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.

Carin Ramirez and David McLain recognized among the Best Lawyers in America© for 2021

Higgins, Hopkins, McLain & Roswell is pleased to announce that Carin Ramirez and David McLain were recently selected by their peers for inclusion in The Best Lawyers in America© for 2021. Carin Ramirez has been recognized for her work in insurance litigation and David McLain has been recognized for his work in construction law. 

Carin Ramirez has over 11 years of experience in civil defense litigation with an emphasis on the defense of construction defect lawsuits on behalf of developers, general contractors, and other construction professionals. She also practices in the areas of personal injury defense, premises liability, environmental torts, wrongful death, negligent design, property damage, subrogation claims, contract disputes, bad faith, and commercial litigation.   David McLain has over 22 years of experience and is well known for his work in the defense of the construction industry, particularly in the area of construction defect litigation. He is a member of the Executive Committee of the CLM Claims College - School of Construction, which is the premier course for insurance, industry, and legal professionals.

HHMR is highly regarded for its expertise in construction law and the litigation of construction-related claims, including the defense of large and complex construction defect matters. Our attorneys provide exceptional service to individuals, business owners, Fortune 500 companies, and the insurance industry. The firm is experienced in providing legal support throughout trials and alternative dispute resolution such as mediations and arbitrations.

Since it was first published in 1983, Best Lawyers® has become universally regarded as the definitive guide to legal excellence. Best Lawyers lists are compiled based on an exhaustive peer-review evaluation. Almost 108,000 industry leading lawyers are eligible to vote (from around the world), and we have received over 13 million evaluations on the legal abilities of other lawyers based on their specific practice areas around the world. For the 2021 Edition of The Best Lawyers in America©, 9.4 million votes were analyzed, which resulted in more than 67,000 leading lawyers being included in the new edition. Lawyers are not required or allowed to pay a fee to be listed; therefore inclusion in Best Lawyers® is considered a singular honor.

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.

Don’t Conspire to Build a Home…Wait…What?

In 1986, the Colorado General Assembly enacted the Pro Rata Liability Act, codified at C.R.S. § 13-21-111.5, which eliminated joint and several liability for defendants in favor of pro rata liability.[1] The statute was “designed to avoid holding defendants liable for an amount of compensatory damages reflecting more than their respective degrees of fault.”[2] However, the following year, the Colorado legislature carved out an exception to preserve joint liability for persons “who consciously conspire and deliberately pursue a common plan or design to commit a tortious act.”[3] Because of this conspiracy exception, plaintiffs try to circumvent the general rule against joint and several liability by arguing that construction professionals defending construction defect cases were acting in concert, as co-conspirators. Plaintiffs argue that if they can prove that two or more construction professionals consciously conspired and deliberately pursued a common plan or design, i.e., to build a home or residential community, and such a plan results in the commission of a tort, i.e., negligence, the defendants may be held jointly and severally liable for all of the damages awarded.

Since 1986, Colorado courts have construed the “conspiracy” provision in § 13-21-111.5(4), but some have disagreed as to what constitutes a conspiracy for purposes of imposing joint liability.

Civil Conspiracy

In Colorado, the elements of civil conspiracy are that: “(1) two or more persons; (2) come to a meeting of the minds; (3) on an object to be accomplished or a course of action to be followed; (4) and one or more overt unlawful acts are performed; (5) with damages as the proximate result thereof.”[4]

With respect to the fourth element, Colorado adheres to the view that “[t]he gist of [a civil conspiracy] action is not the conspiracy charged, but the tort working damage to the plaintiff.”[5] In Contract Maintenance Co. v. Local No. 105, the Colorado Supreme Court stated “the purpose of the conspiracy must involve an unlawful act or unlawful means.”[6]

In Pinon Sun Condo. Ass’n, Inc. v. Atain Specialty Ins. Co., a condominium association hired a public adjuster for the claims process and a construction company to conduct estimates and repairs after the condominiums sustained hail damage.[7] After a dispute over the amount of the claims paid, the association sued the insurers for breach of contract, among other claims.[8] The insurers counterclaimed, alleging fraud and civil conspiracy against the association, the public adjuster, and the construction company.[9] In its Order Granting in Part and Denying in Part Motions for Summary Judgment, the court granted summary judgment in favor of the association, public adjuster, and construction company on the fraud claim because the insurers failed to prove one of the elements of fraud.[10] Noting that the fourth element of a civil conspiracy requires an unlawful overt act, the court also granted summary judgment in favor of the association, public adjuster, and construction company on the civil conspiracy claim because the insurer failed to prove fraud, which was critical to showing an unlawful overt act.[11] Thus, although the association, public adjuster, and construction company acted in concert with one another, no conspiracy existed because no unlawful act or unlawful means in furtherance of a conspiracy existed.

