Tuesday, June 10, 2014

Taylor Morrison v. Terracon and the Homeowner Protection Act of 2007

On January 30, 2014, the Colorado Court of Appeals decided the case of Taylor Morrison of Colorado, Inc. v. Bemas Construction, Inc. and Terracon Consultants, Inc. 2014WL323490. The case addressed a substantial issue of Colorado constitutional law, as well as a variety of procedural issues of potential importance to construction litigation attorneys.  Of particular interest is the question of whether the provisions of the 2007 Homeowner Protection Act (“HPA”) are limited in application to contracts between residential homeowners and construction professionals, or whether they have broader application between commercial construction professional parties as well.  As discussed below, the Court of Appeals stated that it would not answer the question, and then, separately, implied that the statute might only apply to homeowner transactions – with the resulting exclusion of commercial transactions. However, after its analysis, it left the actual decision of that issue to a future court in a later case.

The factual background for the case involved claims of breach of a contract for soils engineering by Terracon Consultants, Inc. (“Terracon”) and negligent excavation work by Bemas Construction, Inc. (“Bemas”).  Plaintiff was Taylor Morrison of Colorado (“Taylor Morrison”), the developer and general contractor for a residential subdivision called Homestead Hills. After it constructed many homes, Taylor Morrison began to receive complaints of cracking drywall resulting from foundation movement and it made repairs at significant expense.  Taylor Morrison then filed suit against Terracon and Bemas in connection with their respective roles in the original construction.

Terracon defended in part by asserting that the HPA provisions that nullified limitations of liability were only applicable in contracts as between homeowners and construction professionals.  The heart of that argument was that Taylor Morrison was not a homeowner and for that reason could not defeat Terracon’s contractual limitation of liability for a specific dollar amount.  Terracon also defended in part by arguing that the HPA was being applied to its contract retrospectively, in violation of Article 11 of the Colorado Constitution.

Taylor Morrison responded to these defenses by attempting to amend its pleadings to assert separate claims against Terracon for gross negligence, negligent misrepresentation, and fraud.  However, the trial court judge denied this attempt to amend because it was so late in the case. Taylor Morrison then challenged Terracon’s defenses that the HPA was inapplicable to the Terracon contract.  The trial court agreed that the HPA only applied to transactions between homeowners and construction professionals. It held that Terracon’s contract with Taylor Morrison did not violate the HPA for that reason, and Terracon’s limitation of liability was valid.  Terracon thereafter deposited the maximum amount that Taylor Morrison could recover under the limitation of liability in the contract in the trial court’s registry, and the trial court then dismissed Taylor Morrison’s claims against Terracon.

Bemas proceeded to trial and received a defense verdict on the merits.  Taylor Morrison’s appeal sought a new trial of the Terracon issues, but also sought a new trial against Bemas.  Its argument for a full re-trial was that Bemas had an unfair advantage in trying its case with an “empty chair” that should have been occupied by Terracon. The appellate court disagreed, saying that the issues involving Terracon were distinct from those involving Bemas, and that a partial re-trial of the issues involving only Terracon involved no inherent unfairness to Taylor Morrison. In the absence of clear prejudice to Taylor Morrison, the Court refused to allow the re-trial of Bemas.

The appellate court addressed the matter of the trial court’s refusal to consider evidence that Terracon’s conduct was willful and wanton and/or grossly negligent, as alleged.  While the appellate court did not clearly reverse the trial court’s ruling that denied Taylor Morrison’s amended complaint, it did hold that Taylor Morrison had the right to contest Terracon’s defenses  by offering proof of such misconduct, because it would potentially invalidate Terracon’s limitation of liability. The appellate ruling viewed the potential evidence of misconduct as potentially admissible to respond to Terracon’s defenses, even if it was not part of an amended complaint.

In the course of remanding the Terracon case to trial, the appellate court disagreed with the trial court’s determination that the HPA only applied to homeowner/construction professional transactions, but did so without actually deciding the issue. Instead, it expressly declined to decide that issue, vacated the lower court’s HPA determination, and proceeded to decide Terracon’s constitutional argument.

In deciding that constitutional argument, the Court of Appeals held that Terracon’s contract was retrospectively impaired by the application of the HPA to its terms, which pre-existed the 2007 statute.  In an extended discussion of constitutionality, the Court explained that where: (1) perfected contract rights had fully vested; (2) those rights were the subject of past actions on the part of the parties; and (3) those rights would be reasonably expected by the parties to be enforceable, any statute that changed those rights after the fact was unconstitutionally retrospective.  

