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.

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

Settlement Payment May Preclude Finding of Policy Exhaustion: Scottsdale v. National Union

In the last year, the U.S. District Court for the District of Colorado found that a settlement payment from an excess insurance carrier to another primary insurance carrier precluded a finding of vertical exhaustion sufficient to trigger the primary carrier’s duty to indemnify.  See Scottsdale Ins. Co. v. National Union Fire Ins. Co. of Pittsburgh, 2012 WL 6004087 (D. Colo. 2012).  The Scottsdale case arose out of the construction of a 507-unit apartment complex in Arapahoe County, Colorado in which a number of defects became apparent during construction.  As a result, the owner of the project sued the general contractor and/or the construction manager, seeking to recover more than $22 million for various construction deficiencies.  Id. at *1. 

The general contractor was insured under policies issued by several carriers.  Scottsdale Insurance Co. (“Scottsdale”) and National Union Fire Ins. Co. (“National Union) provided umbrella coverage, and CNA and American Zurich Ins. Co. (“Zurich”) provided primary insurance under commercial general liability policies.  About five years later, the construction defect case settled for $8.5 million dollars.  The settlement was funded by CNA, Scottsdale, and Zurich.  CNA contributed $4 million, Scottsdale contributed $4,350,000, Zurich contributed $75,000, and the insured contributed $75,000.  National Union did not contribute to the settlement.  In a related agreement, Scottsdale agreed to pay CNA $500,000 to facilitate the resolution of related coverage disputes involving CNA. 

Subsequently, Scottsdale commenced a declaratory judgment action against National Union seeking reimbursement for at least $2,283,911 of the funds Scottsdale paid to settle the construction defect action.  Scottsdale asserted four claims for relief, including equitable contribution and contractual subrogation.  National Union answered, denied liability, and eventually moved for summary judgment.  According to National Union, Scottsdale could not show that the primary insurance policies underlying the National Union umbrella policies had been fully exhausted.  Id. at *2.  National Union argued that Scottsdale payment of $500,000 precluded Scottsdale from showing that the policy limits under a certain CNA policy had been fully exhausted.  National Union characterized Scottsdale’s $500,000 payment as replenishment of policy limits under the CNA policy limits.  Although Scottsdale attempted to argue that the $500,000 payment applied to only one CNA policy, the court disagreed. 

In commenting on testimony offered by a Scottsdale representative limiting that payment to a certain CNA policy, the court stated “[t]his evidence does not satisfy Scottsdale’s evidentiary burden with respect to the exhaustion requirement.”   Id. at *3.  Notably, the court indicated that the relevant factual inquiry is how CNA allocated the $500,000, and that Scottsdale had not presented any evidence on that subject.  As a result, the court found that Scottsdale’s response lacked the requisite evidentiary support to preclude summary judgment on the question of vertical exhaustion.  The court granted National Union’s motion for summary judgment, dismissed all of Scottsdale’s claims, and awarded National Union its costs.  The takeaway from this case is to be extremely cautious when considering the possibility of settlement with one of several potential carriers who may be liable for defense and/or indemnity.  You may be impairing and/or precluding coverage.                

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

A New Trend Emerging Regarding the Definition of Ongoing Operations: Jaynes Corp. v. ASIC

The term “ongoing operations” has appeared in construction insurance policies for many years.  Here in Colorado, that phrase has had a particular meaning when applied to an insurer’s coverage of liability arising out of an insured’s work, i.e. liability arising during an insured’s work on a specific project.  The case of Jaynes Corporation v. American Safety Indemnity Company illustrates a new trend in other jurisdictions where courts are loosening the coverage application of an “ongoing operations” clause.

In December 2012, in U.S. District Court in Nevada, Judge Miranda M. Du ruled on cross motions for summary judgment filed by Jaynes Corporation (“Jaynes”) and American Safety Indemnity Company (“ASIC”).  ASIC’s argument that the “ongoing operations” provision precludes coverage for Jaynes is the pertinent issue to this article.

The background facts of the case are pretty standard for construction litigation. A subcontractor entered into written agreement with Jaynes, the general contractor, for site concrete work at a residential housing project.  In the contract, the subcontractor agreed to name Jaynes as an additional insured on policies issued by ASIC.  The damages in the original construction litigation, between the homeowners association and the developer, were alleged to have occurred during the policy periods.  The subcontractor performed its work on the project in 2003 and 2004.

ASIC asserted that the “ongoing operations” provision in the policies, issued to the subcontractor, precludes coverage for the construction defect claims in the underlying lawsuit because those claims involved completed operations.  ASIC argued that the claims involved completed work and not works in progress.  Jaynes countered-argued that the “ongoing operations” provision does not restrict coverage to damage that occurred during the subcontractor’s ongoing operations, but it also covers claims for damages that occurred after completed operations but was caused by ongoing operations.

