Become Familiar With Your CGL Policy Exclusions to Ensure You Are Covered: Wardcraft v. EMC.

In a recent case arising out of a denial of coverage for alleged construction defect claims concerning a pre-fabricated home, the U.S. District Court for the District of Colorado applied the 10^th Circuit’s determination of what can constitute an “occurrence” under a commercial general liability (“CGL”) policy.  See Wardcraft Homes, Inc. v. Employers Mutual Cas. Co., 2014 WL 4852117 (D. Colo. September 29, 2014).  William and Grace Stuhr sued Wardcraft, which manufactured pre-fabricated homes at a facility in Fort Morgan, Colorado, because their home was not completed as scheduled and contained various defects.  The Stuhrs filed suit against Wardcraft alleging negligence, breach of warranty, and deceptive trade practices in violation of the Colorado Consumer Protection Act.   

Wardcraft tendered the Stuhrs’ complaint to Employers Mutual Casualty Company (“EMC”), which denied coverage under its policy and denied any duty to defend.  According to EMC, the Stuhrs’ alleged construction defects were not property damages and there was no occurrence in connection with faulty workmanship.  Approximately two and a half years after they filed their initial complaint, the Stuhrs filed an amended complaint.  Wardcraft did not tender this amended complaint to EMC, and first informed EMC about the amended complaint about a year after it was filed.  A month prior, Wardcraft settled with the Stuhrs. 

About the same time, Wardcraft commenced suit against EMC, claiming it was entitled to a defense and indemnity under the EMC policy.  See Wardcraft Homes, Inc., 2014 WL at *2.  Wardcraft alleged breach of contract, bad faith breach of insurance, and unreasonable conduct pursuant to C.R.S. §§ 10-3-1115 and 10-3-1116.  Wardcraft filed a motion for partial summary judgment, arguing that EMC breached its duty to defend.  EMC filed a motion for summary judgment asserting it had no duty to defend or indemnify, and that Wardcraft’s bad faith and unreasonable conduct claims were barred by the applicable statute of limitations. 

In its motion, Wardcraft argued that EMC’s duty to defend arose from the allegations in the amended complaint.  Id. at *4.  The court noted, however, that Wardcraft failed to provide any evidence disputing EMC’s allegation that Wardcraft did not tender the Stuhrs’ amended complaint to EMC.  In its analysis, the court referred to the Greystone court’s prior determination that an occurrence under a CGL policy can encompass “unforeseeable damage to non-defective property arising from faulty workmanship.”  Id. (quoting Greystone Constr., Inc. v. National Fire & Marine Ins. Co., 661 F.3d  1272, 1282 (10^th Cir. 2011)).  “In other words, ‘injuries flowing from improper or faulty workmanship constitute an occurrence so long as the resulting damage is to non-defective property, and is caused without expectation or foresight.”[1]  Id. (quoting Greystone Constr., Inc., 661 F.3d at 1284). 

The Wardcraft court applied Greystone to the Stuhrs’ complaint to determine whether it contained a factual or legal basis to conclude that the claimed damages resulted from an occurrence.  Although the court found no indication of any actual or consequential damages from a non-defective aspect of the Stuhrs’ home alleged in their complaint, it did find allegations of loss of use, which the court noted constituted property damage under Wardcraft’s EMC policy.  See Wardcraft Homes, Inc., 2014 WL *5.  As a result, the court found that the Stuhrs’ complaint alleged an occurrence with respect to property damage in the form of loss of use of property that was not physically injured. 

However, EMC argued that coverage was barred by the impaired property exclusion. Wardcraft apparently did not respond to this argument, and thus, the court found Wardcraft conceded EMC’s argument on the issue.  “Even if the Stuhr Complaint contains allegations that damages were caused by delay after the home was considered real property, the Stuhrs’ home would be considered impaired property under the EMC policy.”  Id. at *7.  The court concluded EMC satisfied its burden of showing that the impaired property exclusion applied to the alleged occurrence thereby finding the Stuhr complaint contained no factual or legal basis upon which to conclude that EMC would be liable for property damage as defined by the policy. 

Wardcraft attempted to craft another argument to support its allegation that EMC owed a duty to defend under the policy’s personal and advertising injury coverage.  According to Wardcraft, EMC’s potential liability for breaching its duty to defend arose out of its “use of another’s advertising injury.”  Id.  Finding little guidance from Colorado courts, the court looked to other jurisdictions that have been presented with this issue.  Those courts “have held that the ‘use of another’s idea’ means the ‘wrongful taking of the manner by which another advertises its goods or services’ or the ‘wrongful taking of an idea about the solicitation of business.”  Id. at *8.  The Wardcraft court found no allegation in the Stuhrs’ complaint that Wardcraft misappropriated the Energy Star moniker, and thus, found no advertising injury alleged in the Stuhrs’ complaint to implicate the EMC’s policy’s coverage for advertising injury.  Accordingly, the court granted EMC’s motion for summary judgment on the duty to defend, and found no corresponding duty to indemnify arising from the Stuhr complaint. 

The Wardcraft case emphasizes the importance of reviewing your CGL policy and its exclusions to ensure you are purchasing insurance that will protect you.  For additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.

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[1] It is important to note that this requirement to resulting or resultant damage to non-defective property is in terms of an occurrence under a CGL policy, and not necessarily a requirement in a civil lawsuit.         

Colorado Defense Lawyers Association to Host a Construction Defect Reform Legislative Preview on December 10th

Construction Defect Reform – A Legislative Preview

December 10, 2014 – 3:00 to 5:00 pm

2 hours CLE applied for

Happy Hour to Follow

Members Only 

There is no question that the conversation surrounding construction defect litigation and legislation is both intensifying and that it has changed tone. Instead of being a dispute between the residential construction industry and homeowners, it has become a conversation between advocates for affordable housing on the one hand and plaintiffs’ construction defect attorneys, speaking either through the Community Association Institute or the Build Our Homes Right Coalition, on the other. On December 10^th, the CDLA will host a seminar focused on this discussion, where it has been, and where it is going.

