Insurance Coverage for Defective Workmanship
Part 1 of 4 - Duty to Defend
Albert Wolf - Wolf, Slatkin & Madison, PC
This is the first installment of at multi-part Construction Law Briefs ® column addressing coverages under commercial comprehensive general liability (CGL) insurance policies. These columns were prompted by a recent Colorado Court of Appeals decision and a 2010 statute passed by the Colorado legislature that appears to be an attempt to overrule that case and clarify CGL insurance coverages.
This first part will deal with the issue of whether and under what conditions construction defect claims are covered, the second part will deal with insurance companies' duty to defend claims against their contractor-policyholders, and the third will deal with the Colorado legislature's attempt to address coverage issues. A fourth installment is expected to be an attempt to suggest what might be expected by CGL policyholders.
Colorado law is in a state of flux over insurance coverage under contractor (and subcontractor) insurance policies for defective or poor workmanship. Typically, their policies are called comprehensive general liability (CGL) that, in truth, are neither comprehensive nor general. According to a bill passed by the Colorado legislature, those policies "have become increasingly complex, often containing multiple, lengthy endorsements and exclusions conflicting with the expectations of the insured."
There are two benefits provided by CGL policies that are of concern to contractors and subcontractors when they are accused of defective workmanship: (1) the payment of costs to defend the contractor against claims (called the insurer's "duty-to-defend"), and (2) insurance company liability for payment of claims or judgments against their insureds for defective workmanship (the insurer's "duty-to-indemnify"). This column will address only the indemnity aspect. The defense aspect will be considered in a later Construction Law Briefs ® column.
As it now appears and based upon a somewhat controversial 2009 decision of a three-judge panel of the Colorado Court of Appeals that has received national concern, CGL policies do not cover claims for damages if the defective workmanship does not result in harm or damage to something or someone other than the defective work product itself. For example, under that case, if the contractor installs flooring that is chipped, cracked, buckled and heaved, the typical CGL insurance policy would not cover a claim for repair or replacement of the floor, but would provide coverage for injuries suffered by someone who slips and falls on the defectively installed floor.
Whether, under that flooring example, Colorado law would require insurance coverage for water seepage damages caused to the soundly constructed flooring substrate or areas below the defective floor is not entirely clear. Based upon the above-mentioned Court of Appeals case, that would appear to depend upon whose insurance would be involved. If it's the flooring subcontractor's insurance, Colorado courts would likely rule in favor of coverage for damages to the substrate and lower areas because those were not areas of that subcontractor's work. If it's the general contractor's insurance, Colorado law is not entirely clear. There is a Colorado federal trial court decision of non-coverage under similar circumstances. However, that case is on appeal to the federal appellate court. Interestingly, the appellate court has asked the Colorado Supreme Court to decide the issue because that court has the last word on Colorado law, but it has refused to address the issue.
The 2009 Colorado Court of Appeals is the General Security Indemnity Company of Arizona v. Mountain States Mutual Casualty Company case ("General Security"). In that case, the panel wrestled between what it found to be the majority and minority views of courts in other jurisdictions. It sided with the majority over the interpretation of the insurance policy use of the word "occurrence" which is defined in CGL insurance policies as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."
The General Security decision can be understood to have ruled that in a construction defect case there is no "accident" (and therefore no "occurrence") and no insurance coverage if only the defective work itself is damaged. The court concluded that ". . . claims of defective workmanship, standing alone, do not constitute an 'occurrence.'" The court observed that if, however, the defective work results in harm or damage to someone or some other property, there is an "accident" and resulting insurance coverage -- unless other policy exclusions apply. In short, no coverage unless there is consequential damage, i.e. damage to something or someone else.
Notably, in 2005 a different three-judge panel of the Colorado Court of Appeals had ruled otherwise. It held that if the insured had not intended or expected the damage caused by its defective work, there was an "accident" and an "occurrence" and insurance coverage. The General Security case judges disagreed with the conclusions as the earlier case. Under these circumstances where two different panels of the Colorado Court of Appeals render conflicting decisions, the issues are decided by the Colorado Supreme Court upon application of one of the parties. However, neither party in the General Security case requested a supreme court review. That's not surprising since all of the parties to that case were insurance companies who, in later cases, might benefit from the rulings.
Relying upon the decision in General Security, the federal trial court ruled that there was no insurance coverage for two separate residential homebuilders whose homes had suffered structural damage from admittedly poor foundation or soils work. The trial court reasoned that there was only property damage to the homes themselves that were the work product of the builders. Damages to other parts of the homes, i.e. patios, garage, porch and driveways were not considered by the court to have been consequential because they were parts of the homes built by the contractors. No "consequential damage" to anything other than the home, no insurance coverage!
The appeal of that case prompted the federal appeals court to ask the Colorado Supreme Court: "Is damage to non-defective portions of a structure caused by conditions resulting from a subcontractor's defective work product a covered "occurrence" under Colorado law?" The Colorado Supreme Court declined to answer.
All this could have been or could still be solved by the CGL insurance companies since most have banned together by using a company, Insurance Services Office, Inc., to prepare insurance policy language. That organization or the various companies selling CGL insurance can certainly adopt policy language that clearly spells out what their policies cover and what is not covered. Why don't they?
(EDITOR'S NOTE: Albert B. Wolf is a principal in the Denver law firm of Wolf Slatkin & Madison P.C. This column was written with the intent of providing general legal information intended to be reasonably accurate although not comprehensive. Readers are therefore urged to consult their attorneys for any specific legal advice they may desire concerning the subject matter of this column.)