Judge Du discarded ASIC’s arguments and agreed with Jaynes, determining that the “ongoing operations” clause applies to damage on work performed by the subcontractor caused by its ongoing operations.  Judge Du cited two cases, from Arizona and California, which analyzed similar “ongoing operations” clauses.  Those two cases, Tri-Star Theme Builders, Inc. v. OneBeacon Insurance Co., 426 Fed.Appx. 506 (9^th Cir. 2011) and McMillin Construction Services, L.P. v. Arch Specialty Insurance Co., 2012 WL 243321 (S.D. Cal. Jan. 25, 2012), determined that the policies at issue covered liability performed by a subcontract caused by that subcontractor’s ongoing operations.  In those cases, the specific language, “arising out of,” in the “ongoing operations” clause was vital to the courts’ rulings.

Judge Du noted that Nevada courts, like those of Arizona for Tri-Star and California for McMillan, review insurance policy terms from the perspective of a layman not trained in law or insurance, and the contract language viewed in its plain, ordinary, popular meaning.  Judge Du found compelling the Tri-Star’s Court’s discussion of the phrase “arising out of,” “this language does not state that injury must occur, or liability must arise, during the name insured’s ongoing operations, but rather requires only that the liability arise “out of” the ongoing operations.”   Tri-Star, 426 Fed.Appx. at 510 (9^th Cir. 2011).

Judge Du also addressed ASIC’s arguments and supportive cases contrary to Tri-Star and McMillan.  One of the cases ASIC cited was a Colorado case, Weitz Co., LLC v. Mid-Century Ins. Co., 181 P.3d 309 (Colo. App. 2007).  Judge Du stated that those contrary cases relied not on the plain language of the provisions at issue, i.e. “ongoing operations,” but rather, the drafting history of the clause by the insurance company.  Judge Du went further stating that such history lessons are not persuasive in the face of the plain language of the “ongoing operations” clause.  Judge Du then let the Tri-Star case speak for her one more time:

Such evidence might be persuasive if the controversy . . . were between two insurers, or if it suggested that the language reflected the mutual intent of the parties. This evidence is wholly lacking here. Indeed, . . . the only court to construe the additional insured endorsement, without reference to the industry’s drafting history, held that it provided coverage for damages occurring after the completion of operations.

Tri-Star, 426 Fed.Appx. at 512 (9^th Cir. 2011).

The Weitz case has a similar factual background to the Jaynes case: A general contractor, sued by a homeowner, brought an action against an insurer that issued a policy to a subcontractor to which the general contractor was an additional insured.  The district court granted the insurer’s summary judgment motion asserting that coverage was limited to “ongoing operations” and there was no coverage for claims arising out of subcontractor’s completed work or operations.  Weitz, the general contractor, appealed the order and the Colorado Court of Appeals affirmed the district court’s ruling.

In coming to its decision, the Colorado Court of Appeals found persuasive an analysis of the ISO’s history of drafting the additional insured endorsement (CG 20 10 1993) in another case.  The Weitz court found their construction of the phrase and the coverage it affords to be in line with the views of commentators addressing the history of the ongoing operations clause.  Ultimately, the Weitz court found that no ambiguity existed and the “ongoing operations” clause would not cover any work that had been previously completed.

The analysis by the Weitz court is exactly what Judge Du found unpersuasive as it failed to dissect the plain language of the clause, instead relying on the history of the clause within the insurance industry.  While the Jaynes case is not authority in Colorado, the fact is a trend is emerging in courts of neighboring jurisdictions and soon Colorado courts may be faced with a similar analysis.  We have to wait and see if Weitz will be challenged soon.  Using these mounting cases as support for an extension of coverage under the “ongoing operations” clause seems imminent in Colorado courts.


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

Read Carefully. The Insurance Coverage You Thought You Were Getting May Not Be The Coverage You Got.

A recent U.S. District Court case in Colorado highlighted the importance for an insured to read and understand the terms of its insurance policy.  The case 2-BT, LLC v. Preferred Contractors Insurance Company Risk Retention Group, LLC, Civil Action No. 12CV02167PAB, was a controversy between an insured’s expectations for coverage, and the terms and exclusions of the insurance policy.

2-BT is a heating, ventilation, and air-conditioning (“HVAC”) contractor, which utilizes soldering devices and heat sources among other tools for its trade.  2-BT needed liability insurance to cover its work, and found a provider, Preferred Contractors Insurance Company Risk Retention Group, LLC (“PCIC”).  2-BT read PCIC’s online materials, which stated “PCIC’s personalized underwriting process allows us to tailor coverage to properly outfit the contractor with excellent coverage and rates.” 

