Faulty Workmanship That Damages Other Work Is Potentially Covered In Colorado
Mt. Hawley Ins. Co. v. Creek Side at Parker Homeowners Ass’n, Inc., 2013 WL 104795 (D. Colo. Jan. 8, 2013)
On January 8, 2013, the U.S. District Court for the District of Colorado held that, when a subcontractor’s faulty workmanship causes damage to other, non-faulty, parts of a construction project, there may be an “occurrence” under a general liability policy. (This case reaches the opposite conclusion of a Sixth Circuit case that came down the day before, which we have summarized here). In this Colorado decision, the district court found that, although there may have been an “occurrence,” the policy nevertheless excluded coverage for both construction defects that take place during and after a construction project.
In the underlying lawsuit, a homeowners association sued the developer of a residential project, seeking damages allegedly caused by construction defects. The homeowners alleged that the developer’s plumbing subcontractor caused consequential damage to other parts of the project such as concrete cracking and deterioration, asphalt cracking and deterioration, and water intrusion.
The insured developer tendered its defense to two insurers, one of which defended and settled the underlying lawsuit. The other insurer denied coverage and filed a declaratory judgment action seeking a declaration that its policies did not provide coverage. The insurer moved for summary judgment, arguing that the allegations of the underlying lawsuit did not qualify as an “occurrence,” as that term was defined in the commercial general liability policy it had issued to the insured. The insurer argued in the alternative that several exclusions precluded coverage.
The district court found that the underlying lawsuit did allege an occurrence because, under Colorado law, faulty workmanship on one part of a construction project can constitute an occurrence if it damages otherwise non-defective parts of the same construction project. Accordingly, the district court held that, for purposes of the duty to defend, there was an “occurrence.” The court relied upon Greystone Constr., Inc. v. Nat’l Fire & Mar. Ins. Co., 661 F.3d 1272 (10th Cir. 2011) (Colo. law).
The district court then considered the policy’s standard “business risks” exclusions and focused on Exclusion j.(6), which precludes coverage for “property damage to… that particular part of any property that must be restored, repaired or replaced because “your work” was incorrectly performed on it.” The policy provided that Exclusion j.(6) did not apply to “property damage” included in the “products-completed operations hazard.” The district court explained that Exclusion j.(6) excludes coverage for property damage that is caused by the faulty workmanship of the insured and its subcontractors while the work is ongoing. Exclusion j.(6) does not preclude coverage for damage caused by faulty, but completed, work. Because there was a genuine issue of material fact as to whether the damage caused by the subcontractors’ faulty workmanship occurred while work was ongoing or after the work was complete, Exclusion j.(6) alone did not preclude all coverage.
However, the policy issued to the insured developer in this case also contained an endorsement that provided “[t]his insurance does not apply to ‘property damage’ included within the ‘products-completed operations hazard’.” The district court found that this language effectively negated the exception to Exclusion j.(6) discussed above. In other words, Exclusion j.(6) precluded all coverage for damage that occurred because of faulty workmanship while the work was ongoing, and the endorsement precluded all coverage for damage that occurred because of faulty workmanship after the work was completed. Accordingly, the district court found that no coverage applied in connection with the underlying case through a combination of Exclusion j.(6) and the endorsement.
Courts around the country have split on the “occurrence” addressed in Creek Side – namely, whether an “occurrence” has taken place when faulty workmanship by one subcontractor causes damage to another part of the construction project but does not damage any property other than the project itself. The district court’s ruling here is the opposite of a Sixth Circuit ruling that came down one day earlier, summarized here. Therefore, to determine whether there is coverage when defective work of one subcontractor only damages other parts of the construction project, the analysis may turn upon the law of the state that applies to the insurance contract, as well as the construction role (general contractor or subcontractor) of the insured party that is being sued.
For more information on the issues discussed above, or any other insurance coverage questions, please contact Adam Fleischer, afleischer@batescarey.com or Michael Passman, mpassman@batescarey.com.