U.S. District Court of Colorado Interprets Insurance Policy’s Faulty Workmanship Exclusion and Exception for Ensuing Damage

Recently, the United States District Court for the District of Colorado interpreted a faulty workmanship exclusion in a property insurance policy in The Lodge at Mountain Village Owner Association v. Eighteen Certain Underwriters of Lloyd’s of London, 22 U.S Dist. Ct LEXIS 48883*, decided on March 18, 2022.  The Court held that the faulty workmanship exclusion at issue extended to preclude coverage for later ensuing damage that arose from the faulty workmanship, even though the damage was weather related, because faulty workmanship was the primary cause of the ensuing damage.

The claims in The Lodge at Mountain Village arose from maintenance work performed on log siding at three multi-unit condominium buildings in Telluride.  The maintenance work to the log siding included staining, finishing, and chinking repairs to joints between the logs.  About a year after completion of the work, The Lodge at Mountain Village Owners Association (“The Lodge”) notified the maintenance contractor that logs were extremely weathered and that its work was defective.  The Lodge retained an expert who prepared a report stating that the log finish and underlying wood was deteriorating because of the contractor’s work and that some areas were not properly protected from exposure to snow, rain, and brine from ice-melting salt.  The Lodge pursued and settled its claims against the contractor.

A year after filing suit against the contractor, but before settling those claims, The Lodge filed an insurance claim with its first-party property insurance carrier.  The insurance policy provided coverage for “All Risks of Direct Physical Loss or Damage except as hereinafter excluded.”  With respect to applicable exclusions, the policy stated that it did not insure against “the cost of making good defective design or specifications, faulty material, or faulty workmanship, unless physical loss or damage by a peril not excluded ensues and then this policy shall only cover for such ensuing loss or damage . . .”  The policy also excluded “ordinary wear and tear” and “gradual deterioration,” with the same language that “unless physical loss or damage by a peril not excluded ensues and then this policy shall only cover for such ensuing loss or damage.”  The insurance carrier denied the loss pursuant to the exclusions for faulty material, faulty workmanship, gradual deterioration, and ordinary wear and tear.  The Lodge then had its expert provide an additional report, which described damage that was due to the failed chinking sealant and that areas with failed chinking had increased moisture due to rain and melting snow events.  The Lodge provided this letter report to its insurance carrier and asked that it reopen the claim, describing the loss as damage that resulted from faulty workmanship, but noting that the damage ensued after the faulty workmanship.  The insurance carrier denied the claim a second time.

The Lodge then filed suit against its insurance carrier and the independent insurance adjuster that investigated the claim, asserting claims of breach of contract, statutory bad faith, and common law bad faith.  The parties agreed that the damage arose from faulty workmanship.  The question addressed by the Court was whether the ensuing damage was covered by the insurance policy.  The Lodge’s argument was essentially that the contractor did not cause the damage itself, but that it was caused by later moisture intrusion from rain and snow.  The Court noted that, though courts around the country have reached mixed results regarding ensuing damage caused by excluded perils, they all agree with the principle that “the exception cannot be allowed to swallow the exclusion.”  Therefore, the Court found that the cause of the damage claimed by The Lodge was the construction defect, not a later covered peril.  There was no dispute that the damage to the logs was caused by the contractor’s failure to properly seal the logs, which led to water penetrating behind them, which the Court found to have unambiguously fallen within the exclusion for faulty workmanship.  The court noted that, to read the policy as The Lodge requested, would have resulted in coverage for the very damage caused by the construction defect, which was excluded under the policy.  In other words, it would allow the exception to swallow the exclusion.

The Court went on to analyze whether the damage would similarly be excluded by the ordinary wear and tear and gradual deterioration exclusions.  The Lodge argued that the damage was due to moisture from rain and snow.  The Lodge had described such damage in its complaint and discovery responses as resulting from “slow, hidden, and repeated intrusion of water,” which was “slow and discrete,” and “gradual and progressive.”  Based on this description, the Court found that The Lodge’s argument that the damage was due to later rain and snow intrusion would similarly result in a lack of coverage for the damage because it would fall under the policy’s exclusion for gradual deterioration.