2-BT filled out a policy application, which included a description of the type of HVAC work it performs, initialed several sections, and signed it.  One of the initialed paragraphs on the application, “Policy Exclusions,” stated that damages arising from “fungi/bacteria,” “open flame,” and “use of heating devices,” was not covered.  PCIC issued a policy to 2-BT, which included a section titled, “Additional Exclusions” that excluded coverage for mold and damage related to heating elements among others.

A few weeks after the policy went into effect; a 2-BT employee was using a blow-torch on a job, but triggered a fire sprinkler that flooded two condominium units, which led to mold growth.  2-BT submitted a claim to PCIC, but PCIC denied coverage.  2-BT sued PCIC, claiming fraud, deceptive trade practices under the Colorado Consumer Protection Act (“CCPA”), and breach of contract.

The Court dismissed the lawsuit without a trial, granting PCIC’s motion for summary judgment.  The Order can be found at 2013 WL 5729932. 

2-BT based its claims for fraud and under the CCPA on PCIC’s statement online that it provides a “personalized underwriting process. . . to tailor coverage to properly outfit the contractor with excellent coverage and rates.”  The Court, however, held that this was merely a statement of opinion, or puffery, and not one a reasonable person would consider an objective statement of warranty.  The statement is not actionable under fraud or the CCPA. 

For its breach of contract claim, 2-BT claimed that the policy was ambiguous, as it did not meet the reasonable expectations of an HVAC contractor.  Both parties acknowledged that the policy incorporated the application, where 2-BT provided basic information about the type of work it performs.  2-BT argued that an HVAC contractor would reasonably expect coverage for work using heat elements.  But the Court disagreed, stating, “Here, the relevant inquiry is not what an HVAC contractor might reasonably expect, but what an ordinary reader would reasonably expect and understand upon a reading of the entire policy.”   Order at pg. 6, citation omitted.  The Court found that “an ordinary reader of the entire application and policy would reasonably expect that liability arising from mold and the use of heating elements would be excluded from coverage.”  Order at pg. 7.  Further, since the policy would cover occurrences arising from personal injury and other types of property damage, the policy was not illusory.  In exchange for receiving premiums from 2-BT, PCIC was incurring a risk of liability that the policy would cover.

When applying for or obtaining an insurance policy, it is critical that the insured confirms that the policy, its terms and exclusions, actually provides the coverage to meets the insured’s needs.

To learn more about the 2-BT v. PCIC case or about construction law in Colorado, you can reach Bret Cogdill by telephone at (303) 653-0046 or by e-mail at Cogdill@hhmrlaw.com.

Colorado Court of Appeals to Rule on Arbitrability of an HOA's Construction Defect Claims

On October 24, 2013 the Colorado Court of Appeals granted a rare interlocutory appeal in a multi-family residential construction defect case.  The Court of Appeals accepted the case of Triple Crown at Observatory Village Association, Inc.  v. Village Homes of Colorado, Inc. (2013 WL 5761028) as an interlocutory appeal after the parties briefed and obtained rulings from the trial court that compelled the case to binding arbitration in lieu of a jury trial on all issues. The appellate decision of October 24, 2013 did not decide the merits of the case, but discussed the issues to be decided in the eventual merits decision.  The significance of the issues presented and the interlocutory nature of this appeal both make this case worth watching for further appellate proceedings.

The core issue in this appeal was the applicability of Colorado’s Uniform Arbitration Act (C.R.S. § 13-22-201, et seq.), based on recorded Declarations filed by the developer. The Declarations mandated that the HOA arbitrate any design/construction disputes with the developer.  Immediately prior to suit, the Association sought to amend the Declarations in order to avoid the arbitration process for these claims. The interlocutory appellate issues resulted from the trial court’s order compelling the arbitration over the objections of the Association.

The trial court’s decision was based on a reading of the Colorado Revised Non-Profit Corporation Act (“CRNPC,” at C.R.S. § 7-127-107), which was found applicable to the Association. The CRNPC which requires that any written vote (in lieu of an actual meeting vote) to revise the declarations governing a non-profit be accomplished by a 2/3 majority of the members of the association, and that all such written votes be gathered within a 60-day period after obtaining the first signature.

The trial court determined that the Association had only obtained 42% of the necessary signatures within the 60-day statutory period, and that it had obtained the balance of 67% of required signatures only two months after the statutory 60-day period.  As a result, the trial court found that the Declarations had not been properly amended to preclude arbitration, and it ordered the parties to binding arbitration.

