Interpreting Insurance Coverage and Exclusions: When Sudden means Sudden and EIFS means Faulty

EIFS, or Exterior Insulation and Finish System, is an integrated exterior insulation and synthetic stucco system, praised for its energy efficiency.[1] However, EIFS has come to be well known in the construction defect world as placing homes at risk due to a lack of a built-in moisture management system. Before long, insurance companies recognized the risk and began explicitly excluding coverage for EIFS-related damage. However, EIFS exclusions have not always been so clearly set forth in some policies, causing insurance coverage litigation.

Recently, a Greenwood Village couple, Mark and Susan Mock, lost this fight.

Built in 1994, the Mocks’ home was constructed with an EIFS system. The Mocks carried a homeowner’s insurance policy through Allstate, which covered “sudden and accidental loss” to property, but excluded coverage for “planning, construction or maintenance” issues. Such “planning, construction or maintenance” exclusions included “faulty, inadequate or defective designs.”

A few months after a hailstorm, the Mocks discovered moisture-related damage to their home’s EIFS system. They reported the damage to Allstate, but Allstate would not cover it, reasoning that the damage to the EIFS system was excluded as a design and/or construction failure, and thus not covered as a “sudden and accidental” loss. The experts who evaluated the damage concluded it was the result of inherent flaws in the EIFS systems common in the 1994 timeframe, which involved long term moisture intrusion behind the cladding and no means for the water to escape.

The Mocks subsequently sued Allstate for 1) entry of a declaratory judgment; 2) breach of contract; 3) common law insurance bad faith; and 4) improper denial of claim under C.R.S. § 10-3-1115.[2] Allstate moved for summary judgment.

The District Court Case: When Sudden means Sudden

At the district court level, the Mocks made several arguments for denial of Allstate’s summary judgment motion, only two of which the court analyzed.

First, the Mocks argued Allstate’s policy was ambiguous. That is, because the policy expressly covered sudden and accidental loss to property without defining “sudden and accidental,” the terms should be construed against the insurance company and in favor of the insured to mean “unexpected and unintended.”[3] Because the damage to their home was “unexpected and unintended,” the Mocks argued, the loss should be covered.[4] In making this argument, the Mocks relied on Hecla Min. Co. v. N.H. Ins. Co., 811 P.2d 1083, 1090 (Colo. 1991), which defined “sudden and accidental” in certain pollution policy exclusions to mean “unexpected and unintended.”

However, here, the district court found Hecla’s definition of “sudden and accidental” to be inapposite.

Hecla holds that “a pollution exclusion clause in a commercial liability insurance policy which provides coverage for a ‘sudden and accidental’ event is inconsistent with that policy’s definition of an ‘occurrence’ as an accident including ‘continuous or repeated exposure to conditions.’” Because of that inconsistency, Hecla held that the word “sudden” in that context was ambiguous and defined it to mean “unexpected and unintended,” so as to ensure consistency in the policy.[5] In other words, Hecla was about defining ambiguous terms in an insurance policy to be harmonious with one another, ensuring none are rendered meaningless.[6]

Upon finding Hecla does not apply here, the district court defined “sudden,” according to its plain meaning, which, according to the Merriam-Webster dictionary, implicates something that happens abruptly or hastily. Thus, the court rejected the Mocks’ attempt to construe “sudden” as “gradual or continuous” to fit the fact pattern of a slowly deteriorating EIFS stucco system.[7]

Second, the Mocks argued that a factual dispute existed with respect to whether the EIFS system suffered a design flaw or a construction flaw. The district court summarily dismissed this argument, relying on the experts’ reports, which consistently opined that the EIFS system was damaged as a result of long-term water intrusion, not a “sudden” incident.[8]

The Appeal: When EIFS means Faulty

On appeal, the Tenth Circuit Court of Appeals did not address the district court’s analysis surrounding coverage for “sudden and accidental” loss. Instead, the Court of Appeals affirmed summary judgment based on the faulty construction or design exclusion.[9]

The Tenth Circuit’s opinion, therefore, focused on the experts’ opinions that the damage to the Mocks’ home flowed from inherent flaws with EIFS stucco systems. The issue with respect to whether EIFS systems met building codes at the time of construction in the 90s is a legal issue—the court said—and thus not a material dispute of fact to be analyzed on summary judgment.