3:00-3:30 pm – A View of Construction Defect Reform at the State Level, by Mr. Tom Clark

Tom Clark is the Chief Executive Officer of the Metro Denver Economic Development Corporation and is currently involved with the Homeownership Opportunity Alliance. The HOA is a broad based coalition that supports a balanced, reasonable, and common-sense approach to improving the current legal environment, meeting the demands of home buyers, increasing the supply of affordable housing, and promoting the repair of defects and protecting the rights of consumers. Mr. Clark will discuss the legislative reform efforts over the last two years, and provide a preview for what may be in store for the 2015 legislative session.

3:30-4:00 pm – A View of Construction Defect Reform at the Local Level, by Ms. Chérie Talbert

Ms. Talbert is the Senior Vice President of Public Affairs and Executive Director of the Metro Housing Coalition Political Committee for the Home Builders Association of Metro Denver. Ms. Talbert is very involved in local politics in the Denver metro area and has been orchestrating the local efforts to address the affordable housing crisis throughout the Denver area. She was instrumental in the passage of Lakewood’s much-discussed Ordinance No. 2014-21, Parker’s less-discussed Ordinance No. 9.217.1 and she is involved in similar efforts in other local jurisdictions. Ms. Talbert will discuss the history behind addressing construction defect reform at the local level, provide some context for the various approaches taken by different jurisdictions, and provide some insight for what other jurisdictions may be contemplating.

4:00 – 5:00 pm – Panel Discussion Regarding the Defense Communities’ Opinions on Various Approaches to Construction Defect Reform, moderated by Dave McLain

This panel discussion is intended to be an open forum and sharing of opinions and ideas among those typically involved in construction defect litigation, including counsel for the general contractor/developer, subcontractors, and design professionals, coverage counsel for both the insurer and the insured, and a representative of the insurance industry. If the legislature takes this issue up in the 2015 legislative session and it results in any legislation being passed, it is likely that the issue will not be addressed again in the foreseeable future. With that in mind, it is imperative that the legislation put forward actually moves the needle with respect to the size and frequency of construction defect lawsuits. Come share your thoughts regarding what might actually make a difference.

5:00 – 6:30 – Happy Hour 

There is no question that the conversation surrounding construction defect litigation and legislation is both intensifying and that it has changed tone.

See you there!

Construction Law Committee

Janet Wells, Chair, Ray Lego & Associates
David M. McLain, Vice Chair, Higgins, Hopkins, McLain & Roswell

Register Now!

Preparing for the 2015 Colorado Legislative Session

As Colorado starts to prepare for the 2015 legislative session, construction defect reform is shaping up to be another key issue under the Capitol dome. Once again, the Homeownership Opportunity Alliance (HOA) will be leading the charge. The HOA is a coalition of Coloradans working to open the doors to homeownership by: 1) protecting consumers from unknowingly entering into litigation and establishing solid processed through which homeowners and developers can work together to achieve a positive resolution to identified defects in construction, and 2) increasing the supply of attainable, affordable housing while protecting the rights of consumers to take legal action.

The HOA's coalition partners include:

American Subcontractors Association Apartment Association of Metro Denver Associated Builders and Contractors Associated General Contractors Building Jobs 4 Colorado Colorado Association of Home Builders CO Assoc. of Mechanical & Plumbing Contractors CO Assoc. of Plumbing-Heating-Cooling Contractors Colorado Civil Justice League Colorado Competitive Council Colorado Concern Denver Metro Chamber of Commerce

Denver South Economic Development Partnership Douglas County Commissioners Downtown Denver Partnership Heating, Air-Conditioning, Refrigeration Professionals Hope Communities Housing Colorado Independent Electrical Contractors Metro Denver Economic Development Corp. Metro Mayors Caucus NAIOP Colorado National Electrical Contractors Sheet Metal & Air Conditioning Contractor

In addition, the coalition is joined by the following Colorado mayors:

Marc Williams, Arvada Steve Hogan, Aurora Sue Horn, Bennet Dick McLean, Brighton Rick Pilgrim, Bow Mar Randy Ahrens, Broomfield Jeffrey Huff, Castle Pines Cathy Noon, Centennial Doug Tisdale, Cherry Hills Village Gale Christy, Columbine Valley Sean Ford, Commerce City Michael Hancock, Denver Randy Penn, Englewood

Tony Carey, Frederick Marjorie Sloan, Golden Ron Rakowsky, Greenwood Village Bob Murphy, Lakewood Phil Cernanec, Littleton Jim Gunning, Lone Tree Joe Gerlach, Nederland Joyce Thomas, Northglenn Mike Waid, Parker Dallas Hall, Sheridan Herb Atchison, Westminster Joyce Jay, Wheat Ridge

To follow the HOA's activities, you can visit its website, follow it on Twitter, or like it on Facebook. In addition to following the HOA, be sure to check back here to stay informed about the latest happenings on the legislative front.

KF-103 v. American Family Mutual Insurance: An Exception to the Four Corners Rule

In Colorado, the “complaint rule,” also known as the “four corners rule,” requires an insurer to provide a defense when an underlying complaint alleges any set of facts that may fall within an insurance policy. This can result in a situation where an insurer has a duty to defend although the underlying facts ultimately do not fall within the policy.

 

In KF-103 v. American Family Mutual Insurance, 2014 WL 4409876, District Court Judge Richard P. Matsch recognized an exception to the complaint rule.  In doing so, Judge Matsch determined that a court may look beyond the complaint to judicial orders preceding the filing of the complaint to determine whether an insurer has a duty to defend. Therefore, a party may not be able to assert unsupported facts in a complaint for the sole purpose of triggering an insurance policy.

KF 103 v. American Family arose out of an underlying easement dispute. In the underlying case, KF 103-CV, LLC (“KF 103”) purchased a piece of property from the Infinity Group. As a condition of the purchase agreement, Infinity Group was required to complete improvements to boundary streets and the intersection of Ski Lane and Sorpresa Lane.  Several adjoining property owners (the “neighbors”) objected to the modification of the intersection because it violated an express easement (the “easement”) that provided access to their properties.