The Association appealed the trial court ruling applying the CRNPA  to the Association, arguing that it conflicted with the provisions of the Colorado Common Interest Owners Act (“CCOIA,” at C.R.S. § 38-33.3-301, et seq.), which generally governs multi-family residential developments and their affiliated homeowners associations.  The Association asserted that CRNPA was not applicable to the Association for purposes of time-restricting the members’ process of amendment of the Declarations, because CCOIA did not impose any time constraints as part of its provisions for the members’ amendment or repeal of Declarations.

Finally, the Association also argued that CCOIA prohibited restrictions between the Association and the developer which were greater than limitations for the Association in dealing with other persons and entities. This was based on an argument that the Association was not required to arbitrate disputes between itself and others, unlike issues with the developer.

The final issue that was accepted for this interlocutory appeal was whether the Association’s punitive damage claims for alleged developer violations of the Colorado Consumer Protection Act (“CCPA”) were also subject to arbitration, as ordered by the trial court.  The Association argued that such claims were not subject to arbitration.

The focus of the present Court of Appeals decision dealt with the appropriateness of granting the interlocutory appeal, and whether the issues involved controlling and unresolved questions of Colorado law.  The decision to grant the interlocutory appeal was a 2-1 decision, with Judge Terry dissenting, because he felt that the circumstances of the case made the granting of the appeal impermissible under the Colorado Uniform Arbitration Act.  Judge Terry relied substantially on the deference given to trial judge orders compelling arbitration under the language of the arbitration statute, and the preference of appellate courts not to grant interlocutory appeals. 

While the granting of this interlocutory appeal is not predictive of the outcome that will follow on the merits of the issues, the issues are significant to construction professionals and the attorneys that represent them.  There has been a multi-year trend by developers to limit design and construction issues with homeowners’ associations to private arbitration, in lieu of jury trials.  Similar declarations have led to a greater number of developer-compelled arbitration proceedings for residential construction defect claims over the past several years. 

This is the first case in Colorado which clearly seeks to defeat these arbitration provisions as being in claimed conflict with the provisions of CCOIA, after the homeowners’ association seeks to repeal the declarations arbitration language. Similarly, it is the first case which seeks to carve out the Associations’ CCPA claims for a jury trial, separate from the disputes which are made subject to arbitration by the terms of a developer’s declarations.

On this latter issue, it is notable that CCPA claims are generally declined by insurers as covered claims, despite the requests of the insured and its coverage counsel for defense of these claims. Separate from the above-discussed matters of arbitration enforcement, it is a matter of concern to construction professionals that there may (in a future decision) be a potential separation of such claims from the negligence-based claims of construction defects. A separation of such claims would potentially leave the construction professional without available insurance coverage for both indemnity and defense on those CCPA claims.   

It will be months, or longer, before this case is decided on the merits. However, the outcome on the merits will be important to construction professionals, insurers who write construction liability policies, and to homeowners’ associations who seek to amend their declarations to avoid enforcement of binding arbitration proceedings.

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

DRCOG’s Findings on the Impact of Construction Defect Litigation Have Been Released (And the Results Should Not Surprise You)

The downward trend in attached-housing construction in Colorado is well-known and discussed often within the region’s construction, insurance, finance, and legal communities.  In recent years, builders and insurers in particular have striven to bring greater awareness to local governments and lawmakers regarding the impact that construction defect lawsuits have on the builders’ ability to introduce desirable, affordable, yet cost-efficient attached-housing options, such as condominiums and townhomes, into the marketplace.  The Denver Regional Council of Governments (“DRCOG”) has been aware of the builders’ and insurers’ plight, largely because of the impact that the scarcity of affordable attached-housing has had on their respective communities.

On October 29^th, DRCOG released its long-awaited Denver Metro Area Housing Diversity Study, prepared by Economic & Planning Systems, Inc., which investigated the factors contributing to the recent (downward) attached-housing development trends and conditions.  The Study evaluated factors including changing financing and insurance requirements for builders and homebuyers, the impacts of foreclosures, changes in prospective homebuyer demographics, economic conditions which limit options for prospective homebuyers, and the costs and risks associated with construction defect regulations and lawsuits.

Despite the retorts and rebukes of the naysayers, the negative impact of construction defect regulations and lawsuits on Colorado’s housing market is significant. In this regard, the DRCOG Study found that:

• There is a belief within the development community that the probability of being sued is nearly 100 percent for attached residential for-sale projects involving an HOA.
• The costs of litigation, including retaining experts to evaluate defects, and legal costs associated with the builders’ insurance companies seeking to recover costs from contractors, are a deterrent to future development.
• All of the national homebuilders interviewed indicated they have no plans for building attached for-sale housing in Colorado—where the risk of being sued is “just not worth it.”
• At least one insurer interviewed opined that insurance premiums are 25 to 45 percent higher in Colorado than other states for comparable products.
• The number of subcontractors and development team members willing and/or able to work on attached for-sale housing has diminished.
• Developers are estimated to need to pay an average of $15,000 of additional cost per unit due to construction defects (i.e., the eminent threat of a lawsuit for same). 