The Tenth Circuit concluded that “[t]he undisputed facts show that the manufacturer’s design of the EIFS system caused water infiltration and damage.”[10]

Conclusion

When considering installing EIFS systems, construction professionals should beware—not just of EIFS exclusions in their insurance policies—but also of potentially ambiguous language in those policies that courts will construe as excluding EIFS-related damage.

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[1] https://www.eima.com/eifs/benefits.

[2] See Mock v. Allstate Ins. Co., 340 F. Supp. 3d 1087 (D. Colo. 2018).

[3] Id. at 1090.

[4] Id.

[5] Id.

[6] See Martinez v. Am. Fam. Mut. Ins. Co., 413 P.3d 201, 203 (Colo. App. 2017).

[7] Mock, 340 F. Supp. 3d at 1090-91.

[8] Id.

[9] Mock v. Allstate Ins. Co., No. 18-1407, 2020 U.S. App. LEXIS 642 (10th Cir. Jan. 9, 2020).

[10] Id. at *8.

For more information on EIFS, you can reach Ben Volpe at (303) 987-7140 or by e-mail at volpe@hhmrlaw.com.

Contractual Impartiality Requires an Appraiser to be Unbiased, Disinterested, and Unswayed by Personal Interest

On June 24, 2019, the Colorado Supreme Court held that when a contract or insurance policy requires an “impartial” appraisal, the appraiser for a party cannot be an advocate for that party.[1]  In this situation, the appraiser must be unbiased, disinterested, without prejudice, and unswayed by personal interest.  Id.

Owners Insurance Company (“Owners”) issued a policy to the Dakota Station II Condominium Association, Inc. (“Association”) that represents a 49-building multifamily residential property in Jefferson County, Colorado.  Concerning loss conditions, the policy includes an appraisal provision requiring that, in the event of property appraisal, “each party will select a competent and impartial appraiser.”  The parties would then select an umpire or have one appointed by the court.  Any agreement as to the values reached by two of the three would bind them all.

On May 24, 2012, the Association made a storm-damage roofing claim to Owners for $1.33 million.  The parties could not agree on the amount of the loss and the Association invoked the policy’s appraisal process.  The Association retained Scott Benglen as its contingent-fee cap appraiser.  Mr. Benglen retained Laura Haber as a policy and damage expert, who appraised the roof loss at $2.55 million and the total replacement at $4.3 million.[2]  Owners’ appraiser, Mark Burns, submitted the loss at $1.86 million with the replacement cost award of $2.3 million.  The umpire, Honorable James Miller, adopted Owners’ estimates in four of the six categories, awarding just over $3 million to the Association.  Id.

On June 15, 2019, Owners filed a Petition to Vacate Appraisal Award, arguing the Association’s appraiser acted improperly by entering into a contract with the public adjuster that capped her fees at five percent of the insurance award, giving her a financial interest in the outcome.  Id. at p.3.  The District Court rejected Owners’ argument that appraisers must act as impartially as an umpire or arbitrator in every instance.  The Court of Appeals affirmed the decision, noting any ambiguity in the definition of “impartial” is construed against Owners, but agreed with the District Court that the impartial appraiser requirement meant “that an impartial appraiser in rendering his or her valuation opinion applies appraisal principles with fairness, good faith, and lack of bias.”[3] The Court of Appeals reasoned that the policy contemplated that the appraisers would put forth a value to the umpire on behalf of the party that selects them and so long as the appraiser acts fairly, without bias, and in good faith, he or she meets the policy requirement of an impartial appraiser.  Id. 