On October 13, 2010, the district court judge issued oral rulings and findings, holding that the neighbors’ easement had been impaired by the modification of the intersection and that KF 103 had not sought to relocate the easement. The Court found that KF 103 acted intentionally, although not with malice, and in direct violation of Colorado common law. In October 2012, the Court ruled in favor of the neighbors on claims for trespass, civil conspiracy, and negligence, awarding damages accordingly.

During the relevant time period, American Family insured KF 103. KF 103 first notified American Family of the underlying easement dispute in January 2011. American Family denied KF 103’s initial request for coverage and subsequent requests claiming that the neighbors’ claims were all based on KF 103’s intentional conduct, which was not covered under its policy.  On September 10, 2013, KF 103 sued American Family seeking declaratory relief and damages. KF 103 asserted that the factual allegation in the neighbors’ negligence, negligent misrepresentation, and trespass claims triggered coverage under the complaint rule.

The Court found that the neighbors’ claims all involved intentional conduct on the part of KF 103. The fact that claims alleged by the neighbors’ were categorized as “negligent” and used such terms as “negligence,” “negligent failure,” and “legal duty” did not change the fact that the well-pleaded allegations were really claims arising out of KF 103’s intentional actions. Even if those facts pleaded unintentional actions, the Court already found that KF 103 knowingly violated the neighbors’ easement rights.

KF 103 argued that the complaint rule prevents the Court from considering earlier rulings and that the Court must rely on the claims as pleaded, therefore American Family owed KF 103 a defense.  The Court disagreed with KF 103, finding that it may consider its earlier rulings because they preceded the filing of the claims and do not undercut the purpose of the complaint rule. If the Court were to agree with KF 103’s argument, it would allow any plaintiff to merely recite language in a complaint that would trigger insurance coverage.

While the complaint rule is still the general rule, a court may look outside the four corners of a complaint when there have been prior judicial determinations. It is important when determining the extent of insurance coverage to consider whether any prior court rulings have been issued in the case and how they may contradict the claims or counterclaims asserted.

To learn more about the KF 103 v. American Family decision or for additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.

HHMR Attorneys to Present at an Upcoming CRG Builder Lunch & Learn - Reserve Your Seat Now

The Construction Resource Group will be hosting a Builder Lunch & Learn. If you are a Colorado builder and are interested in attending, you can visit the Eventbrite website to reserve your spot. Seating is extremely limited.

David M. McLain, Esq. to Speak at the 2014 CLM Claims College

David McLain will be a speaker at the School of Construction.  The Claims College will be held from September 7-10 in Philadelphia, Pennsylvania.  Mr. McLain is a founding member of Higgins, Hopkins,McLain & Roswell, LLC, a firm which specializes in construction law and construction litigation throughout Colorado.  Mr. McLain received his undergraduate degree from Colorado State University, graduating cum laude, and his law degree from the University of Denver, College of Law.  Mr. McLain completed the Claims and Litigation Management Alliance Litigation Management Institute, earning the designation from that organization as a Certified Litigation Management Professional. He has a general civil litigation practice with an emphasis on the defense of complex construction lawsuits on behalf of developers and general contractors.  As a result of the experience gained by defending some of Colorado’s largest residential construction defect lawsuits, developers, general contractors, and subcontractors seek out Mr. McLain to consult on risk avoidance and risk management strategies.  Currently among his clients are several of the state’s largest home builders, regional and custom builders, and numerous insurance carriers.  Mr. McLain is an AV® Preeminent™ Peer Review Rated attorney by Martindale-Hubbell and is a regular speaker at local, regional, and national seminars regarding construction defect litigation in Colorado.

About the CLM

The Claims and LitigationManagement Alliance (CLM) promotes and furthers the highest standards of claims and litigation management and brings together the thought leaders in both industries. CLM’s Members and Fellows include risk and litigation managers, insurance and claims professionals, corporate counsel, outside counsel and third party vendors. The CLM sponsors educational programs, provides resources and fosters communication among all in the industry. To learn more about the CLM, please visit www.theclm.org.

Contact:

Susan Wisbey-Smith, Communications Manager

Claims and Litigation Management Alliance

(847) 317-9103

susan.wisbey-smith@theclm.org

When Can a General Contractor’s Knowledge be Imputed to a Developer?

The Colorado Court of Appeals recently handed down an opinion clarifying when the knowledge of a general contractor can be imputed to a developer. In the case of Jehly v. Brown, 327 P.3d (Colo. App. 2013), the Court of Appeals held that a developer cannot be held liable for fraudulent concealment when the developer has no actual knowledge of the fact or facts allegedly being concealed even if the general contractor had knowledge.

In this case, Brown, the developer, owned real property in Teller County and hired a general contractor to build a single-family house. Sometime before or during the construction, the general contractor became aware that part of the home site was located in a designated floodplain.  Although the general contractor was aware that part of the home site was located in a floodplain, he continued to build the home without informing Brown of the floodplain designation.

Once the home was complete, Brown sold the property to the Jehlys. Brown completed a Seller’s Property Disclosure Form regarding the condition of the house and property, but failed to identify that the home site was located in a governmentally designated floodplain.

Approximately five years after purchasing the home, heavy rains caused severe flooding and damage to the basement. The Jehlys sued Brown for fraudulent concealment, alleging that he fraudulently concealed knowledge of the floodplain in order to entice the Jehlys to purchase the property. The Jehlys asserted that the general contractor’s knowledge that the home site was located in a designated floodplain should be imputed to Brown. The trial court ruled in Brown’s favor, finding that the Jehlys failed to show Brown had any actual knowledge that the home site was located in a floodplain.

On appeal, the Court of Appeals upheld the trial court’s ruling that the general contractor’s knowledge cannot be imputed to Brown to support a claim of fraudulent concealment.  The Court of Appeals in its ruling stated that “in the context of a fraudulent concealment claim, knowledge of the information by the agent, when not communicated to the principal, is not deemed to be that of the principle.” Id.  The Court further added “when an agent has information that he has a duty to disclose, the principal may be liable except where actual knowledge is important.” Id.

