In the July 5, 2022, case of Indian Harbor Ins. Co. v. Houston Casualty Co., the United States District Court for Colorado addressed the issue of whether damage to defectively installed balconies is considered “property damage” under Colorado law, requiring payment by a commercial general liability policy.
Facts of the Case
The case stems from a construction project where a subcontractor improperly installed balconies on an apartment complex. The owner of the project secured commercial general liability (CGL) coverage through an OCIP insured by Houston Casualty Company (HHC). The OCIP insured the general contractor and subcontractors. The general contractor also purchased a subcontractor default insurance policy insured by Indian Harbor.
All parties agreed that the subcontractor improperly installed portions of various balconies, including flashing, water-proof sealing, and water-resistant barriers, among other defects with the installation process. The parties also agreed that other portions of the balconies were properly installed. However, in order to repair the defects in the installations, every bit of each balcony had to be torn off and re-constructed.
The OCIP provides coverage to the subcontractor for “those sums that the insured becomes legally obligated to pay as damages because of `bodily injury’ or `property damage’ to which this insurance applies.” However, the standard “your work” and “business risk” exclusions commonly found in CGL policies (exclusions j, k, and l) were removed from the HCC policy.
The Indian Harbor subcontractor default insurance policy also insured the loss, providing coverage for indemnification of “Loss,” which was defined as “costs and expenses paid by (the general contractor) to the extent caused by a Default of Performance of a Subcontractor/Supplier under the terms of a Covered Subcontract.” After paying the general contractor for the default claim, Indian Harbor brought suit to recover from the subcontractor’s liability insurer, which was HCC.
Ultimately, HCC denied any coverage under its policy based upon the argument that there was no “property damage” as defined under their policy. HCC’s argument was that the damage that everyone agreed happened was damage to the subcontractor’s defective work itself, and therefore, did not qualify as “property damage” under the terms of the CGL policy. Eventually, both parties filed motions for summary judgment.
If There Is No “Property Damage,” There Is No Coverage
The court begins its analysis by stating that the first issue to determine is “whether the installation of the defective balconies constitutes ‘property damage’ under the HCC CGL policy and Colorado law.” The court indicated that without the existence of “property damage,” one never gets to the issue of whether there was an “occurrence” or an “accident.” HCC’s CGL policy defines “property damage” as “[p]hysical injury to tangible property, including all resulting loss of use of that property.”
The court first addresses Indian Harbor’s argument that Colorado’s Construction Defect Action Reform Act (CDARA) should resolve the issue in its favor. Since its passage in 2010, many parties to these types of cases have made an argument about the CDARA and that it should be conclusive on the issue of defective work being covered. However, this has not been the case.
The court quickly dismissed the CDARA argument as premature. Indian Harbor cites the language of the act which states, “work that results in property damage, including damage to the work itself, is an accident unless the property damage was expected or intended by the insured.” (Colo. Rev. Stat. § 13-20-808(3)). In rejecting this argument, the court reasoned that it was irrelevant as to whether there was an accident or occurrence without first determining whether there is “property damage” as defined in the HCC policy. It would be premature to discuss whether there was an accident or occurrence before first addressing whether there was property damage, because if there is no property damage, there is no coverage.
The court referenced the 2012 Colorado Court of Appeals decision in Colorado Pool Systems, Inc. v. Scottsdale Insurance Co., where an insurer refused to indemnify a general contractor for losses resulting from demolishing and replacing an improperly constructed pool. In Colorado Pool Systems, the court held that a CGL policy did not cover the cost of replacing the defectively built pool but did cover any necessary “rip and tear” damage to non-defective areas necessary for the defective pool replacement. The court did not apply the CDARA because the contract in the case was negotiated and signed prior to the statute’s enactment. However, in dicta, the Colorado Pool court stated that, “[t]he statute’s effect is clear enough. If we were to apply it, we would presume that the CGL policy covered damage that resulted from [the general contractor’s] defective workmanship.” The Indian Harbor court dismissed this as mere dicta and chose not to consider it.
The Indian Harbor court also cited the 2017 case of Peerless Indem. Ins. Co. v. Colclasure, where the Colorado federal district court applied Colorado Pool, holding that damage for repair and replacement of a defective arena roof was not considered “property damage” and thus is not covered under a CGL policy. Although, in Peerless, that court did agree that the CDARA applied, and property damage caused by defective workmanship was covered. But the court went on to conclude that “property damage” does not include costs of repair or replacement of defective workmanship but does include consequential damage to other parts of the property.
Based upon Colorado Pool and Peerless, the court denied Indian Harbor’s summary judgment motion and granted HCC’s cross-motion for summary judgment.
The Bottom Line
The court’s holding in this case, as well as the holding in Peerless, is contrary to the legislative intent of the CDARA. Section 13–20–808 of the CDARA was enacted in response to the General Security Indemnity Co. v. Mountain States Mutual Casualty Co. case. In that case, the Colorado Court of Appeals held that faulty workmanship, standing alone, is not an “accident” and that a construction defect is not an “occurrence.” In enacting Section 13-20-808, the legislature’s intent was clear that it considered a construction defect as an occurrence and that defective work should be covered by a CGL policy, unless and until it was excluded by another provision of the policy.
Specifically, the statute states the following in Section 13-20-808(1)(b)(III): “The decision of the Colorado court of appeals in General Security Indemnity Company of Arizona v. Mountain States Mutual Casualty Company, 205 P.3d 529 (Colo. App. 2009) does not properly consider a construction professional’s reasonable expectation that an insurer would defend the construction professional against an action or notice of claim contemplated by this part 8.”
Then, in Section 13-20-808(3), the statute states:
“(3) In interpreting a liability insurance policy issued to a construction professional, a court shall presume that the work of a construction professional that results in property damage, including damage to the work itself or other work, is an accident unless the property damage is intended and expected by the insured. Nothing in this subsection (3):
(a) Requires coverage for damage to an insured’s own work unless otherwise provided in the insurance policy; or
(b) Creates insurance coverage that is not included in the insurance policy.”
The Indian Harbor decision basically says that defective workmanship is not “property damage” that should be considered under the CDARA. This begs the question, if defective work will not be considered “property damage,” then why enact the CDARA to begin with? The CDARA was specifically enacted to overturn the holding of General Security and declare that faulty workmanship should be covered by a CGL.
SDV will monitor future decisions out of Colorado to see how this statute is used (or not used) in dealing with coverage of construction defects as occurrences and faulty workmanship.
Shortly after this decision was reached, the parties in this case reached a settlement.
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.