On the heels of a recent order regarding coverage under a Comprehensive General Insurance policy issued by Mt. Hawley Insurance Company (“Mt. Hawley”), builders should be very wary of CGL policies providing no coverage for property damage.
On January 8, 2013, District Court Judge R. Brooke Jackson granted a motion for declaratory judgment filed by Mt. Hawley. The order states that the subject insurance policies issued by Mt. Hawley to Mountain View Homes II, LLC (“MV Homes”), the builder developer of the Creek Side at Parker development (the “Project”), did not provide coverage for any of the work performed by MV Homes or its subcontractors on the Project.
MV Homes originally began construction on the Project in 2002 and completed construction in 2005. MV Homes was insured by National Fire and Marine Insurance Company (“National Fire”) and Mt. Hawley. In December 2008, Creek Side at Parker Homeowners Association, Inc. (“the HOA”) served notice on MV Homes. The HOA then instituted a construction defect lawsuit on June 1, 2009 against MV Homes and others. MV Homes initially demanded a defense and indemnity from National Fire, which provided a defense. Then, after two years, MV Homes demanded a defense and indemnity from Mt. Hawley in July 2011. Mt. Hawley denied coverage and did not provide a defense. The case was settled soon after, and National Fire reserved or assigned claims against Mt. Hawley.
Mt. Hawley filed the case at issue, seeking a declaration that its policies did not provide either a defense or indemnity with respect to the underlying lawsuit. Mt. Hawley argued that its policies did not cover the HOA’s claims, because faulty work is not an occurrence and exclusions j(5), j(6), and m, preclude coverage. MV Homes counterclaimed on several issues, including a declaration of its rights, breach of contract for failure to provide a defense and indemnity, common law bad faith, and statutory damages for bad faith.
In making his ruling, Judge Jackson noted that the Mt. Hawley policies were written on a standard “Commercial General Liability Coverage Form,” where an occurrence is defined as “an accident, including continuous or repeated exposures to substantially the same general harmful conditions.” Mt. Hawley Ins. Co. v. Creek Side at Parker Homeowners Association, Inc., WL 104795, p. 2 (D. Colo. 2013). Judge Jackson also noted that faulty workmanship, according to Greystone Construction, Inc. v. National Fire & Marine Ins. Co., 661 F.3d 1272, 1286-87 (10th Cir. 2011), can constitute an occurrence that triggers coverage under CGL policy in two circumstances. First, the property damage was not caused by purposeful neglect or knowingly poor workmanship and second, the damage was to non-defective portions of the contractor’s or subcontractor’s work or to third-party 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.
Paragraph (6) of this exclusion does not apply to “property damage” included in the “products-completed operations hazard.”
Exclusion j(6), states Judge Jackson, quoting, Advantage Homebuilding, LLC v. Maryland Cas. Co., 470 F.3d 1003, 1012 (10th Cir. 2006), has been interpreted to “exclude ‘property damage’ that directly or consequentially occurs from the faulty workmanship of the insured and its contractors/subcontractors (i.e., work that ‘was incorrectly performed’) while the work is ongoing.” The exclusion broadly excludes all property damage that occurred while the work was ongoing and was the result of fault workmanship.
There is an exception to the exclusion for property damage included in the “products-completed operations hazard, which is defined in the standard form. The definition includes property damage arising from insured’s or its subcontractors’ work except, “work that has not been completed or abandoned.” Thus, according to Advantage Homebuilding, the exception to exclusion j(6) allows an insured to recover consequential damages that arise out of his or her faulty workmanship after the completion of the work.
To exemplify this, Judge Jackson again relied on Advantage Homebuilding, citing a possible instance where a homebuilder, after constructing the walls and installing the roof, has engaged in installing parquet floors. A leak develops in the roof, which was poorly installed, and damages the roof and the partially installed wood floors. The roof repair or replacement, which was a direct result of faulty workmanship, would be excluded. On the other hand, the damage to the parquet floors was a consequence of the faulty and completed work on the roof and would be covered because of the exception to exclusion j(6).
At this point, it would look like coverage should be forthcoming, in the case at issue, but Judge Jackson performed one more analysis, this time on an endorsement the Mt. Hawley policies contained. The endorsement provides, “this insurance does not apply to ‘bodily injury’ or ‘property damage’ included within the ‘products-completed operations hazard’.” Despite MV Homes’ opposition, Judge Jackson found that the language of the policy was unambiguous, in part, because it had been negotiated by two sophisticated commercial parties. Judge Jackson even acknowledged that what the exception to j(6) in the standard form provided to the insured, the endorsement, using the same language, took away again.
Summarizing, Judge Jackson found that exclusion j(6) excludes from coverage all direct and indirect damages that occur while work is ongoing. Normally, damage that occurred after work was completed (but, within Mt. Hawley’s policy period) would not be excluded from coverage by exclusion j(6). Damages occurring after all work has been completed has been defined in the policy to be within the products-completed operations hazard. The endorsement then removed the products-completed operations hazard form the policy. Consequently, the damages that occurred after all work was completedwere also not covered by the policy.
MV Homes tried to argue that the court’s reading of the policy and endorsement would render the coverage of the policy illusory and violate public policy. MV Homes’ argument is technically untrue, the policy provides coverage for personal injury, advertising injury, and medical payments that are not affected by the products-completed operations hazard endorsement. While the argument was not a winning one, Judge Jackson did sympathize with MV Homes stating, “MV Homes is, after all, a homebuilder. If there is no coverage for liability for property damage caused by its negligence or the negligence of its subcontractors while doing what the business exists to do, one has to wonder how much meaningful coverage MV Homes received for its money.”
Unfortunately for MV Homes, Judge Jackson relied on the fact that both parties were sophisticated commercial entities negotiating at arm’s length. Mt. Hawley’s motion for declaratory judgment was granted and Judge Jackson found that Mt. Hawley was not unreasonable in denying coverage or to commence its action for declaratory judgment and there was no basis for a finding of bad faith on the part of Mt. Hawley.
The lesson for builders is to be vigilant regarding its insurance policies, being very wary of CGL policies and endorsements providing no coverage for property damage.
For additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at firstname.lastname@example.org.