It is important to note that while the Court held that a general contractor’s knowledge cannot be imputed to a developer in the context of a fraudulent concealment claim, this result would not follow for causes of action that lack an actual knowledge requirement.  A court could impute the general contractor’s knowledge to a developer under a negligence based claim or other claim where actual knowledge is not required. Therefore, it is important for developers to stay apprised of such information and not merely turn a blind eye in hopes of claiming they didn’t have actual knowledge.

To learn more about the Jehly v. Brown decision or for additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.

Taylor Morrison v. Terracon and the Homeowner Protection Act of 2007

On January 30, 2014, the Colorado Court of Appeals decided the case of Taylor Morrison of Colorado, Inc. v. Bemas Construction, Inc. and Terracon Consultants, Inc. 2014WL323490. The case addressed a substantial issue of Colorado constitutional law, as well as a variety of procedural issues of potential importance to construction litigation attorneys.  Of particular interest is the question of whether the provisions of the 2007 Homeowner Protection Act (“HPA”) are limited in application to contracts between residential homeowners and construction professionals, or whether they have broader application between commercial construction professional parties as well.  As discussed below, the Court of Appeals stated that it would not answer the question, and then, separately, implied that the statute might only apply to homeowner transactions – with the resulting exclusion of commercial transactions. However, after its analysis, it left the actual decision of that issue to a future court in a later case.

The factual background for the case involved claims of breach of a contract for soils engineering by Terracon Consultants, Inc. (“Terracon”) and negligent excavation work by Bemas Construction, Inc. (“Bemas”).  Plaintiff was Taylor Morrison of Colorado (“Taylor Morrison”), the developer and general contractor for a residential subdivision called Homestead Hills. After it constructed many homes, Taylor Morrison began to receive complaints of cracking drywall resulting from foundation movement and it made repairs at significant expense.  Taylor Morrison then filed suit against Terracon and Bemas in connection with their respective roles in the original construction.

Terracon defended in part by asserting that the HPA provisions that nullified limitations of liability were only applicable in contracts as between homeowners and construction professionals.  The heart of that argument was that Taylor Morrison was not a homeowner and for that reason could not defeat Terracon’s contractual limitation of liability for a specific dollar amount.  Terracon also defended in part by arguing that the HPA was being applied to its contract retrospectively, in violation of Article 11 of the Colorado Constitution.

Taylor Morrison responded to these defenses by attempting to amend its pleadings to assert separate claims against Terracon for gross negligence, negligent misrepresentation, and fraud.  However, the trial court judge denied this attempt to amend because it was so late in the case. Taylor Morrison then challenged Terracon’s defenses that the HPA was inapplicable to the Terracon contract.  The trial court agreed that the HPA only applied to transactions between homeowners and construction professionals. It held that Terracon’s contract with Taylor Morrison did not violate the HPA for that reason, and Terracon’s limitation of liability was valid.  Terracon thereafter deposited the maximum amount that Taylor Morrison could recover under the limitation of liability in the contract in the trial court’s registry, and the trial court then dismissed Taylor Morrison’s claims against Terracon.

Bemas proceeded to trial and received a defense verdict on the merits.  Taylor Morrison’s appeal sought a new trial of the Terracon issues, but also sought a new trial against Bemas.  Its argument for a full re-trial was that Bemas had an unfair advantage in trying its case with an “empty chair” that should have been occupied by Terracon. The appellate court disagreed, saying that the issues involving Terracon were distinct from those involving Bemas, and that a partial re-trial of the issues involving only Terracon involved no inherent unfairness to Taylor Morrison. In the absence of clear prejudice to Taylor Morrison, the Court refused to allow the re-trial of Bemas.

The appellate court addressed the matter of the trial court’s refusal to consider evidence that Terracon’s conduct was willful and wanton and/or grossly negligent, as alleged.  While the appellate court did not clearly reverse the trial court’s ruling that denied Taylor Morrison’s amended complaint, it did hold that Taylor Morrison had the right to contest Terracon’s defenses  by offering proof of such misconduct, because it would potentially invalidate Terracon’s limitation of liability. The appellate ruling viewed the potential evidence of misconduct as potentially admissible to respond to Terracon’s defenses, even if it was not part of an amended complaint.

In the course of remanding the Terracon case to trial, the appellate court disagreed with the trial court’s determination that the HPA only applied to homeowner/construction professional transactions, but did so without actually deciding the issue. Instead, it expressly declined to decide that issue, vacated the lower court’s HPA determination, and proceeded to decide Terracon’s constitutional argument.

In deciding that constitutional argument, the Court of Appeals held that Terracon’s contract was retrospectively impaired by the application of the HPA to its terms, which pre-existed the 2007 statute.  In an extended discussion of constitutionality, the Court explained that where: (1) perfected contract rights had fully vested; (2) those rights were the subject of past actions on the part of the parties; and (3) those rights would be reasonably expected by the parties to be enforceable, any statute that changed those rights after the fact was unconstitutionally retrospective.  

The Court of Appeals was presented with and rejected arguments that asserted that the HPA was a remedial statute, and was akin to new regulation of an existing industry.  In making this determination, the Court held that the statute was not part of a body of prior regulation that was simply being expanded and was reasonably anticipated by the parties. That was the argument offered by an amicus brief which argued analogous cases. Those cases were rejected as distinguishable by the Court of Appeals.

The appellate court also considered the question of whether the stated public policy of the HPA – “to protect Colorado residential property owners' rights and remedies” – was to be balanced against Terracon’s contract rights.  The Court held that since “the contracts at issue were the products of arms-length negotiations between sophisticated commercial entities” there was no impact of the HPA in the present case on residential property owners. The Court also based its analysis on detailed references to the 2007 Colorado legislative history.  Accordingly, the Court found no basis for any such “balancing” analysis between public policy and Terracon’s impaired contract rights.