I encourage anyone and everyone reading this article, and particularly those within Colorado’s construction, real estate, finance, insurance, and government circles, to read the DRCOG Study and to become more in-tune with the real risks and concerns brought on by rampant construction defect litigation in Colorado. Based on the DRCOG Study’s findings, you can’t afford not to.

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

Insurance Policy’s “No Voluntary Payment” Clauses Lose Some Bite in Colorado

The Colorado Court of Appeals recently handed down an opinion dulling the teeth of the “no voluntary payment” clauses found in many contractors’ insurance policies.  In the case of Stresscon Corporation v. Travelers Property Casualty Company of America, 2013 WL 4874352 (Colo. App. 2013), the Court of Appeals found that an insured’s breach of the “no voluntary payment” clause does not always bar the insured from receiving benefits from its insurance company.

In July 2007, at a construction project run by Mortenson (the “GC”), a partially erected building collapsed, killing one worker and gravely injuring another.  The collapse was caused by a crane hook pulling a concrete component off of its supports.  The GC contracted with Stresscon Corporation (“Stresscon”) to build pre-cast concrete components for the project, and in turn Stresscon hired two sub-subcontractors, RMS and Hardrock (the “Crane Team”) to work together to erect those concrete components.  Stresscon and the Crane Team had liability insurance, and Stresscon was insured by Travelers Property Casualty Company of America (“Travelers”).

The accident led to three separate lawsuits: 1) one brought by the deceased worker; 2) one brought by the injured worker; and 3) one brought by the GC against Stresscon claiming it was entitled to contract damages incurred because the project was delayed.  The first two personal injury cases were settled.  The third case relates to the Stresscon case and its resolution.

Initially, the GC notified Stresscon that it expected to be reimbursed for the damages resulting from the delay to the project caused by the accident.  Stresscon then informed Travelers of the claim, to which Travelers responded by sending two reservation of rights letters stating that Stresscon’s insurance policy might not cover the delay damages sought by the GC.  Travelers also sent a later letter to the GC on behalf of Stresscon denying that it was liable to the GC.  At this time, the GC entered into settlement discussions with Stresscon.

After negotiations, the GC settled its dispute with Stresscon.  The settlement reimbursed the GC for delay damages caused by the accident and other unrelated damages resulting from the accident that were clearly not covered by Stresscon’s insurance policy. The settlement was not allocated between categories of covered by insurance and not covered by insurance.  Before entering into the settlement, Stresscon did not inform Travelers or obtain its consent.

Once Stresscon settled with the GC, it initiated a case against the Crane Team and Travelers.  The lawsuit alleged the Crane Team owed Stresscon indemnification for the delay damages paid to the GC.  Stresscon also alleged that Travelers had, in bad faith, breached its duty to Stresscon, violating C.R.S. § 10-3-1115(1)(a), by unreasonably delaying or denying a claim for benefits.  The case was bifurcated into two phases, the first between Stresscon and the Crane Team to determine liability and damages, the second against Travelers on contractual bad faith claims.

The jury in the first phase found the Crane Team was liable to Stresscon for $678,826, the amount the GC, and thus Stresscon, had suffered as a result of the accident.  One insurer for a member of the Crane Team settled with Stresscon and paid it $678,826.  The first phase was not appealed.

The second phase involved only Stresscon and Travelers.  In this phase, the jury was asked: 1) to decide whether Travelers had acted unreasonably in denying Stresscon’s claim for benefits to cover the amount that it had paid to the GC; 2) to decide whether Travelers had suffered prejudice as a result of Stresscon’s settlement with the GC; and 3) to apportion the first jury’s award among categories of damages, some of which were not covered by the insurance policy.  The jury found Travelers had unreasonably denied Stresscon’s claim, Travelers had not been prejudiced by the settlement, and that $546,899 of the first phase award represented damages that were covered by the insurance policy.

Travelers appealed several aspects of the trial court’s ruling, as did Stresscon.  Here, we will only discuss Travelers’ appeal of the trial court’s ruling that it was not prejudiced by Stresscon’s breach of the “no voluntary payment” clause.

Travelers argued that the notice-prejudice rule adopted in Friedland v. Travelers Indemnity Co., 105 P.3d 639 (Colo. 2005), does not apply to “no voluntary payment” clauses.  Travelers also argued that insurers are prejudiced as a matter of law whenever an insured settles with a third-party claimant before that third party has filed a lawsuit.  The Court of Appeals disagreed and upheld the trial court’s ruling.

