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.