Construction Defect Breach of Contract

No Coverage for Counterclaim Alleging Construction Defects Pled as Breach of Contract

Tred Eyerly
September 5, 2012

The Colorado Court of Appeals considered whether counterclaims against the insured for alleged faulty construction work were based in contract or constituted allegations of an "accident" under the policy. TCD, Inc. v. Am. Family Mutual Ins. Co., 2012 WL 1231964 (Colo. Ct. App. April 12, 2012).

The developer, Frisco Gateway Center, LLC, contracted with TCD, the general contractor, to construct a building. TCD, in turn, subcontracted with Petra Roofing to install the roof. The subcontract required Petra to "indemnify, hold harmless, and defend" TCD against claims arising out of resulting from the performance of Petra's work on the project. Petra was also required to name TCD as an additional insured on its CGL policy.

After a dispute arose between TCD and Gateway regarding payment and performance on the project, TCD sued Gateway and other parties seeking payment. Gateway counterclaimed against TCD for breach of contract  and negligence. TCD demanded coverage from Petra's insurer, but coverage was denied.

TCD sued Petra and its insurer for declaratory judgment, breach of insurance contract, and negligence. The trial court entered granted summary judgment in favor of the insurer.

On appeal, TCD contended that Gateway's counterclaims were allegations of "property damage." The court disagreed. There were no allegations in the underlying complaint of an "accident" which would trigger an "occurrence." Instead, the counterclaims alleged that Petra improperly installed the roof, resulting in a defective roof, causing TCD to breach its contract with Gateway. Further, there was no allegation that Petra caused damage beyond its own work product. The court concluded these allegations sounded in contract and tort law, and did not fit within the reasonable meaning of "property damage." 

The court also considered the impact, if any, of Colorado's section 13-20-808, after which early versions of Hawaii's Act 83 was modeled. The Colorado statute provided,

[i]n interpreting a liability insurance policy issued to a construction professional, a court shall presume that the work of a construction professional that results in property damage, including damage to the work itself or other work, is an accident unless the property damage is intended and expected by the insured.

The statute, however, was not retroactive. It applied to all insurance policies currently in existence or issued on or after May 21, 2010, the date of enactment. Here, the policy was entered in 2006.

SOURCE: www.insurancelawhawaii.com

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