On November 1, 2011, the Tenth Circuit Court of Appeals ruled on the certified question of whether property damage caused by a subcontractor’s faulty workmanship is an “occurrence” for purposes of a commercial general liability (CGL) insurance policy. In Greystone Const., Inc. v. National Fire & Marine Ins. Co., No. 09-1412 (10th Cir. Nov. 1, 2011), the Tenth Circuit determined that because damage to property caused by poor workmanship is generally neither expected nor intended, it may qualify under Colorado law as an occurrence and liability coverage should apply. Id. at 2.
The short history of the Greystone case is as follows. In Greystone Const., Inc. v. National Fire & Marine Ins. Co., 649 F. Supp. 2d 1213 (D. Colo. 2009), two contractors and one of their insurers brought an action against a second insurer after the second insurer refused to fund the contractors’ defense in construction defect actions brought by separate homeowners. Id. at 1215. The U.S. District Court for the District of Colorado, relying on General Sec. Indem. Co. of Arizona v. Mountain States Mut. Cas. Co., 205 P.3d 529 (Colo. App. 2009), granted summary judgment in favor of the second insurer on the basis that the homeowners’ complaints did not allege accidents that would trigger covered occurrences under the second insurer’s policies. Id. at 1220. Notably, the Greystone, General Security, and other similar decisions prompted the Colorado General Assembly to enact C.R.S. § 13-20-808, which was designed to provide guidance for courts interpreting perceived coverage conflicts between insurance policy provisions and exclusions. The statute requires courts to construe insurance policies to favor coverage if reasonably and objectively possible. C.R.S. § 13-20-808(5).
The Tenth Circuit began its analysis by determining whether C.R.S. § 13-20-808, which defines the term “accident” for purposes of Colorado insurance law, would have a retroactive effect, and thereby settle the question before the court. The Tenth Circuit gave consideration to several Colorado district court orders issued since the enactment of C.R.S. § 13-20-808 which have suggested that the statute does not apply retroactively, including Martinez v. Mike Wells Constr., No. 09cv227 (Colo. Dist. Ct., Mar. 1, 2011), and Colo. Pool. Sys., Inv. V. Scottsdale Ins. Co., No. 09cv836 (Colo. Dist. Ct., Oct. 4, 2010). The Tenth Circuit also attempted to ascertain the General Assembly’s intent behind the term “all insurance policies currently in existence…” Greystone, No. 09-1412, at 12. The Tenth Circuit determined that the General Assembly would have more clearly stated its intentions for the term if it was supposed to apply retroactively to expired policies, rather than those still running. Id. at 12-13. Ultimately, the Tenth Circuit decided that C.R.S. § 13-20-808 did not apply retroactively, but noted that “the retrospective application of the statute is not necessarily unconstitutional.” Id. at 9, 11-14. As such, the Tenth Circuit advised that it was required to decide the question presented in the appeal under the principles of Colorado insurance law. Id. at 15.
In so doing, the Tenth Circuit looked at the Colorado Court of Appeal’s decision in the General Security matter, which held that because the term “accident,” as used in CGL policies, necessarily implies fortuity, “a claim for damages arising from poor workmanship, standing alone, does not allege an accident that constitutes a covered occurrence…” General Security, 205 P.3d at 534. The Tenth Circuit noted that the Court of Appeal’s rationale was persuasive, but took an overly narrow view of CGL policy language and was inconsistent with the inherent structure of CGL policies. Greystone, No. 09-1412, at 22.
The Tenth Circuit predicted that the Colorado Supreme Court, if asked to construe the term “occurrence” as contained in standard form CGL policies, would do so in a manner that encompassed unforeseeable damage to non-defective property arising from faulty workmanship. Id. at 16. It compared its prediction with approaches in other jurisdictions and decided that most federal and state cases favor a finding of an occurrence in the circumstances considered by the Greystone appeal, and noted that “a strong recent trend in the case law interprets the term ‘occurrence’ to encompass unanticipated damage to nondefective property resulting from poor workmanship.” Id. at 18.
The Tenth Circuit’s decision also reaffirms the viability of the “your work” exclusion present in most standard form GCL policies: “[T]he exclusion’s exception for property damage arising out of the work of a subcontractor necessitates the conclusion that damage to the builder’s work caused by the poor workmanship of a subcontractor can constitute an occurrence in the first instance.” Id. at 34. However, the court also acknowledged that coverage can nonetheless be eroded by such an exclusion: “Therefore, we conclude that damage to the contractor’s nondefective work—even if arising out of poor workmanship—may fall under the CGL’s policy initial grant of coverage, even though coverage may ultimately be withdrawn through one of the policy’s exclusions.” Id.
Ultimately, the Tenth Circuit’s decision makes clear that “injuries flowing from improper or faulty workmanship constitute an occurrence so long as the resulting damage is to nondefective property, and is caused without expectation or foresight.” Id. at 22. The court further distanced itself from the Court of Appeal’s rationale in General Security, stating that “fortuity is not the sole prerequisite to finding an accident under a CGL policy. To the contrary, an unanticipated or unforeseeable injury to person or property—even in the absence of true fortuity—may be an accident and, therefore, a covered occurrence.” Id. at 23. Further driving home its position, the Tenth Circuit reiterates that “CGL policies are meant to cover unforeseeable damages—a category that encompasses faulty workmanship that leads physical damage of nondefective property.” Id. at 25.
The Greystone decision provides the most comprehensive interpretation of coverage under Colorado insurance law to date, including an unequivocal construal of the intent behind C.R.S. §13-20-808. Thus, as construction defect litigation continues to persist in Colorado, and with the issuance of each new CGL policy, the Tenth Circuit’s Greystone decision looks to be the newest, clearest authority on a historically obscure area of law.
For additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at
mclain@hhmrlaw.com.