Tcd and Colorado Pool—the Bogeyman Lurks
| Publication year | 2014 |
| Pages | 43 |
| Citation | Vol. 43 No. 4 Pg. 43 |
Tort and Insurance Law
TCD and Colorado Pool—The Bogeyman Lurks
By Ronald M. Sandgrund, Leslie A. Tuft
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 Editor
William P. Godsman of the Law Office of William Godsman, Denver—(303) 455-6900, willgodsman@gmail. com
About the Authors
Ronald M. Sandgrund (of counsel) and Leslie A. Tuft (associate attorney) are with the Sullan[2] , Sandgrund, Perczak & Nuss Construction Defect Group of Burg Simpson Eldredge Hersh & Jardine, P.C. The firm represents commercial and residential property owners, homeowner associations and unit owners, construction professionals, and insurers in construction defect and insurance coverage disputes. Sandgrund and Tuft have authored many amicus briefs from the policyholder's perspective, and filed amicus briefs in the Colorado Pool case discussed here; Sandgrund helped write most of Colorado's Construction Professional Commercial Liability Insurance Act, CRS § 13-20-808.
This article summarizes two Colorado Court of Appeals decisions concerning whether the consequences of negligent construction constitute an "accident" under standard-form commercial general liability insurance policies. It also discusses why a definitive answer to this question has proven to be so elusive and considers whether Colorado's Construction Professional Commercial Liability Insurance Act, CRS § 13-20-808(3), offers resolution.
The crux of the difficulty in reconciling current Colorado state and federal authority regarding insurance coverage for property damage caused by construction defects is a fundamental conflict between two lines of contract interpretation. The first line of authority requires that the undefined term "accident" in standard commercial general liability (CGL) insurance policies be given its plain and ordinary meaning, and has found that term to encompass any faulty construction (negligent, defective, or shoddy work) done either unwittingly or without the subjective intent or expectation it would result in property damage to the work itself or other work. The second line of authority seeks to give meaning to all of the policy's terms, but implicitly also seeks to avoid a purportedly unreasonable construction that might open the floodgates to insurance coverage for the cost of repairing all improperly performed work, and has found that the term "accident" does not include faulty construction without accompanying damage to non-defective property.
Some commentators have proposed resolving this conflict by: applying the standard-form CGL policy's plain and ordinary meaning, including a common understanding of the word "accident," which encompasses all negligent conduct that results in property damage whether to the negligent work itself or other work; not "implying" limitations on coverage that are not expressly set out in the policy; out, limiting coverage Dy applying, as relevant, the policy's myriad 'Business risk" exclusions (there are at least seven[1]). These commentators argue that the insurance industry drafted these exclusions to demarcate precisely what is and is not covered when the insured's negligent, shoddy, or defective work causes property damage. The same commentators argue against assuming that simply because poor construction may reasonably or foreseeably result in the need to repair or remedy deficient work, poor construction constitutes a non-accident, because this assumption rests on the unproven inference that the insured knew in the first instance that it performed its work improperly and repairs would be required.
Alternatively, in light of the CGL policy coverage ambiguities identified by the Colorado Court of Appeals and the U.S. Court of Appeals for the Tenth Circuit, policyholders argue that retroactively applying the Colorado Legislature's proffered reasonable construction of these ambiguities, codified in the Construction Professional Commercial Liability Insurance Act (Act), CRS § 13-20-808(3), does not implicate the prohibition against unconstitutional retrospective legislation. Policyholders argue that the ambiguous meaning of the undefined word "accident" nullifies the argument that applying the Act retroactively would improperly upset an insurer's reasonable expectations regarding coverage for the consequences of negligent construction, especially in light of the Act's preservation of the policy's business risk exclusions.[
2
]The insurance industry rejects both the policyholder and legislative responses to the problem, arguing that under no circumstances should an insurer be liable to correct deficiencies in or damage to the insured's own work, regardless of whether that work is defective. The industry strongly inveighs against the legislature trying to regulate what risks insurers should and should not underwrite, warning that such efforts only interfere with the free market and, ultimately, make insurance less available or more costly.