The Court also held that another basis to dismiss The Lodge’s breach of contract claim against the insurer was that The Lodge had failed to notify the insurer of the claim until at least 24 months after it discovered the damage.  The Court held that it was undisputable, as a matter of law, that The Lodge did not notify its insurance carrier of the claim within a reasonable time as required by the insurance policy.  Therefore, the Court dismissed The Lodge’s breach of contract claim for this additional reason.

Since the Court dismissed The Lodge’s breach of contract claim against its insurance carrier, there was no basis for its bad faith claims against the carrier as a matter of law.  This opinion upholds the U.S. District Court’s inclination to interpret insurance policy language strictly, and to not permit an insured to use an exception to an exclusion to serve as a means for the insured to get around an exclusion.  Also, it provides guidance to policyholders that damage arising from defective workmanship will not be covered where there is a faulty workmanship exclusion unless there is a subsequent loss legitimately caused by a covered peril.

For additional information regarding The Lodge at Mountain Village Owner Association v. Eighteen Certain Underwriters of Lloyd’s of London case, or Colorado construction law, generally, you can reach Carin Ramirez by e-mail at ramirez@hhmrlaw.com or by telephone at (303) 987-7140.

The Economic Loss Rule: From Where Does the Duty Arise?

When entering a contract under Colorado law or attempting to enforce your rights when the other party breaches a contract, it is important to know and understand what rights you have and what claims you can bring or defenses you may have.  One important consideration is Colorado’s version of the economic loss rule.  The Colorado Supreme Court has issued several opinions clarifying the scope of the economic loss rule since it adopted the rule in 2000.  The purpose of the economic loss rule is to maintain the boundary between contract law and tort law.

In Colorado, the economic loss rule provides that a party suffering only economic loss from the breach of an express or implied contractual duty may not assert a tort claim for the breach without an independent duty of care under tort law.  In most instances the economic loss rule will not bar intentional tort claims.  The question becomes: from where does the duty arise?  Is there an independent duty in tort law?  Did the duty arise solely from the contract?

On January 14, 2021, a division of the Colorado Court of Appeals released its opinions in McWhinney Centerra v. Paog & McEwen, 486 P.3d 439 (Colo. App. 2021), answering the question as to when the economic loss rule applies and altering Colorado’s economic loss rule. The Court of Appeals noted in its decision, that while the decision is contrary to several other decisions, it was based on the recent decision of the Colorado Supreme Court in Bermel v. BlueRadios, Inc., 440 P.3d 1150 (Colo. 2019).  The Court specifically determined that where an independent duty exists, outside the agreement, the economic loss rule does not bar a tort claim.

The McWhinney case arose from a land development deal gone bad during the real estate collapse of 2008.  McWhinney Centerra Lifestyle Center LLC (“MCLC”), a subsidiary of McWhinney Holding Company, LLP (“McWhinney”), and Poag & McEwen Lifestyle Centers-Centerra LLC (“P&M”), a subsidiary of Poag & McEwen Lifestyle Centers, LLC (“PMLC”), formed Centerra LLC.  The purpose of Centerra LLC was to acquire, develop, own, and operate an upscale shopping center in Loveland, Colorado, The Promenade Shops at Centerra.  MCLC provided the capital, land, and an established public-private partnership with the city and county entities for infrastructure financing.  P&M served as the managing member of the joint venture.  MCLC & P&M signed an operating agreement (the “Agreement”), and McWhinney and PMLC signed as guarantors.

The Agreement required P&M to obtain a construction loan for Centerra LLC and later a permanent loan.  In 2005, P&M obtained the construction loan for $116 million in accordance with the Agreement, and the shopping center opened in October 2005.  In 2006, P&M purchased a $155 million forward swap loan on behalf of Centerra LLC without first obtaining the permanent loan.  P&M’s intent for obtaining the forward swap loan was to gain the trust of other investors to obtain a loan for personal reasons not for the benefit of Centerra LLC.

