When is Construction Put to Its “Intended Use”?

Defining words and phrases in the law can be a tricky proposition.  In everyday life one would presume to know what the phrase “intended use” would mean, but when it comes to litigation, oftentimes the definitions become much more nuanced.

On March 12, 2013, in the Bituminous Cas. Corp. v. Hartford Cas. Ins. Co. v. Canal Ins. Co., WL 950800 (D. Colo. 2013) case, Senior District Court Judge Wiley Y. Daniel denied Third-Party Defendant Canal Insurance Company’s (“Canal”) motion to dismiss Third-Party Plaintiff Hartford Casualty Insurance Company’s (“Hartford”) third-party complaint.  The case arose out of a liability insurance coverage dispute related to an underlying construction defect lawsuit.  In the construction defect suit, a plaintiff homeowner’s association brought a suit against a developer and a general contractor (“GC”) among others.  While the underlying action was settled, a dispute remained between Bituminous Casualty Corporation, which insured the GC, and Hartford, which insured the developer.

Hartford asserted third-party claims against Canal seeking a declaration of Canal’s obligations and contribution in the event Hartford owed any defense or indemnity obligations to the GC.  Hartford’s claims are based on the premise that Canal owed a duty to defend and/or indemnify the GC in the underlying action.

For its part, Canal issued two general liability insurance policies to the GC, spanning from March 31, 2002 to March 31, 2003, and March 31, 2003 to March 31, 2004.  The policies extend coverage for “property damage” caused by an “occurrence” during the applicable policy periods.  Canal initially agreed to defend the GC under a reservation of rights, but later withdrew its defense in the underlying action.  It is well established that the duty to defend is determined by an examination of the allegations in the underlying complaint against the insured, and that it is more easily triggered than the duty to indemnify.  The Colorado Supreme Court has also established that it is a high standard for an insurance company seeking to avoid its duty to defend.

As mentioned above, Canal’s policies protect the insured from claims based upon “occurrences” within a specific policy period.  Coverage under the policies is triggered only if the third party suffered damage within the policy period.  The time of an “occurrence” has been defined as not the time the wrongful act was committed but the time when the complaining party was actually damaged.  See Leprino v. Nationwide Prop. And Cas. Ins. Co., 89 P.3d 487 (Colo. App. 2003).  On the other hand, coverage has been found to exist under an occurrence type policy issued to a homebuilder where there was an ongoing progressive condition that existed during the policy period that caused property damage.  See Travelers Cas. And Sur. Co. v. Village Homes of Colo., Inc., 155 P.3d 369 (Colo. 2007).

In light of those cases, Judge Daniel reviewed the allegations made by the association in the underlying action.  The complaint stated that the Association was created on November 3, 2004.  The complaint also alleged that errors, deficiencies, and defects have cause damage over time from the date those areas were first put to their intended use.  Canal’s arguments rest on the allegations that the Association could not have been damaged before it was formed, and that the project could not have been put to its intended use before November 3, 2004.  Thus, Canal’s policies would not be triggered since they would have been expired by that date.

Judge Daniels agreed with Canal concerning when the complaint alleges damage occurred, i.e. over time from the date those areas were first put to their intended use.  However, Judge Daniels disagrees that the date of the association’s formation is controlling regarding when the damages started.  Unsurprisingly, Judge Daniels hangs the disagreement on defining when the project or areas of the project were “put to their intended use.”  If the damage occurred before the association’s formation, during the policy periods, then Canal would have a duty to defend.

Hartford cited EMC Ins. Cos. v. Mid-Continent Cas. Co., 884 F. Supp.2d 1147 (D. Colo. 2012) as a case that discusses when a project or areas of the project are first put to their intended use in the context of a construction defect claim.  EMC stands for the proposition that discrete areas of a project can be put to their intended use while a construction projects is ongoing.  Judge Daniels walked through an analysis of the EMC case and found it persuasive in his own ruling.

While the EMC case discussed language regarding “ongoing operations” and a “products completed operations hazard,” the complaint in that case had almost identical language regarding when defects first caused damage.  The Court in EMC found that even if “first put to its intended use” means than an area was completed, it does not preclude the possibility that damages began during ongoing operations.  As an example, the Court described a situation where the grading was installed and put to its intended use, but then the contractor moved on to another area.  The Court found that allegations for damages flowing from the grading could have begun while the contractor still has ongoing operations.  Finally, the Court stated that contrary to other cases where an allegation clearly averred that damages arose after operations were completed, in the EMC case, the damages could have arisen during the contractor’s ongoing operations.