The TCD, Inc. v. American Family Mutual Insurance Co. Opinion
In TCD, Inc. v. American Family Mutual Insurance Co., a general contractor, TCD, sued its insurer for declaratory judgment, breach of contract, and negligence arising from the insurer's refusal to defend and indemnify the contractor against counterclaims asserted in an underlying action.[3] Specifically, the developer claimed in the underlying action that TCD's subcontractor had improperly installed a roof that would not pass a certificate of occupancy inspection; that the work did not meet contract specifications; that TCD's subcontractor walked off the job; that TCD failed to correct the roof's deficiencies; and that the work was not performed in a workmanlike manner due to its various defects.[4]
The Colorado Court of Appeals affirmed the trial court's summary judgment grant, holding that the developer's counterclaims against TCD sounded in both tort and contract, but that the counterclaims did not seek damages because of "property damage," as the policy defined that term, and did not implicate an accident, a necessary prerequisite to establishing an "occurrence" (also a defined term) sufficient to trigger coverage. The court refused to retroactively apply § 808(3) of the Act, which requires courts to presume that property damage resulting from construction defects, including damage to a construction professional's work itself, is an accident, unless the construction professional intended and expected the resulting damage or the policy otherwise excludes coverage for the damage.[5]
In response to TCD's contention that the developer's counterclaims alleged property damage covered by the insurer's CGL policy (under which TCD was an additional insured), the court observed that the gist of the underlying allegations, sounding both in tort and contract law, was that TCD's subcontractor had improperly installed the roof, "resulting in a defective roof and causing TCD to breach its contract with [the developer]."[6] The court held that the allegations did not "fit within the fair, natural, and reasonable meaning of 'property damage"' as defined by the policy, and that '"a claim for damages arising from poor workmanship, standing alone, does not allege an accident that constitutes a covered occurrence. . . ."'[7] The court also held that although coverage may attach "when consequential property damage has been inflicted upon a third party as a result of the insured's activity," because the counterclaims did not contain a "specific allegation" of "consequential damage to a third party or non defective property," this corollary coverage principle did not apply.[8] The TCD court then refined this corollary principle, as previously enunciated by a different Colorado Court of Appeals panel in General Security Indemnity Co. of Arizona v. Mountain States Mutual Casualty Co. {General Security), by adopting the Tenth Circuit's broader view of what constitutes such corollary covered consequential damage, articulated in Greystone Construction v. National Fire & Marine Insurance Co. (Greystone).[9]
The TCD court also refused to broaden Colorado’s four corners rule, which gauges an insurer’s duty to defend by comparing the allegations within the four corners of the complaint to the policy’s coverage, and therefore did not permit TCD to offer evidence outside the counterclaims to determine the insurance company’s duty to defend.[10] In doing so, the TCD panel distinguished two Tenth Circuit decisions that had predicted the Colorado Supreme Court would deviate from the four corners rule under very narrow circumstances that TCD admitted did not apply to its claims.[11] Finally, TCD, following Greystone, held that Colorado’s General Assembly did not intend CRS § 13-20-808(3) to apply retroactively, and that the Act did not apply to liability policies whose policy term expired before the Act’s May 21, 2010 effective date. [12]
The Colorado Pool Systems, Inc. v. Scottsdale Insurance Co. Opinion
In Colorado Pool Systems, Inc. v. Scottsdale Insurance Co., a swimming pool contractor, Colorado Pool, and its owner sued its insurer and the insurer's independent claims adjuster for reimbursement of losses arising from the cost of demolishing and replacing an improperly constructed pool.[13] Colorado Pool agreed to build a community swimming pool and, through subcontractors, constructed the pool's concrete shell by pouring it around a rebar frame within an excavation. After Colorado Pool poured the concrete shell, an inspector found that some of the shell's rebar was misplaced and rejected Colorado Pool's proffered fixes of the defective shell...
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