part of their policies:

1. A form CG 32 29 06 10, naming you as an additional insured, or a CG 32 27 06 10 (automatic additional insured status if agreed by contract), to cover ongoing operations, such as workers compensation litigation.

AND

2. A form CG 32 28 06 10, naming you as an additional insured, to cover completed operations, such as construction defect litigation.

The name of the general contractor or developer should appear either on the actual ISO form listed above or in the policy declarations, along with the subject project(s). Although it is common in the industry, you should not merely accept a checklist form from the subcontractor’s insurance agent that states the proper coverage is in the policy. You should request certified copies of the subcontractors’ policies and ensure that the policies are reviewed by your own insurance company, or an attorney that specializes in construction coverage matters. Alternatively, you can ask the subcontractors' insurance producers to sign a subcontractor insurance compliance form, certifying that the proper coverages are in place.

If you are a subcontractor, you need to speak with an insurance coverage attorney and demand your insurance company write you the above-referenced forms or the equivalents. If your current insurance company will not, shop around. The failure to procure the correct insurance could leave you with millions of dollars in uncovered liabilities such as the attorney fees and expert costs of the project owner, general contractor, and/or developer in any construction defect litigation. Please understand that this is not inserted here as a pitch for work. We are not coverage attorneys, we just happen to think this is a good idea.

If you would like to obtain copies of these Colorado-specific ISO forms, or have any other questions regarding risk management for your construction business, please contact Chad W. Johnson by phone at (303) 987-9815 or by e-mail at cjohnson@hhmrlaw.com.

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[1] Engineers, Architects, and Surveyors have different coverage forms.

Colorado's legislature is back in action. What does this mean for Colorado's construction professionals?

Yesterday was the first day of the 2012 legislative session of the Colorado General Assembly, which promises to be an exciting year.  From what we have heard around town (and from the mouth of a plaintiffs' construction defect attorney at an out-of-state seminar) there is likely to be a construction defects bill at the Capitol this year.  This attempt will likely take the form of a bill providing for the payment of attorneys' fees to homeowners and homeowners associations in residential construction defect cases.  Whether it happens or not, there are enough people talking about the prospect that it was picked up by The Denver Business Journal. 

For the roofers out there, you may want to pay attention to Senate Bill 12-038, "concerning measures to protect consumers who engage a roofing contractor to perform roofing services on residential property," which requires "residential roofing contractors to sign a written contract with customers that details the following:"

 - The scope of roofing services and materials to be provided;

 - The approximate dates of service;

 - The costs of the services;

 - The roofing contractor's contact information;

 - Identification of the roofing contractor's surety and liability coverage insurer and their contact information, if applicable;

 - The roofing contractor's policy regarding cancellation of the contract and refund of any deposit, including a rescission clause allowing the client to rescind the contract and obtain a full refund of any deposit within 72 hours after entering the contract; and

 - A written statement that if the client plans to use the proceeds of a property or casualty insurance policy to pay for the roofing work, the roofing contractor cannot pay, waive, rebate, or promise to pay, waive, or rebate all or part of any deductible applicable to the claim for payment for roofing work on the covered residential property.

Finally, despite meetings through the summer and fall, it looks as though the Colorado Association of Home Builders will not again support a bill to require pre-lien notices as a prerequisite to the validity of mechanics' liens. 

Stay tuned and hang on, it could be a wild ride. If you would like to discuss the prospects of the upcoming session, please call me at (303) 987-9813 or e-mail me at mclain@hhmrlaw.com. 

It is time to clarify that plaintiffs in construction defect cases cannot recover more than 100% of their actual damages.

Developers in Colorado could be facing more of an uphill battle than the economy.  Attorneys for homeowners’ associations have conceived a new argument whereby they seek to hold the developer liable for one hundred percent of the damages in a construction defect action as a fiduciary under Colorado law.  As most of us know, developers rarely participate in the actual construction work of any given project.  However, pursuant to Colorado’s Common Interest Ownership Act (“CCIOA”), board members appointed by the declarant developer are fiduciaries of the unit owners.  See 38-33.3-301, et seq.  Attorneys for homeowners’ associations argue that this designation of a declarant as a fiduciary creates a non-delegable duty to assure that there is no negligence in the construction of a home.  See Cosmopolitan Homes Inc. v. Weller, 663 P.2d 1041 (Colo. 1983). [1]  

Taking this argument one step further, attorneys for homeowners’ associations are now arguing that, in accordance with its non-delegable duty, a developer should not be allowed to allocate any liability to settling parties, including general contractors and/or subcontractors, which actually performed the work on a project.  If successful, the ultimate result of this argument precludes the developer from seeking a set-off for any of the settlements between the association and the settling parties, thereby allowing the homeowners’ associations to potentially recover more than one hundred percent of their claimed damages. 

In a recent construction defect suit, the plaintiff homeowners’ association successfully argued that the developer, as a fiduciary, has a non-delegable duty under CCIOA.  As a result, the association argued that the jury should not allocate any liability to the general contractor, which had already settled.  The jury then allocated one hundred percent of the liability for the claimed construction defects to the developer on the verdict form.  As a result, the developer was precluded from seeking a set-off for the amount of settlement between the general contractor and the association, which essentially allowed the homeowners’ association to recover from the developer what it had already recovered from the general contractor.            

