Exploring the Initial Impact of Colorado HB 10-1394: Crossen v. American Family Mutual Insurance

As many of you are aware, in May of this year Governor Ritter signed into law Colorado House Bill 10-1394, soon to be codified as C.R.S. § 13-20-808(3). Among other effects, the bill retroactively changes the duty of insurers to defend construction professionals in construction liability cases. The bill faced staunch opposition from insurers, agents, and even some subcontractors, which warned that it would turn liability policies into near guarantees of a contractor’s work, not unlike a warranty or a bond.

Critics of the bill may find some solace in a recent ruling in Crossen v. American Family Insurance Co., 2010 WL 2682103 (D. Colo. July 7, 2010). In Crossen, the United States District Court for the District of Colorado was presented with a motion for partial summary judgment filed by the plaintiff homeowners, which sought a ruling on American Family’s duty to defend its policy holder, Premier Specialty Services (“Premier”). The homeowners hired Premier to clean and seal tile flooring in their home. In their complaint, the homeowners alleged that their floors were damaged by Premier’s cleaning process, as well as by Premier’s failure to allow the floors to properly dry before applying the new sealant. In response, American Family argued, inter alia, that the original complaint alleged no damage other than to the floor itself and, therefore, there was no occurrence under the applicable policy.

As part of its analysis, the court reviewed the recent decision by the Colorado Court of Appeals in General Security Indemnity Co. of Arizona v. Mountain States Mutual Casualty Co., 205 P.3d 529 (Colo. App. 2009) (holding that a claim for damages arising from poor workmanship, standing alone, does not allege an accident that constitutes a covered occurrence), as well as the United States District Court for the District of Colorado’s ruling in Greystone Constr., Inc. v. Nat’l Fire & Marine Ins. Co., 649 F.Supp.2d 1213 (D. Colo. 2009) (holding that in order to constitute a covered occurrence, the poor workmanship must cause damage to something other than the work product itself).

The court also gave consideration to the recent passage of HB 1394, acknowledging that it requires a court to “presume that the work of a construction professional that results in property damage, including damage to the work itself or other work, is an accident unless the property damage is intended and expected by the insured.” Crossen, at p. 5.

Ultimately, the court determined that the plaintiff homeowners’ complaint “passed” the “occurrence” tests presented by the General Security and Greystone decisions because it alleged damage to floors themselves, beyond simply Premier’s failure to adequately clean and seal them. Nonetheless, the court ruled that coverage under the applicable policy was barred pursuant to certain “faulty work” exclusions, including Exclusion (j)(6), which precludes coverage for damaged property that must be restored, repaired, or replaced because the insured’s work was incorrectly performed on it, and Exclusion (l), which precludes coverage for property damage arising out of the insured’s own work.

Notably, in making its decision, the court reiterated that “a CGL policy is not intended to serve as a performance bond or guaranty of goods or services,” and further advised that HB 1394 did not alter its conclusion because it “expressly does not create or require coverage for damage not otherwise provided in the policy.” Id., pp. 5 – 6.

The Crossen ruling provides a preliminary look at how HB 1394 may or may not impact coverage under construction professionals’ commercial general liability insurance policies. At the very least, it gives us an example of how one court refused to employ the bill as a mechanism for creating coverage where there was none under the plain and ordinary language of the policy. For the moment, it appears as though the critics’ concerns over the undesired effects of the bill have been quelled.

For additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.