CONSTRUCTION LAW IN THE NEWS November 2011 A Construction Law Update New Colorado Court Decision Impacts Insurance Coverage for Construction Defects www.polsinelli.com C onstruction defect claims in Colorado can be a menace to construction professionals, both from a corporate perspective as well as a personal perspective. In Colorado, both your company and you personally can be sued for construction defects. What stands between you, your company and these lawsuits? Your insurance. A recent Colorado court decision could impact your protections. In Greystone Const., Inc. v. National Fire & Marine Ins. Co., No. 09-1412 (10th Cir. 11/1/2011), the United States Court of Appeals for the Tenth Circuit revisited the recurring question of whether property damage caused by a subcontractor s faulty workmanship is an occurrence for purposes of a commercial general liability (CGL) insurance policy. Reviewing trends in this area of the law and rejecting a recent analysis by the Colorado Court of Appeals that swept too broadly, the Tenth Circuit predicted that the Colorado Supreme Court would hold that any unintended damage to property caused by improper or faulty workmanship can constitute an occurrence so long as the damage is to property other than a contractor s own work. To understand the Tenth Circuit s decision, it helps to start with a concrete example. Suppose a Chicago Dallas Edwardsville Jefferson City Los Angeles New York St. Joseph St. Louis Springfield Topeka Washington DC Wilmington DE Redefining the Business of Law SM
CONSTRUCTION LAW E-ALERT contractor does a bad job installing windows that leak and cause water damage to a building. The majority of cases construing CGL policy coverage for this property damage will generally exclude the cost of repairing or replacing the windows themselves (the contractor s own faulty work), but will cover the cost of repairing parts of the building suffering water damage as a result of the leaky windows. Next, it helps to set the stage for the Tenth Circuit s decision. Colorado case law addressing this coverage scenario has long been somewhat confusing, largely because of outlier cases like American Employer's Ins. Co. v. Pinkard Const. Co., 806 P.2d 954 (Colo. App. 1990), which held that damages caused by the partial collapse of a defectively installed roof were a covered occurrence including the cost of repairing the defective roof itself. Then in 2009, the Colorado Court of Appeals switched gears in General Security v. Mountain States Mutual, categorically holding that a claim for damages arising from poor workmanship, standing alone, does not allege an accident that constitutes a covered occurrence. 205 P.3d 529, 534 (Colo. App. 2009). This holding took the construction industry by surprise because it didn t just preclude coverage for a contractor s faulty workmanship itself (e.g., the cost of repairing or replacing the windows), but also precluded coverage for all property damage caused by a contractor s faulty workmanship (e.g. the cost of repairing the water damage caused by the leaky windows). In 2010, the Colorado General Assembly responded to General Security by enacting C.R.S. 13-20-808, which attempts to legislatively overrule the General Security decision by directing courts to interpret CGL policies broadly in favor of coverage, and in other particular ways in this scenario. One question created by the new statute was whether it would apply retroactively, since the statute states that it applies to all insurance policies currently in existence... caused by shifting soils. A homebuilder used a foundation subcontractor that did not adequately design and construct soil-drainage and structural foundation elements for Colorado's notorious shifting soils. Two homeowners sued for resulting damage to their houses living areas, including the upstairs rooms, garage, patio, porch, and driveway. After this underlying defect litigation concluded, the builder and the CGL insurer that defended it filed a federal court lawsuit against a CGL insurer that refused to participate in the defense. The threshold issue was whether the underlying lawsuit alleged a potentially covered "occurrence." The U.S. Federal District Court for Colorado followed the Colorado Court of Appeals recent decision in General Security to hold that the property damage to the houses could not be a covered occurrence. That is, not only was the cost of repairing the faulty foundations not covered, but the damage to the upstairs rooms, garage, patio, porch and driveway was also not covered. The General Assembly enacted C.R.S. 13-20-808 while the Greystone case was being appealed to the Tenth Circuit. If this new statute applied retroactively, then the Tenth Circuit s job would have been simplified the legislative overruling of General Security would apply to the Greystone case to require coverage. However, the Tenth Circuit held that the new statute operated only prospectively, despite its cryptic language about applying to all insurance policies currently in existence.... This was the legal landscape against which the Tenth Circuit decided the appeal of the Greystone case. Greystone involved familiar claims for property damage 2011 Polsinelli Shughart Page 2 of 5
CONSTRUCTION LAW E-ALERT As a result, the Tenth Circuit was required to review the district court s coverage ruling on the merits. The Tenth Circuit first certified the coverage question to the Colorado Supreme Court, which declined to take the question. The Tenth Circuit therefore had to predict how the Colorado Supreme Court would approach the coverage issue. The Tenth Circuit predicted that the Colorado Supreme Court would not apply the Colorado Court of Appeals analysis from General Security, but would hew to the mainstream approach which precludes coverage for the contractor s defective work while permitting coverage for otherwise non-defective property that is damaged as a result of the contractor s faulty workmanship. The Tenth Circuit grounded its analysis in both a careful review of pertinent CGL policy language, and a broad review of cases throughout the country addressing this coverage issue. The Tenth Circuit concluded that injuries flowing from improper