While Colorado law would seemingly prohibit this outcome, those involved and/or interested in the home building industry are urged to speak up and get involved. Perhaps there should be an amendment to Colorado’s statute concerning pro rata liability that would explicitly preclude the ability to recover more than one hundred percent of a party’s claimed damages.  See C.R.S. § 13-21-115.5.  Currently, Colorado’s statute concerning contribution among tortfeasors provides that a release given in good faith to a person liable in tort for the same injury does not discharge any of the other tortfeasors from liability for their respective pro rata share of liability for the injury.  C.R.S. § 13-50.05-105.  Pursuant to Colorado’s pro rata statute, no defendant is liable for an amount greater than represented by the degree or percentage of fault or negligence attributable to such defendant.  C.R.S. § 13-21-115.5.  However, both statutes are silent on the issue of recovery, which is why many believe an amendment is necessary to preclude what is essentially double recovery by homeowners’ associations in construction defect actions.

 

Another way to skin the cat may be to make clear, statutorily, that C.R.S. § 13-21-115.5(6)(a)(I) means what it says, that “every construction business in the state is financially responsible under the tort liability system for losses that a business has caused.” This can be accomplished by making clear that developers and general contractors are not liable for the negligence of the subcontractors and design professionals they hire, but are only liable for their own negligence.

- Heather M. Anderson

 

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[1] The Colorado Supreme Court has also recognized that subcontractors are also under an independent to act without negligence in the construction of homes.  See A. C. Excavating v. Yacht Club II Homeowners Ass’n, Inc., 114 P.3d 862 (Colo. 2005); see also Driscoll v. Columbia Realty-Woodland Park Co., 590 P.2d 73 (Colo. App. 1973).        

Licensure for Common Interest Community Association Managers in Colorado: Should Construction Professionals and Their Insurers Support the Effort?

On November 4, 2011, the Colorado Legislative Action Committee (“CLAC”) Licensing Task Force of the Community Association Institute (“CAI”) submitted a Sunrise Review Application for Licensure of Common Interest Community Association Managers.  You can view a copy of the application here.

This blog entry will briefly describe the application, and then discuss why Colorado construction professionals and their insurers may want to support this application, with some revisions. 

The Application

To me, the most interesting parts of the application are the following:

5.         Describe the functions performed by members of this occupational group. Note which functions are unsupervised or supervised and by whom. In addition, indicate functions which are similar to those performed by other groups and identify those groups. How do the functions performed by this group vary from the other groups’ functions?

Background

Common Interest Community Associations are created under Colorado law to govern and operate common interest communities (commonly referred to as “Community Association” and “Homeowners’ Association”). The vast majority of Common Interest Communities are created as nonprofit corporations under Colorado law and are comprised of the owners of units located in these communities who are the members of these nonprofit corporations.

Volunteer Board Members are members of their Community Associations by virtue of owning a home in that Association. Election to these volunteer Boards of Directors generally requires no experience or knowledge; just an interest in serving on the volunteer Board of Directors. The natural legal and business structures of Community Associations place these institutions, and the people who serve them, in control of hundreds of thousands to millions of dollars of assets; often without consistent education or expertise. Directors serving on these volunteer Boards have a fiduciary duty to protect and preserve the common property in these communities and the property values of their fellow individual homeowners within the association. Directors often rely upon the expertise of their Community Managers for advice and assistance in carrying out their fiduciary duty, making decisions of significance, managing the finances of the Association and implementing policies and decisions of the Board.

