In a case that squarely confronts the juxtaposition of an
insurer’s duty to defend or indemnify its insured for construction related defects,
the United States District Court for the District of Colorado recently granted
an insurer’s motion for summary judgment on both matters against a construction
subrogee, in Ass’n Ins. Co. v. Carbondale Glen Lot E-8, LLC, No.
15-cv-02025-RPM, 2016 WL 9735743, at *1 (D. Colo. Oct. 10. 2017).
Mountainview Construction Services, LLC (“MCS”) served as
the general contractor for the construction of a residence on a lot owned by Glen
Lot E-8, LLC (“E-8”). MCS took out a
Commercial General Liability Policy (“Policy”) with Association Insurance
Company (“AIC”) that provided coverage to MCS for the relevant time period for
the construction of the residence. E-8 then
asserted a series of claims against MCS, based on the allegation that MCS and
its subcontractors defectively constructed the home by, among other things,
building the residence two feet too high in violation of applicable codes. E-8 also argued that MCS and its
subcontractors made significant alterations and/or deviations from the original
project specifications without obtaining E-8’s consent or approval from relevant
authorities. MCS tendered the claim to AIC
for defense and indemnity. In turn, AIC
declined coverage on the argument that the Policy precluded any coverage for
defective work MCS may have performed on the project, absent damage to person
or other property.
MCS and E-8 subsequently settled all of E-8’s claims
against MCS. As part of the settlement
terms, however, MCS assigned all of its rights against AIC to E-8 related to
AIC’s refusal to defend and indemnify MCS.
In the ensuing action by E-8 against AIC, AIC moved for summary judgment
on its declaratory judgment claim. In
doing so, AIC argued that the relevant Policy language prevented it from
defending or indemnifying MCS for the allegations contained in E-8’s operative
complaint against MCS in the underlying action.
In holding that AIC did not owe MCS any duty to defend it
for E-8’s claims, Judge Richard Matsch first delved into the relevant language
of the Policy. Indeed, the Policy provided
in pertinent part that AIC would cover and pay sums to MCS for “bodily injury”
or “property damage” to property which the Policy covered. The Policy, however, defined property damage
as follows:
a. Physical injury to tangible property, including all resulting loss of
use of that property. All such loss of
use shall be deemed to occur at the time of the physical injury that caused it;
or
b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur
at the time of the ‘occurrence’ that caused it.
Construing the foregoing language, the Judge Matsch held
that AIC did not have a duty to defend MCS against E-8’s claims because E-8 did
not allege “physical injury to tangible property,” or “loss of use of tangible
property that is not physically injured.”
Rather, E-8’s allegations against MCS made clear that its grievance
stemmed from a defectively built house.
What is more, E-8 never implied in its complaint that the flawed
workmanship “caused the loss of use of some other tangible property that was
not physically injured.” The court also
stressed that the Policy’s exclusionary language that prohibited coverage for
faulty workmanship, effectively put an end to any duty on AIC’s part to defend
or indemnify MCS for any defect, deficiency, or inadequacy germane to MSC’s
work on the project.
Having been precluded from coverage based on the Policy
language, E-8 then argued that C.R.S. § 13-20-808 effectively mandated a duty
to defend on AIC’s part since the duty is triggered where there is a “potentially
covered liability” against a “construction professional concerning a
construction defect.” Even so, the court
noted that the duty to defend under the statute is still subject to the express
terms of the Policy language between an insurer and its insured, and the duty
is not triggered where the claims at issue are not covered by the insurance
policy. For the foregoing reasons, the court
held that AIC had no duty to defend or indemnify MCS pursuant to the Policy. Accordingly, the court entered summary
judgment in AIC’s favor and dismissed all of E-8’s counterclaims against AIC.
In application, the ruling reaffirms the well-established principle
that the express terms of a policy will continue to be the benchmark with which
courts determine an insurer’s duty to provide coverage, in the absence of any
contravention of public policy. Further,
policy language that expressly discounts coverage for a contractor’s substandard
work on a project, absent injury to person or other property, remain
enforceable provisions. The public
policy underlying this appears to be the need to discourage shoddy workmanship
and to provide contractors the incentive to avoid preventable defective work
during the construction of a project.