The Court of Appeals was presented with and rejected arguments that asserted that the HPA was a remedial statute, and was akin to new regulation of an existing industry.  In making this determination, the Court held that the statute was not part of a body of prior regulation that was simply being expanded and was reasonably anticipated by the parties. That was the argument offered by an amicus brief which argued analogous cases. Those cases were rejected as distinguishable by the Court of Appeals.

The appellate court also considered the question of whether the stated public policy of the HPA – “to protect Colorado residential property owners' rights and remedies” – was to be balanced against Terracon’s contract rights.  The Court held that since “the contracts at issue were the products of arms-length negotiations between sophisticated commercial entities” there was no impact of the HPA in the present case on residential property owners. The Court also based its analysis on detailed references to the 2007 Colorado legislative history.  Accordingly, the Court found no basis for any such “balancing” analysis between public policy and Terracon’s impaired contract rights.

Notably, in this last determination, one can see the possibility that the 2007 HPA may yet be held by a future appellate court to be inapplicable between general contractor and design professional or subcontractor (or similarly postured non-homeowner) parties.  In this later portion of the opinion, the Court suggests that an argument that the 2007 HPA is not applicable to commercial transactions between construction professionals may yet be upheld in a future case.

The Court of Appeals remanded the case back to the trial court for further proceedings on whether Taylor Morrison’s claims of Terracon’s willful and wanton conduct were sufficient to overcome Terracon’s limitation of liability argument. This was determined separate from the constitutional analysis described above. Notably, the case has not been selected for official publication as of this date, and may be further appealed because of the significance of the constitutional issue that was decided.

For more information about the Taylor Morrison v. Terracon case or residential construction litigation in Colorado, you can reach Buck Mann by e-mail at mann@hhmrlaw.com or by calling him at (303) 987-7143.

Wednesday, April 30, 2014

Builder’s Be Wary of Insurance Policies that Provide No Coverage for Building: Mt. Hawley Ins. Co v. Creek Side at Parker HOA

On the heels of a recent order regarding coverage under a Comprehensive General Insurance policy issued by Mt. Hawley Insurance Company (“Mt. Hawley”), builders should be very wary of CGL policies providing no coverage for property damage.

On January 8, 2013, District Court Judge R. Brooke Jackson granted a motion for declaratory judgment filed by Mt. Hawley.  The order states that the subject insurance policies issued by Mt. Hawley to Mountain View Homes II, LLC (“MV Homes”), the builder developer of the Creek Side at Parker development (the “Project”), did not provide coverage for any of the work performed by MV Homes or its subcontractors on the Project.

MV Homes originally began construction on the Project in 2002 and completed construction in 2005.  MV Homes was insured by National Fire and Marine Insurance Company (“National Fire”) and Mt. Hawley.  In December 2008, Creek Side at Parker Homeowners Association, Inc. (“the HOA”) served notice on MV Homes.  The HOA then instituted a construction defect lawsuit on June 1, 2009 against MV Homes and others.  MV Homes initially demanded a defense and indemnity from National Fire, which provided a defense.  Then, after two years, MV Homes demanded a defense and indemnity from Mt. Hawley in July 2011.  Mt. Hawley denied coverage and did not provide a defense.  The case was settled soon after, and National Fire reserved or assigned claims against Mt. Hawley.

Mt. Hawley filed the case at issue, seeking a declaration that its policies did not provide either a defense or indemnity with respect to the underlying lawsuit.  Mt. Hawley argued that its policies did not cover the HOA’s claims, because faulty work is not an occurrence and exclusions j(5), j(6), and m, preclude coverage.  MV Homes counterclaimed on several issues, including a declaration of its rights, breach of contract for failure to provide a defense and indemnity, common law bad faith, and statutory damages for bad faith. 

In making his ruling, Judge Jackson noted that the Mt. Hawley policies were written on a standard “Commercial General Liability Coverage Form,” where an occurrence is defined as “an accident, including continuous or repeated exposures to substantially the same general harmful conditions.”  Mt. Hawley Ins. Co. v. Creek Side at Parker Homeowners Association, Inc., WL 104795, p. 2 (D. Colo. 2013).  Judge Jackson also noted that faulty workmanship, according to Greystone Construction, Inc. v. National Fire & Marine Ins. Co., 661 F.3d 1272, 1286-87 (10th Cir. 2011), can constitute an occurrence that triggers coverage under  CGL policy in two circumstances.  First, the property damage was not caused by purposeful neglect or knowingly poor workmanship and second, the damage was to non-defective portions of the contractor’s or subcontractor’s work or to third-party property.