Conspiracy in the Construction Context

However, in construction defect cases, the fourth element of civil conspiracy is not so clear.

In Resolution Trust Corp. v. Heiserman, the Colorado Supreme Court opined that “although the execution of a common plan or design may in many circumstances not result in wrongful conduct causing injury or damages,” . . . it may in some circumstances result in a tort such as negligence, causing injury or damages.[12] Thus, joint and several liability may be imposed on two or more persons pursuant to C.R.S. § 13-21-111.5(4), even when the conspiracy results in the tort of negligence.

Although the language of Heiserman appears to say that one may “conspire” to be negligent and thus be held jointly and severally liable, trial courts will not equate lawful contracting to do construction and design work with tortious conspiracy, absent some other evidence of tortious conduct. Indeed, Heiserman held that for joint and several liability to be applied, the trigger for liability had to be based on something other than a breach of contract.[13] The following cases help define the contours of this issue.

Rivergate Lofts Condo. Owners Ass’n v. Rivergate Lofts Partners, LLP: A tort must be reasonably foreseeable to result from the agreement.

On a partial summary judgment motion regarding joint and several liability in a construction defect case, La Plata County District Court Judge David Dickinson concluded the Colorado Supreme Court’s discussion in Heiserman regarding whether an agreement must include intent to commit a tort is dicta.[14] Judge Dickinson further concluded “as a result of the agreement, it must at a minimum be reasonably foreseeable that the agreement will result in the commission of tortious acts in furtherance thereof.” Id. at *7. Thus, due to a lack of evidence of agreement to violate the building code in the design-build agreement, Judge Dickinson found no conspiracy existed and granted partial summary judgment in favor of the construction company defendant. Id.

Villas at La Campanella Property Owners v. Hunnahs, LLC et al.: Benign cooperation does not establish joint liability.

In another La Plata County case, on a defendant’s motion for determination of a question of law regarding joint and several liability, Judge William Herringer determined that construction defect defendants would not be held jointly and severally liable because the plaintiff homeowners association was unable to establish facts to show the defendants agreed, in any way, to engage in tortious conduct.[15] More specifically, the judge acknowledged that the plaintiff presented factual evidence that the defendants worked together and coordinated closely on the construction project. However, the judge stated:

[That defendants worked together] is unsurprising and would be expected for a project of this nature. However, the mere fact that there were cooperative efforts and communication is insufficient for the imposition of joint liability. While the Plaintiff does not need to show that the defendants had the “specific intent” to commit a tortious act, the Plaintiff must produce some evidence of a “common plan or design” that results in the commission of a tort. Benign cooperation with a tortfeasor does not make a defendant jointly responsible for the tortfeasor’s misconduct. “One who innocently, and carefully, does an act which happens to further the tortious purpose of another is not acting in concert with the other.”[16]

Polmer et al. v. Hi Point Home Builders LLC et al.: Lawful contracting to build a home is not in and of itself a C.R.S. § 13-21-111.5(4) conspiracy.

In Polmer v. Hi Point Home Builders, El Paso County District Court Judge William Bain also ruled on a motion to determine a question of law regarding joint and several liability in a construction defect case.[17] In this case, RMG engineers designed the grading and excavation plans for a new development, conducted soils testing, and provided the structural designs and observation and compliance services for construction of the homes.[18] Ruling against joint and several liability, Judge Bain found that the plaintiff provided insufficient evidence that RMG “conspired” with the other construction defendants to recommend a new design, or that the construction defendants conspired to market the home fraudulently or build it defectively, based merely on the fact the parties lawfully contracted with each other.[19]

Conclusion

Taken together with Heiserman, the cases are clear on this point: Parties cannot be said to conspire when they have merely engaged in lawful contracting.[20] However, each case presents “unique factual circumstances” and “detailed factual findings will be necessary” to make a determination of whether any given contractual relationship among construction professionals will rise to the level of conspiracy under C.R.S. § 13-21-111.5(4).[21]

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[1] James W. Avery, The Pro Rata Liability Act and Imposition of Joint Liability Against Physicians, Colo. Law., 2/98, at 89.

[2] B.G.’s, Inc. v. Gross ex rel. Gross, 23 P.3d 691, 694 (Colo. 2001).

[3] C.R.S. § 13-21-111.5(4). This is also known as “actions in concert,” which is broader than civil conspiracy, not requiring express agreement or proof of intent to commit a tortious act. Resolution Tr. Corp. v. Heiserman, 898 P.2d 1049, 1056-57 (Colo. 1995).

