Wednesday, November 30, 2011

Renovation Contractors: Be Careful How You Disclose Your Projects

In Palu and Beyer v. Toney, 2011 WL 2560249 (Bankr. D. Colo.), the United States Bankruptcy Court for the District of Colorado determined that a Colorado District Court order granting summary judgment in favor of plaintiff homebuyers was binding on the Bankruptcy Court in the defendant contractor’s bankruptcy proceeding based on issue preclusion.[1]

Pertinent to this column is the subject matter of the summary judgment motion:  Colorado’s Seller’s Property Disclosure (Form LC-18-5-04).  In the underlying state court action, the plaintiff homebuyers filed a motion for summary judgment contending that the defendant contractor represented to them, through the Seller’s Property Disclosure, that there were no present or past conditions involving moisture or water problems, roof problems or leaks, skylight problems, or gutter downspout problems.

In granting plaintiffs’ motion, the state court determined that the defendant contractor made these representations on her Seller’s Property Disclosure despite witnessing water leaking from the skylight onto the floor and being aware of repairs to the roof, skylight, and interior drywall prior to the sale of the property. The state court also determined that the past water damages and repairs were material facts, because “any past water damages and resulting repairs are information a reasonable person under these circumstances would regard as important in deciding what to do.”  Additionally, the state court determined that the defendant contractor intended for the plaintiff buyers to rely on her representations, and that the plaintiff buyers did so.

Notably, there is a “Seller’s Advisory” contained on Colorado’s Seller’s Property Disclosure which indicates that “failure to disclose a known material defect may result in legal liability.” Although the Palu case is an example of a renovation contractor’s blatantly false disclosure, the lesson is still clear:  Colorado courts will treat the representations made on your next Seller’s Disclosure very seriously.

-- Derek J. Lindenschmidt


[1] “Issue Preclusion” operates to bar re-litigation of an issue that has been finally decided by a court in a prior action.

Monday, November 21, 2011

United States District Court for the District of Colorado Denies Summary Judgment in the High Street Lofts Case.

On September 26, 2011, the United States District Court for the District of Colorado issued an order that denied American Family Mutual Insurance Company’s motion for summary judgment regarding claims arising out of an alleged breach of insurance contract brought by High Street Lofts Condominium Association, Inc. (“High Street”). High St. Lofts Condo. Ass'n, Inc. v. Am. Family Mut. Ins. Co., 10-CV-02484-MSK-BNB, 2011 WL 4479120 (D. Colo. Sept. 26, 2011).
Concrete Express, Inc. began performing road repair work in May 2009 near the High Street Lofts in Boulder. That work included using tamping equipment to compact soil that allegedly created ground vibrations in the area. Shortly after the work began, representatives of High Street Lofts noticed damage to their buildings. In September 2009, High Street brought suit against Concrete Express (“CD Action”) alleging that “equipment used by Concrete Express caused extensive vibrations to travel through the ground and into the building,” which damaged High Street’s building.  Id. at *2. Thereafter High Street filed suit against American Family (“Coverage Action”) based on American Family’s denial of coverage under a business insurance policy. 
Since the CD Action had concluded, and ironically as the court pointed out, High Street’s position on causation had changed. In the CD Action, High Street had argued that vibrations from Concrete Express’ work caused the damages. In the Coverage Action, High Street argued “that the building was not damaged by vibrations at all,” but instead by “poorly performing historical foundations, disregard for geotechnical considerations,” and other causes not involving Concrete Express’ roadwork activities. Id. at *4.
American Family argued that High Street should be precluded from changing its causation argument from the CD Action to the Coverage Action because of judicial estoppel. The court dismissed this argument because it had not been proven that High Street had benefited from its previous causation theory, a necessary element of judicial estoppel.
American Family sought to exclude coverage based on: 1) an exclusion for damages caused by the negligence of a third party, and 2) an earth movement exclusion. The court quickly dismissed the first argument, as “Concrete Express’ negligence remains disputed.” Id. at *3.
The court then tackled the language of the insurance policy. The most relevant language from the policy regarding earth movement excluded coverage for the following: 
Earth sinking (other than sinkhole collapse), rising, or shifting including soil conditions which cause settling, cracking or other disarrangement of foundations or other parts of realty. Soil conditions include contraction, expansion, freezing, thawing, erosion, improperly compacted soil and the action of water underlying the ground surface.
The court, applying the “reasonable expectations doctrine” and construing ambiguity against the drafter, held that an ordinary insured might reasonably understand this “un-grammatical maze” “‘to exclude coverage for settling, cracking or other disarrangement of foundations’ of buildings when that damage results from the ‘sinking, rising, shifting, expansion, or contraction’ of earth, when that movement is caused by ‘freezing, thawing, erosion, improperly compacted soil, [or] the action of [sub-surface] water” Id. at *6 (brackets in original).
Because freezing, thawing, erosion, and sub-surface water had been eliminated as potential causes, the court analyzed the “improperly compacted soil” exclusion. The court opined that American Family could still prove that the alleged earth movement was caused by improperly compacted soil or by vibrations causing harm to improperly compacted soil; therefore, any damages to High Street’s building would be within the policy exclusion. Id. at *7. However, High Street could still prove that the soil was properly compacted at original construction and any damages, (whether from vibrations or otherwise) would avoid the earth movement exclusion. Id. This would, ironically, now require both parties to alter their causation positions to support their interests.
The court concluded that because there still was a genuine issue of material fact on the actual cause of the earth movement, the case must proceed to trial and American Family’s motion for summary judgment was denied.

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, November 3, 2011

The U.S. Tenth Circuit Court of Appeals Rules on Greystone.

