As is often the
case in construction defect and other insurance defense litigation, a plaintiff’s
claims for relief typically encompass both covered and uncovered damages. Obviously, it is in the insured’s best
interests to have as many damages covered by insurance as possible. From the insurer’s perspective and against
the backdrop of owing duty of good faith and fair dealing to its insureds,
however, it is generally better to have an allocation of covered vs.
non-covered damages. This places the insurer, insured, and insurance retained defense counsel in a difficult position.
A recent opinion from
U.S. District Court for the District of Colorado, Rockhill Ins. Co. v.
CFI-Global Fisheries Mgmt, Civil Action No. 1:16-CV-02760-RM-MJW, 2020 U.S.
Dist. LEXIS 35209 (D. Colo. Mar. 2, 2020), sheds light on the issue, even
though some may feel it only further muddies already murky waters.
Rockhill involved review of
an arbitration proceeding that property-owner, Heirloom I, LLC (“Heirloom”)
filed against CFI-Global Fisheries Management (“CFI”). Rockhill Insurance Company (“Rockhill
Insurance”) was asked to defend the arbitration as CFI’s professional and
general liability insurer. At issue in
the arbitration was Heirloom’s claim that CFI defectively designed and
constructed a fisheries enhancement that was destroyed by natural processes
four times in three years.
Rockhill Insurance
agreed to defend the arbitration but reserved the right to deny coverage based on
various exclusions, including a faulty workmanship exclusion. The arbitrators ultimately awarded Heirloom
$609,995.91, and the parties subsequently stipulated an additional $265,000
award of attorney fees. The decision was not accompanied by a reasoned award as
neither party requested such.
Prior to the
issuance of the arbitration award, Rockhill Insurance filed a federal
declaratory judgment action against CFI and Heirloom alleging that it had no
duty to defend and indemnify CFI in the arbitration. CFI asserted counterclaims for declaratory
judgment, breach of contract, and bad faith for Rockhill Insurance’s failure to
timely settle. After the arbitration
award entered, the U.S. District Court for the District of Colorado granted summary
judgment in favor of Rockhill Insurance, holding, in pertinent part, that the
entirety of the arbitration award was excluded under the policy’s faulty
workmanship exclusion.
The Tenth Circuit
Court of Appeals, in Rockhill Ins. Co. v. CFI-Global Fisheries Mgmt., 782 F. App'x
667 (10th Cir. 2019), disagreed, and found that the faulty
workmanship exclusion did not apply to design failing, and remanded the case
for the district court to consider in the first instance whether the entire
arbitration award is covered under a correct reading of the exclusion, or
whether the damages could be apportioned between covered professional design
services and non-covered construction work.
On remand, the Rockhill court emphasized
that because Rockhill Insurance controlled the defense, it “had a corresponding
duty to ensure that the damages were allocated between those that were covered
under CFI’s policy and those that were not.” Because Rockhill Insurance failed to request
an allocated or reasoned award, the arbitrators issued a standard,
non-explanatory, award that said nothing with respect to allocation between
covered and non-covered damages. Under
such circumstances the Rockhill court held that all damages
awarded are presumed covered under the policy.
To support its finding that Rockhill Insurance did not meet its burden
of establishing that it was not liable for the entire award, the Rockhill
court relied on the fact that the arbitrators were presented with evidence
that CFI’s design work was so faulty that that project was destined to fail,
and there was no evidence that any of the damages awarded were due solely to
CFI’s construction work.
Though the Rockhill
decision may surprise Colorado insurance practitioners, especially insurance
defense attorneys, one must bear in mind that like other opinions of the U.S.
District Court for the District of Colorado, Rockhill is not
binding on Colorado state courts. Further,
Rockhill does not go so far as to expressly state that insurance
defense counsel has any affirmative duty to seek an allocation between covered
and non-covered damages, or that an insurer can direct insurance defense
counsel to seek such an allocation. Such
a proposition would insert potentially prejudicial coverage issues into a case
in direct contravention of, for example, Colorado Rule of Evidence 411 or
insurance defense counsel’s ethical duties as set forth in Colorado Ethics
Opinion 91.
The important
takeaway from Rockhill is that it highlights the danger for
insurers relying on coverage defenses that do not, prior to an action’s
conclusion, at least request intervention in order to seek allocation
of covered vs. non-covered damages. While
Colorado courts almost always deny such requests, the fact that such a request
was made can be used in an effort to preserve an insurer’s right to
subsequently seek allocation. If no
request is made, regardless of whether it is successful, Rockhill makes
clear that the carrier risks both waiving its right to seek allocation after
the fact, and liability for an entire damages award.
Rockhill’s effect may be
that insurers ramp up efforts to request that an insured seek allocation
through not only special verdict forms and reasoned arbitration awards, but
also case investigation and discovery.
The extent to which it is advisable for an insured defendant to
cooperate with such requests is outside the scope of this article. In such situations, insurance defense counsel should
inform its client of the issues and the client’s right to consult with, and
follow, the often nuanced, case-specific advice of coverage or other independent
counsel.
For additional information regarding the Rockhill decision, or construction litigation in Colorado, you can reach out to Todd Likman by telephone at (303) 987-9814 or by e-mail at likman@hhmrlaw.com.