Notably, in this last determination, one can see the possibility that the 2007 HPA may yet be held by a future appellate court to be inapplicable between general contractor and design professional or subcontractor (or similarly postured non-homeowner) parties.  In this later portion of the opinion, the Court suggests that an argument that the 2007 HPA is not applicable to commercial transactions between construction professionals may yet be upheld in a future case.

The Court of Appeals remanded the case back to the trial court for further proceedings on whether Taylor Morrison’s claims of Terracon’s willful and wanton conduct were sufficient to overcome Terracon’s limitation of liability argument. This was determined separate from the constitutional analysis described above. Notably, the case has not been selected for official publication as of this date, and may be further appealed because of the significance of the constitutional issue that was decided.

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

Builder’s Be Wary of Insurance Policies that Provide No Coverage for Building: Mt. Hawley Ins. Co v. Creek Side at Parker HOA

On the heels of a recent order regarding coverage under a Comprehensive General Insurance policy issued by Mt. Hawley Insurance Company (“Mt. Hawley”), builders should be very wary of CGL policies providing no coverage for property damage.

On January 8, 2013, District Court Judge R. Brooke Jackson granted a motion for declaratory judgment filed by Mt. Hawley.  The order states that the subject insurance policies issued by Mt. Hawley to Mountain View Homes II, LLC (“MV Homes”), the builder developer of the Creek Side at Parker development (the “Project”), did not provide coverage for any of the work performed by MV Homes or its subcontractors on the Project.

MV Homes originally began construction on the Project in 2002 and completed construction in 2005.  MV Homes was insured by National Fire and Marine Insurance Company (“National Fire”) and Mt. Hawley.  In December 2008, Creek Side at Parker Homeowners Association, Inc. (“the HOA”) served notice on MV Homes.  The HOA then instituted a construction defect lawsuit on June 1, 2009 against MV Homes and others.  MV Homes initially demanded a defense and indemnity from National Fire, which provided a defense.  Then, after two years, MV Homes demanded a defense and indemnity from Mt. Hawley in July 2011.  Mt. Hawley denied coverage and did not provide a defense.  The case was settled soon after, and National Fire reserved or assigned claims against Mt. Hawley.

Mt. Hawley filed the case at issue, seeking a declaration that its policies did not provide either a defense or indemnity with respect to the underlying lawsuit.  Mt. Hawley argued that its policies did not cover the HOA’s claims, because faulty work is not an occurrence and exclusions j(5), j(6), and m, preclude coverage.  MV Homes counterclaimed on several issues, including a declaration of its rights, breach of contract for failure to provide a defense and indemnity, common law bad faith, and statutory damages for bad faith. 

In making his ruling, Judge Jackson noted that the Mt. Hawley policies were written on a standard “Commercial General Liability Coverage Form,” where an occurrence is defined as “an accident, including continuous or repeated exposures to substantially the same general harmful conditions.”  Mt. Hawley Ins. Co. v. Creek Side at Parker Homeowners Association, Inc., WL 104795, p. 2 (D. Colo. 2013).  Judge Jackson also noted that faulty workmanship, according to Greystone Construction, Inc. v. National Fire & Marine Ins. Co., 661 F.3d 1272, 1286-87 (10^th Cir. 2011), can constitute an occurrence that triggers coverage under  CGL policy in two circumstances.  First, the property damage was not caused by purposeful neglect or knowingly poor workmanship and second, the damage was to non-defective portions of the contractor’s or subcontractor’s work or to third-party property.

In the case at issue, there were no allegations that MV Homes or its subcontractors  purposefully or knowingly performed poor workmanship.  Thus, MV Homes relied on the HOA’s claims in the underlying suit to contend the property damage was to non-defective portions of its or its subcontractors’ work or to third-party property.  Judge Jackson found there was enough evidence regarding whether an occurrence triggered the policy for the issue to proceed to a jury.

Judge Jackson’s discussion then moved to exclusions, specifically j(5), j(6), and m.  Exclusion j(5) and j(6) exclude coverage for property damage to:

 (5) That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the “property damage” arises out of those operations; or

(6) That particular part of any property that must be restored, repaired or replaced because “your work” was incorrectly performed on it.
…
Paragraph (6) of this exclusion does not apply to “property damage” included in the “products-completed operations hazard.” 

Judge Jackson found that exclusion j(5) applies to damage to the work being done by the insured during the course of the insured’s work, not to damage after operations have finished.  Assuming some of the damage occurred during the course of MV Homes’ work, Judge Jackson found that exclusion j(5) did not bar a coverage claim.

Exclusion j(6), states Judge Jackson, quoting, Advantage Homebuilding, LLC v. Maryland Cas. Co., 470 F.3d 1003, 1012 (10^th Cir. 2006), has been interpreted to “exclude ‘property damage’ that directly or consequentially occurs from the faulty workmanship of the insured and its contractors/subcontractors (i.e., work that ‘was incorrectly performed’) while the work is ongoing.”  The exclusion broadly excludes all property damage that occurred while the work was ongoing and was the result of fault workmanship.

There is an exception to the exclusion for property damage included in the “products-completed operations hazard, which is defined in the standard form.  The definition includes property damage arising from insured’s or its subcontractors’ work except, “work that has not been completed or abandoned.”  Thus, according to Advantage Homebuilding, the exception to exclusion j(6) allows an insured to recover consequential damages that arise out of his or her faulty workmanship after the completion of the work.

To exemplify this, Judge Jackson again relied on Advantage Homebuilding, citing a possible instance where a homebuilder, after constructing the walls and installing the roof, has engaged in installing parquet floors.  A leak develops in the roof, which was poorly installed, and damages the roof and the partially installed wood floors.  The roof repair or replacement, which was a direct result of faulty workmanship, would be excluded.  On the other hand, the damage to the parquet floors was a consequence of the faulty and completed work on the roof and would be covered because of the exception to exclusion j(6).

At this point, it would look like coverage should be forthcoming, in the case at issue, but Judge Jackson performed one more analysis, this time on an endorsement the Mt. Hawley policies contained. The endorsement provides, “this insurance does not apply to ‘bodily injury’ or ‘property damage’ included within the ‘products-completed operations hazard’.”  Despite MV Homes’ opposition, Judge Jackson found that the language of the policy was unambiguous, in part, because it had been negotiated by two sophisticated commercial parties.  Judge Jackson even acknowledged that what the exception to j(6) in the standard form provided to the insured, the endorsement, using the same language, took away again.

