Recently, United States District Court Judge Miller ruled in favor of a motion for partial summary judgment in the case of Continental Western Insurance Company v. Shay Construction, Inc. Continental Western Insurance Company v. Shay Construction, Inc., 2011 WL 3236102 (D. Colo. 2011). Judge Miller’s order ruled on arguments between the insurance carrier (“Continental Western”) and the subcontractor (“Shay”) regarding the application of HB 10-1394, codified as C.R.S. § 13-20-808. It is important to review the underlying case before digging into Judge Miller’s order.
Milender White Construction Company (“Milender White”) was a general contractor on a project in Grand County, CO and in early 2008 entered into several contracts with Shay for the framing, siding, and related work on the project. Shay was insured by Continental Western under a commercial general liability (“CGL”) insurance policy. Continental Western canceled the policy on or about April 27, 2009 for non-payment.
Shay hired Wood Source, Inc. and Chase Lumber Company (collectively, the “Subcontractors”) to furnish materials, labor, and equipment for construction on the project. The Subcontractors filed suit against Shay alleging non-compensation for work and materials, seeking to enforce a mechanic’s lien. Both Milender White and Shay were named as defendants. In its answer, Milender White asserted cross-claims against Shay for breach of the contracts entered into in 2008. Milender White asserted many claims of breach, but there were four important claims to note: (1) Shay’s failure to perform work to the quality standards and requirements of the subcontract and contract documents; (2) Shay’s performance of defective work, not in compliance with the requirements of the subcontract and contract documents and failing and/or refusing to correct deficiencies; (3) Shay’s failure to pay the Subcontractors; and (4) Shay’s failure to hold harmless and indemnify Milender White from claims originated by Shay’s Subcontractors.
The motion for summary judgment at issue, came about after Continental Western filed its complaint seeking declaratory judgment that the insurance policy does not cover Shay’s dispute with the Subcontractors or Milender White, particularly Milender White’s cross-claims. Continental Western was seeking summary judgment on the issue that the terms of the insurance policy did not include and/or expressly exclude coverage for the damages claimed by Milender White. Continental Western was also seeking summary judgment on Shay’s counterclaims (breach of contract, bad faith breach under insurance contract, and statutory bad faith) arguing that Shay was not entitled to a defense or indemnity in the underlying lawsuit brought by the Subcontractors.
The insurance policy stated, “We will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.” Coverage also applied to an “occurrence” defined in the policy as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The insurance policy also excluded several things, such as contractual liability, damage to property, and damage to your work.
Continental Western’s first argument essentially stated the insuring language, “those sums that the insured becomes legally obligated to pay as damages,” only applies to damages resulting from tort actions, not claims of breach of contract. Judge Miller denied this argument because Colorado courts have not spoken on the issue and the language could arguably be ambiguous, which must be construed against the insurer.
Continental Western’s second argument, however, received favorable support from Judge Miller. Continental Western argued that the claims in the underlying lawsuit are not born from property damage resulting from an “occurrence” (defined as an “accident”), but rather allege the failure to provide services as promised under a contract. The damage alleged is Shay’s own defective work and damage to work of other trades resulting from repair of Shay’s deficient work. Continental Western argued that generally, poor workmanship is not a covered occurrence under a GCL policy. General Security Indemnity Co. of Arizona v. Mountain States Mutual Casualty Co., 205 P.3d 529 (Colo. App. 2009). Despite being effectively overruled by HB 10-1394, C.R.S. § 13-20-808 signed into law on May 21, 2010, Judge Miller found the General Security case was persuasive law because the policy was canceled roughly a year earlier, and not in force on May 21, 2010. Because the policy had been cancelled before the statute’s effective date, Judge Miller effectively found that the statute does not apply retroactively.
Judge Miller did concede that even with the application of General Security, the cross-claims may allege an occurrence under the policy. Milender White’s cross-claims allege that Shay’s defective work required repair, resulting in damage to work of other trades. Shay’s poor workmanship also brought on damage to a third party, which arguably falls within the definition of occurrence and thus within the scope of the insurance policy.
Judge Miller did, however, agree with Continental Western’s argument that the asserted claims which allege property damage and were not breach of contract claims, are excluded under the “damage to property” exclusion mentioned above. The policy’s specific language called for exclusions related to: “(j) Damage to Property . . . (5) that particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the “property damage” arises out of those operations; or (6) that particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.”
It is important that Milender White gave notice to Shay of the deficiencies during construction and that Shay damaged the work of other trades while repairing is own work. Judge Miller found that exclusion (j)(5) applied to both Shay’s allegedly defective work and the damage allegedly caused to other trades when Shay performed repairs to its work. Furthermore, Judge Miller found that the (j)(6) exclusion regarding “your work” (defined as any work or operations performed by you or on our behalf) also applied to both Shay’s defective work and the damage it directly inflicted on other subcontractor’s work in its repair of its poor workmanship. Accordingly, Judge Miller found that the policy did not cover claims asserting breach of contract that do not involve property damage and the policy excluded the claims alleging property damage under exclusions (j)(5) and (6).
While Judge Miller’s finding is only an order in the district court and not an appellate court decision, it is sure to garner some attention. In the future, we will be following the issues as they are sure to reach the Colorado Courts sooner rather than later.
For additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at email@example.com.