[4] Loughridge v. Goodyear Tire & Rubber Co., 192 F. Supp. 2d 1175, 1186 (D. Colo. 2002).

[5] Resolution Tr. Corp. v. Heiserman, 898 P.2d 1049, 1055 (Colo. 1995) (quoting Prosser and Keeton on the Law of Torts § 46, at 324 (5th ed. 1984)).

[6] Contract Maintenance Co. v. Local No. 105, 415 P.2d 855, 857 (Colo. 1966) (en banc); see also Nelson v. Elway, 908 P.2d 102, 106 (Colo. 1995) (en banc) (An unlawful overt act is a required element of civil conspiracy.).

[7] Pinon Sun Condo. Ass'n v. Atain Specialty Ins. Co., No. 17-cv-01595, 2019 WL 4747673, at *1 (D. Colo. Sept. 27, 2019).

[8] Id. at *2.

[9] Id.

[10] Id. at *4-6.

[11] Id. at *9.

[12] Resolution Tr. Corp. v. Heiserman, 898 P.2d 1049, 1055 (Colo. 1995).

[13] Heiserman, 898 P.2d at 1055 (“We conclude that the term ‘tortious act’ appearing in section 13–21–111.5(4) includes any conduct other than breach of contract that constitutes a civil wrong and causes injury or damages.”).

[14] Rivergate Lofts Condo. Owners Ass'n v. Rivergate Lofts Partners, LLP, No. 10CV19, Order on Motion for Partial Summary Judgment of Defendants Okland and Sill, at *6 (La Plata Ct. Dist. Ct. Oct. 4, 2011).

[15] Villas at La Campanella Property Owners v. Hunnahs, LLC et al., No. 13CV30099, Order Granting Defendant ABC Welding, Inc.’s Motion for Determination of a Question of Law Regarding Joint and Several Liability, (La Plata Ct. Dist. Ct. Aug. 21, 2015).

[16] Id. at *2-3 (internal citations removed & emphasis added).

[17] Polmer et al. v. Hi Point Home Builders LLC et al., No. 2013CV30763, Order: (Proposed) Order: re: Motion for Determination of a Question of Law Regarding Joint and Several Liability, (El Paso Ct. Dist. Ct. Oct. 15, 2015).

[18] Polmer et al. v. Hi Point Home Builders LLC et al., No. 2013CV30763, First Amended Complaint at ¶¶ 16-19, (El Paso Ct. Dist. Ct. Oct. 15, 2015).

[19] Polmer et al. v. Hi Point Home Builders LLC et al., No. 2013CV30763, Order: (Proposed) Order: re: Motion for Determination of a Question of Law Regarding Joint and Several Liability, at *2 (El Paso Ct. Dist. Ct. Oct. 15, 2015).

[20] See also Logixx Automation, Inc. v. Lawrence Michels Family Trust, 56 P.3d 1224, (Colo. App. 2002) (“[W]e conclude that there can be no conspiracy by two or more parties to a contract to breach that contract.”); In re Stanley, 2011 WL 10656536 (E.D. Cal. July 1, 2011) (“[A] party to a contract cannot be bootstrapped into a conspiracy tort.”). “The claim of civil conspiracy . . . requires proof of an unlawful intent.” Nelson v. Elway, 971 P.2d 245, 250 (Colo. App. 1999). Joint and several liability cannot be imposed “for doing in a proper manner that which they had a right to do . . . .” Id.

[21] Resolution Trust Corp. v. Heiserman, 898 P.2d 1049, 1057 (Colo. 1995).

For more information regarding joint and several liability in construction defect cases, you can reach Ben Volpe at (303)-987-7140 or by e-mail at volpe@hhmrlaw.com. 

Interpreting Insurance Coverage and Exclusions: When Sudden means Sudden and EIFS means Faulty

EIFS, or Exterior Insulation and Finish System, is an integrated exterior insulation and synthetic stucco system, praised for its energy efficiency.[1] However, EIFS has come to be well known in the construction defect world as placing homes at risk due to a lack of a built-in moisture management system. Before long, insurance companies recognized the risk and began explicitly excluding coverage for EIFS-related damage. However, EIFS exclusions have not always been so clearly set forth in some policies, causing insurance coverage litigation.

Recently, a Greenwood Village couple, Mark and Susan Mock, lost this fight.

Built in 1994, the Mocks’ home was constructed with an EIFS system. The Mocks carried a homeowner’s insurance policy through Allstate, which covered “sudden and accidental loss” to property, but excluded coverage for “planning, construction or maintenance” issues. Such “planning, construction or maintenance” exclusions included “faulty, inadequate or defective designs.”