On November 1, 2011, the Tenth Circuit Court of Appeals ruled on the certified question of whether property damage caused by a subcontractor’s faulty workmanship is an “occurrence” for purposes of a commercial general liability (CGL) insurance policy. In Greystone Const., Inc. v. National Fire & Marine Ins. Co., No. 09-1412 (10th Cir. Nov. 1, 2011), the Tenth Circuit determined that because damage to property caused by poor workmanship is generally neither expected nor intended, it may qualify under Colorado law as an occurrence and liability coverage should apply. Id. at 2.

The short history of the Greystone case is as follows. In Greystone Const., Inc. v. National Fire & Marine Ins. Co., 649 F. Supp. 2d 1213 (D. Colo. 2009), two contractors and one of their insurers brought an action against a second insurer after the second insurer refused to fund the contractors’ defense in construction defect actions brought by separate homeowners. Id. at 1215. The U.S. District Court for the District of Colorado, relying on General Sec. Indem. Co. of Arizona v. Mountain States Mut. Cas. Co., 205 P.3d 529 (Colo. App. 2009), granted summary judgment in favor of the second insurer on the basis that the homeowners’ complaints did not allege accidents that would trigger covered occurrences under the second insurer’s policies. Id. at 1220. Notably, the Greystone, General Security, and other similar decisions prompted the Colorado General Assembly to enact C.R.S. § 13-20-808, which was designed to provide guidance for courts interpreting perceived coverage conflicts between insurance policy provisions and exclusions. The statute requires courts to construe insurance policies to favor coverage if reasonably and objectively possible. C.R.S. § 13-20-808(5).
The Tenth Circuit began its analysis by determining whether C.R.S. § 13-20-808, which defines the term “accident” for purposes of Colorado insurance law, would have a retroactive effect, and thereby settle the question before the court. The Tenth Circuit gave consideration to several Colorado district court orders issued since the enactment of C.R.S. § 13-20-808 which have suggested that the statute does not apply retroactively, including Martinez v. Mike Wells Constr., No. 09cv227 (Colo. Dist. Ct., Mar. 1, 2011), and Colo. Pool. Sys., Inv. V. Scottsdale Ins. Co., No. 09cv836 (Colo. Dist. Ct., Oct. 4, 2010). The Tenth Circuit also attempted to ascertain the General Assembly’s intent behind the term “all insurance policies currently in existence...” Greystone, No. 09-1412, at 12. The Tenth Circuit determined that the General Assembly would have more clearly stated its intentions for the term if it was supposed to apply retroactively to expired policies, rather than those still running. Id. at 12-13. Ultimately, the Tenth Circuit decided that C.R.S. § 13-20-808 did not apply retroactively, but noted that “the retrospective application of the statute is not necessarily unconstitutional.”  Id. at 9, 11-14. As such, the Tenth Circuit advised that it was required to decide the question presented in the appeal under the principles of Colorado insurance law. Id. at 15.
In so doing, the Tenth Circuit looked at the Colorado Court of Appeal’s decision in the General Security matter, which held that because the term “accident,” as used in CGL policies, necessarily implies fortuity, “a claim for damages arising from poor workmanship, standing alone, does not allege an accident that constitutes a covered occurrence…” General Security, 205 P.3d at 534. The Tenth Circuit noted that the Court of Appeal’s rationale was persuasive, but took an overly narrow view of CGL policy language and was inconsistent with the inherent structure of CGL policies. Greystone, No. 09-1412, at 22.
The Tenth Circuit predicted that the Colorado Supreme Court, if asked to construe the term “occurrence” as contained in standard form CGL policies, would do so in a manner that encompassed unforeseeable damage to non-defective property arising from faulty workmanship. Id. at 16. It compared its prediction with approaches in other jurisdictions and decided that most federal and state cases favor a finding of an occurrence in the circumstances considered by the Greystone appeal, and noted that “a strong recent trend in the case law interprets the term ‘occurrence’ to encompass unanticipated damage to nondefective property resulting from poor workmanship.” Id. at 18.
The Tenth Circuit’s decision also reaffirms the viability of the “your work” exclusion present in most standard form GCL policies: “[T]he exclusion’s exception for property damage arising out of the work of a subcontractor necessitates the conclusion that damage to the builder’s work caused by the poor workmanship of a subcontractor can constitute an occurrence in the first instance.” Id. at 34. However, the court also acknowledged that coverage can nonetheless be eroded by such an exclusion: “Therefore, we conclude that damage to the contractor’s nondefective work—even if arising out of poor workmanship—may fall under the CGL’s policy initial grant of coverage, even though coverage may ultimately be withdrawn through one of the policy’s exclusions.” Id.

Ultimately, the Tenth Circuit’s decision makes clear that “injuries flowing from improper or faulty workmanship constitute an occurrence so long as the resulting damage is to nondefective property, and is caused without expectation or foresight.” Id. at 22. The court further distanced itself from the Court of Appeal’s rationale in General Security, stating that “fortuity is not the sole prerequisite to finding an accident under a CGL policy. To the contrary, an unanticipated or unforeseeable injury to person or property—even in the absence of true fortuity—may be an accident and, therefore, a covered occurrence.” Id. at 23. Further driving home its position, the Tenth Circuit reiterates that “CGL policies are meant to cover unforeseeable damages—a category that encompasses faulty workmanship that leads physical damage of nondefective property.” Id. at 25.

The Greystone decision provides the most comprehensive interpretation of coverage under Colorado insurance law to date, including an unequivocal construal of the intent behind C.R.S. §13-20-808. Thus, as construction defect litigation continues to persist in Colorado, and with the issuance of each new CGL policy, the Tenth Circuit’s Greystone decision looks to be the newest, clearest authority on a historically obscure area of law.

-- Derek J. Lindenschmidt 

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.