The issue of commercial liability insurance coverage for construction defects is a highly complex and evolving area of law. The United States Court of Appeals for the Tenth Circuit recently provided guidance to Colorado courts addressing the question of whether damages arising from a subcontractor’s faulty workmanship triggers insurance coverage under the standard post-1986 commercial general liability (“CGL”) policy.
The question for the 10th Circuit in Greystone Construction, Inc., v. National Fire & Marine Insurance Company (November, 2011), was whether property damage caused by a subcontractor’s faulty workmanship is an “occurrence” for purposes of a CGL insurance policy where an “occurrence” is defined as an “accident.”
In 2010, the Colorado General Assembly enacted C.R.S. § 13–20–808, which establishes an explicit statutory definition of “accident” under Colorado law. The statute states that the work of a construction professional resulting in property damage, including damage to the work itself or other work, is an accident. § 13–20–808 was an express criticism of the Colorado Court of Appeals opinion in General Security Indemnity Co. of Arizona v. Mountain States Mutual Casualty Co. (2009), finding that claims of defective workmanship, standing alone, do not constitute an “occurrence.” Thus, if applicable, the new statute would have settled Greystone in favor of the builder, and the insurance company would have a duty to defend the contractor against the homeowner’s claims of defective construction. The Court, however, found that the new law was not intended to apply retroactively to the policy at issue in Greystone because the policy period had expired before the new law’s effective date (May 21, 2010). Thus, the Court turned to the question of whether, under principles of Colorado insurance law, property damage arising from poor workmanship is an “occurrence” under the standard CGL definition.
Although in agreement with most of General Security’s analysis, the Court criticized General Security’s overly narrow definition of “accident” as requiring an element of fortuity, concluding that the Colorado Supreme Court would construe the term “occurrence,” as contained in standard-form CGL policies, to encompass unforeseeable damage to nondefective property arising from faulty workmanship. “Although the term ‘accident’ certainly incorporates a ‘fortuitous event,” reasoned the Court, “it also incorporates ‘an unanticipated or unusual result flowing from a common place cause” (emphasis in original). Thus, if the physical damage was unforeseeable and resulted from poor workmanship, the event would constitute an accident, and therefore an occurrence, even thought it did not necessarily occur by chance (“foreseeability, rather than fortuity, is the sine qua non of an occurrence”). As such, the Court held that CGL policies are meant to cover unforeseeable damages – a category that encompasses faulty workmanship that leads to physical damage of nondefective property.
In Greystone, a home’s soil-drainage and structural elements were potentially defective and may have caused damage to the home—the nondefective work product. Thus damage to the home was deemed to be covered, while damage to the soil-drainage and structural elements (the defective elements) was not because the obligation to repair defective work is neither unexpected nor unforeseen.
It should be noted that Greystone’s opinion is likely to result in disparate interpretations of the law between Tenth Circuit and Colorado State courts. In cases where insurance policy coverage periods expired before May 21, 2010, the effective date of § 13–20–808, Colorado state courts will continue to be bound by the Court of Appeals decision in General Security (claims of defective workmanship, standing alone, do not constitute an “occurrence”), whereas federal courts will be bound by Greystone (unanticipated damaged to an insured’s own work constitutes an “occurrence”).
If nothing else, the above discussion should solidify one essential fact: when dealing with the intersection of construction law and insurance it is critical to entrust the matter to an attorney who understands both.