Shoddy Work, Negligent Construction, and Reconciling the Irreconcilable Under Cgl Policies
| Publication year | 2009 |
| Pages | 43 |
2009, November, Pg. 43. Shoddy Work, Negligent Construction, and Reconciling the Irreconcilable Under CGL Policies
November 2009
Vol. 38, No. 11 [Page 43]
Construction Law articles are sponsored by the CBA Construction Law Section. Tort and Insurance Law articles provide information concerning current tort law issues and insurance issues addressed by practitioners representing either plaintiffs or defendants in tort cases. They also address issues of insurance coverage, regulation, and bad faith.
Coordinating Editors
Construction Law: James W. Bain of Benjamin, Bain & Howard, L.L.C., Greenwood Village-(303) 290-6600, jamesbain@bbhlegal.com
Tort and Insurance Law: William P. Godsman of the Law Office of William Godsman, Denver-(303) 455-6900, wgodsman@qwestoffice.net
About the Authors
Harmon S. Graves of Harmon S. Graves, P.C., Littleton, represents homeowners and contractors in disputes arising out of construction defects and insurance coverage-harmongraveslaw@qwestoffice.net. Ronald M. Sandgrund is of counsel and Leslie A. Tuft is an associate with the law firm of Sullan,2 Sandgrund, Smith & Perczak, P.C. in Denver-rsandgrund@vsss.com, ltuft@vsss.com. The firm represents commercial and residential property owners and homeowner associations and unit owners in construction defect and insurance coverage disputes.
Shoddy work and unintended negligent construction causing latent property damage find their way into construction projects, but access to insurance coverage for resulting liability is restricted. This article discusses the recent opinion, General Security Indemnity Company of Arizona v. Mountain States Mutual Casualty Company, the court's analysis of an "occurrence" under a commercial general liability policy, and the implications for liability insurers and their policyholders.
In General Security Indemnity Co. of Arizona v. Mountain States Mutual Casualty Co. (General Security),(fn1) the Colorado Court of Appeals held that defective workmanship alone does not constitute an occurrence under a commercial general liability (CGL) insurance policy, and vague allegations of other or consequential damages are insufficient to give rise to an insurer's duty to defend. Neither rehearing nor certiorari was sought. This article discusses General Security and its ramifications, especially relating to liability insurers timely defending insured contractors in construction defect lawsuits.
Case Background
The dispute arose from a homeowner association (HOA) construction defect claim against a builder-developer (Developer). The HOA asserted that Developer's negligence and breach of express and implied warranties resulted in property damage to various condominium common elements and units.
Developer brought a third-party indemnity action for breach of contract, breach of express warranty, and negligence against many of its subcontractors, including Foster Frames. Foster Frames filed a fourth-party complaint against its own subcontractors (Sub-Subcontractors) seeking indemnity. Developer's third-party complaint later was dismissed and the dismissal affirmed on appeal. The trial court stayed Foster Frames' fourth-party claims during the pendency of Developer's appeal of the dismissal of its third-party claims.
General Security Indemnity Company of Arizona (GSINDA) insured Foster Frames and defended it against Developer's claims. Six other insurers insured Foster Frames' Sub-Subcontractors. These other insurers' policies allegedly named Foster Frames as an additional insured, but they refused to participate in Foster Frames' defense. GSINDA sued these other insurers (Insurer Defendants), seeking a declaratory judgment that the underlying claims triggered one or more of these Insurer Defendants' duties to defend, equitable contribution, equitable subrogation, equitable indemnity, and damages for reimbursement. The trial court granted Insurer Defendants' summary judgment motions against GSINDA's claims, determining that the property damage alleged by the HOA was not caused by an "occurrence," as defined by Insurer Defendants' policies. GSINDA appealed.