In 2007, P&M entered a $40 million mezzanine loan.  A loan which the Court found P&M used for personal interests.  P&M used the $40 million dollar loan for Dan and Josh Poag to buy out their co-founder, Terry McEwen.  The Court found that P&M intentionally concealed this buyout and its intention to use these self-dealings to fund it.  P&M gave MCLC limited and misleading information or no information at all about the buyout.

Shortly after P&M’s buy out of McEwen, it began defaulting on its loans and lacked the funds to pay property taxes.  In 2008, the real estate market collapsed, and P&M allowed the construction loan to go into default.

In 2011, after the joint venture failed, MCLC sued P&M, asserting a breach of contract claim based on the Agreement and seven tort claims.  The district court dismissed all seven tort claims under the economic loss rule.  The Court of Appeals determined P&M owed a duty of fair dealing to MCLC, including a duty of disclosure and that P&M had purposefully concealed and misrepresented material facts about the $40 million loan.  Further, the Court of Appeals concluded that the district court erred when it applied the economic loss rule to bar MCLC’s common law intentional tort claims of fraudulent concealment, intentional interference with contractual obligations, and intentional inducement of breach of contract.

The Agreement between MCLC and P&M stated that P&M owed fiduciary duties of care and loyalty to Centerra LLC and MCLC.  The duty of loyalty requires that the best interest of the company and its members take precedence over any of the manager’s individual interests and that the manager act in good faith.  The duty of care requires that a manager act on an informed basis.  P&M breached its fiduciary duties under the Agreement when it purchased the forward swap, entered the $40 million mezzanine loan, and failed to secure permanent financing.

P&M’s purchase of the forward swap on behalf of Centerra LLC was a breach of P&M’s fiduciary duties because of the individual benefit P&M derived from it.  P&M used the forward swap as a tool to obtain the $40 million mezzanine loan to buyout McEwen.  P&M purposefully concealed the purpose and significant details of the $40 million mezzanine loan and failed to give MCLC a complete or accurate picture of how the loan would impact the operations of Centerra LLC.  P&M had a duty to disclose material facts related to the mezzanine loan to MCLC and they failed to do so, therefore, breaching their fiduciary duties.  

Finding that P&M owed fiduciary duties under the Agreement and breached those duties the Court of Appeals turned to MCLC’s intentional tort claims.  The Court determined that the district court erred in dismissing MCLC’s common law intentional tort claims, except for the civil conspiracy claim.  Under the guidance of the Colorado Supreme Court’s decision in Bermel the Court noted that while the intent of the economic loss rule is to prevent tort law from “swallowing” the law of contract, courts must also be cautious not to allow contract law to swallow tort law.  “The economic loss rule generally should not be available to shield intentional tortfeasors from liability that happens to also breach a contractual obligation.” Town of Alma v. AZCO Constr., Inc., 10 P.3d 1256, 1260 (Colo. 2000).

The Court reinstated MCLC’s fraudulent concealment, intentional interference with contractual obligations, and intentional inducement of breach of contract claims.  The Court reasoned that the three claims stem from a duty based in tort law independent of the Agreement.  The conduct underlying each of the claims may also support a breach of contract claim, however, in this case, the Court did not shield the intentional tortfeasors simply because the conduct also happens to breach a contractual obligation.

However, the economic loss rule did bar MCLC’s civil conspiracy claim.  MCLC alleged P&M and PMLC conspired to breach the Agreement.  As signatories to the Agreement, P&M and PMLC’s duty not to conspire to breach the contract stemmed solely from the Agreement itself.  P&M and PMLC had no independent duty in tort law not to conspire to breach the Agreement with another signatory of the Agreement.  Thus, the economic loss rule barred MCLC’s civil conspiracy claim.

Though the McWhinney decision was contrary to previous holdings, one must bear in mind, the Court had new direction from the Colorado Supreme Court’s decision in Bermel.  While the economic loss rule had barred tort claims which happened to breach a contractual obligation the court has moved away from this one-track mind analysis.  McWhinney makes it clear that the economic loss rule does not bar an intentional tort claim simply because a breach of contract claim exists.

