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.