None of the usual adversaries in a construction defect case, such as an insured builder/contractor and its insurer or a subrogated homeowner, were involved in the appeal. Coverage issues, which profoundly affect homeowners damaged by negligent construction, were advocated by insurance companies from whom damaged homeowners traditionally seek recovery of last resort. Insurer versus insurer disputes litigated in such off-label appeals may present a poor forum for determining significant insurance coverage questions.(fn2)
Procedural Posture and Standard of Review
The Colorado Court of Appeals determined that the threshold question, to be examined de novo, was whether, construing the underlying pleadings in the light most favorable to finding coverage, a reasonable potential for coverage existed under any of Insurer Defendants' policies-that is, whether the underlying pleadings alleged an occurrence.(fn3) An insurer's duty to defend arises when allegations in a complaint potentially implicate the insurer's indemnity obligation.(fn4)
CGL Policy Provisions
The policy provisions at issue conformed generally to the standard Insurance Services Office, Inc.'s(fn5) (ISO) post-1986 policy form, and provided, in pertinent part:
1. Insuring Agreement
We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies. . . .
This insurance applies to "bodily injury" and "property damage" only if:
(1) The "bodily injury" or "property damage" is caused by an "occurrence" that takes place in the "coverage territory"; and
(2) The "bodily injury" or "property damage" occurs during the policy period.
The policies defined the word "occurrence," with some minor differences among them, as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." Accordingly, all policies required an accident resulting in property damage, as defined by the policies, to occur during the applicable policy period to trigger coverage.(fn6)
Holding
GSINDA argued that because Sub-Subcontractors did not know, intend, or expect property damage to result from their work, the HOA's complaint and Developer's third-party complaint sufficiently alleged that Developer's defective workmanship resulted from an occurrence (or an accident, under some of the policies). The Colorado Court of Appeals held that "a claim of defective workmanship, standing alone, does not allege an occurrence," and affirmed summary judgment in favor of Insurer Defendants, finding the underlying construction defect complaints did not allege an occurrence triggering a duty to defend.(fn7)
The Court's Examination of the Policy Language
The court concluded that allegations of negligent construction, without more, such as consequential property damage or loss of use arising from the negligence, do not constitute allegations of a covered occurrence. The complaint's allegations of essentially poor workmanship alone, causing unspecified property damage, did not allege a fortuitous event and, therefore, did not allege an accident. In contrast, the court said that an accident and an occurrence are present when a third party suffers consequential damage as a result of the insured's activity.(fn8)
General Security
relied on the requirement that an occurrence involve an "accident," a term the policies did not define. In Colorado, undefined insurance policy terms must be given the broadest reasonable interpretation possible, with all doubts resolved in favor of coverage for the insured.(fn9) General Security said that other courts had equated an accident with a fortuitous event,(fn10) and noted that previous Colorado decisions had defined "accident" as "an unanticipated or unusual result flowing from a commonplace cause."(fn11) This particular definition of "accident" can be traced to life insurance cases(fn12) examining the distinction between "accidental means" and "accidental results."(fn13)
Reliance on Hottenstein and McGowan
The court of appeals previously concluded in Union Insurance Co. v. Hottenstein(fn14) that poor workmanship alone constituting a breach of a construction contract was not an occurrence. Drawing strength from Yegge v. Integrity Mutual Insurance Co.,(fn15) Hottenstein seemed to embrace the reasoning of an Iowa court that a breach of contract generally does not constitute an accident, and were it so construed, a CGL policy might be converted into a performance bond.(fn16)
In Hottenstein, the insurer did not contest coverage for those damages allocated to a negligent construction claim.(fn17) General Security then extended the Hottenstein rule, consistent with what it described as the majority rule, to all damages claims arising from poor workmanship, standing alone, whether founded in contract, tort, or breach of warranty.(fn18) The court rejected the minority rule (which some commentators view as the emerging or modern view), that damage resulting from faulty workmanship is an accident and covered occurrence, "so long as the insured did not intend the resulting damage."(fn19)
In McGowan v. State Farm Fire and Casualty Co.,(fn20) also cited by General Security, the trial court found that defective construction, for which a default judgment was entered against the builder based on tort and contract claims, constituted an occurrence under a CGL policy. Coverage, however, fell victim to a policy exclusion...
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