Summarizing, Judge Jackson found that exclusion j(6) excludes from coverage all direct and indirect damages that occur while work is ongoing.  Normally, damage that occurred after work was completed (but, within Mt. Hawley’s policy period) would not be excluded from coverage by exclusion j(6).  Damages occurring after all work has been completed has been defined in the policy to be within the products-completed operations hazard.  The endorsement then removed the products-completed operations hazard form the policy.  Consequently, the damages that occurred after all work was completed were also not covered by the policy.

MV Homes tried to argue that the court’s reading of the policy and endorsement would render the coverage of the policy illusory and violate public policy.  MV Homes’ argument is technically untrue, the policy provides coverage for personal injury, advertising injury, and medical payments that are not affected by the products-completed operations hazard endorsement.  While the argument was not a winning one, Judge Jackson did sympathize with MV Homes stating, “MV Homes is, after all, a homebuilder.  If there is no coverage for liability for property damage caused by its negligence or the negligence of its subcontractors while doing what the business exists to do, one has to wonder how much meaningful coverage MV Homes received for its money.” 

Unfortunately for MV Homes, Judge Jackson relied on the fact that both parties were sophisticated commercial entities negotiating at arm’s length.  Mt. Hawley’s motion for declaratory judgment was granted and Judge Jackson found that Mt. Hawley was not unreasonable in denying coverage or to commence its action for declaratory judgment and there was no basis for a finding of bad faith on the part of Mt. Hawley.

The lesson for builders is to be vigilant regarding its insurance policies, being very wary of CGL policies and endorsements providing no coverage for property damage.

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

Introduction of the Construction Defects Bill Has Been Stalled! Call or Email Senate & House Leadership Today!

Defenders of the failed status quo are fighting common-sense legislation that would take a first step to protect condominium and townhome owners from unexpected, costly and burdensome litigation – that they want no part of but get swept up into.  They are attacking improvements to the current legal environment that has caused construction of attainably-priced condos & townhomes to grind to a halt.
If you want:

• Attainable for-purchase condominiums and townhomes to be built in Colorado
• Existing homeowners to have the right to be informed and to vote on potential lawsuits affecting their home
• An end to homeowners being unable to refinance or sell their condominiums because the unit is involved in litigation without their knowledge or consent
• To keep less-costly solutions in place to solve construction defects issues short of lawsuits

Please contact:

House Speaker Mark Ferrandino
          303-866-2346 or mferrandino@yahoo.com 
 AND
Senate President Morgan Carroll
          303-866-4879 or morgan.carroll.senate@state.co.us

And tell them to support Senator Jesse Ulibarri’s Homeownership Opportunity Act of 2014!

Colorado Court of Appeals Decides the Triple Crown Case

In an earlier blog post, we discussed the case of Triple Crown Observatory Village Assn., Inc. v. Village Homes of Colorado, Inc., et al (2013 WL 5761028) because it presented the rare case where the Colorado Court of Appeals accepted an interlocutory appeal. Notably, the interlocutory appeal resulted from dismissal of the HOA case in which the trial judge directed the parties to arbitrate in lieu of a jury trial, under the declaration of covenants, conditions, and restrictions that governed the community. The Court of Appeals decided the case on its merits on November 7, 2013, and its decision can be found at 2013 WL 6502659. (Note: this presently unpublished opinion may be subject to further appeal to the Colorado Supreme Court.)

The case resulted from an attempt by the HOA’s counsel to amend the mandatory arbitration provisions of the declarations before it filed suit.  This amendment process took the form of soliciting signature votes of homeowners on a revocation resolution to repeal the specific provisions of the declarations that provided mandatory, binding arbitration as the sole remedy for disputes between the HOA and the developer and/or general contractor. The declarations required that 67% of homeowners vote in favor of amendment in order to modify the declarations. 

After 60 days of soliciting such written signatures, the HOA was only able to get 48% of homeowners to vote for the modifications, which was not enough to pass the amendment.  However, within another 60 days (120 days after beginning to obtain signatures), the HOA had the required 67% of signatures on the amendment resolution.

 

The questions on appeal were whether, as argued by the declarant developer and general contractor, the HOA was governed by the time limits for such a process under the procedures of the Colorado Revised Non-Profit Corporation Act (CRNCA). Declarant argued that those procedures only allowed the HOA 60 days to gather all of the required homeowner signatures, after which time the amendment would fail if there were insufficient signatures.

In contrast, the HOA argued that the Colorado Common Interest Ownership Act (CCIOA) was the relevant governing authority, and that the lack of any stated time limits for gathering such homeowner signatures for modification of the declarations meant that the HOA had successfully amended the declarations using a period of more than 60 days.  Accordingly, the HOA argued that through its actions over 120 days, the arbitration provisions of the declarations had been repealed.  The HOA then argued that it had a right to a jury trial on its claims against the declarant developer and general contractor, as well as other related parties.

In a lengthy and analytical opinion, the Colorado Court of Appeals held that both statutory authorities were potentially applicable.  However, it determined that there is a provision in CCIOA which makes that statute the greater and final authority where the two statutes may be in conflict.  However, the appellate court found that the time limit issues raised by the parties were not addressed to any degree by CCIOA, and instead that such time limits were addressed by the provisions of CRNCA. 

Because there were no timing-related conflicts found between the statutes, the court determined that it had a duty to harmonize the statutes if possible. Since the time limits for such actions were found in CRNCA, and these requirements were not expressly or impliedly contradicted by the terms of CCIOA, the Court determined that the governing authority was the CRNCA.  Since that statute provided time limits that were not met by the HOA, the Court determined that the HOA failed to amend the declarations.  Accordingly, the HOA was required to submit to binding arbitration in lieu of a jury trial, as ordered by the trial court. Significantly, the Court also held that the HOA’s Colorado Consumer Protection Act (CCPA) claims were subject to the same arbitration process, and could not be separately asserted in a jury trial.