*          *          *

Detailed tasks are outlined below, but in general the Manager is frequently responsible for . . . providing guidance and expertise to the Board to assist the Directors in fulfilling their fiduciary duty to the Association. The Community Manager typically provides advice to the volunteer Board on when to seek legal counsel or the guidance from other experts. *          *          * What is unique about this occupation is that the volunteer Board Members who hire, supervise and are responsible for the actions of Community Association Managers are often inexperienced and lacking knowledge regarding the governance and operations of Community Associations and the applicable laws in Colorado. Application, pgs. 5-6. 8.                                      Does the applicant propose licensure, certification, registration, or another type of regulation? Why? (Under licensure, it is illegal for anyone to engage in an occupation without a license, and only persons who possess certain qualifications are licensed. Certification protects specific occupational titles of persons who have met certain educational and experiential standards. Only persons certified in that occupation may use the protected title, although anyone may practice the occupation. Under registration, any person may engage in an occupation, but he or she is required to submit information concerning the location, nature, and operation of the practice.) It is in the best interest of the citizens of this state, of Common Interest Communities located in this state and the individuals who reside and/or own property in them, to provide for the licensure of Managers of Common Interest Communities to insure that persons who hold themselves out as possessing professional qualifications as Managers of Common Interest Communities, also commonly known as Community Associations, are, in fact, qualified to render management services of a professional nature. Licensure will ensure such individuals provide for the maintenance of high standards of professional conduct by those licensed as Managers of Common Interest Communities. We seek licensure of Community Managers because: ·                     . . . Without licensure; there are no assurances that the Community Managers have the specialized knowledge necessary to provide this assistance and advice to the Boards and communities they serve. In addition, without licensure, there is no mandatory system of checks and balances and no standards with which a Community Association Manager is required to comply. . . ·                     This occupational group is hired by volunteer Boards of Directors who are not required to have any prior knowledge of the industry, any experience, any education or any business knowledge. Application, pgs. 9-10. 16.       Describe the minimum competencies necessary to enter this occupation. Proposed minimum competencies would be: ·                             Must be at least 18 years old; ·                             Hold at least a High School diploma; ·                             Shall not have been convicted of a felony within the past 10 years; Shall have demonstrated knowledge of the fundamentals of Common Interest Community (CIC) management as evidenced by passage of the CMCA exam; ·                             Shall have demonstrated knowledge of the laws of Colorado that govern CIC’s specifically: CCIOA and the Nonprofit Act as evidenced by passage of an exam; ·                             Shall agree in writing to abide by a standard of professional conduct; and, ·                             Shall not have failed to cooperate with any law enforcement or regulatory agency in any investigation of any law enforcement or regulatory investigation. Application, pg. 18 (emphasis added).  The National Board of Certification for Community Association Managers (NBC-CAM) develops and enforces the CMCA Standards of Professional Conduct. CMCA Standards of Professional Conduct: A Certified Manager of Community Associations (CMCA®) shall: Be knowledgeable, act, and encourage clients to act in accordance with any and all federal, state, and local laws applicable to community association management and operations. Be knowledgeable, comply and encourage clients to comply with the applicable governing documents, policies and procedures of the Client Association(s) to the extent permitted by that Client. Not knowingly misrepresent materials facts, make inaccurate statements or act in any fraudulent manner while representing Client Association(s) or acting as a CMCA. Not provide legal advice to Client Association(s) or any of its members, or otherwise engage in the unlicensed practice of law. Promptly disclose to Client Association(s) any actual or potential conflicts of interest that may involve the manager. Refuse to accept any form of gratuity or other remuneration from individuals or companies that could be viewed as an improper inducement to influence the manager. Participate in continuing professional education and satisfy all requirements to maintain the CMCA. Act in a manner consistent with his/her fiduciary duty. Conduct themselves in a professional manner at all times when acting in the scope of their employment in accordance with the terms and conditions of their contractual agreement and in accordance with local, state and federal laws. Recognize the original records, files and books held by the manager are the property of the Client Associations to be returned to the Client at the end of the manager’s engagement and maintain the duty of confidentiality to all current and former clients. Application, pg. 30. Why Colorado Construction Professionals and Their Insurers May Want to Support This Application It is undeniable that Colorado’s plaintiffs’ construction defect attorneys are extremely entrenched in the Community Associations Institute - Rocky Mountain Chapter - Colorado.  By looking at its website, one can see that all of the major plaintiffs’ construction defect attorneys sponsor the CAI and at least one member of such a firm sits on the CAI’s 2011 Board of Directors.  It is my belief that the plaintiffs’ construction defect attorneys are so closely associated with the CAI because they naturally derive some benefit from the association. In other words, involvement in the association results in referrals and recommendations from property managers, which results in new retentions and new construction defect lawsuits.  To read about extreme examples of how the alliance between property managers and plaintiffs’ attorneys can be abused, one needs look no further than Nevada.  In Las Vegas, the FBI has recently investigated a scheme employed by property management companies and plaintiffs’ construction defect attorneys to take control of homeowners association boards with members who pushed for construction defect lawsuits against builders.  If you have not yet heard or read about this story, you can follow it here. Even though there is no reason to believe that similar schemes are in the works in Colorado, it would not hurt to shed some light onto the role of property managers in evaluating the need for a homeowners association to retain a lawyer to investigate alleged construction defects, in recommending certain plaintiffs’ construction defect attorneys, or in recommending certain courses of action with respect to pursuing construction defect actions. This is certainly true in light of the fact that the CAI has acknowledged in its application that members of homeowners associations boards of directors may have no experience, knowledge, education, or expertise in managing the affairs of a homeowners association and that they “often rely upon the expertise of their Community Managers for advice and assistance in carrying out their fiduciary duty, making decisions of significance, managing the finances of the Association and implementing policies and decisions of the Board.” I wrote an article for Mountain Builder Magazine, Aspen and Vail Edition on the topic of construction defect lawsuits and why they are not always in the homeowners’ best interest.  You can read that article here.  In that construction defects lawsuits are often avoidable and should be a decision of last resort, perhaps the Colorado Department of Regulatory Agencies should include requirements or guidelines for property managers who recommend this course of action. I do not yet know what those requirements or guidelines would look like, but if this sunrise review process gets legs, it might be something to look into.  If nothing else, making it crystal clear that property managers cannot accept any form of gratuity or other remuneration from individuals or companies that could be viewed as an improper inducement to influence the manager, or to recommend a certain course of action to a homeowners association board of directors, would be a good start.  Stay tuned and we will see where this goes. -- David M. McLain