The Colorado Supreme Court reviewed and held that word “impartial,” when required in a contract, requires appraisers to be “unbiased, disinterested, and unswayed by personal interest.”[4]  Thus, appraisers must not favor one side more than another, meaning no advocacy on behalf of either party.  Id.  The Colorado Supreme Court found that an individual acting as an advocate for one side cannot simultaneously be considered impartial and remanded the case to the District Court to determine if the Association’s appraiser’s conduct conformed to the impartiality requirement set forth by the Supreme Court.  Id.

District Court Judge Laura A. Tighe held a hearing upon remand and issued her Findings of Fact.  Judged Tighe found that Mr. Benglen had retained Ms. Haber for her expertise on insurance policies and how best to maximize damage estimates.[5]  Mr. Benglen retained Ms. Haber once he understood her assessment would be favorable to the Association.  Id.  Ms. Haber worked as Mr. Benglen’s partner for three months before being appointed as appraiser.  Id. at p. 7.  Mr. Benglen “prodded” Ms. Haber to “go in at $4.5 million” to get the judge to award $2-2.5 million, which would be a “huge win” for the Association.  Id.  Judge Tighe noted Ms. Haber’s eventual loss estimate of nearly $2.5 million and total replacement loss of nearly $4.4 million was in Mr. Benglen’s targeted range.  Id.

Judge Tighe noted Ms. Haber’s lack of credibility and found her testimony, “obstinate, off-putting, and defensive in nature.”  Id. at. p. 8.  Judge Tighe wrote that Ms. Haber demonstrated that she lacked impartiality required by the policy and her conduct constituted bias, bad faith, or dishonesty in formulating her appraisal.  Id.  She found multiple examples of Ms. Haber’s advocacy and overall failure to act in an unbiased, disinterested, and unswayed by personal interests.  Id. at p. 9.  Judge Tighe found Ms. Haber’s conduct in estimating this loss “smacks of unabashed advocacy, lacking any sense of a moral barometer to meet the standard” of impartiality as defined by the Colorado Supreme Court.[6]

Judge Tighe found that Owners proved by a preponderance of the evidence that the appraiser, Ms. Haber, did not perform the duties required of her in the Owner’s policy because she failed to meet the impartiality standard set forth by the Colorado Supreme Court, and therefore misconduct resulted.”  Id. at p. 15.  The Association argued Owners, nonetheless, failed to meet its burden under Andres Trucking Co. v. United Fire & Cas. Co., 2018 COA 144, P49, 2018.  In Andres Trucking, “as a general matter, an appraisal award entered by an umpire may be disregarded only if the award was made without authority or was made as a result of fraud, accident, or mistake.”  Id.  Judge Tighe found Ms. Haber’s “troubling misconduct” necessitated setting aside the award.[7]

Conclusion

Consistent with general principles of contractual interpretation, the Colorado Supreme Court gave effect to the intent and reasonable expectations of the parties by enforcing the plain language of the Owners’ policy.[8]  When a contract or policy requires an “impartial” appraisal, the appraiser can no longer be an advocate for the party that retained the appraiser.  That means the appraiser must be unbiased, disinterested, without prejudice, and unswayed by personal interest.  Id.

Attorneys, on the other hand, must advocate for their clients.  In this situation, attorneys cannot influence their retained appraiser as their opinions cannot be put forth “on behalf of a party…”  Id.  Therefore, where an impartial appraisal is required by contract, attorneys must do their research on a potential appraiser to know how that appraiser evaluates the claim and the probable final valuation.

While the Colorado Supreme Court’s decision has been cited only five times nationally since its recent decision, it remains unknown whether this standard will apply to all expert opinions where an impartial expert is required by contract.  The Colorado Supreme Court relied on the Black’s Law Dictionary (10^th ed. 2014) definition of “Impartial” as “not favoring one side more than another; unbiased and disinterested; unswayed by personal interest.”  Id.  Where expert opinions are contractually required to be impartial, the courts will look to Dakota Station to determine the standard of care for these experts.

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[1] Owners Ins. Co. v. Dakota Station II Condominium Assoc., Inc., 443 P.3d 47, 52 (Colo. 2019).

[2] Jefferson County District Court Order, 2015CV21037, p. 2, January 10, 2020.