In ruling against Travelers, the Court of Appeals relied on the notice-prejudice rule, described in the Friedland case.  The notice-prejudice rule comes with a burden shifting procedure, which provides that (1) if an insured does not provide the insurer with notice of a claim until after the insured has settled; then (2) the insured will lose benefits after the settlement based on a presumption of prejudice; unless (3) the insured rebuts the presumption that the insurer’s interests were prejudiced by the lack of notice; and (4) the insurer does not then prove that it was actually prejudiced by the lack of notice.

Despite Friedland addressing an insured’s failure to give notice of a claim, the Court of Appeals found that another case, Lauric v. USAA Casualty Insurance Co., 209 P.3d 190 (Colo. App. 2009), relied on Friedland to conclude that the notice-prejudice rule applied to “consent to settle” clauses.  The Court of Appeals in the present case found that such “consent to settle” clauses are similar to the “no voluntary payment” clauses at issue.

The notice-prejudice rule’s burden shifting procedure allows an insured to rebut the presumption of prejudice caused by the breach of the policy by introducing evidence contrary to that prejudice.  The Friedland case provided some examples of such evidence, including proof that: 1) the insured obtained all material information that could have been obtained in the course of reaching a settlement; 2) the insured raised all legitimate defenses; 3) the insured’s liability was reasonably clear under the facts and the law; and 4) the insurer, had it received notice, could not have obtained any materially better outcome than the insured achieved without the insurer’s assistance.

It was undisputed that Stresscon breached the “no voluntary payment” clause, meaning there was a presumption that Travelers was prejudiced.  Stresscon then had to overcome that presumption by presenting evidence similar to that laid out in Friedland.  The Court of Appeals noted that Stresscon presented evidence that: 1) its liability to the GC was reasonably clear because it owed damages to the contractor for the project’s delay under the parties’ construction contract; 2) Stresscon was responsible for the disruption, the effect on the plan, and the flow of the work; 3) the GC incurred costs associated with the accident such as securing the site, evidence preservation, moving the evidence to a new location, dealing with OSHA, adding a scheduler, legal representation, demolishing the site, demolishing parts of the foundations and rebuilding the foundations, and delay to progress of the work; 4) the GC had written Stresscon identifying the type of damages being incurred; 5) Stresscon was responsible for supervising the Crane Team at the time of the accident; 6) Travelers’ second vice-president of complex claims testified that the contract between the GC and Stresscon created legal obligations; 7) Stresscon obtained all material information necessary to analyze the claim; 8) Stresscon asked for backup documentation of the costs of the delay; 9) Stresscon received a claim document containing breakouts detailing the costs the GC incurred; 10) the GC designated an employee who provided Stresscon with information in every different form and style it asked for; 11) the settlement was reasonable; 12) Travelers would not have achieved a result that was materially better; 13) the settlement amount was significantly less than the amount of the delay plus accident claims; 14) Travelers’ second vice-president of complex claims testified that he had no idea if Travelers could have reached a better settlement; and 15) that Travelers had it been asked, by Stresscon, to represent it in the settlement negotiations would have refused.

The Court of Appeals found this evidence sufficient to shift the burden back to Travelers to prove that it was actually prejudiced.  To prove prejudice, a party must establish the precise way in which its interests were damaged.  The Court of Appeals noted that such a standard does not contemplate the mere possibility of prejudice.  In denying Travelers’ appeal, the Court of Appeals found that its assertions of prejudice were questions of fact determined by the jury.  Because Travelers’ assertions were determined by the jury, the Court of Appeals reviewed the evidence and found that there was enough sufficient probative force to support the jury’s findings.  Of particular interest to the Court of Appeals was the evidence that Stresscon’s liability was “reasonably clear;” the settlement was “reasonable;” and that Travelers would not have achieved a result that was “materially better.”

In the end, the Court of Appeals was not persuaded by Travelers and found that Stresscon should not lose its benefits automatically because it breached its “no voluntary payment” clause.  However, it does appear that the case has been appealed and is awaiting a decision from the Colorado Supreme Court about whether the case will be heard. Until then, some of the teeth of the “no voluntary payment” clause have been removed.

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

Colorado Supreme Court to Hear Colorado Pool Systems, Inc. v. Scottsdale Insurance Company, et al.

The Colorado Pool case has been featured in two past blog entries, including: “An Arapahoe County District Court Refuses to Apply HB 10-1394 Retrospectively,” which discussed the case at the trial court level, and “Colorado Court of Appeals Finds Damages to Non-Defective Property Arising From Defective Construction Covered Under Commercial General Liability Policy,” which discussed the case at the Court of Appeals level. In both instances, the courts held that retroactively applying C.R.S. C.R.S. § 13-20-808 to policies in effect prior to the date of the statute’s enactment would be impermissibly retrospective because it would change the coverage under the policy for which the parties had originally bargained. 