Judge Daniels found that example and the possibility it detailed convincing.  The association’s complaint in the underlying case alleges errors, deficiencies, and defects in many areas, including the foundation system, structural and floor systems, grading and drainage, façade, roofing, elevated decks, balconies or walkways, and mechanical systems.  Judge Daniels considered that under those allegations it was at least possible that one of these areas was put to its intended use before the entire project was constructed.  Thus, although the complaint did not specify the period the construction of the project or the alleged negligence of the defendants occurred, in the underlying case, Judge Daniels’ found that the alleged facts potentially fall within the scope of Canal’s coverage.  Consequently, Canal’s motion to dismiss was denied.

While a construction professional might assume it knows when a project is put to its intended use, it is clear the law is a more particular about that definition.  It appears that, at least for now, the court’s definition could provide some protection for contractors in similar positions with insurance companies refusing to provide a duty to defend.

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’s Federal District Court Finds Carriers Have Joint and Several Defense Duties

An issue that has plagued builders in Colorado construction defect litigation is the difficulty of getting additional insured carriers to fully participate in the builder’s defense, oftentimes leaving the builder to fund its own defense during the course of the litigation. 

Many additional insurers offer a variety of positions regarding why they will not pay for fees and costs during the course of a lawsuit.  Some insurers argue that, until after trial, it is impossible to determine its proper share of the defense, and therefore cannot make any payments until the liability is determined as to all of the potentially contributing policies. (This is often referred to as the “defense follows indemnity” approach.)  Others may make an opening contribution to defense fees and costs, but fall silent as fees and costs accumulate.  In such an event, the builder may be forced to fund all or part of its own defense, while the uncooperative additional insured carrier waits for the end of the lawsuit or is faced with other legal action before it makes other contributions. 

Recent orders in two, currently ongoing, U.S. District Court cases provide clarity on the duty to defend in Colorado, holding that multiple insurers’ duty to defend is joint and several.  The insured does not have to go without a defense while the various insurers argue amongst themselves as to which insurer pays what share. 

In D.R. Horton, Inc. – Denver v. Mountain States Mut. Cas. Co., et al., Civil Action No. 12-CV-01080, the Honorable R. Brooke Jackson issued an order on February 25, 2013, ruling on two motions for determination of a question of law.  That case arose out of an earlier construction defect lawsuit against D.R. Horton, Inc. (“DRH”), involving the work of several subcontractors.  DRH was named as an additional insured on several of the subcontractors’ policies. Those insurance carriers agreed to defend DRH, but then refused to pay or paid only a small portion of DRH’s defense costs. DRH subsequently filed a lawsuit against the carriers, in part, for breach of contract for failing to defend, and bad faith liability under C.R.S. § 10-3-1116. 

The first issue before Judge Jackson was whether or not DRH was a “first party claimant” under C.R.S. § 10-3-1115 and entitled to benefits owed directly to it under an insurance policy.  Mountain States argued that since the underlying litigation arose from claims against DRH, that DRH was not a “first party claimant.”  The Court disagreed, and held that the policies entitled DRH to the benefits of a defense.  Therefore, as a “first party claimant,” DRH was able to maintain an action against the insurers under C.R.S. § 10-3-1116, arising from an unreasonable delay or denial of a claim, and could seek recovery of reasonable attorney fees, court costs, and two times the covered benefit.

DRH also sought a ruling as to whether the multiple accepting insurance carriers each had joint and several duties to defend. The U.S. District Court held in favor of DRH, stating, “the allocation of defense costs is a matter to be worked out among the insurers and, if they cannot do so, then by a court.  The insured does not have to go without a defense or fund its own defense while the insurers argue amongst themselves.” 

Judge Jackson cited an order in the similar matter of D.R. Horton, Inc. – Denver, et al. v. Travelers Indem. Co. of America, et al., Civil Action No. 10-CV-02826, 2012 WL 5363370 (D. Colorado).  That case, now settled, also involved litigation between DRH, an insurance carrier, and several subcontractors that had agreed to obtain additional insured coverage for DRH.  There, the Honorable William J. Martinez issued an order on October 31, 2012, concerning numerous dispositive motions.  Both DRH and Travelers moved for summary judgment on the issue of whether an insurer’s duty to provide a defense is a joint and several obligation.  Judge Martinez stated that while Colorado courts have not affirmatively resolved this issue, sufficient authority indicates that the Colorado Supreme Court, “would hold that each liability insurer has a duty to provide a complete defense, such that a liability insurer who breaches this duty can be found liable for the entire amount of defense fees and costs (and that insurer can then seek equitable contribution from any co-insurer).”  The Court granted DRH’s motion with respect to joint and several liability, holding that DRH was entitled to recover from Travelers its full, uncollected defense fees and costs.