The lesson to be taken from this case is obvious, regardless of whether it is further appealed to the Colorado Supreme Court.  The application of technical procedures under the CRNCA and CCOIA must be part of overall case evaluation, and early in the case.  If there are arbitration provisions which arguably govern the dispute, they must be followed. If those provisions have been amended, the amendment requirements must also be strictly followed, or the amendments may not be successful.  In the end, that analysis will decide whether the case proceeds to jury trial or mandatory binding arbitration.

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

The Economic Loss Rule and the Disclosure of Latent Defects: In re the Estate of Carol S. Gattis

In a recent case of first impression, the Colorado Court of Appeals determined that the economic loss rule does not bar a nondisclosure tort claim against a seller of a home, built on expansive soils which caused damage to the house after the sale.  The case of In re the Estate of Carol S. Gattis represents a new decision regarding the economic loss rule.  Because it is a case of first impression, we must wait to see whether the Colorado Supreme Court grants a petition for certiorari.

Until then, we will analyze the decision handed down on November 7, 2013.  The sellers of the home sold it to an entity they controlled for the purpose of repairing and reselling the home.  Before that purchase, Sellers obtained engineering reports including discussion of structural problems resulting from expansive soils.  A structural repair entity, also controlled by Sellers, oversaw the needed repair work.  After the repair work was completed, Sellers obtained title to the residence and listed it for sale.

Sellers had no direct contact with Gattis, who purchased the residence from Sellers.  The purchase was executed through a standard-form real estate contract, approved by the Colorado Real Estate Commission: Contract to Buy and Sell Real Estate, to which no changes were made.  Several years after taking title to the residence, Gattis commenced action, pleading several tort claims alleging only economic losses based on damage to the residence resulting from expansive soils.

Sellers argued, in a pretrial motion for summary judgment, that Gattis’ claims should be precluded by the economic loss rule.  Sellers also raised the economic loss rules through an oral motion to dismiss at the end of Gattis’ case-in-chief at trial.  The trial court denied all of Sellers’ attempts to invoke the economic loss rule.  Sellers appealed on the basis that the economic loss rule should have barred Gattis’ tort claims.

Pursuant to 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.”  Town of Alma v. AZCO Constr., Inc., 10 P.3d 1256, 1264 (Colo. 2000).  The source of the underlying duty determines whether the economic loss rule applies.  Id. at 1262.  For a claim to escape the economic loss rule, the duty must arise independently of any contractual obligation.  Id. at 1262.

The trial court held Sellers liable for nondisclosure of material facts.  The trial court explained that Sellers falsely represented in the contract that they had no personal knowledge of the property, including the presence of expansive soils which already had caused serious structural damage to the residence.  On appeal, Sellers did not dispute the trial court’s finding that before the sale closed: no reference was made to “expansive soil;” no person or entity ever informed Gattis, or Gattis’ representatives, that the Sellers were principals of the structural repair entity; and, neither Gattis, nor Gattis’ representatives, were ever made aware of the various engineering reports that Sellers had reviewed when debating their purchase of the residence. 

The Court of Appeals relied on past cases to conclude that an independent duty exists between home sellers and home buyers, as well as residential builders and subcontractors.  The Gattis court relied on Mid Valley Real Estate Solutions V, LLC v. Hepworth-Pawlak Geotechnical, Inc., 2013 WL 3943215, a negligent construction case involving a residence.  In that case, several policy considerations were identified favoring an independent duty to protect homeowners: preventing overreaching by builders, who are comparatively more knowledgeable to determine structural conditions of a house than most buyers; ordinary purchasers of a home are not qualified to determine when or where a defect exists; purchasers of homes rarely have access to make any inspection of the underlying structural work, as distinguished from the merely cosmetic features; magnitude of the investment made when purchasing a home; foreseeability that a house will be sold to someone who is not the original owner; foreseeability that a construction professional’s work on a home is for the benefit of the homeowners, and that harm to the homeowners from negligent construction is foreseeable; and, an independent duty discourages misconduct and provides an incentive for avoiding preventable harm.

The Gattis court drew analogies between a home builder’s common law duty to act with ordinary care, as discussed in the Mid Valley case, and a home seller’s common law duty to disclose known but latent defects in the property.  Both of those duties are long standing, with the Gattis court pointing out that for over 50 years Colorado has required sellers to disclose latent soil defects of which they are aware.  Another analogy was drawn between a builder’s position of superior knowledge related to the structural condition of a home and a seller who has actual knowledge of a latent defect.  The Gattis court then stated that where a disparate knowledge exists, a person has a duty to disclose to another with whom he deals facts that in equity or good conscience should be disclosed.  In contrast, where an original homeowner or a later buyer, both parties have a similar difficulty in learning of a latent defect.

Furthermore, according to the Gattis court, a buyer cannot not afford to suddenly find a latent defect in his or her home, whether it is caused by a negligent home builder or a seller who remains silent despite knowledge of a latent defect.  Typically, this is because a home purchase is the biggest purchase and most important investment, and done on a limited budget.  Such harm to the home and homeowner are also equally foreseeable, whether caused by a latent defect arising from negligent construction or nondisclosure of any latent defect known by the seller.

The final analogy the Gattis court drew between the home builder’s common law duty to act with ordinary care and a home seller’s common law duty to disclose known but latent defects in the property, relates to enforcing the duty of the sellers to disclose the known latent defects.  Just as enforcing the duty to build with ordinary care avoids preventable harm to innocent parties, the Gattis court concludes so will enforcing the duty of the sellers to disclose the known latent defects.  Limiting its holding somewhat, the Gattis court did state that the burden to disclose latent but known defects is minor because the seller’s duty to disclose latent but known defects would only apply to material defects.

We have to wait and see if Gattis will be upheld by the Colorado Supreme Court.  But until then, Colorado home sellers have a new independent tort duty for disclosure of latent but known defects.

