Whether construction defect claims against an insured contractor or subcontractor are covered is undergoing an intense debate in Colorado that is reminiscent of the current coverage battle in Hawaii.
Although I missed the case until recently, the decision in Colo. Pool Sys. v. Scottsdale Ins Co., 2012 Colo. App. LEXIS 1732 (Colo. Ct. App. Oct. 25, 2012), appears to divert from a prior case from the Colorado Court of Appeals, Gen. Sec. Indem. Co. v. Mountain States Mut. Cas. Co., 205 P.3d 529 (Colo. App. 2009). Gen. Security held that faulty workmanship, standing alone, was not an "accident." Gen. Security was heavily relied upon by the Hawaii Intermediate Court of Appeals when it found construction defects arose from breach of contract and were not covered under a liability policy. See Group Builders v. Admiral Insurance Co., 123 Haw. 142, 231 P.3d 67 (Haw. Ct. App. 2010).
In Colo. Pool Sys., Colorado Pool hired subcontractors to construct a poll's concrete shell. After the shell was poured, an inspection noticed that some re-bar was too close to the surface. The owner turned to its general contractor, White Construction Group, and demanded that the pool be removed and replaced. White turned to Colorado Pool, who notified its carrier, Scottsdale.
Scottsdale's adjuster visited the site and assured Colorado Pool that the losses from demolishing and replacing the pool would be covered under the CGL policy. Demolition began. Colorado Pool paid for the work, expecting to be reimbursed. But Scottsdale then refused to reimburse for the cost of demolishing and replacing the pool because it determined there was no duty to defend the claim.
At arbitration, Colorado Pool confessed liability in the amount of $133,500, and satisfied the judgment. Colorado Pool then sued Scottsdale.
Colorado Pool argued that Colorado's Construction Professional Commercial Liability Insurance Act applied to restore coverage. The statute was intended to change the result in General Security and provided, "[A] court 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 trial court ruled that the Act did not apply retroactively and Scottsdale's policy did not cover the claimed damages.
The Court of Appeals first determined that the statute was intended to apply retroactively because it applied to policies "currently in existence." But to apply the statute here would retroactively change the coverage provided under the policy and would be impermissibly retroactive.
Nevertheless, pursuant to common law, there was coverage. The policy did not define "accident." The court found the term ambiguous. "Accident" could either be read narrowly, to include only events that occurred by chance, or broadly, to include any unintended event. Because the term was ambiguous, it was construed broadly, in favor of the insured.
Consequently, the policy did not cover damage incurred in demolishing and replacing the pool itself. This damage resulted solely from the insured's obligation to replace defective work product, and was necessarily expected. But the rip and tear damage to non-defective third-party work (including damage to a deck, side-walk, retaining wall and electrical conduits) was covered because it was the result of an accident. The trial court was reversed and the case remanded for further proceedings on the the insured's claims.
