During the summer of 2011, Ellis Construction hired Cool Sunshine Heating & Air Conditioning to install the HVAC systems in a single-family home it was building for Gary Doberman and Ellen Robertson in Boulder, Colorado. The homeowners took issue with much of the work performed on their home and tried to negotiate directly with Ellis Construction. When those negotiations broke down, the homeowners sent a notice of claim pursuant to the Construction Defect Action Reform Act, C.R.S. § 13-20-801, et seq. One of the defects alleged in the notice of claim was that the SEERS 13 compressor installed by Cool Sunshine was inappropriate for the system and that because it was installed to run on only one stage, it did not meet the City of Boulder’s code requirements for noise levels. The homeowners therefore requested that the compressor be replaced with a SEERS 20 compressor, which would comply with the Boulder City Code.
When negotiations fell apart, the homeowners filed a lawsuit against Ellis Construction and many of its subcontractors, including Cool Sunshine. The claims against Cool Sunshine included breach of implied warranty and negligence. Cool Sunshine tendered a copy of the complaint to American Family, which had issued Cool Sunshine the CGL insurance policy in effect at the time. American Family denied coverage and declined to provide a defense to Cool Sunshine. Thereafter, Ellis Construction filed cross-claims against its subcontractors, including Cool Sunshine, for breach of contract, breach of warranty, indemnification, and contribution. There was no evidence that Cool Sunshine ever tendered these cross-claims to American Family.
After Cool Sunshine settled the claims against it, and was dismissed from the lawsuit with prejudice, Cool Sunshine filed a declaratory judgment action against American Family in the U.S. District Court for the District of Colorado seeking a ruling that American Family had an obligation to provide a defense against the homeowners’ lawsuit, and for breach of contract based on American Family’s failure to conduct a reasonable investigation into the homeowners’ claims, to provide a defense against the claims, or indemnify Cool Sunshine for the settlement. Cool Sunshine also brought claims for statutory bad faith breach of contract and for violation of the Colorado Consumer Protection Act. During the pendency of this suit Cool Sunshine and American Family filed cross-motions for summary judgment regarding whether American Family had a duty to provide Cool Sunshine a defense against the homeowners’ claims.
In his order on these motions, Judge William J. Martinez denied Cool Sunshine’s motion and granted American Family’s motion. Cool Sunshine Heating & Air Conditioning, Inc. v. American Family Mut. Ins. Co., 2014 WL 7190233, (D. Colo. December 17, 2014). In his order, Judge Martinez started his analysis by quoting the tenets of Colorado coverage law, including the following:
· “An insurance company owes its insured a ‘duty to affirmatively defend its insured against pending claims.’”;
· “An insurer seeking to avoid its duty to defend an insured bears a heavy burden.”;
· “The insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot.”;
· “An insurer has a duty to defend unless it can show that: (1) the allegations of the complaint against the insured describe only situations which are within the policy exclusions; and (2) there is no factual or legal basis on which the insurer might be held liable to indemnify the insured.”; and
· “The obligation to defend is not determined by the insured’s actual liability to the claimant; instead, the duty to defend arises when the allegations in the complaint, if sustained, would impose a liability covered by the policy.”
Id. at 2 (internal citations omitted).
With this legal framework as a backdrop, Judge Martinez pointed out that “[f]aulty workmanship can constitute an occurrence that triggers coverage under a [commercial general liability] policy if (1) the property damage was not caused by purposeful neglect or knowingly poor workmanship, and (2) the damage was to non-defective portions of the contractor’s or subcontractor’s work or to third-party property.” Id. at 3 (quotingGreystone Constr., Inc. v. Nat’l Fire & Marine Ins. Co., 661 F.3d 1272, 1286-87 (10th Cir. 2011). In this case, there was no allegation of property damage to any non-defective portion of Cool Sunshine’s work. For that reason, Judge Martinez found that neither the notice of claim nor the complaint contained allegations that could reasonably come within coverage of American Family’s policy. In so ruling, Judge Martinez quoted favorably a Tennessee case that held, “the cost to repair a defectively installed product does not constitute ‘property damage’ unless the defective product causes some damage to the property outside of the cost to replace the defective product.” Id.at 4 (citing Travelers Indem. Co. of Am. v. Moore & Assoc., 216 S.W.3d 302, 310 (Tenn. 2007).
Judge Martinez continued by pointing out that even if the installation of an inferior compressor constituted property damage under American Family’s policy, there would still be no coverage for the claims against Cool Sunshine because of the exclusions in the policy related to damage to the insured’s own work. According to exclusion 2.l of the policy, the policy did not cover property damage to “your work” arising out of it or any part of it. Judge Martinez quoted Farmington Cas. Co. v. Duggan, 417 F.3d 1141, 1143 (10th Cir. 2005) stating: “Damage to an insured’s own work resulting from his faulty workmanship on it is usually covered by a performance bond, not a commercial general liability policy.” “Commercial liability policies are not intended to protect the insured from unsatisfactory performance of a contract.” United Fire & Cas. Co. v. Boulder Plaza Residential, LLC, 633 F.3d 951, 959 (10thCir. 2011).
Judge Martinez dispensed with Cool Sunshine’s last argument, that the homeowners alleged bodily injury (emotional distress and anxiety), which American Family acknowledged did not fall squarely within any of the policy’s exclusions, by pointing out that “Colorado law establishes that ‘bodily injury’ in the context of a commercial liability policy does not include emotional distress.” Id.at 5 (citing Nat’l Cas. Co. v. Great Southwestern Fire Ins. Co., 833 P.2d 741, 746-47 (Colo. 1992).
Based on the foregoing, Judge Martinez held as a matter of law that the claims against Cool Sunshine describe only situations which fall clearly within the policy’s exclusions. As there were no claims asserted which could form the basis for creating a duty for American Family to indemnify, American Family had no duty to defend.