On September 3, 2013, the Colorado Supreme Court granted Colorado Pool Systems, Inc.’s petition for writ of certiorari and summarized the issue to be decided as:

Whether the court of appeals erred in (a) holding that section 13-20-808, C.R.S. (2012) would be unconstitutionally retrospective as applied to Colorado Pool’s commercial general liability (CGL) policy and (b) whether the court of appeals further erred in its interpretation of the CGL policy under the common law.

For additional information regarding C.R.S. § 13-20-808 or the Colorado Pool’s case, you can contact David M. McLain by e-mail at mclain@hhmrlaw.com or by telephone at (303) 987-9813.

A few pictures from HHMR's day at the Home Builders Foundation 2013 Blitz Build

Issue and Claim Preclusion When Forced to Litigate Similar Issues in Different Forums: White River Village, LLP v. Fidelity and Deposit Company of Maryland

Often in construction litigation the parties wish to move the case to arbitration.  However, there are certain circumstances in which such change of litigation forums should be carefully analyzed.  The case of White River Village, LLP v. Fidelity and Deposit Company of Maryland, serves as an example of one of those circumstances.

In March 2013, U.S. District Court Judge Blackburn ruled on a motion for summary judgment filed by Fidelity and Deposit Company of Maryland (“F&D”).  The order grants the motion in part and denies it in part.  White River Village, LLP (“White River”) was the owner of the project which hired S&S Joint Venture (“S&S”), the contractor, to build two similar developments, directly adjacent to each other.  The contracts between Whiter River and S&S for the two projects were so substantially similar that the court referred to them as the S&S Contracts.  F&D issued payment and performance bonds guarantying the obligations of S&S under the S&S Contracts.

After S&S defaulted on the construction contracts, F&D, as the surety, undertook to complete performance on the contracts.  White River alleged that F&D was liable for construction defects and delays in completing the project, and failed to fulfill its obligations under the performance bonds after it overtook the construction of the projects.  Specifically, White River asserted claims for (1) breach of performance bonds; (2) bad faith breach of insurance/surety contract; (3) civil conspiracy; (4) negligence (against a different company); (5) breach of express warranty; (6) breach of payment bonds; (7) slander of title; and (8) deceit.

Initially, the case was brought in the U.S. District Court for the District of Colorado, but Judge Blackburn ordered the parties to arbitrate certain aspects of the case according to an arbitration provision in the S&S Contracts.  However, the bonds did not contain an agreement to arbitrate and, thus, White River’s claims based on those remained in district court and were stayed until conclusion of the arbitration.  Thus, F&D’s counterclaims went to arbitration and were fully litigated before White River was able to litigate its claims in the district court. 

F&D was successful in proving its counterclaims and third-party claims against White River in the arbitration.  White River was also allowed to assert various affirmative defenses in the arbitration, though it was not successful on any of them.  Accordingly, F&D filed the motion for summary judgment arguing that White River’s claims already were resolved in the arbitration.  F&D relied on the doctrines of issue preclusion and claim preclusion.  On the other hand, White River argued that its claims related to the bonds were stayed, not resolved, and reserved for litigation in federal court.

Judge Blackburn’s order immediately dismissed White River’s fourth and seventh claims, negligence and slander of title.  The negligence claim was asserted against a separate entity and the slander of title claim was conceded by White River.  Also, White River’s claim of deceit, the eighth claim, was entitled to summary judgment because the claim was barred by the economic loss rule.  Judge Blackburn then took the remaining claims in order and determined if they were precluded.

The first issue, breach of performance bonds, included a determination of what the arbitration panel decided and what was excluded from the panel’s consideration.  The exclusions are important as they continue through Judge Blackburn’s order.  The first exclusion was that the arbitration did not resolve White River’s claims based on the alleged failure of F&D to remove all pre-existing mold and other damaged materials prior to replacement of decks on the buildings.  The second exclusion the panel did not resolve was White River’s claim based on the alleged failure of F&D to install Tyvek in some portions of the project. 

The other two issues excluded from the arbitration panel’s consideration dealt with damages -- the first being White River’s claim for replacement costs to the extent the panel did not determine the amount of replacement costs to which White River might be entitled, and the second being White River’s claims for liquidated damages.  In resolving the breach of performance bonds claim, Judge Blackburn stated that the arbitration resolved F&D’s obligations under the S&S contracts and that White River’s claims (save for the exceptions noted) were a part of that determination.  Thus, Judge Blackburn concluded, in accordance with the elements for issue preclusion, that the issues decided in the arbitration were: identical to the issues raised in the breach of performance bonds claim; the parties to the two proceedings are identical; the issues were adjudicated in the arbitration proceeding finally and on the merits; and White River had a full and fair opportunity to litigate these issues in arbitration.

