In a February 1, 2010 Order on Plaintiff United Fire’s Second Motion for Reconsideration, Judge Brimmer, of the United States District Court for the District of Colorado, dealt yet another blow to coverage for construction defect claims in Colorado. The court issued the order in the case of United Fire & Casualty Company v. Boulder Plaza Residential, LLC, 06-CV-00037-PAB-CBS.
In this declaratory relief action, United Fire sought a declaration that it owed no duties to defend or indemnify insureds for claims related to allegedly improper installation of, and resulting damage to, wood floors in a condominium complex in Boulder, Colorado. A judge previously assigned to the case, Judge Daniel, had denied a motion for summary judgment filed by United Fire, determining that, as a matter of law, United Fire had a duty to defend the insureds in the underlying state court action. Judge Daniel also issued an order finding that Boulder Plaza was entitled to a declaration that United Fire was obligated to indemnify its insureds for liability under the policy at issue. Then, along came the General Security
Based on an intervening change in the law, i.e., the General Security case, Judge Brimmer determined it appropriate to entertain United Fire’s motion for reconsideration. By way of a refresher, the General Security court held that “a claim for damages arising from poor workmanship, standing alone, does not allege an accident that constitutes a covered occurrence, regardless of the underlying theory pled.”
Based on this holding, and a finding that any allegations in the state court pleadings to “loss of use” referred solely to the loss of use of the floor itself, as opposed to loss of use of the entire condominium units or to some other component of construction unrelated to the insureds’ own work, Judge Brimmer concluded, as a matter of law, that United Fire did not have a duty to defend or to indemnify its insureds in the state court actions at issue. In coming to this conclusion, Judge Brimmer cited to an order in the Greystone
case, another case recently decided in the U.S. District Court for the District of Colorado. The Greystone
order is currently being appealed.
The one bright part of Judge Brimmer’s order, from a coverage perspective, is that he did acknowledge and discuss the exception to the General Security case. In doing so, Judge Brimmer stated: “General Security’s exception for ‘additional or consequential property damage,’ focuses first on the object of the work involved and second on whether there also was damage to something other than the object of such work. In other words, to fall within the consequential-damage exception, the damage must be to something other than the work product itself.” Order, at pg. 11.
This discussion highlights the importance of pleading into coverage by being very specific, in complaints alleging construction defects, about alleging consequential damage to something other than the work product itself. This applies equally to homeowners suing a general contractor or developer for construction defects and to general contractors or developers suing subcontractors, material suppliers, and design professionals for construction defects.
Stay tuned as this appears to be an ongoing saga. We anticipate that the U.S. District Court for the District of Colorado will certify one or more questions from the Greystone case to the Colorado Supreme Court for determination. If and when the Colorado Supreme Court speaks to the issue, we may finally have some direction in Colorado regarding whether there is coverage for construction defects in Colorado. At the same time, it remains to be seen whether homeowners and/or construction professionals turn to the Colorado State Legislature for a legislative solution to the problem of disappearing coverage in Colorado.
What puzzles me is how or why the January 29, 1979 ISO circular, meant to explain broad form property damage coverage, has been lost in the shuffle. By the very document used by ISO to explain the coverage available under these policies: 1) an insured should have coverage for damage to his work arising out of a subcontractor’s work; 2) an insured should have coverage for damage to a subcontractor’s work arising out of the subcontractor’s work; and 3) the insured should have coverage for damage to a subcontractor’s work, or if the insured is a subcontractor to a general contractor’s work or another subcontractor’s work, arising out of the insured’s work. The only thing that should not be covered, according to this early ISO explanation, is damage to an insured’s work arising out of his work.
While this application would not have aided in the Boulder Plaza case, as it was actually the subcontractor’s policy at issue, the outcome of General Security would have been drastically different had the Colorado Court of Appeals followed the explanation provided by ISO.