McWhinney’s effect may be that plaintiffs’ attorneys ramp up efforts to bring intentional tort claims.  It is important for defense counsel to know to what claims the economic loss rule can serve as a defense.

For additional information regarding the McWhinney decision or Colorado construction law, you can reach Taylor Hite by e-mail at Hite@hhmrlaw.com or by telephone at (303) 653-0043.

Contractual warranty agreements may preclude future tort recovery

When a buyer purchases a product that is later discovered to be defective, the court offers a remedy to make the buyer whole.  Such remedies can arise either out of a contract, including express and/or implied warranties, or under common law through a tort theory.  However, what happens when a buyer has already received the remedy specified in the contractual warranty, only to discover the product manufacturer misrepresented the quality of its product by failing to disclose a defect?  Can the buyer subsequently recover for the same product under a tort theory of recovery?  The Colorado Court of Appeals analyzed such questions in its December 2021 decision in Dream Finders Homes, LLC v. Weyerhaeuser NR Co., 2021 COA 143.

In Dream Finders, the court examines the rights of sophisticated buyers who purchased defective products and received a warranty from the product manufacturer with purchase. The court specifically determines whether such buyers may recover under the tort theory product misrepresentation and failure to disclose when the buyers have already received the remedy specified and the warranty expressly excludes the type of damage the buyer now seeks.

The case involved two main parties, including Weyerhaeuser, a product manufacturer which designed and sold engineered joists with a fire-resistant coating to be used in residential construction, and Dream Finders, a home builder, which purchased and utilized Weyerhaeuser’s fire-resistant joists in homes it constructed and sold. Upon purchase of the joists, Dream Finders received two warranties, from Weyerhaeuser to wit: a general warranty delivered with all Weyerhaeuser products and a specific warranty relating to the joists providing that Weyerhaeuser would pay reasonable costs for repair or replacement of the covered joists for any delamination, separation, or inadequacy that might occur in the joists. The reasonable costs were to be capped at three times the cost of the joists themselves. The specific warranty also expressly stated that Weyerhaeuser would not be responsible for incidental, indirect, or consequential damages.

Three months after Dream Finders started purchasing and installing the joists into its homes, Weyerhaeuser received third-party reports indicating that the joists, which were coated with a formaldehyde-based resin, emitted a chemical-like odor that caused eye and throat irritation.  In compliance with the specific warranty, Weyerhaeuser offered remediation options to builders which installed the affected joists.  Dream Finders opted for a mechanical removal option. Weyerhaeuser complied with the request and paid for all remediation costs, which ended up being significantly greater than three times the product cost.  After the remediation was completed, Dream Finders sued Weyerhaeuser for breach of express and implied warranty, negligence, negligent failure to warn, negligence per se, strict product liability, violation of Colorado’s Consumer Protection Act (the “CCPA”), negligent misrepresentation, and fraudulent concealment.  In its claims, Dream Finders alleged that Weyerhaeuser knew that its products contained a urea-formaldehyde resin but failed to disclose the known hazardous levels of formaldehyde in the joists.  Dream Finders alleged that it incurred over $20 million in damages, including remediation costs and costs incurred because of delayed home sales.  

In evaluating the case, the Court first considered the economic loss rule, which bars recovery under tort claims for purely economic losses stemming from a breach of contract.  While Colorado law provides that construction professionals owe homeowners independent, common law, duties of care to homeowners, which do form the basis for tort-based negligence claims safe from the reaches of the economic loss rule, the Court refrained from extending this duty to a builder, which only owned the homes briefly before selling them to the ultimate purchasers. The Court held that the economic loss rule limited Dream Finders’ ability to recover damages arising from tort claims because it and Weyerhaeuser already completed the contractually mandated remedy for the defective joists.

