Chapter 6 - § 6.3 • PROFESSIONAL LIABILITY INSURANCE
| Jurisdiction | Colorado |
Many construction defect claims contain allegations of deficiencies in both construction and design. Construction deficiencies that cause property damage are covered under CGL policies. CGL policies, however, specifically exclude any damages caused by the rendering or failure to render professional services. Professional liability insurance picks up this exposure. It typically provides coverage on a claims-made basis for architects, engineers, surveyors, and other design professionals. Recently, the use of design-build projects has grown tremendously. In these types of projects one entity is responsible for both the design and construction of the project. This setup requires careful consideration in how a liability insurance program is put together.
§ 6.3.1-Nature of the Claim and Litigation Factors66
As with most large undertakings, a construction project needs a variety of disciplines to accomplish the job. One such group is the design team, typically consisting of the architect and his or her consulting engineers, or a design-build contractor.
Negligence and breach of contract are the common legal theories asserted against design professionals by owners. However, a design professional's liability can also extend to those outside the contractual relationship if it results from a mistake and causes damage to a third party. In those situations, the claim is typically based upon negligence. Colorado, like other jurisdictions, has determined that a negligence claim cannot be brought against a design professional if the plaintiff (injured party) is seeking solely economic damages. This "economic loss rule" is based on the general rule that no cause of action lies in tort when purely economic damage is caused by a negligent breach of a contractual duty. This economic loss rule prevents recovery for negligence when the duty breached is a contractual duty and the harm incurred is the result of failure of the purpose of the contract. Otherwise, the injured party could avoid the contractual limitation remedy.
The Colorado Supreme Court has set out the parameters of the economic loss rule in two decisions: Town of Alma v. Azco Construction, Inc.67 and Grynberg v. Agri Tech, Inc.68 In these cases, the court officially adopted the economic loss rule and explained the rule's origin and how it should be applied.
The court began by noting that the economic loss rule is intended to maintain the boundary between contract and tort law. The economic loss rule emerged largely from the development of products liability jurisprudence. The court explained that the underlying rationale for the economic loss rule is that tort obligations generally arise from duties imposed by law. Tort law is designed to protect all citizens from the risk of physical harm to persons or to their property. In contrast, contract obligations arise from promises made between the parties. Contract law is intended to enforce the expectancy interests created by the parties' promises so that they can allocate risks and costs during their bargaining. Limiting tort liability when a contract exists between the parties is appropriate because a product's potential non-performance can be adequately addressed by rational economic actors bargaining at arm's length to shape the terms of the contract.
The court also explained that the key in determining the availability of a contract or tort action lies in determining the source of the duty that forms the basis of the action.69
The question, thus, is not whether the damages are physical or economic. Rather the question of whether the plaintiff may maintain an action in tort for purely economic loss turns on the determination of the source of the duty [the] plaintiff claims the defendant owed. A breach of a duty which arises under the provisions of a contract between the parties must be redressed under contract, and a tort action will not lie.70
A party suffering only economic loss from the breach of an express or implied contractual duty may not assert a tort claim for such a breach absent an independent duty of care under tort law. Economic loss is defined generally as damages other than physical harm to persons or property.
The court recognized several situations where special relationships, by their nature, automatically trigger an independent duty of care that supports a tort action, even when the parties have entered into a contractual relationship. Examples of such relationships include attorney/client, physician/patient, and insurer/insured. Common law fraud claims and negligent misrepresentation claims also exist independently of a breach of contract claim.71
The economic loss rule is an excellent defense tool in construction cases to dismiss a plaintiff's or co-defendant's tort claims. This is especially true in construction situations because almost all the parties' duties are governed by written contracts. However, the economic loss rule has little or no application in the context of residential construction where the claimant is the homeowner or its successor-in-interest.72
The defense attorney must be mindful of the ethical difficulties associated with filing a motion to dismiss or a motion for summary judgment based on the economic loss rule where the granting of such a motion may take his or her client outside of insurance coverage. Counsel defending a party and considering a motion based on the economic loss rule should carefully review Colorado Bar Association Formal Ethics Opinion 91 and the Colorado Rules of Professional Conduct before filing such a motion.
The economic loss rule is limited to cases in which only economic damages are sought, and does not prevent a negligence action to recover for physical injury to property or persons, since those duties arise independently of the contract. Another exception to the rule is negligent misrepresentation: one who, in the course of employment, supplies false information for the guidance of others in their business transactions is subject to liability for the pecuniary loss caused to them by their justifiable reliance upon that information, if that information is incorrect and the supplier was negligent.73
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