Another issue in Judge Martinez’ order denied a motion for summary judgment brought by a subcontractor, seeking to limit a broad duty to defend arising from a failure to procure insurance as it had agreed. Travelers brought claims for contribution against several of DRH’s subcontractors on the underlying project.  One of the subcontractors, Ark Construction (“Ark”), moved for summary judgment, arguing that (1) it was not a “co-insurer” of the builder; and (2) if it was, it did not insure the same risk as the insurance carrier.  The subcontract required Ark to carry insurance naming DRH as an additional insured, but Ark failed to do so.  The U.S. District Court held that, due to Ark’s breach, Ark assumed a complete duty to defend DRH (resulting in potential joint and several liability for each insurer).  Here, the Court relied on Steamboat Dev. Corp. v. Bacjac Indus., Inc., 701 P.2d 127 (Colo. App. 1985), and Richmond v. Grabowski, 781 P.2d 192, 194 (Colo. App. 1989), which held, “In general, the party who agrees to procure the insurance and fails to do so assumes the position of the insurer and, thus, the risk of loss.”

Judge Martinez’s order also discusses the majority view in other jurisdictions, which holds that the duty of an insurer to defend extends to a defense of the entire case, and that each of multiple insurers is severally liable to the insured for the entire cost of the defense.  These recent U.S. District Court orders clarify that the law in Colorado follows the majority view.

For additional information regarding this or any construction law issues in Colorado, you can reach Bret Cogdill by e-mail at Cogdill@hhmrlaw.com or by telephone at (303) 653-0046.               

Land Planners Not Held to Professional Standard of Care

Recently, the Colorado Court of Appeals indicated that there is no professional duty of care applicable to land planners.  See Stan Clauson Associates, Inc. v. Coleman Brothers Constr., LLC, 297 P.3d 1042 (Colo. App. 2013).  Stan Clauson Associates, Inc. (“SCA”) agreed to provide land planning services to Coleman Brothers Construction, LLC (“Coleman”) for property referred to as Crown Mountain in a letter and then verbally agreed to provide a development analysis for another property, located on Emma Road in Basalt, Colorado.  Thereafter, SCA sent letters to the defendant concerning the possible subdivision and development of the Emma Road property. 

Approximately two years later, SCA sued Coleman for breach of the verbal agreement concerning the Emma Road property.  Coleman then asserted counterclaims against SCA for negligently providing inaccurate advice about whether the Emma Road property could be subdivided and developed, and that the county had denied the planned unit development sketch plan SCA prepared and submitted on behalf of Coleman.  The district court granted SCA’s motion for summary judgment thereby concluding that the economic loss rule barred Coleman’s negligence counterclaims.  The Court of Appeals agreed.

In its opinion, the Court of Appeals reiterated the economic loss rule espoused in the Colorado Supreme Court in the Town of Alma v. AZCO Constr., Inc., 10 P.3d 1256, 1264 (Colo. 2000) case.  “Under the economic loss rule, ‘a party suffering only economic loss from the breach of an express or implied contractual duty may not assert a tort claim for such a breach absent an independent duty of care under tort law.’”  Stan Clauson Associates, Inc., 297 P.3d at 1045; quoting Town of Alma, 10 P.3d at 1264.  In determining whether the economic loss rule bars a claim, a court must identify the tort duties alleged in the claim as well as the alleged contractual duties.  A court must also ascertain whether the act or omission alleged to have breached a tort duty would also be a material breach of the contract.   Stan Clauson Associates, Inc., 297 P.3d at 1045.                                   

While it is generally understood that professionals are held to duties and standards of care independent of any established by contract, Coleman nor the Court of Appeals could not find a Colorado case that held a land planner to a professional standard of care.  The court explained that service providers who have duties independent of their contracts and are held to professional standards are identified in Title 12 of the Colorado Revised Statutes.  See C.R.S. § 12-1.5-101 – C.R.S. § 12-71-104.  The Court of Appeals found that all of Coleman’s claims concerning SCA’s work being “inaccurate,” “juvenile,” not “state of the art,” “rushed,” and late were all allegations that SCA failed to substantially perform its duties under the contract.  Stan Clauson Associates, Inc., 297 P.3d at 1047.  As such, the court found that these claims give rise to a breach of contract claim but not claims independent of the contract. 

In doing so, the Court of Appeals concluded that SCA did not owe Coleman a duty independent of the contract.  “Land planning is not a profession that is held to an independent duty and standard of care under any Colorado statute, nor have land planners otherwise been held to such a duty or standard at common law in our state.”  Id. 

Those looking to hire land planners will want to keep this opinion in mind when crafting a contract for such services as this opinion seemingly limits your recourse in the event of a problem.

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