In the case at issue, there were no allegations that MV Homes or its subcontractors  purposefully or knowingly performed poor workmanship.  Thus, MV Homes relied on the HOA’s claims in the underlying suit to contend the property damage was to non-defective portions of its or its subcontractors’ work or to third-party property.  Judge Jackson found there was enough evidence regarding whether an occurrence triggered the policy for the issue to proceed to a jury.

Judge Jackson’s discussion then moved to exclusions, specifically j(5), j(6), and m.  Exclusion j(5) and j(6) exclude coverage for property damage to:

 (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.

Paragraph (6) of this exclusion does not apply to “property damage” included in the “products-completed operations hazard.” 

Judge Jackson found that exclusion j(5) applies to damage to the work being done by the insured during the course of the insured’s work, not to damage after operations have finished.  Assuming some of the damage occurred during the course of MV Homes’ work, Judge Jackson found that exclusion j(5) did not bar a coverage claim.

Exclusion j(6), states Judge Jackson, quoting, Advantage Homebuilding, LLC v. Maryland Cas. Co., 470 F.3d 1003, 1012 (10th Cir. 2006), has been interpreted to “exclude ‘property damage’ that directly or consequentially occurs from the faulty workmanship of the insured and its contractors/subcontractors (i.e., work that ‘was incorrectly performed’) while the work is ongoing.”  The exclusion broadly excludes all property damage that occurred while the work was ongoing and was the result of fault workmanship.

There is an exception to the exclusion for property damage included in the “products-completed operations hazard, which is defined in the standard form.  The definition includes property damage arising from insured’s or its subcontractors’ work except, “work that has not been completed or abandoned.”  Thus, according to Advantage Homebuilding, the exception to exclusion j(6) allows an insured to recover consequential damages that arise out of his or her faulty workmanship after the completion of the work.

To exemplify this, Judge Jackson again relied on Advantage Homebuilding, citing a possible instance where a homebuilder, after constructing the walls and installing the roof, has engaged in installing parquet floors.  A leak develops in the roof, which was poorly installed, and damages the roof and the partially installed wood floors.  The roof repair or replacement, which was a direct result of faulty workmanship, would be excluded.  On the other hand, the damage to the parquet floors was a consequence of the faulty and completed work on the roof and would be covered because of the exception to exclusion j(6).

At this point, it would look like coverage should be forthcoming, in the case at issue, but Judge Jackson performed one more analysis, this time on an endorsement the Mt. Hawley policies contained. The endorsement provides, “this insurance does not apply to ‘bodily injury’ or ‘property damage’ included within the ‘products-completed operations hazard’.”  Despite MV Homes’ opposition, Judge Jackson found that the language of the policy was unambiguous, in part, because it had been negotiated by two sophisticated commercial parties.  Judge Jackson even acknowledged that what the exception to j(6) in the standard form provided to the insured, the endorsement, using the same language, took away again.

Summarizing, Judge Jackson found that exclusion j(6) excludes from coverage all direct and indirect damages that occur while work is ongoing.  Normally, damage that occurred after work was completed (but, within Mt. Hawley’s policy period) would not be excluded from coverage by exclusion j(6).  Damages occurring after all work has been completed has been defined in the policy to be within the products-completed operations hazard.  The endorsement then removed the products-completed operations hazard form the policy.  Consequently, the damages that occurred after all work was completed were also not covered by the policy.

MV Homes tried to argue that the court’s reading of the policy and endorsement would render the coverage of the policy illusory and violate public policy.  MV Homes’ argument is technically untrue, the policy provides coverage for personal injury, advertising injury, and medical payments that are not affected by the products-completed operations hazard endorsement.  While the argument was not a winning one, Judge Jackson did sympathize with MV Homes stating, “MV Homes is, after all, a homebuilder.  If there is no coverage for liability for property damage caused by its negligence or the negligence of its subcontractors while doing what the business exists to do, one has to wonder how much meaningful coverage MV Homes received for its money.” 

Unfortunately for MV Homes, Judge Jackson relied on the fact that both parties were sophisticated commercial entities negotiating at arm’s length.  Mt. Hawley’s motion for declaratory judgment was granted and Judge Jackson found that Mt. Hawley was not unreasonable in denying coverage or to commence its action for declaratory judgment and there was no basis for a finding of bad faith on the part of Mt. Hawley.

The lesson for builders is to be vigilant regarding its insurance policies, being very wary of CGL policies and endorsements providing no coverage for property damage.

The attorney who drafted this entry is no longer with the firm. For additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com

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 
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.

The attorney who drafted this entry is no longer with the firm. For additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com

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”
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.


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.