When Does a Claim Against an Insurance Carrier for Failing to Defend Accrue?

The following is an update on our December 20, 2010 article regarding United States Fire Insurance Company v. Pinkard Construction Company, Civil Action No. 09-CV-01854-MSK-MJW, and its underlying dispute, Legacy Apartments v. Pinkard Construction Company, Case No. 2003 CV 703, Boulder County Dist. Ct.  That article can be found here. 

The present action, St. Paul Fire and Marine Insurance Co., et al. v. The North River Insurance Co., et al., Civil Action No. 10-CV-02936-MSK-CBS, encompasses the coverage battle that ensued between Pinkard’s insurers, Travelers Indemnity Company of America (“Travelers”) and United States Fire Insurance Company (“USFI”), following the settlement of Legacy’s construction defect claims against Pinkard.  A short history of the underlying facts is as follows:

In 1995, Pinkard constructed the Legacy Apartments housing complex in Longmont, Colorado. Following construction, Legacy notified Pinkard of water leaks associated with various elements of construction.  Legacy ultimately filed suit against Pinkard in 2003, and would go on to clarify and amend its defect claims in 2004, 2006, and again in 2008. Following Pinkard’s notification of Legacy’s claims, USFI provided a defense to Pinkard, but Travelers refused to do so, on the purported basis that Legacy’s allegations did not implicate property damage under the terms of Travelers’ policy.  The case proceeded to trial in 2010 and settled during the jury’s deliberations.  Thereafter, both Travelers and USFI each contended that their settlement contributions exceeded their liability under the respective policies. They asserted claims against one another for contribution, indemnity, and subrogation. 

Among the claims, USFI asserted specifically that Travelers owed contribution towards Pinkard’s defense. In response, Travelers moved for summary judgment on the basis that its refusal to defend Pinkard was known to USFI as early as 2003, and thus, under the three-year statute of limitations provided by C.R.S. § 13-80-101, USFI’s claims became barred in 2006.  In reply, USFI argued that its claims were not stale, and in fact were continuing to accrue, under the “continuing wrong” doctrine, under which the cause of action and ensuing limitations run from the date of the last injury.

District Judge Marcia Krieger was not persuaded and determined that, under Colorado law, “the insurer’s [Travelers’] continued refusal to defend the insured constituted a series of breaches….for which the limitations period runs with each breach.”  Accordingly, Judge Krieger concluded, “a plaintiff can only sue on those breaches that occurred within the relevant limitation period.” Thus, whereas Travelers disclaimed its intention to defend Pinkard on multiple occasions, each disclaimer gave rise to a separate breach subject to a separate limitation period. This effectively limited USFI’s right to recover defense costs against Travelers, if any, for the three-year time period between January 2008 and 2011. 

Travelers separately contended that its policy coverage — and thus its defense obligation — was not triggered by Legacy’s allegations within the aforesaid time period because Legacy only alleged claims of faulty workmanship. In response, USFI argued that, in accordance with the Tenth Circuit Court of Appeals’ Greystone Const. Inc. v. National Fire & Marine Ins. Co., 661 F.3d 1272 (10^th Cir. 2011) decision, Legacy’s claims should be enough to trigger Travelers’ defense obligation, insofar as it was alleged that the apartments were damaged as a result of Pinkard’s failure to construct them in a workmanlike manner. 

Presently, because the Greystone decision was issued just a few weeks before the parties’ briefing on this topic, Judge Krieger appears inclined to allow the parties to submit additional briefing on Greystone’s impact on the sufficiency of Legacy’s defect allegations for the purpose of invoking coverage under Travelers’ policies.

Perhaps most importantly, Judge Krieger has posed questions with regard to other issues of law, including the retroactive application of Greystone, the timeframe from which a court should assess the legal aspects of a duty to defend, and even the mens rea of an insurance carrier that denies its defense obligation.  Whereas Travelers and USFI have an obvious interest in resolving the matter at hand, it is no stretch to say that Judge Krieger’s eventual resolution of these broader topics of law will have an enormous impact on defense coverage for contractors in the years to come.

For additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.

Important Information Regarding Colorado Mechanic’s Lien Rights.

With payment problems in the construction economy having accelerated over the past few years, there has been a substantial increase in mechanic’s lien activity and associated litigation. The typical mechanic’s lien claimant is a material supplier, a trade subcontractor, or even a general contractor that has not been paid by the developer/owner of the construction project. The reason for filing a mechanic’s lien claim is that it offers the prospect in many cases to make the unpaid construction professional a priority creditor, with a lien on the real estate that is superior to the construction lender. 

One of the primary rules governing a mechanic’s lien claim is that the creditor’s formal written “Notice of Intent to File a Mechanic’s Lien” (hereafter “Lien Notice”) must be (1) served on the owner of the property for which the work was done or the materials used, and (2) served at the same time on the general contractor who has handled the construction project.  After the creditor has made service of the lien claim by USPS certified mail (using the green return receipt card for proof of service) or separate personal delivery of the notice to the property owner and general contractor, ten full days must pass (not including the date of mailing of the notices) before the lien notice is filed in the public records.

After ten days have expired following the date of mailing using certified mail, or personal delivery of the notice to the property owner and the general contractor, the lien notice can be filed to make the lien valid.  The lien notice must be filed in the county land records where the property is located.  This mailing and recording process must be completed within four months of the last substantial work done on the construction by the party claiming the lien. The required minimum ten-day waiting period between serving the lien on the owner and general contractor, and recording the lien means that a lien claimant actually should accomplish service of the Lien Notice not less than three and a half months after the creditor’s last substantial work on the project. 