[3] Id. at p. 3 (citing Owners Ins. Co. v. Dakota Station II Condo. Ass’n Inc., 444 P.3d 784 (Colo. App. 2017)).

[4] Dakota Station II, 443 P.3d 47, 52.

[5] Jefferson County District Court Order, supra, at p. 6.

[6] Id. at p. 14 (citing Dakota Station II, 443 P.3d 47, 52).

[7] Jefferson County District Court Order, supra, at p. 15.

[8] Dakota Station, 443 P.3d 47, 53.

For more information about Owners Ins. Co. v. Dakota Station II Condominium Assoc., Inc., you can reach Frank Ingham at (303) 653-0046 or by e-mail at ingham@hhmrlaw.com. 

Colorado House Bill 20-1290 – Restriction on the Use of Failure to Cooperate Defense in First-Party Claims

On February 7^th, Representative Garnett, with Senator Fenberg as the Senate sponsor, introduced HB 20-1290, concerning the ability of an insurer to use a failure-to-cooperate defense in an action in which the insured has made a claim for insurance coverage.

If the bill were to pass, in order to plead or prove a failure-to-cooperate defense in any action concerning first-party insurance benefits, the following conditions must be met:

1. The carrier has submitted a written request for information the carrier seeks to the insured or the insured’s representative, by certified mail;
2. The written request provides the insured 60 days to respond;
3. The information sought would be discoverable in litigation;
4. The written request provides citations to the specific policy language entitling the carrier to the information requested.  A general statement of a duty to cooperate would be deemed insufficient.
5. The insured’s failure to cooperate had made the carrier’s performance under the policy impossible;
6. The carrier has given the insured an opportunity to cure, which must:


• Include the furnishing of written notice to the insured of the alleged failure to cooperate, describing with particularity the alleged failure, within 30 days of the alleged failure; and
• Allow the insured 60 days after receipt of the written notice to cure the alleged failure to cooperate.

House Bill 1290 also states that the existence of a duty to cooperate in a policy does not relieve an insurer of its duty to investigate or to comply with C.R.S. § 10-3-1104.  Finally, the Bill states that any language in a first-party insurance policy that conflicts with the Bill’s language is void as against public Policy.  If enacted, the new law would apply to any litigation that occurs on or after the applicable effective date of this act, estimated to be August 5, 2020, if the Legislative adjournment sine die is on May 6, 2020.  HB 20-1290 has been assigned to the House Judiciary Committee and but is not yet scheduled for its first hearing in committee.

For additional information about House Bill 20-1290 or the Colorado legislative session, you can reach Dave McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.

  

HB 20-1046 - Private Retainage Reform - Postponed Indefinetely

On Tuesday, February 18th, the Colorado House Business Affairs & Labor Committee voted 10-0 to postpone indefinitely House Bill 1046.  If it had been enacted, HB 1046 would have required, for all for all construction contracts of at least $150,000:

• A property owner to make partial payments to the contractor of any amount due under the contract at the end of each calendar month or as soon as practicable after the end of the month;
• A property owner to pay the contractor at least 95% of the value of satisfactorily completed work;
• A property owner to pay the withheld percentage within 60 days after the contract is completed satisfactorily;
• A contractor to pay a subcontractor for work performed under a subcontract within 30 calendar days after receiving payment for the work, not including a withheld percentage not to exceed 5%;
• A subcontractor to pay any supplier, subcontractor, or laborer who provided goods, materials, labor, or equipment to the subcontractor within 30 calendar days after receiving payment under the subcontract; and
• A subcontractor to submit to the contractor a list of the suppliers, sub-subcontractors, and laborers who provided goods, materials, labor, or equipment to the subcontractor for the work.

The bill did not apply to contracts with public entities or to a contract concerning one multi-family dwelling of no more than 4 units or one single-family dwelling. A person who failed to make a required payment would have been required to pay 1.5% interest per month until the debt is fully paid. In a lawsuit to enforce the bill, the prevailing party iswould have been awarded attorney fees and costs. 

