Colorado Court of Appeals Finds Damages to Non-Defective Property Arising From Defective Construction Covered Under Commercial General Liability Policy

The recently decided case of Colorado Pool Systems, Inc. v. Scottsdale Insurance Company (Colo. Ct. App. 10CA2638, October 25, 2012), confirms that absent specific exclusions in the policy, a commercial general liability (“CGL”) policy covers damages to non-defective property arising from a builder’s own defective workmanship.

Colorado Pool Systems, Inc. (“Colorado Pool”) was hired as a subcontractor to install a swimming pool at Founders Village Pool and Community Center (“Founders Village”) in Castle Rock, Colorado.  After the concrete shell of the pool was placed, some of the rebar frame was found to be too close to the surface.  Founders Village demanded that Colorado Pool remove and replace the pool, and Colorado Pool contacted its insurance carrier, Scottsdale Insurance Company (“Scottsdale”), with which Colorado Pool held a CGL policy.  After inspecting the pool, Scottsdale’s claims adjuster stated that the insurance policy would cover losses associated with removing and replacing the pool.

Relying on the claim adjuster’s statement, Colorado Pool paid for the demolition of the pool’s concrete shell.  After demolition was complete, however, Scottsdale refused to pay for the demolition or for the cost of replacing the pool, and denied all coverage under the CGL policy.  Colorado Pool, after paying damages to the general contractor for the pool project, filed suit against Scottsdale asserting that Scottsdale had a duty to defend and indemnify Colorado Pool pursuant to the applicable CGL policy.  The trial court found that the CGL policy did not cover Colorado Pool’s claimed damages, and Colorado Pool appealed.

The Court of Appeals first addressed whether the Builders Insurance Act, C.R.S. § 13-20-208, applied to Colorado Pool’s claims.  The Court found that while the Act was intended to apply retroactively, such an application to Colorado Pool’s CGL policy would be impermissibly retrospective because it would change the coverage under the policy that the parties had originally bargained for. 

The Court, therefore, interpreted the CGL policy and the term “accident” in the policy under the common law, and adopted the test from Greystone Construction, 661 F.3d 1272 (10^th Cir. 2011).  Applying the Greystone test, the Court held that coverage exists under a CGL policy for damages arising from improper or faulty workmanship if those damages are not specifically excluded in the policy, if non-defective property is damaged, and if the damage was unforeseen and unexpected.   For Colorado Pool, that meant that Scottsdale did not have to pay for removing and replacing the pool, since Colorado Pool was obligated to replace its own defective work product.  Related damage to a non-defective deck, sidewalk, retaining wall, and electrical conduits, however, were covered under the CGL policy, because such damages were not specifically excluded, the property was not defective, and Colorado Pool did not expect or foresee the damage.

To learn more about the Colorado Pool case or construction litigation in Colorado, you can reach Heidi Gassman at (303) 987-9815 or by e-mail at gassman@hhmrlaw.com.