As for the bad faith claim, Judge Blackburn found that White River was precluded from asserting factual contentions contrary to the myriad factual issues that were addressed and resolved by the arbitration panel.  Judge Blackburn did allow White River to bring its claim to the extent it would be based on the alleged conduct at issue in the exceptions noted.

Judge Blackburn found that White River’s civil conspiracy claim was not adjudicated by the arbitration panel and would not be precluded.

Similar to the bad faith claim, Judge Blackburn found the claim for breach of express warranty was not to be precluded for the specific carved out exceptions.  Otherwise, Judge Blackburn concluded that the issue had been resolved by the arbitration panel and White River was barred from asserting any factual contentions contrary to the panel’s conclusions.

Finally, White River’s breach of payment bond was completely precluded by Judge Blackburn.  The judge concluded that White River was obligated to raise the issue as a defense when addressing the breach of contract issues the arbitration.  Since White River never raised the issue in the arbitration, Judge Blackburn determined claim preclusion barred it from raising the claim in the district court case.

In summary, to the extent White River’s claims were based on the alleged failure of F&D to remove all pre-existing mold and other damaged materials prior to replacement of decks on the buildings or the alleged failure of F&D to install Tyvek in some portions of the project, and the associated damages claims, neither issue preclusion or claim preclusion bar the claims.  White River was barred from asserting: (1) any other claim that F&D breached the terms of the performance bond and the underlying S&S contracts in any way; (2) any claim that it did not breach its obligations under the performance bonds and the S&S contracts by failing to make payment under the S&S contracts; and (3) any factual contention that was contrary to the conclusions of the arbitration panel.

As the White River case demonstrates, arbitration is not always the best course of action for a contractor.  There are other factors that need to be considered before a final decision is made regarding in what forum all or part of the case will be litigated.

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

A Closer Look at an HOA Board Member’s Duty to Homeowners

Whenever a homeowner association (HOA) starts thinking in terms of a construction defect lawsuit against its developer and/or builder, its board members will inevitably be confronted with the purported risk and liability to their homeowners if they do not pursue the alleged defects and deficiencies brought to their attention.

Not surprisingly, the board members are on occasion led to believe that pursuing such claims is synonymous with acting in the homeowners’ “best interests.” Further—and unfortunately—board members often feel as though they will breach their obligation to the homeowners if they don’t agree to proceed with such claims.

Nevertheless, how well do we really know what the board members’ duty actually consists of, when it applies, and what potential liability exists for a board member’s breach of same?  The answers might surprise you.

Colorado’s Common Interest Ownership Act, which was enacted ideally to “establish a clear, comprehensive, and uniform framework for the creation and operation of common interest communities” – but which in reality provides the statutory basis for most multi-family construction defect lawsuits – describes a board member’s duty of care in express and unequivocal terms:

Except as otherwise provided in subsection (2.5) of this section [pertaining to the investment of the association’s reserve funds]:

(a)              If appointed by the declarant, in the performance of their duties, the officers and members of the executive board are required to exercise the care required of fiduciaries of the unit owners.

(b)       If not appointed by the declarant, no member of the executive board and no officer shall be liable for actions taken or omissions made in the performance of such member's duties except for wanton and willful acts or omissions.

C.R.S § 38-33.3-303(2) (emphasis added).  To be sure, as set forth in subsection (2)(a) above, an officer or board member appointed by the declarant, .i.e., the developer/builder, does indeed have a fiduciary duty to the homeowners. Accordingly, it is common for such declarant-appointed officers to be named personally in construction defect lawsuits.

Subsection (2)(b), in contrast, makes it very clear that HOA-appointed or elected officers and board members shall not be liable for their actions or omissions made within the performance of their duties, except for wanton or willful acts or omissions. In such instances, Colorado courts have determined that the board member’s conduct will be measured against the “business judgment rule,” which generally holds that board members will not be held liable for errors or mistakes in judgment, pertaining to law or fact, when they have exercised their judgment or discretion in good faith.

Furthermore, Colorado law makes it clear that courts will generally not interfere with a board member’s decision regarding whether to pursue a claim, provided they engage in a “reasonable and honest exercise of [that] judgment.” See Rywalt v. Writer Corp., 526 P.2d 316 (Colo. 1974).  

In the context of a board member’s decision to [or not to] pursue claims against a developer or builder for alleged construction defects, it reasonably follows that such a board member will not be subject to liability unless they willfully or wantonly fail to exercise judgment and discretion in good faith.

Given Colorado’s construction litigation climate, where homeowners and communities are subjected to long and frustrating legal battles with uncertain results (while the attorneys and forensic experts profit), it begs the question whether the board members’ decision to pursue such claims was really in the homeowners’ best interests in the first place.

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