Applying Colorado law, the Tenth Circuit found a duty to defend construction defect claims where the faulty workmanship was unintentional. Greystone Const. Inc. v. National Fire & Marine Ins. Co., 661 F.3d 1272 (10th Cir. 2011). A prior post [here] discussed the Tenth Circuit's certified question to the Colorado Supreme Court in this matter, a request that was rejected by the Colorado court.
In two underlying cases, Greystone was sued by the homeowner for damage caused to the foundation by soil expansion. In both cases, the actual construction was performed by subcontractors. Further, in neither case was the damage intended or anticipated. Nevertheless, National Union refused to defend, contending property damage resulting from faulty construction was not an occurrence.
Relying on a Colorado Court of Appeals case, General Security Indemn. Co. of Arizona v. Mountain States Mut. Cas. Co., 205 P.3d 529 (Colo. App. 2009), the district court granted summary judgment to National Union.
On appeal, the Tenth Circuit first considered whether Colorado legislation enacted to overturn General Security could be applied retroactively. The statute, section 13-20-808, provided courts "shall 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." The court concluded the statute had no retroactive effect and did not apply to this appeal. Incidentally, section 13-20-808 was the model for the initial drafts of the Hawaii 2011 legislature's HB 924, which was eventually enacted in a different version as Act 83.
The Tenth Circuit then looked to General Security, which held that because the term "accident" implied 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. Despite the decision by the Colorado Court of Appeal, the Tenth Circuit believed the Colorado Supreme Court would construe the terms "occurrence" to encompass unforeseeable damage to nondefective property arising from faulty workmanship.
The Hawaii Intermediate Court of Appeals (ICA) was heavily influenced by General Security in Group Builders, 123 Haw. 142, 231 P.3d 67 (Haw. Ct. App. 2010), wherein the ICA determined construction defects do not arise from an occurrence and are not covered. The ICA was influenced by General Security's breakdown of cases across the country addressing whether construction defects are covered under a CGL policy, and ultimately agreed with what it termed the "majority" position that there was no coverage.
The Tenth Circuit, however, disagreed with General Security's breakdown. Most federal circuit and state supreme court cases lined up in favor of finding an occurrence where damage arises from faulty workmanship. The court noted the recent trend interpreted the term "occurrence" to encompass unanticipated damage to non-defective property resulting from poor workmanship. These cases generally held that damage caused by faulty workmanship was neither expected nor intended from the standpoint of the policy holders, and was therefore covered as long as it did not fall under a policy exclusion.
Therefore, injury flowing from improper or faulty workmanship was an occurrence so long as the resulting damage was to non-defective property, and was caused without expectation or foresight. CGL policies were intended to cover unforeseeable damages, a category that encompassed faulty workmanship leading to physical damage of non-defective property. The damage suffered by the homeowners here may have resulted from an unforeseen occurrence: the damage caused by the faulty workmanship that failed to account for exposure to expansive soils.
Finally, the court considered the meaning of the "your work" exclusion and the subcontractor exception. It was the initial broad grant of coverage, not the exception to the exclusion, that ultimately created (or did not create) coverage. Exclusions were then considered to determine whether coverage was negated. Given this structure of CGL policies, the "your work" exclusion and the subcontractor exception were illusory if damages to the contractor's non-defective work product was not covered in the first place.
Consequently, damage arising from poor workmanship could fall under a CGL policy's initial grant of coverage, even though recovery may still be precluded by a business-risk exclusion or other provision.
Thanks to my Damon Key colleague, Anna Oshiro, for flagging this case.