In response to the indefinite postponement of the Bill, the Colorado Contractors Coalition put out a announcement reading:

The Colorado Contractors Coalition | CCC announce that they will table efforts to pass HB20 1046, Private Retainage Reform stating that most of the 2020 objectives have been achieved and a path forward post the current Colorado legislative session is underway. 

 Tuesday, February 18, 2020, the House Business Affairs Committee heard a motion from Representative Valdez, primary sponsor, to postpone indefinitely the bill. Representative Kraft-Tharp, Chair thanked him for his work and that she spoke to all parties involved who have agreed to work together in the interim for a solution to this very real problem.
 

CCC and their lobby team Valdez Public Affairs are pleased with the response to HB20 1046 with much of the Colorado construction industry in support of the legislation. The work prior to the 2021 Colorado General Assembly will focus on the banking and construction development community. 

Scott Deering, ASAC Legislative Chair and CCC Vice Chair | Absolute Caulking & Waterproofing, Inc., commented “Though we hoped to celebrate the passage of HB20-1046 this year, we know that rarely is a bill passed the first year it is introduced. We accomplished a great deal this session including unprecedented industry support for this effort. Members of the CO legislature and stakeholders have committed to continue to work with us on this very important issue. Our goal remains to allow subcontractors to be able to invest their earned capital into their businesses.” 

CCC is fully engaged in partnership with Valdez Public Affairs as we advocate for the membership of the Coalition on several issues before the 2020 Colorado General Assembly. Rob Willis, CCC Chair | BT Construction stated, “We have a full agenda that will take us through adjournment May 6. We will be working on private retainage reform in the interim and focus on candidates and campaigns leading up to the 2020 General Election November 3.” 

CCC established in 2017 to influence state and local policy makers to support public policy that provides for the improvement and betterment of the subcontractor business community. Members are American Subcontractors Association Colorado, Associated Wall and Ceiling Industries, Colorado Roofing Association, National Utility Contractors Association Colorado and Rocky Mountain Steel Construction Association.

For additional information regarding the 2020 Colorado Legislative Session or construction law in Colorado, you can reach David McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.

The Attack on Colorado’s Construction Industry Continues at the State Legislature

Here is a rundown of the latest goings on at the Colorado State Capitol:

SB 20-138 - Concerning increased consumer protection for homeowners seeking relief for construction defects.

As previously discussed, if enacted, Senate Bill 20-138 would:

1. Extend Colorado’s statute of repose for construction defects from 6+2 years to 10+2 years;
2. Require tolling of the statute of repose until the claimant discovers not only the physical manifestation of a construction defect, but also its cause; and
3. Permit statutory and equitable tolling of the statute of repose.

The Senate Judiciary Committee passed SB 138 out of committee unamended, on a 3-2 party-line vote, on February 12, 2020, sending the Bill to the Senate Floor, where it is scheduled for Second Reading on February 18, 2020.

It does not yet appear that there is a sponsor for this Bill in the House.  If you haven’t already done so, it is imperative that you contact your State Senator to ask him or her to oppose SB 20-138.  You can find the contact for your Senator here.

SB 20-093 - Concerning protections related to mandatory agreement provisions, and, in connection therewith, enacting the "Consumer and Employee Dispute Resolution Fairness Act."

As previously reported, for certain consumer and employment arbitrations, the Bill:

• Prohibits the waiver of standards for and challenges for evident partiality prior to a claim being filed and requires any waiver of such provisions after the claim is filed to be in writing;
• Provides that the right of a party to challenge an arbitrator based on evident partiality is waived if not raised within a reasonable time of learning of the information leading to the challenge but that such right is not waived if caused by the opposing party;
• Establishes ethical standards for arbitrators; and
• Requires specified public disclosures by arbitration services providers but includes protections for certain confidential information.

The Bill also requires an individual arbitrator for certain consumer and employment arbitrations to make additional disclosures of information that might affect the arbitrator’s impartiality.