The Court determined that the relief sought by Dream Finders was identical under both tort and contract theories.  To come to this conclusion the Court compared both the tort duties and contractual duties owed by Weyerhaeuser.  Generally, a tort duty can be distinguished from a contractually arising duty when the tort duty extends beyond the scope of duty provided for in the contract.  Dream Finders and Weyerhaeuser agreed that Weyerhaeuser complied with the terms and conditions of its warranty and that because of this compliance, Dream Finders received the benefit for the contract-based bargain.

Because Dream Finders had already received the agreed-upon contractual benefit and expressly chose to contract away any other rights to recover, the Court precluded Dream Finders from recovering anything further. Even though only one of Dream Finders’ entities entered into the warranty agreement with Weyerhaeuser, the Court held that the warranty still controlled under Colorado law.  C.R.S. § 4-2-318 provides that a manufacturer’s warranty “extends to any person who may reasonably be expected to use, consume, or be affected by the goods and who is injured by breach of warranty.”  The Court maintained that the warranty, therefore, impeded recovery under the economic loss rule because, even though one of the entities did not expressly enter into the warranty agreement, its coverage by the warranty was implied by statute.

The economic loss rule does not bar recovery for damages based on pre-contractual fraud where the fraud induced a plaintiff to enter the contract, as discussed in Van Rees v. Unleaded Software, Inc., 373 P.3d 603 (Colo. 2016).  However, in Dream Finders, the alleged claims arose from post-contractual conduct and did not fraudulently induce Dream Finders to enter the warranty agreement.  Because of this fact, Weyerhaeuser did not owe Dream Finders a separate duty apart from those specified in the warranty contract.  The Court concluded, therefore, that the economic loss rule disqualified Dream Finders from recovering anything under its tort-based claims.

There are limitations to the economic loss rule and the Court affirmed that it does not bar CCPA claims.  However, the Court ruled that Dream Finders failed to prove all elements of its CCPA claim.  Additionally, CCPA claims were created to protect individual consumers who are at a bargaining disadvantage compared to more sophisticated buyers, such as Dream Finders.  

Judge Jaclyn Brown issued a warning at the end of the Court’s decision, stating that the expansion of the economic loss rule has the frightening propensity to encourage a contracting party to act fraudulently during the contractual relationship and then attempt to escape liability by hiding behind the rule. Judge Brown further emphasized that the economic loss rule should not apply to cases where the damages arise from an intentional act as it would be bad policy for courts to shield intentional tortfeasors from liability.  Judge Brown’s fears have not yet come to fruition, but we anticipate future Colorado court decisions will further mold the trajectory of the economic loss rule.

Dream Finders now serves as a reminder of the importance of contracts and warranty clauses and why both product manufacturers and contractors should take a close look at what rights are provided or relinquished when entering into such agreements.

For additional information regarding the Dream Finders case or Colorado construction law, you can reach out to Taylor Ostrowski by telephone at (303) 653-0047 or by e-mail at ostrowski@hhmrlaw.com.

Implied Warranty Claims–Not Just a Seller’s Risk: Builders Beware!

One of the thorns in the side of every construction defect defense litigator is the implied warranty claim.  The “implied warranty” is a promise that Colorado law is “implied” into every contract for a sale of a new home that the home was built in a workmanlike manner and is suitable for habitation. Defense attorneys dislike the implied warranty claim because it is akin to a strict liability standard.  All that is required to provide the claim is that an aspect of construction is found to be defective — i.e., inconsistent with the building code or manufacturer’s installation instructions — regardless of whether the work was performed to the standard of care. The implied warranty claim is therefore easier to prove than a negligence claim, where a claimant must prove that a construction professional’s work fell below a standard of reasonable care. Additionally, it is not a defense to an implied warranty claim that the homeowners or the HOA are, themselves, partially liable for the defects where damage is due in part to insufficient or deferred maintenance, as it is for negligence claims. The only redeeming aspect to the implied warranty claim was that, until recently, it was believed that it could only be asserted by a first purchaser against the seller of an improvement, because the implied warranty arises out of the sale contract.

