Construction projects are inherently complex, and insurance coverage plays a crucial role in managing risks, especially when unforeseen issues arise.  The case of Acuity v. Kinsale demonstrates the tangled web of insurance obligations, especially when multiple insurers provide coverage for a single event.  This case, involving Monarch Stucco, Inc., Acuity, and Kinsale Insurance Company, sheds light on the challenges that contractors, subcontractors, and insurers may face when disputes over liability and coverage occur.

The Background of the Case

At the heart of this dispute lies a construction defect at a retirement community project in Lakewood, Colorado.  Monarch Stucco, Inc. (“Monarch”), a subcontractor hired by GH Phipps Construction Company (“Phipps”), was responsible for stucco work on the project.  Unfortunately, defects in the building’s envelope system, particularly Monarch’s stucco work, led to significant damage and costly repairs.

The owner of the retirement community, BMSH I Lakewood CO LLC (“BMSH”), initiated an arbitration claim against Phipps for the construction defects.  In response, Phipps, as the general contractor, brought a third-party claim against Monarch for the defective stucco work that contributed to the larger building envelope failure.  This work necessitated extensive repairs to fifteen independent living buildings, with damages continuing over a prolonged period.

The Insurance Coverage Puzzle

Monarch was insured under three different commercial general liability (“CGL”) policies over the span of several years.  The sequence of insurance coverage was as follows:

Acuity: Provided coverage from September 2016 to September 2018.

National Specialty Insurance: Covered Monarch from September 2018 to September 2020.

Kinsale Insurance: Provided coverage from September 2020 to September 2022.

Given the prolonged nature of the defects and damages, Phipps’ claims against Monarch spanned the periods covered by all three insurers.  As a result, the three insurers—Acuity, National Specialty, and Kinsale—each held responsibility during different time periods, making them co-indemnitors of Monarch for the claims arising from the project.

The Settlement Conference and Kinsale’s Refusal to Pay

Fast forward to August 2023, the parties involved—BMSH, Phipps, Monarch, and the three insurers participated in a settlement conference to resolve the claims.  While Acuity and National Specialty actively participated and contributed to the settlement, Kinsale took a different approach.

According to court documents, Kinsale refused to contribute its proportionate share to the settlement.  Acuity and National Specialty, in the interest of resolving the claims against Monarch, paid the amount that Kinsale should have covered under its policy.  Essentially, Kinsale’s non-participation led Acuity and National to cover the costs on Kinsale’s behalf.

Legal Claims and the Motion to Dismiss

 As a result of this settlement dispute, Acuity filed a lawsuit against Kinsale, seeking to recover the portion of the settlement for which Kinsale was responsible.  Acuity’s claims included:

Breach of contract: Acuity argued that Kinsale failed to meet its obligations under the insurance contract by refusing to contribute to the settlement.

Common law bad faith: Acuity asserted that Kinsale’s conduct in handling Monarch’s claims and the settlement negotiations amounted to bad faith.

Statutory bad faith: In addition to common law bad faith, Acuity also pursued statutory claims for Kinsale’s failure to handle the claim in a reasonable and timely manner.

Contribution: Acuity sought contribution from Kinsale for the portion of the settlement payment for which Kinsale was responsible.

Kinsale filed a motion to dismiss Acuity’s claims for breach of contract, common law bad faith, and statutory bad faith, arguing that it had no direct contractual obligations to Acuity, and that Acuity’s breach of contract and bad faith claims were unfounded.  Kinsale did not seek to dismiss Acuity’s contribution claim.

Trial Court’s Decision Regarding the Motion to Dismiss

Breach of Contract:

The court denied Kinsale’s motion to dismiss the breach of contract claim.  Even though Acuity was not a direct party to Kinsale’s insurance contract with Monarch, the court found that Acuity could pursue the claim through the doctrine of subrogation.  Subrogation allows Acuity to step into Monarch’s shoes and seek recovery from Kinsale for the portion of the settlement Kinsale should have paid.  Therefore, the court rejected Kinsale’s argument that Acuity lacked privity of contract and allowed the breach of contract claim to proceed​.

Common Law Bad Faith:

Kinsale also sought to dismiss Acuity’s common law bad faith claim, arguing that bad faith claims arise from a special insurer-insured relationship, which Acuity, as a co-insurer, did not share with Kinsale.  However, Acuity contended that as a joint insurer with Kinsale, it was entitled to certain duties of good faith.  The court agreed with Kinsale and dismissed the common law bad faith claim, concluding that Acuity, lacking a direct insurer-insured relationship with Kinsale, could not bring a claim for breach of the implied covenant of good faith and fair dealing.

Statutory Bad Faith:

Acuity also pursued statutory bad faith claims under Colorado law, which requires insurers to act reasonably and in good faith in handling claims.  Kinsale moved to dismiss this claim, arguing that the statutory obligations of insurers, like the common law obligations, apply only to their insureds.  The court agreed, dismissing Acuity’s statutory bad faith claim as well.  Since Acuity was not Kinsale’s insured, it could not assert these statutory protections.

Conclusion: A Reminder of the Complexities in Multi-Insurer Coverage

The Acuity v. Kinsale case serves as a reminder of the complexities contractors, subcontractors, and their insurers face in multi-insurer coverage disputes.  When construction defects span multiple years and multiple insurance policies, insurers may find themselves entangled in disputes over which bear responsibility for coverage.

For contractors and subcontractors, this case highlights the importance of understanding the interplay between different insurance policies and the coverage each provides.  While Monarch, in this case, was insured throughout the period of damage, disputes between insurers like Acuity and Kinsale can significantly affect the resolution of claims and the financial burden on all parties involved.

While this case primarily serves as a legal dispute between insurers, it underscores the necessity of having clear communication with your insurance carriers and ensuring that all parties are on the same page when it comes to coverage responsibilities.  Contractors can minimize risk and potential disputes by proactively engaging with their insurers and understanding the full scope of their coverage.

Ultimately, this case will likely continue to wind its way through the courts, but it stands as a cautionary tale for those in the construction industry to ensure they are adequately protected and that their insurance partners are aligned regarding the coverage provided.