November 21, 2011
On November 1, 2011, the Tenth Circuit Court of Appeals issued a ruling that will significantly impact construction-defect insurance coverage.
In Greystone Construction, Inc. v. National Fire & Marine Insurance Co., the court addressed the definition of the term “accident,” as it relates to the meaning of the term “occurrence” in Commercial General Liability (CGL) insurance policies issued and expiring before the effective date of § 13-20-808, C.R.S., a statute addressing insurance coverage for construction professionals.
The decision has two significant rulings. First, the court addressed retroactive application of the definition of “occurrence” incorporated into § 13-20-808. Effective May 21, 2010, this statute defines “accident” and, therefore, the term “occurrence,” in standard CGL policies, to include “work of a construction professional that results in property damage, including damage to the work itself or other work . . . unless the property damage is intended or expected by the insured.” This expressly overruled a narrower definition of the term applied by the Colorado Court of Appeals in General Security Indemnity Co. of Arizona v. Mountain States Mutual Casualty Co., 205 P.3d 529 (Colo.App. 2009). In an issue that has divided state trial courts, the Tenth Circuit held that this definition did not apply to insurance policies where the coverage period expired before the effective date of the statute.
The court then addressed the pre-statutory definition of “occurrence” as defined by General Security, which had been adopted by the federal district court in Greystone. These cases had defined “occurrence” to require consequential property damage to property other than the insured’s work. Based on the rarely used proposition that “[w]here jurisdiction rests solely on diversity of citizenship and there is no controlling decision by the highest court of a state, a decision by an intermediate court should be followed by the Federal court, absent convincing evidence that the highest court would decide otherwise,” the Tenth Circuit rejected the General Security definition of “occurrence” In its view, there was convincing evidence that if this issue were before the Colorado Supreme Court, given the existing law regarding the interpretation of insurance policies, that court would not follow General Security. Rejecting General Security, the Tenth Circuit in Greystone held that unanticipated damage to the insured’s own work constitutes an “occurrence.” Therefore, if the work at issue were performed by a subcontractor, and the policy contained the standard subcontractor exception to the “‛your work’ exclusion,” allegations of property damage to the insured’s own work would constitute an “occurrence” and trigger the duty to defend.
The court’s ruling creates a potentially unusual situation. In cases interpreting insurance policies where the coverage period expired before May 21, 2010, Colorado state court trial judges will, presumably, still be bound by the Colorado Court of Appeals’ decision in General Security; federal trial court judges, however, will be bound by the Tenth Circuit’s decision in Greystone. Thus, if construction-defect coverage lawsuits concern policies expiring before the effective date of § 13-20-808, and do not meet the requirements for diversity jurisdiction, the insurer may receive a favorable ruling regarding coverage in a Colorado state court, but the exact same factual situation might result in a ruling adverse to the insurer if the elements of diversity jurisdiction are present. Accordingly, unless the Colorado Supreme Court addresses this issue, we may see two disparate interpretations of the law that will impact construction-defect litigation for the next several years, until the statutory definition of “accident” found in § 13-20-808, controls all construction-defect claims.