Todd Likman | Colorado Constructin Litigation
As is often the case in construction defect and other insurance defense litigation, a plaintiff’s claims for relief typically encompass both covered and uncovered damages. Obviously, it is in the insured’s best interests to have as many damages covered by insurance as possible. From the insurer’s perspective and against the backdrop of owing duty of good faith and fair dealing to its insureds, however, it is generally better to have an allocation of covered vs. non-covered damages. This places the insurer, insured, and insurance retained defense counsel in a difficult position.
A recent opinion from U.S. District Court for the District of Colorado, Rockhill Ins. Co. v. CFI-Global Fisheries Mgmt, Civil Action No. 1:16-CV-02760-RM-MJW, 2020 U.S. Dist. LEXIS 35209 (D. Colo. Mar. 2, 2020), sheds light on the issue, even though some may feel it only further muddies already murky waters.
Rockhill involved review of an arbitration proceeding that property-owner, Heirloom I, LLC (“Heirloom”) filed against CFI-Global Fisheries Management (“CFI”). Rockhill Insurance Company (“Rockhill Insurance”) was asked to defend the arbitration as CFI’s professional and general liability insurer. At issue in the arbitration was Heirloom’s claim that CFI defectively designed and constructed a fisheries enhancement that was destroyed by natural processes four times in three years.
Rockhill Insurance agreed to defend the arbitration but reserved the right to deny coverage based on various exclusions, including a faulty workmanship exclusion. The arbitrators ultimately awarded Heirloom $609,995.91, and the parties subsequently stipulated an additional $265,000 award of attorney fees. The decision was not accompanied by a reasoned award as neither party requested such.
Prior to the issuance of the arbitration award, Rockhill Insurance filed a federal declaratory judgment action against CFI and Heirloom alleging that it had no duty to defend and indemnify CFI in the arbitration. CFI asserted counterclaims for declaratory judgment, breach of contract, and bad faith for Rockhill Insurance’s failure to timely settle. After the arbitration award entered, the U.S. District Court for the District of Colorado granted summary judgment in favor of Rockhill Insurance, holding, in pertinent part, that the entirety of the arbitration award was excluded under the policy’s faulty workmanship exclusion.
The Tenth Circuit Court of Appeals, in Rockhill Ins. Co. v. CFI-Global Fisheries Mgmt., 782 F. App’x 667 (10th Cir. 2019), disagreed, and found that the faulty workmanship exclusion did not apply to design failing, and remanded the case for the district court to consider in the first instance whether the entire arbitration award is covered under a correct reading of the exclusion, or whether the damages could be apportioned between covered professional design services and non-covered construction work.
On remand, the Rockhillcourt emphasized that because Rockhill Insurance controlled the defense, it “had a corresponding duty to ensure that the damages were allocated between those that were covered under CFI’s policy and those that were not.” Because Rockhill Insurance failed to request an allocated or reasoned award, the arbitrators issued a standard, non-explanatory, award that said nothing with respect to allocation between covered and non-covered damages. Under such circumstances the Rockhillcourt held that all damages awarded are presumed covered under the policy. To support its finding that Rockhill Insurance did not meet its burden of establishing that it was not liable for the entire award, the Rockhillcourt relied on the fact that the arbitrators were presented with evidence that CFI’s design work was so faulty that that project was destined to fail, and there was no evidence that any of the damages awarded were due solely to CFI’s construction work.
Though the Rockhill decision may surprise Colorado insurance practitioners, especially insurance defense attorneys, one must bear in mind that like other opinions of the U.S. District Court for the District of Colorado, Rockhillis not binding on Colorado state courts. Further, Rockhilldoes not go so far as to expressly state that insurance defense counsel has any affirmative duty to seek an allocation between covered and non-covered damages, or that an insurer can direct insurance defense counsel to seek such an allocation. Such a proposition would insert potentially prejudicial coverage issues into a case in direct contravention of, for example, Colorado Rule of Evidence 411 or insurance defense counsel’s ethical duties as set forth in Colorado Ethics Opinion 91.
The important takeaway from Rockhillis that it highlights the danger for insurers relying on coverage defenses that do not, prior to an action’s conclusion,at least request intervention in order to seek allocation of covered vs. non-covered damages. While Colorado courts almost always deny such requests, the fact that such a request was made can be used in an effort to preserve an insurer’s right to subsequently seek allocation. If no request is made, regardless of whether it is successful, Rockhill makes clear that the carrier risks both waiving its right to seek allocation after the fact, and liability for an entire damages award.
Rockhill’s effect may be that insurers ramp up efforts to request that an insured seek allocation through not only special verdict forms and reasoned arbitration awards, but also case investigation and discovery. The extent to which it is advisable for an insured defendant to cooperate with such requests is outside the scope of this article. In such situations, insurance defense counsel should inform its client of the issues and the client’s right to consult with, and follow, the often nuanced, case-specific advice of coverage or other independent counsel.