Recently, the Colorado Court of Appeals opinion in Brooktree Village Homeowners Association v. Brooktree Village, LLC, 19CA1635, decided on November 19, 2020, extended the reach of the implied warranty — though just how far remains to be seen.  Specifically, a division of the Court of Appeals held that an HOA can assert implied warranty claims on behalf of its members for defects in common areas, even where there is no direct contractual relationship between the parties to base the warranty upon.

The facts of the Brooktree case are somewhat unique.  The original developer constructed the grading and 2 of 14 planned buildings at the development before filing for bankruptcy.  After the original developer filed for bankruptcy, the common areas were conveyed to the HOA.  Several years later, Brooktree Village, LLC, the developer defendant in the Brooktree case, acquired the undeveloped areas other than the common areas, and completed the development using a builder that was a related entity. The primary construction defect allegations in the case involved site grading and drainage in the common areas and the HOA sought damages of the cost to repair the common areas. Though the facts of the case are unique, the reasoning and holding of the Brooktree opinion could, nonetheless, significantly broaden the scope of implied warranty claims.

First, the Brooktree court held that the HOA could assert implied warranty claims against the builder, even though the developer, not the builder, was the entity that sold the homes to the owners.  The decision was based, in part, upon the fact that the builder had signed the purchase agreements, had provided express warranties to the purchases, and had created the developer entity primarily to market and sell the homes. The decision could therefore be interpreted to apply only in similar factual circumstances in which the developer and builder are related entities and both sign the purchase agreements.  There is language in the Brooktree opinion that could support a broader interpretation that would apply to nearly any builder of a home. The opinion states that, even if the builder had not been a party to the purchase agreements, it constructed the townhomes and knew they would be sold to individual owners and should not be permitted to “shirk its responsibilities under implied warranties” to the homeowners.  We anticipate this language will be used in the future by plaintiff’s attorneys to support arguments that homeowners can assert implied warranty claims against builders, regardless of whether the builder was also the seller of a home.

The second holding of the Brooktree is that the HOA can assert an implied warranty claim against the builder and second developer arising from defects in the common areas, even though neither the builder nor second developer ever owned the common areas or conveyed the common areas to the HOA.  As above, the fact that there was no contract between the HOA and the builder and developer for conveyance of the common areas for the warranty to be “implied” into did not deter the Court of Appeals from finding a way to allow the HOA to pursue the claim. Rather, the Brooktree court found that, because the sales of the individual homes included rights to use the common areas, and the builder completed the construction of the common areas after they were conveyed to the HOA, construction defects within the common areas fell within the implied warranty to the purchasers.  This holding, as did the first, indicates a willingness on the part of the Colorado Court to bend the rules—or simply create new ones—to permit homeowners to hold developers and builders to a strict liability standard regardless of the contractual relationship between the parties.

Additionally, the court held that, because some of the homes were owned by purchasers that purchased their units directly from the second developer, the HOA could assert implied warranty claims for defects in the common areas and seek the entire amount of repair costs from the builder and second developer — as opposed to a proportion of damages representing the portion of direct purchasers — because the repair of only a portion of the common areas would not provide a meaningful remedy to the direct purchasers.

Just how broadly the implied warranty claim will now apply remains to be seen.  However, we anticipate we will see the implied warranty claim asserted in more circumstances and against more parties, particularly builders, in the future. 

For additional information regarding the Brooktree case or Colorado construction law, you can reach out to Carin Ramirez by telephone at (303) 987-7140 or by e-mail at ramirez@hhmrlaw.com.

 

This is why I practice law

This week I received an e-mail from a developer client with whom we have recently been working on a residential construction defect matter.  I receive a lot of e-mails during any given week, but this one struck me.  Short and sweet, the e-mail reads:

Dave,

Just thinking today about the legal problems in the last couple years.  I just wanted you to know that there isn’t a day that goes by that I don’t think I’m just plain lucky I found David McLain.  I may not always sound appreciative on the phone but I want you to know that I truly am grateful our paths have crossed. 

Thanks

[client]

Being on the defense side of cases is not glorious.  Defense attorneys typically do not get headlines or recognition, certainly there are more lucrative practice areas out there, and the goal in many cases on the defense side is essentially to minimize exposure in settlement or judgment in as cost-effective manner as possible.

