Insurance Coverage for Defective Workmanship
Part 2 of 4- Duty to Defend
Albert B. Wolf - Wolf, Slatkin & Madison, PC
This is the second of a multi--part Construction Law Briefs ® series dealing with questions concerning insurance coverages for defective construction claims. This installment deals with the question of whether a contractor's or a subcontractor's insurance company is required under its policy to defend claims made against their insureds.
One important feature of CGL (comprehensive general liability) insurance policies carried by most contractors and subcontractors involves the insurance companies' "duty-to-defend." That means that when claims are made against policyholders and under certain circumstances, the insurers are required to pay the costs of defending their insureds. Those costs typically involve attorneys' fees and related litigation and/or arbitration expenses.
Whether that "duty to defend" arises is the subject of some confusion among Colorado courts (state and federal) and the Colorado legislature.
It should be observed that the "duty-to-defend" is broader than the "duty-to-indemnify" (pay claims) under Colorado law. If a claim, complaint in a lawsuit or arbitration demand makes allegations that, if proven, would require insurance coverage under the law or facts of the case, the insurance company has a duty-to-defend. The burden is on the insurance company to prove that it has no duty to defend.
It is not unusual for an insurance company to provide a defense for its insured against claims of poor workmanship and later have a court decide that the company had no duty to pay a judgment rendered against the insured. That means that the company would have had no duty to "indemnify." Under these circumstances, the insurance company may have the right to recover its defense costs from its insured if it had previously reserved that right.
The issue was brought to a head by a February 2009 decision of a three-judge panel of the Colorado Court of Appeals in the case of General Security Indemnity Company of Arizona v. Mountain States Mutual Casualty Company. That case ruled that the insurance companies for a framing subcontractor's sub-subcontractors who themselves were not accused of defective workmanship that caused damage to other property or people were not required to pay costs to defend claims. In short, the court held that the sub-subcontractor's insurance companies had no duty to defend because the work of the sub-subcontractors did not damage other property or other persons.
The court arrived at that decision by choosing between what it perceived were the majority and minority views of courts of other jurisdictions. It determined that the majority rule, bolstered by fragments of earlier Colorado appellate court decisions, should be applied. Under that rule, typical CGL policy language is interpreted to mean that unless the specific claims were for defective workmanship of the insured contractor that resulted in consequential (collateral) damages, such as personal injury or property damage to property other than the defective work itself, the companies were not obligated to defend. The court concluded that claims of poor workmanship, standing alone, did not require the framing sub-subcontractors' CGL insurance carriers to pay or share in the defense costs.
In the General Security case, the court mentioned damage to property of "third parties." What remains unclear is whether damage to non-defective other work on the same project is other property that would require the insurance company to defend. For example, there are many decisions from courts in other jurisdictions holding that where faulty workmanship caused damage to other soundly constructed portions of the same building or home, there were both indemnity coverages and duties of the insurance carriers to defend the claims against their policyholders.
However, a Colorado federal trial court judge has ruled that two builders of two separate homes were not entitled to defense costs from their insurance carriers when their defective foundation or soils work also caused damages to patios, garages and driveways of their houses. The judge ruled that the entire homes were part of the builders' "work product" and there was accordingly no insurance coverage either for defense or indemnity. That decision is on appeal to the federal appeals court that had asked the Colorado Supreme Court to decide the issue because Colorado law must be applied, but the Supreme Court has declined. That issue was not resolved in the General Security case, but it will undoubtedly be decided in a later case.
Also, as noted in Part I of this Construction Law Briefs ® series, the fact that a different panel of the Colorado Court of Appeals reached a conflicting result in 2005 in interpreting similar CGL policy language. That panel held that unexpected and unintended defective workmanship was an "accident" that required insurance coverages, both indemnity and, necessarily, defense and without the necessity of damage to other property. One major treatise on construction law has recently not only quoted extensively from the 2009 General Security decision, but has commented that the trend in other jurisdictions appears to favor CGL coverage for all defective construction. Those conflicting results are likely to prompt consideration and perhaps a final decision on the issues by the Colorado Supreme Court at some future time.
Until then, stay tuned.
(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.)