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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