The reason I practice in this area is to make a difference in the lives of my clients and to help them get through tough situations.  Knowing that I can do this and do this well keeps me going.  To get an e-mail like I did this week is just icing on the cake.  

For additional information on construction litigation in Colorado, you can reach Dave McLain by telephone at (303) 987-9813 or by email at mclain@hhmrlaw.com.

Colorado’s abbreviated legislative session offers builders a reprieve

Would you believe me if I told you that this year could have been worse for builders? Had COVID-19 not hit, the Colorado Legislature may have passed bills that would have had a severely negative impact on the home building industry. In response to the COVID-19 pandemic, the Legislature temporarily adjourned in mid-March, 67 days into the 120-day legislative session. After a two-month recess, the Legislature returned for approximately one month to pass critical bills including the state budget, the school finance act and what to do with the money from the federal CARES Act. Of the bills on the calendar when the Legislature temporarily adjourned, legislators focused on those that were “fast, free, and friendly,” and let the others fall by the wayside. 

Bills that died included SB 20-138, which would have extended Colorado’s statute of repose for construction defect claims from six plus two years to 10 plus two years. The bill also contained a number of accrual and tolling provisions, which would have made it harder for builders to convince tribunals that claims were untimely. This bill died on the Senate floor, for lack of support. We will see whether plaintiffs’ attorneys will revive this effort next year. 

SB 20-093, while not an outright ban on arbitration or a legislative overturning of the Vallagio decision, would have made it harder to administer and more difficult to get cases into arbitration. The bill died under the “fast, free, and friendly” test, i.e., it faced too much opposition. I expect to see this bill again next year, in some form.

HB 20-1046 would have limited retainage to 5% on certain construction contracts. The bill also included requirements on timing of payments, interest on late payments, and attorneys’ fees and costs to be awarded to those who sued for late or non-payment. The bill died in committee prior to the COVID-19 recess in the face of opposition from owners’ groups. It remains to be seen whether this bill will be rerun next year.

The Legislature did pass a number of bills that will impact the home building community. Among them, HB 20-1155 will require, once it goes into effect, home builders to offer: a solar panel system, a solar thermal system or both; prewiring or pre-plumbing for the solar systems; and a chase or conduit for future installation of such systems. The bill will further require builders to offer: an electric vehicle charging system; prewiring for the future installation for such a system; or a plug-in receptacle in a place accessible to a vehicle parking area. Finally, the bill will require builders to offer electrical heating systems.

Buckle up for next year when some or all of the unsuccessful bills from this year return, and the plaintiffs’ bar takes another crack at the home building industry.

For additional information on Colorado's legislative session, or construction litigation in Colorado, you can reach Dave McLain by telephone at (303) 987-9813 or by email at mclain@hhmrlaw.com. 

Requesting an Allocation Between Covered and Non-Covered Damages? [Do] Think Twice, It’s [Not Always] All Right.

As is often the case in construction defect and other insurance defense litigation, a plaintiff’s claims for relief typically encompass both covered and uncovered damages.  Obviously, it is in the insured’s best interests to have as many damages covered by insurance as possible.  From the insurer’s perspective and against the backdrop of owing duty of good faith and fair dealing to its insureds, however, it is generally better to have an allocation of covered vs. non-covered damages.  This places the insurer, insured, and insurance retained defense counsel in a difficult position. 

A recent opinion from U.S. District Court for the District of Colorado, Rockhill Ins. Co. v. CFI-Global Fisheries Mgmt, Civil Action No. 1:16-CV-02760-RM-MJW, 2020 U.S. Dist. LEXIS 35209 (D. Colo. Mar. 2, 2020), sheds light on the issue, even though some may feel it only further muddies already murky waters.  

Rockhill involved review of an arbitration proceeding that property-owner, Heirloom I, LLC (“Heirloom”) filed against CFI-Global Fisheries Management (“CFI”).  Rockhill Insurance Company (“Rockhill Insurance”) was asked to defend the arbitration as CFI’s professional and general liability insurer.  At issue in the arbitration was Heirloom’s claim that CFI defectively designed and constructed a fisheries enhancement that was destroyed by natural processes four times in three years.

