In a case that squarely confronts the juxtaposition of an insurer’s duty to defend or indemnify its insured for construction related defects, the United States District Court for the District of Colorado recently granted an insurer’s motion for summary judgment on both matters against a construction subrogee, in Ass’n Ins. Co. v. Carbondale Glen Lot E-8, LLC, No. 15-cv-02025-RPM, 2016 WL 9735743, at *1 (D. Colo. Oct. 10. 2017).
Mountainview Construction Services, LLC (“MCS”) served as the general contractor for the construction of a residence on a lot owned by Glen Lot E-8, LLC (“E-8”). MCS took out a Commercial General Liability Policy (“Policy”) with Association Insurance Company (“AIC”) that provided coverage to MCS for the relevant time period for the construction of the residence. E-8 then asserted a series of claims against MCS, based on the allegation that MCS and its subcontractors defectively constructed the home by, among other things, building the residence two feet too high in violation of applicable codes. E-8 also argued that MCS and its subcontractors made significant alterations and/or deviations from the original project specifications without obtaining E-8’s consent or approval from relevant authorities. MCS tendered the claim to AIC for defense and indemnity. In turn, AIC declined coverage on the argument that the Policy precluded any coverage for defective work MCS may have performed on the project, absent damage to person or other property.
MCS and E-8 subsequently settled all of E-8’s claims against MCS. As part of the settlement terms, however, MCS assigned all of its rights against AIC to E-8 related to AIC’s refusal to defend and indemnify MCS. In the ensuing action by E-8 against AIC, AIC moved for summary judgment on its declaratory judgment claim. In doing so, AIC argued that the relevant Policy language prevented it from defending or indemnifying MCS for the allegations contained in E-8’s operative complaint against MCS in the underlying action.
In holding that AIC did not owe MCS any duty to defend it for E-8’s claims, Judge Richard Matsch first delved into the relevant language of the Policy. Indeed, the Policy provided in pertinent part that AIC would cover and pay sums to MCS for “bodily injury” or “property damage” to property which the Policy covered. The Policy, however, defined property damage as follows:
a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the ‘occurrence’ that caused it.
Construing the foregoing language, the Judge Matsch held that AIC did not have a duty to defend MCS against E-8’s claims because E-8 did not allege “physical injury to tangible property,” or “loss of use of tangible property that is not physically injured.” Rather, E-8’s allegations against MCS made clear that its grievance stemmed from a defectively built house. What is more, E-8 never implied in its complaint that the flawed workmanship “caused the loss of use of some other tangible property that was not physically injured.” The court also stressed that the Policy’s exclusionary language that prohibited coverage for faulty workmanship, effectively put an end to any duty on AIC’s part to defend or indemnify MCS for any defect, deficiency, or inadequacy germane to MSC’s work on the project.
Having been precluded from coverage based on the Policy language, E-8 then argued that C.R.S. § 13-20-808 effectively mandated a duty to defend on AIC’s part since the duty is triggered where there is a “potentially covered liability” against a “construction professional concerning a construction defect.” Even so, the court noted that the duty to defend under the statute is still subject to the express terms of the Policy language between an insurer and its insured, and the duty is not triggered where the claims at issue are not covered by the insurance policy. For the foregoing reasons, the court held that AIC had no duty to defend or indemnify MCS pursuant to the Policy. Accordingly, the court entered summary judgment in AIC’s favor and dismissed all of E-8’s counterclaims against AIC.
In application, the ruling reaffirms the well-established principle that the express terms of a policy will continue to be the benchmark with which courts determine an insurer’s duty to provide coverage, in the absence of any contravention of public policy. Further, policy language that expressly discounts coverage for a contractor’s substandard work on a project, absent injury to person or other property, remain enforceable provisions. The public policy underlying this appears to be the need to discourage shoddy workmanship and to provide contractors the incentive to avoid preventable defective work during the construction of a project.
For more information about the Association Insurance Company v. Carbondale Glen Lot E-8, LLC case or about construction law in Colorado, you can reach David McLain by e-mail at mclain@hhmrlaw.com or by telephone at (303) 987-9813.