The Bill specifies how attorney fees and other reasonable expenses are to be awarded if a court vacates an award because of an arbitrator’s evident partiality or failure to make required disclosures and clarifies when appeals of orders may be made in consumer and employee arbitrations.

The Bill also provides that for a standard form contract involving a consumer or employee:

• Specified terms are unenforceable as against public policy;
• Including an unenforceable term constitutes a deceptive trade practice under the "Colorado Consumer Protection Act"; and
• How certain cost-shifting provisions are to be interpreted.

The Senate Judiciary Committee Passed SB 93 out of committee, with amendments, on a 3-2 party-line vote on January 29^th and the Senate Passed the Bill on Second Reading, again with amendments, on February 6^th.  SB 93 now remains on the Senate Calendar for Third Reading.  You can find the most recent version of the Bill here.  Of all of the amendments made to the Bill in Committee or on the Senate Floor during Second Reading, only one seems to be aimed at alleviating the construction industry’s concerns with the Bill.  On Second Reading, Senator Foote offered Amendment No. L.010, which added a legislative declaration, reading: “The general assembly declares that nothing in this act is intended to approve, disapprove, modify, or overrule Vallagio at Inverness Residential Condo. Ass’n v. Metro Homes, Inc., 2017 CO 69, 395 P.3d 788.”  While this is nice, it does not do enough to remove the chilling effect on arbitration that the Bill will have.     

If you haven’t already done so, it is imperative that you contact your State Senator to ask him or her to oppose SB 20-138.  You can find the contact for your Senator here.

HB 20-1046 - Concerning payments in construction contracts governing improvements to private real property.

As a refresher, for all construction contracts of at least $150,000, the HB 20-1046 would require:

• A property owner to make partial payments to the contractor of any amount due under the contract at the end of each calendar month or as soon as practicable after the end of the month;
• A property owner to pay the contractor at least 95% of the value of satisfactorily completed work;
• A property owner to pay the withheld percentage within 60 days after the contract is completed satisfactorily;
• A contractor to pay a subcontractor for work performed under a subcontract within 30 calendar days after receiving payment for the work, not including a withheld percentage not to exceed 5%;
• A subcontractor to pay any supplier, subcontractor, or laborer who provided goods, materials, labor, or equipment to the subcontractor within 30 calendar days after receiving payment under the subcontract; and
• A subcontractor to submit to the contractor a list of the suppliers, sub-subcontractors, and laborers who provided goods, materials, labor, or equipment to the subcontractor for the work.

The bill does not apply to contracts with public entities or to a contract concerning one multi-family dwelling of no more than 4 units or one single-family dwelling. A person who fails to make a required payment must pay 1.5% interest per month until the debt is fully paid. In a lawsuit to enforce the bill, the prevailing party is awarded attorney fees and costs.

House Bill 1046 is currently on the Calendar for the House Business Affairs & Labor Committee on February 18^th, for action only.

HB 20-1155 - Concerning requirements that builders of new residences offer buyers options to accommodate higher efficiency devices.

Finally, as previously discussed, current law requires a home builder to offer to a buyer of a new home one of the following:

• A solar panel system or a solar thermal system;
• To prewire or preplumb the home for these systems; or
• A chase or conduit to wire or plumb the home for these systems in the future.

Section 1 of the House Bill 1155 changes this to require that the home builder offer each of these options.

Section 2 requires a home builder to offer one of the following options to a buyer of a newly constructed residence:

• An electric vehicle charging system;
• Upgrades of wiring to accommodate future installation of an electric vehicle charging system; or
• A 208- to 240-volt alternating current plug-in located in a place accessible to a motor vehicle parking area.

Section 2 also requires the home builder to offer electric heating options. These requirements apply to both traditional detached, single-family homes and buildings that contain owner-occupied condominium units.

The House Committee on Energy & Environment passed HB 1155 out of committee, as amended, on an 8-1 vote, on February 13, 2020, sending the Bill to the House Floor, where it is scheduled for Second Reading on February 19, 2020.

For additional information about the Colorado legislative session or construction litigation in Colorado, you can reach Dave McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com