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 Bill for an Act Concerning Workers’ Compensation – 2014 Edition

Workers’ compensation (“WC”) costs are a significant portion of the labor costs experienced by construction companies.  These costs have typically risen over time due to the “experience modification factor.” This term means the amortized cost of past claims recovered through future premiums charged by an insurer to an employer. As a company’s claims go up in both number of claims and total expense of claims over time, the experience modifier increases as a multiplier of the base WC premium.  As with other general medical costs, the question is not whether the cost of claims with a medical component will go up, but rather the rate at which they will increase from year to year.

It is with these facts of life in mind that it is reported that the Colorado legislature will take up a bill concerning WC benefits in the 2014 session. This bill, if passed, will have the likely effect of dramatically increasing the cost of WC claims to the construction industry - along with all other Colorado employers.

The draft bill has three distinct changes for the current law, each of which serves to change the delicate balance of rights and obligations of employers and employees under existing law. 

1.      The Changed Choice of WC Primary Physician

The first change allows the injured employee to select his own attending primary doctor for the first three days after the injury occurs.  Existing law gives this right of appointing the primary physician to the employer, and it is a key to (1) getting appropriate, cost-conscious care to the employee; (2) getting the employee released to light duty and/or the earliest reasonable physician-approved return to regular work; and (3) getting the doctor’s reasonable determination of when the employee has reached “maximum medical improvement,” after which medical care either ceases, or tapers to a lesser degree of “maintenance care.” In other words, it is as important to an employer to have a middle-of-the road physician to serve as the medical “umpire” of what is reasonable for the nature, extent, and duration of WC medical care.

This proposed change would alter the present procedures, and allow the employee to select a Level II accredited WC physician of the employee’s choosing within three days of the accident/injury. Note: Level II accreditation is not significantly less difficult to obtain than a driver’s license.  It involves limited and brief attendance of classes held on weekends, and successful completion of a multiple-choice examination on WC procedures and benefits.  

Interestingly, or coincidentally, the present law also gives the employee up to three days to report the accident/injury to the employer.  Practically speaking, this means that the employee has two and a half days not to report the accident/injury, but within which to find a lawyer who will typically direct the employee to a doctor who is generously claimant-oriented. Then, both the accident and the chosen doctor will be made known to the employer by the end of the third day.  If the accident/injury was not witnessed and understood for what it was (which is surprisingly often the case), the employer may not know that there is a WC situation brewing.

Odds are that the claimant-chosen physician may be significantly less of an honest broker when it comes to (1) making decisions about referrals to other medical providers for additional care; (2) deciding work restrictions during recovery from the injury; (3) allowing the employee to return to regular duty; (4) deciding when “maximum medical improvement” has been reached; and (5) determining the nature of future care and disability benefits.  These are the key decisions that drive claim costs, claim duration, and overall WC benefits to the employee – which will return as later premium costs to the employer.  Clearly, the proposed change which would allow the employee to make the key cost-driving decisions at the front of the WC claim.

2.      The 50% Increase in Benefits if the Injury Was Due to an “Unsafe Workplace”

3.       

The second proposed legislative change involves the right of the employee to claim a 50% increase in the statutory WC benefits if the employer “willfully placed the employee in an unsafe work environment.”  Little needs to be said about the vagueness of this new provision which appears to lack any objective standards.

More importantly, this potential change would create an opportunity for claimants to increase their benefits by 50%, if the Administrative Law Judge (ALJ) who decides the case as a sole fact-finder decides that the facts of any particular case meet this nebulous and potentially subjective standard.  Bluntly stated, it is designed to create new, ancillary claims for a 50% increase in WC benefits in exchange for merely asking for a hearing on the matter before an ALJ.

The proposed change in override benefit liability is akin to an injured worker being given a lottery ticket at the time of the injury. Most importantly, it is philosophically contrary to the 100-year historical legislative policy that the Colorado WC system was created as a no-fault area of the law, with benefits being awarded solely on the basis of the injury, not the causal fault of the employee or the employer.

Notably, ALJ fact-finding is generally not subject to any meaningful appeal. Once an ALJ decides the facts of the case, they are presumptively written in stone. 

Once again, these new 50% override benefit exposures will be translated (even prospectively and pre-emptively) into steeply climbing premium costs. This is particularly likely in construction environments, where safety can be inherently difficult to control during multi-trade activity.

3.      The Change in “At Will” Employment for WC Claimant Employees

The third change proposed by next year’s draft bill is that a WC claimant’s resignation of current employment may only be “voluntary,” rather than decided by the employer in the present Colorado “at will” employment environment.  While this leaves open the possibility that the employment resignation of the WC claimant will be “negotiated” by the parties for an exchange of dollars, it gives the WC claimant employee an effective right of veto over the employer’s decision to terminate that employment.  In a worst case scenario, this means that a WC-injured employee who cannot do the job that they were doing before the injury is potentially an employee for life of the WC employer by statute.  In the hypothetical alternative, the employer can make the employee an offer of settlement that is so lucrative that it is an “offer that cannot be refused.”

The practical and legal problem for employers is that insurers will potentially say that this termination prohibition is a non-insured employment law issue, rather than a covered WC insurance issue. The potential result may be that such settlements will not be paid – or will be only partially paid – by the WC insurer, if at all. The uninsured “resignation” balance will potentially need to be paid by the employer without the benefit of WC insurance.  The alternative is that no resignation is ever negotiated, and the disabled employee must be continued on the payroll. This scenario assumes that the employee may be paid a pre-injury salary or wage that is not driven by the (diminished) ongoing value of the employee’s work for the employer.

4.      Action and Communication are Needed – NOW

These proposed legislative alterations in the present fabric of WC law and employment law are problematic to say the least. That they will dramatically raise employer costs – with significant impact on construction costs, in particular, is not debatable.  In fact, this assessment is probably superficial in identifying the mischief that will be done with such changes. 

If action is to be taken to avoid these developments, it should be taken now.  Contacting your state senator and representative is an important means to this end.  Testifying before the committee with responsibility for the bill is equally important.  Talking to your colleagues and even your competitors in the world of construction – now – has seldom been this important.

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