A few months after a hailstorm, the Mocks discovered moisture-related damage to their home’s EIFS system. They reported the damage to Allstate, but Allstate would not cover it, reasoning that the damage to the EIFS system was excluded as a design and/or construction failure, and thus not covered as a “sudden and accidental” loss. The experts who evaluated the damage concluded it was the result of inherent flaws in the EIFS systems common in the 1994 timeframe, which involved long term moisture intrusion behind the cladding and no means for the water to escape.

The Mocks subsequently sued Allstate for 1) entry of a declaratory judgment; 2) breach of contract; 3) common law insurance bad faith; and 4) improper denial of claim under C.R.S. § 10-3-1115.[2] Allstate moved for summary judgment.

The District Court Case: When Sudden means Sudden

At the district court level, the Mocks made several arguments for denial of Allstate’s summary judgment motion, only two of which the court analyzed.

First, the Mocks argued Allstate’s policy was ambiguous. That is, because the policy expressly covered sudden and accidental loss to property without defining “sudden and accidental,” the terms should be construed against the insurance company and in favor of the insured to mean “unexpected and unintended.”[3] Because the damage to their home was “unexpected and unintended,” the Mocks argued, the loss should be covered.[4] In making this argument, the Mocks relied on Hecla Min. Co. v. N.H. Ins. Co., 811 P.2d 1083, 1090 (Colo. 1991), which defined “sudden and accidental” in certain pollution policy exclusions to mean “unexpected and unintended.”

However, here, the district court found Hecla’s definition of “sudden and accidental” to be inapposite.

Hecla holds that “a pollution exclusion clause in a commercial liability insurance policy which provides coverage for a ‘sudden and accidental’ event is inconsistent with that policy’s definition of an ‘occurrence’ as an accident including ‘continuous or repeated exposure to conditions.’” Because of that inconsistency, Hecla held that the word “sudden” in that context was ambiguous and defined it to mean “unexpected and unintended,” so as to ensure consistency in the policy.[5] In other words, Hecla was about defining ambiguous terms in an insurance policy to be harmonious with one another, ensuring none are rendered meaningless.[6]

Upon finding Hecla does not apply here, the district court defined “sudden,” according to its plain meaning, which, according to the Merriam-Webster dictionary, implicates something that happens abruptly or hastily. Thus, the court rejected the Mocks’ attempt to construe “sudden” as “gradual or continuous” to fit the fact pattern of a slowly deteriorating EIFS stucco system.[7]

Second, the Mocks argued that a factual dispute existed with respect to whether the EIFS system suffered a design flaw or a construction flaw. The district court summarily dismissed this argument, relying on the experts’ reports, which consistently opined that the EIFS system was damaged as a result of long-term water intrusion, not a “sudden” incident.[8]

The Appeal: When EIFS means Faulty

On appeal, the Tenth Circuit Court of Appeals did not address the district court’s analysis surrounding coverage for “sudden and accidental” loss. Instead, the Court of Appeals affirmed summary judgment based on the faulty construction or design exclusion.[9]

The Tenth Circuit’s opinion, therefore, focused on the experts’ opinions that the damage to the Mocks’ home flowed from inherent flaws with EIFS stucco systems. The issue with respect to whether EIFS systems met building codes at the time of construction in the 90s is a legal issue—the court said—and thus not a material dispute of fact to be analyzed on summary judgment.

The Tenth Circuit concluded that “[t]he undisputed facts show that the manufacturer’s design of the EIFS system caused water infiltration and damage.”[10]

Conclusion

When considering installing EIFS systems, construction professionals should beware—not just of EIFS exclusions in their insurance policies—but also of potentially ambiguous language in those policies that courts will construe as excluding EIFS-related damage.

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[1] https://www.eima.com/eifs/benefits.

[2] See Mock v. Allstate Ins. Co., 340 F. Supp. 3d 1087 (D. Colo. 2018).

[3] Id. at 1090.

[4] Id.

[5] Id.

[6] See Martinez v. Am. Fam. Mut. Ins. Co., 413 P.3d 201, 203 (Colo. App. 2017).

[7] Mock, 340 F. Supp. 3d at 1090-91.

[8] Id.

[9] Mock v. Allstate Ins. Co., No. 18-1407, 2020 U.S. App. LEXIS 642 (10th Cir. Jan. 9, 2020).

[10] Id. at *8.

For more information on EIFS, you can reach Ben Volpe at (303) 987-7140 or by e-mail at volpe@hhmrlaw.com.