or faulty workmanship constitute an occurrence so long as the resulting damage is to nondefective property, and is caused without expectation or foresight. In other words, the damages flowing from those leaky windows should be, once again, covered by your CGL insurance policy. In one respect, the Tenth Circuit s Greystone decision might have little impact because future CGL coverage cases will tend to be governed by the new statute C.R.S. 13-20-808. Additionally, the decision is just a prediction of Colorado law that Colorado courts are not bound to follow. However, the decision is probably the best effort by any Colorado court state or federal to provide a thorough review and coherent analysis of this complicated area of insurance coverage law. As a result, this opinion is likely to become one of the most cited decisions in this heavily litigated area of Colorado insurance law. cases include personal claims against some construction professionals) is sued for construction defects, often for millions of dollars, insurance coverage becomes the paramount protection. The insurance policy can both pay for an attorney to defend the company, and pay for a settlement or judgment against the company. In the event your insurance policy claims there is no coverage for a construction defect claim, even a healthy company can be destroyed. For More Information For questions about this case and the issues discussed in this message, please contact: Eugene R. Commander 720.931.1160 gcommander@polsinelli.com Ryan E. Warren 303.583.8238 rwarren@polsinelli.com Why should you care? Insurance coverage is one of the most important protections a construction company can have in today's litigious environment. When a construction company (or you personally - most construction defect 2011 Polsinelli Shughart Page 3 of 5
CONSTRUCTION LAW ATTORNEYS Roy Bash, Chair 816.395.0633 rbash@polsinelli.com Eugene R. Commander, Vice Chair 720.931.1160 gcommander@polsinelli.com Heath M. Anderson 816.360.4156 handerson@polsinelli.com Catherine R. Bell 816.374.0512 cbell@polsinelli.com William D. Blakely Washington D.C. 202.626.8310 wblakely@polsinelli.com Kevin J. Breer 913.234.7404 kbreer@polsinelli.com John S. Conner 816.374.0574 jconner@polsinelli.com Andrew M. DeMarea 913.234.7504 ademarea@polsinelli.com Wayne B. Ducharme 602.650.2068 wducharme@polsinelli.com Robert O. Dyer 602.650.2049 rdyer@polsinelli.com Cynthia R. Estrella 602.650.2003 cestrella@polsinelli.com Brian M. Flaherty 602.650.2016 bflaherty@polsinelli.com David P. Ganderton 303.583.8242 dganderton@polsinelli.com Heber O. Gonzalez 816.396.0634 hgonzalez@polsinelli.com Matthew R. Hale 816.360.4111 mhale@polsinelli.com Thomas K. Irvine 602.650.2094 tirvine@polsinelli.com G. Edgar James 816.395.0661 ejames@polsinelli.com Ryan M. Manies 816.374.0508 rmanies@polsinelli.com William R. Meyer 720.931.8156 wmeyer@polsinelli.com Christopher J. Mohart 816.360.4394 cmohart@polsinelli.com Brett C. Randol 913.234.7413 brandol@polsinelli.com Jeffrey B. Rosen 816.360.4253 jrosen@polsinelli.com Rebecca A. Ross 720.931.1171 rross@polsinelli.com Craig A. Smith St. Louis 314.889.7053 csmith@polsinelli.com Christopher P. Sobba 816.395.0609 csobba@polsinelli.com Holly A. Streeter-Schaefer 816.218.1218 hschaefer@polsinelli.com About Our Construction Law Practice Michael H. Talboy 816.395.0667 mtalboy@polsinelli.com Michael D. Textor Springfield 417.829.3802 mtextor@polsinelli.com Ryan E. Warren 303.583.8238 rwarren@polsinelli.com Justin R. Watkins Springfield 417.829.3827 jwatkins@polsinelli.com Polsinelli Shughart PC has significant experience working in the construction industry and brings a great variety of perspective to each project. Our attorneys are an integral part of the industry, which helps us provide the type and depth of service you deserve. Our attorneys are more than just members of associations; many are active participants with leadership roles. Whether from years of experience working with contractors, design professionals, consultants or owners, or through formal education as architects, engineers or construction managers, our attorneys have a fundamental background in construction transactions and claims resolution. Our lawyers offer national and regional seminars and help draft industry-related legislation. This means we have an indepth understanding of the needs of your business and your project. 2011 Polsinelli Shughart Page 4 of 5
CONSTRUCTION LAW ABOUT About Polsinelli Shughart With 570 attorneys, Polsinelli Shughart is a national law firm that is a recognized leader in the areas of business law, financial services, real estate and business litigation. Serving corporate, institutional and individual clients, Polsinelli Shughart is redefining the business of law by sharing ideas, goals and outcomes with its clients. The firm builds enduring relationships by creating value through legal services with passion, ingenuity and a sense of urgency. The firm can be found online at www.polsinelli.com. Polsinelli Shughart PC. In California, Polsinelli Shughart LLP. About This Publication If you know of anyone who you believe would like to receive our e-mail updates, or if you would like to be removed from our e-distribution list, please contact Therese O Shea via e-mail at toshea@polsinelli.com. Polsinelli Shughart provides this material for informational purposes only. The material provided herein is general and is not intended to be legal advice. Nothing herein should be relied upon or used without consulting a lawyer to consider your specific circumstances, possible changes to applicable laws, rules and regulations and other legal issues. Receipt of this material does not establish an attorney-client relationship. Polsinelli Shughart is very proud of the results we obtain for our clients, but you should know that past results do not guarantee future results; that every case is different and must be judged on its own merits; and that the choice of a lawyer is an important decision and should not be based solely upon advertisements. Polsinelli Shughart PC. In California, Polsinelli Shughart LLP. Polsinelli Shughart is a registered trademark of Polsinelli Shughart PC. 2011 Polsinelli Shughart Page 5 of 5