Commentary: Insurance Coverage for Defective Workmanship Part 5
Editor’s Note: Past “Construction Law Briefs” have published four separate columns dealing with Colorado law on the question of whether defective construction is covered under comprehensive general liability (CGL) insurance policies carried by most contractors and subcontractors.
The column has addressed previous Colorado court decisions and the Colorado statute passed in 2010 that was designed to overrule an earlier Colorado Court of Appeals decision. In the latest of those columns, coverage for defective construction was generally left unanswered. However, on October 25, the Colorado Court of Appeals rendered a decision that may answer the question—but not entirely.
In the October 2012 decision in “Colorado Pool Systems Inc. v. Scottsdale Insurance Company” (and others), the Colorado Court of Appeals ruled that a typical comprehensive general liability (CGL) insurance policy does not cover defectively performed work of a subcontractor but does cover nondefective work of third parties damaged by or resulting from defective work.
The case involved a poured-in-place concrete swimming pool that suffered from the rebar not having sufficient concrete coverage. That case presents a good picture of what typically happens in litigation involving construction defects and insurance.
According to the court’s decision, here’s what happened. White Construction Group was the general contractor for the Founders Village Pool and Community Center. White contracted with Colorado Pool Systems to build the project swimming pool. Colorado Pool Systems then subcontracted the concrete shell placement to others. The swimming pool rebar was too close to the surface and it was agreed that the pool needed to be replaced.
Colorado Pool Systems made an insurance claim on its policy with Scottsdale Insurance Co. That company’s claims adjuster allegedly stated that the CGL policy would cover losses associated with the demolition and replacement of the pool.
The pool was torn out and, while replacement was in process, Colorado Pool Systems was unable to complete the work, so the general contractor did. The general contractor then asserted claims for reimbursement against Colorado Pool Systems in arbitration. Its claims were settled and paid. Six weeks after it got notice of Colorado Pool’s claim, Scottsdale Insurance denied coverage under its policy.
Colorado Pool then filed suit against both its insurance company and its claims adjuster. It maintained that it had coverage under its CGL policy and that the adjuster was also liable because it had originally said that there was coverage and, in reliance upon that representation, the pool was ultimately replaced at its expense.
The trial court threw out all the claims and the pool subcontractor appealed. On appeal, the Colorado Court of Appeals ruled that there was no insurance coverage for the cost of the demolition and replacement of the pool because there was no “accident,” but ruled that there was insurance coverage for cost of replacement of “rip and tear” damage to the nondefective third-party work that included damage to a deck, sidewalk, retaining wall and electrical conduits.
The Colorado Court of Appeals also decided that the pool subcontractor may have had valid claims against the insurance company adjuster. It therefore sent the case back to the trial court to (1) have that court determine the amount of dollar damages that Colorado Pools was entitled to for replacement of the nondefective third-party work, and (2) for a determination of whether the insurance company’s adjuster was liable for damages and, if so, how much.
Since that was a decision of the Colorado Court of Appeals, it may not be the last word. Any of the parties could ask the Colorado Supreme Court to review that decision. Because the Court of Appeals decision essentially made new law for Colorado, it is likely that the Supreme Court will, at its discretion, agree to review it.
One other issue that will probably arise in the future that was not resolved by the Colorado Pool Systems case is the effect of the Colorado Builders Insurance Act passed by the Colorado Legislature in 2010. That act includes the presumption that work performed by a construction profession that results in property damage is an accident. If that presumption is applied, there would likely be fully coverage for all construction defects including those to the defective work itself.
Albert B. Wolf is a principal in the Denver law firm of Wolf Slatkin & Madison PC.