As a practical matter, it is advisable to work well within these deadlines rather than waiting until the four month window is about to close. The reason for this timing recommendation is that a creditor needs to (1) prepare a completely accurate Lien Notice; (2) locate and separately serve the notice(s) on both the property owner and general contractor; (3) wait at least full ten days after service of the notices, not including the date(s) of service; and (4) record a copy of the complete and served Lien Notice in the land records of the county where the work was done -- all within the four-month period. 

For practical reasons of timing and complying with the time limits of the mechanic’s lien statute, it is advisable to prepare and serve the written Lien Notice approximately 75 days after the last substantial work is done on the project. Most importantly, if there is any difficulty in serving the owner and general contractor parties by certified mail within the time allowed, it will be advisable to have them served personally by a professional process server. Under Colorado law, it is possible that a mechanic’s lien can be defeated in the end if the certified mail is sent to an incorrect address, for the property owner or the general contractor.  It is best to send redundant lien notices to these parties if they have multiple addresses, or if you believe that they may be using multiple addresses without knowing which address is their primary address.  

The two morals to this story are that if you have mechanic’s lien claims (1) try not to wait more than 75 days to begin the process of asserting the claim with formality by means of a written Lien Notice; and (2) send the notice to multiple addresses for the property owner and the general contractor if you are in doubt about which address is correct. If you send the notice(s) by certified mail, return receipt requested to any correct address, you are considered to have served the party. 

Also, if you use certified mail, return receipt requested, and the addressee refuses to accept or sign for the certified letter, it will be returned to you by the USPS.  Keep the letter in its returned condition for later proof that you served the notice, because mailing the certified letter (with the return receipt) is sufficient under Colorado law, as long as the notice was sent to the right address for the owner or general contractor.  It does not matter for purposes of serving the required notice(s) that the certified mail was refused or never picked up by the addressee.

For additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.

The Colorado Court of Appeals rules that a statutory notice of claim triggers an insurer’s duty to defend.

Gene and Diane Melssen d/b/a Melssen Construction (“Melssen”) built a custom home for the Holleys, during which period of time Melssen retained a CGL insurance coverage from Auto Owners Insurance Company. Soon after completion of the house, the Holleys noticed cracks in the drywall and, eventually, large cracks developed in the exterior stucco and basement slab. Thereafter, the Holleys contacted Melssen, the structural engineer, an attorney, and Auto-Owners, which assigned a claims adjuster to investigate the claim.

In April 2008, the Holleys sent Melssen a statutory notice of claim pursuant to C.R.S. § 13-20-803.5 (“NOC”). In this NOC, the Holleys claimed approximately $300,000 in damages related to design and construction defects. The Holleys also provided a list of claimed damages and estimated repairs, accompanied by two reports from the Holleys’ consultant regarding the claimed design and construction defects. In June 2008, Melssen tendered the defense and indemnity of the claim to Auto-Owners. While Auto-Owners did not deny the claim at that time, it did not inspect the property or otherwise adjust the claim. Thereafter, in October 2008, Auto-Owners sent Melssen a letter denying coverage on the basis that the damage occurred outside of the applicable policy period.

Ultimately, Melssen settled the claims against it for $140,000. This settlement occurred prior to the Holleys’ serving a complaint on Melssen and Melssen never provided the draft settlement agreement to Auto-Owners prior to execution. After the settlement, Melssen brought suit against Auto-Owners for breach of contract, bad faith breach of contract, and violations of C.R.S. §§ 10-3-1115 and 1116. After a three-day trial on the merits, the jury returned a verdict in favor of Melssen on all claims and awarded it damages. The trial court then ordered Auto-Owners to pay Melssen’s costs and attorneys’ fees.

In its appeal to the Colorado Court of Appeals, Auto-Owners argued that the trial court erred by submitting to the jury the question regarding whether the Holleys’ NOC constituted a “suit” under the policy, which thereby triggered Auto-Owners’ duty to defect Melssen. Auto-Owners’ argument contended that the NOC process was neither a complaint (i.e., suit) nor was it an alternative dispute resolution proceeding.

The Court of Appeals ruled, in its June 21, 2012 decision,[1] that the trial court indeed committed error in submitting this issue to the jury but that the error was harmless because the Holleys’ NOC was, as a matter of law, a “suit” which triggered Auto-Owners’ duty to defend. In so holding, the Court of Appeals ruled that the NOC also constituted an alternative dispute resolution proceeding under the policy.

Auto-Owners also argued in the appeal that the NOC served as nothing more than a condition precedent to the Holleys filing suit against Melssen. Not persuaded, the Court of Appeals held that the NOC process constitutes an alternative dispute resolution proceeding, as well as serving as a condition precedent to the institution of a suit against a construction professional.

Interestingly, during the appeal, Melssen also argued that C.R.S. § 13-20-808(7), enacted in 2010, applied retroactively to trigger Auto-Owners’ duty to defend. That section states:

An insurer’s duty to defend a construction professional or other insured under liability insurance policy issued to a construction professional shall be triggered by a potentially covered liability described in:

(1)               A notice of claim made pursuant to section 13-20-803.5….

Because it had already determined that a NOC constitutes a “suit” under the insurance policy at issue, the Court of Appeals determined that it need not address the retroactive application of the 2010 amendments to the Construction Defect Action Reform Act. At least one panel of the Court of Appeals has previously held that C.R.S. § 13-20-808 should not be applied retroactively,[2] so the issue may be resolved, at least until the Colorado Supreme Court weighs in on the issue.

For more information regarding the Melssen case or construction litigation in Colorado, you can reach David M. McLain by telephone at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.

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[1] Melssen v. Auto-Owners Insurance Company, 285 P.3d 328 (Colo. App. 2012).

[2] TCD, Inc. v. American Family Mutual Insurance Company, 2012 WL 1231964 (Colo. App. April 12, 2012).