Adding to the growing number of courts that have rejected the logic that held sway in Hawaii’s Group Builders decision, the Tenth Circuit Court of Appeals recently predicted the Colorado Supreme Court would hold that property damage caused by defective construction could qualify as an occurrence under a standard commercial general liability insurance policy, and ruled a contractor’s insurer had a duty to defend against claims arising from property damages caused by faulty workmanship.
In that case, the plaintiff homeowners purchased a home built by Greystone Construction, Inc. Greystone employed subcontractors to perform all work on the house, which was built on soils containing expansive clays. Over time, soil expansion caused the plaintiff’s house foundation to shift, causing damage to the home’s living area, including the upper level. The owners sued Greystone for their damages, claiming defective construction. Greystone was insured under a CGL policy provided by two insurers, American and National. American defended Greystone subject to a reservation of rights under the policy. National denied coverage. Relying on a recent Colorado Court of Appeals decision, General Security Indemnity Co. of Arizona v. Mountain States Mutual Casualty Co., 205 P.3d 529 (Colo. App. 2009), the federal district court awarded summary judgment to National, holding that the complaints do not allege facts that would trigger coverage under the applicable policy. Greystone appealed. While on appeal, the Colorado legislature enacted a statute that directly criticized the General Security decision and established a statutory definition of “accident” under Colorado law.
Unlike Hawaii, the Colorado legislature did not make the law retroactive. In other words, it only applied on a go-forward basis.
On appeal, the Tenth Circuit Court of Appeals first considered the effect of the recent Colorado legislation crafted to address coverage questions after the General Security decision, wherein the Colorado legislature defined the term “accident” to include coverage for property damage to the work itself or to other work, caused by defective construction, unless the property damage was intended and expected by the insured. The question was whether the legislation had retroactive effect so as to define the term “accident” in the case pending before the court. The court said no. The court noted that Colorado statutes are generally presumed to be prospective in operation absent a stated legislative intent to the contrary. Moreover, the court noted that even if the statute was intended to be retroactive, the court must also determine whether the statute had an unconstitutional retrospective effect, i.e. whether it takes away or impairs vested rights acquired under existing laws, in respect to completed transactions or considerations.
The court determined that the legislation in question was only intended to be applied prospectively, and was not intended to apply to policies that had been issued and under which coverage was already obtained. The court reasoned that if the legislature had intended retroactive application of the statute, it could have clearly stated as much, and it did not.
Nevertheless, the court went on to find that the General Security decision issued by the Colorado Court of Appeals, was not a correct statement of Colorado law, and concluded that the Colorado Supreme Court would interpret the CGL policy at issue differently than the intermediate court.
The Tenth Circuit commented that while the Colorado Court of Appeals had noted that it was joining a majority of jurisdictions holding that claims of faulty workmanship do not give rise to an occurrence warranty coverage, its own survey revealed the opposite: a “strong trend in case law interprets the term ‘occurrence’ to encompass unanticipated damage to non-defective property resulting from poor workmanship.”
Recognizing this trend, the Court of Appeals examined past Colorado Supreme Court decisions in which the Supreme Court found that damage could be excluded from coverage if the insured knew that they would flow directly and immediately from the insured’s act. Thus, the question was whether the property damages alleged were the direct and immediately foreseeable consequences of the contractor and subcontractor’s faulty performance. The property damage in question was the movement of the basement floor and damage to upper living areas allegedly resulting from expansive soils due to the contractor and subcontractor’s claimed inadequate design and construction of soil drainage and structural elements. The court found that the damages could have resulted from an unforeseen occurrence, and were therefore potentially an “accident” triggering the occurrence language of the policy.
Greystone Construction, Inc. v. National Fire & Marine Insurance Co., 2011 U.S. App. LEXIS 22053