Rockhill Insurance agreed to defend the arbitration but reserved the right to deny coverage based on various exclusions, including a faulty workmanship exclusion.  The arbitrators ultimately awarded Heirloom $609,995.91, and the parties subsequently stipulated an additional $265,000 award of attorney fees. The decision was not accompanied by a reasoned award as neither party requested such.

Prior to the issuance of the arbitration award, Rockhill Insurance filed a federal declaratory judgment action against CFI and Heirloom alleging that it had no duty to defend and indemnify CFI in the arbitration.  CFI asserted counterclaims for declaratory judgment, breach of contract, and bad faith for Rockhill Insurance’s failure to timely settle.  After the arbitration award entered, the U.S. District Court for the District of Colorado granted summary judgment in favor of Rockhill Insurance, holding, in pertinent part, that the entirety of the arbitration award was excluded under the policy’s faulty workmanship exclusion. 

The Tenth Circuit Court of Appeals, in Rockhill Ins. Co. v. CFI-Global Fisheries Mgmt., 782 F. App'x 667 (10^th Cir. 2019), disagreed, and found that the faulty workmanship exclusion did not apply to design failing, and remanded the case for the district court to consider in the first instance whether the entire arbitration award is covered under a correct reading of the exclusion, or whether the damages could be apportioned between covered professional design services and non-covered construction work.

On remand, the Rockhill court emphasized that because Rockhill Insurance controlled the defense, it “had a corresponding duty to ensure that the damages were allocated between those that were covered under CFI’s policy and those that were not.”  Because Rockhill Insurance failed to request an allocated or reasoned award, the arbitrators issued a standard, non-explanatory, award that said nothing with respect to allocation between covered and non-covered damages.  Under such circumstances the Rockhill court held that all damages awarded are presumed covered under the policy.  To support its finding that Rockhill Insurance did not meet its burden of establishing that it was not liable for the entire award, the Rockhill court relied on the fact that the arbitrators were presented with evidence that CFI’s design work was so faulty that that project was destined to fail, and there was no evidence that any of the damages awarded were due solely to CFI’s construction work.

Though the Rockhill decision may surprise Colorado insurance practitioners, especially insurance defense attorneys, one must bear in mind that like other opinions of the U.S. District Court for the District of Colorado, Rockhill is not binding on Colorado state courts.  Further, Rockhill does not go so far as to expressly state that insurance defense counsel has any affirmative duty to seek an allocation between covered and non-covered damages, or that an insurer can direct insurance defense counsel to seek such an allocation.  Such a proposition would insert potentially prejudicial coverage issues into a case in direct contravention of, for example, Colorado Rule of Evidence 411 or insurance defense counsel’s ethical duties as set forth in Colorado Ethics Opinion 91. 

The important takeaway from Rockhill is that it highlights the danger for insurers relying on coverage defenses that do not, prior to an action’s conclusion, at least request intervention in order to seek allocation of covered vs. non-covered damages.  While Colorado courts almost always deny such requests, the fact that such a request was made can be used in an effort to preserve an insurer’s right to subsequently seek allocation.  If no request is made, regardless of whether it is successful, Rockhill makes clear that the carrier risks both waiving its right to seek allocation after the fact, and liability for an entire damages award.

Rockhill’s effect may be that insurers ramp up efforts to request that an insured seek allocation through not only special verdict forms and reasoned arbitration awards, but also case investigation and discovery.  The extent to which it is advisable for an insured defendant to cooperate with such requests is outside the scope of this article.  In such situations, insurance defense counsel should inform its client of the issues and the client’s right to consult with, and follow, the often nuanced, case-specific advice of coverage or other independent counsel.

For additional information regarding the Rockhill decision, or construction litigation in Colorado, you can reach out to Todd Likman by telephone at (303) 987-9814 or by e-mail at likman@hhmrlaw.com.