Colorado has been abuzz with several recent decisions regarding additional insured obligations.  These are just a few of the orders that are getting a lot of attention lately.  The TCD case in particular evidences the ongoing tension between the courts and the legislature with regard to insurance policies.  The courts are continuing to marginalize the 2010 law that was passed in Colorado regarding interpretation of commercial general liability policies.  As these decisions evidence, there remain many unresolved in Colorado related to additional insured obligations.  We expect much more from the courts, and possibly even the legislature, on these issues.

TCD, Inc. v. American Family Mutual Insurance Company

(The Court revisits the issue of what is an "occurrence" and CRS §13-20-808 is not retroactive.)

This case arises out of a construction project in Frisco,Colorado. The developer ,Frisco Gateway Center, LLC (Gateway), entered into a contract with TCD, the general contractor, to construct a building. TCD entered into a subcontract with Petra Roofing and Remodeling Company (Petra) to install the roof on the building. The subcontract required Petrato name TCD as an additional insured on its commercial general liability policy in connection with Petra's work under the subcontract. Petra secured a policy with American Family which named TCD as an additional insured.  TCD got sued by Gateway for alleged construction defects and TCD tendered the claim to Petra/American Family.  When American Family refused TCD's tender, TCD filed a declaratory judgment action. 

The trial court granted American Family's Motion for Summary Judgment on its duty to defend TCD saying that there had been no "occurrence" under the policy.  The appellate court confirmed the trial court's ruling and on February 25, 2013, the Colorado Supreme Court denied TCD's Writ of Certiorari, thereby leaving in place the Colorado Appellate Court's decision.

This case is important because, for years, Colorado has been struggling with the meaning of "occurrence" in the construction defect/commercial general liability insurance policy context.  In 2009 the Colorado Appellate Court sent shockwaves through the construction industry by ruling in the case of General Security Indemnity of Arizona v. Mountain States that complaints in construction defect actions that only allege poor workmanship did not allege an "occurrence" that triggered a duty to defend under a CGL policy.  The construction industry responded by getting that decision legislatively superseded by Colorado House Bill 10-1394, codified as Colorado Revised Statute §13-20-808.  CRS §13-20-808 expressly overrides the General Security decision and says, among other things, that alleged construction defects are to be considered "an accident unless the property damage is intended and expected by the insured." 

Since the enactment of CRS §13-20-808, the Colorado Courts have systematically chipped away that statute in what some believe is a rebuke at General Security being overridden.  The TCD case is a perfect example.  CRS §13-20-808 was widely believed by the construction industry to be retroactive when enacted.  The language of the statute says it applies to "all insurance policies currently in existence or issued on or after the effective date of this act [May 21, 2010]."  However, the TCD court said in no uncertain terms that "the statute is not retroactive."  The TCD court stated that "currently in existence" means "the policy had not yet expired on May 21, 2010." 

The TCD appellate court ultimately concluded that there was no occurrence and therefore no additional insured coverage.  The court stated:  "The gist of these counterclaims is that Petraimproperly installed the roof, resulting in a defective roof and causing TCD to breach its contract with Gateway. These allegations sound in contract and tort law and do not fit within the fair, natural, and reasonable meaning of 'property damage.'"

This decision will undoubtedly make it harder to get additional insured tenders accepted in the construction defect context.

D.R. Horton, Inc. v. Mountain States

(Additional insured carriers are jointly and severally responsible for the defense of a mutual insured and additional insureds are first party claimants under CRS §10-3-1116(1)).

D.R. Horton, Inc.-Denver d/b/a Trimark Communities (DRH) developed a residential community in Colorado called Windemere.  The Windemere homeowners' association (HOA) sued DRH for alleged construction defects.  DRH tendered its defense and indemnity to the carriers for the implicated subcontractors based upon its status as an additional insured.  Several carriers accepted DRH's tender, but either refused to actually pay anything toward the defense, or paid only a small portion of the defense costs billed to them.  DRH filed a declaratory relief action.  DRH and the carriers both filed Motions for Determination of Law seeking the court's determination of the carriers' duties under the insurance contract. 

On February 25, 2013 the United States District Court for the District of Colorado ruled on those motions.  In relevant part, the District Court agreed with DRH that when multiple insurers have a duty to defend an insured – in this case an additional insured – the duty is joint and several (in other words – each carrier owes a complete defense).  The judge went on to note, however, that "[t]his is not to say that there should not or will not be an apportionment of the defense costs among the insurers, either under a 'time on the risk' or some other appropriate allocation method…However, the allocation of defense costs is a matter to be worked out among the insurers and, if they cannot do so, then by a court.  The insured does not have to go without a defense or fund its own defense while the insurers argue amongst themselves."  The District Court judge noted that Colorado's appellate courts have not directly addressed this issue, so it remains to be seen what those courts will do with this issue in the future. 

While not specifically discussed in this order, we believe that this analysis supports the use of an "equal shares" allocation between and among additional insured carriers.  An equal shares allocation, with an express understanding that the carriers are free to seek reallocation at a later time, achieves the goals stated by the District Court judge and appears to be the preferred method of allocating by developers and general contractors.

The District Court judge also found that DRH was a "first party claimant" under CRS § 10-3-1116(1).  That statute says that a first party claimant whose claim for payment of benefits under an insurance policy has been unreasonably delayed or denied may bring an action in a district court to recover reasonable attorney fees and court costs and two times the covered benefit.  The carriers argued that DRH was not a first party claimant under the policies.  The District Court noted that ordinary usage of the terms "first party" and "third party" in the insurance context were overridden by the plain language of the definition of "first party claimant" in the statute.  Therefore, DRH could sue the additional insured carriers under CRS § 10-3-1116(1) for an unreasonable delay or denial of insurance benefits.

For those of us who do developer and general contractor construction defect defense, or those of you who do insurance coverage work for developers and general contractors, the DRH ruling will undoubtedly be very useful in getting the carriers who have accepted a tender to issue payments.

Interestingly, when this ruling was circulated by the Colorado Defense Lawyers Association, it sparked a number of comments about whether the ruling would have been the same if the underlying subcontracts with the additional insured obligations in them were entered into after July 1, 2007, the date Colorado's "Anti-Indemnity Statute" (C.R.S. 13-21-111.5) was enacted.  Certain subcontractor counsel argued that this ruling is inconsistent with Colorado's Anti-Indemnity Statute which states that a contract provision in a construction agreement is void and unenforceable which "requires a person to indemnify, insure, or defend in litigation another person against liability for damage arising out of death or bodily injury to persons or damage to property caused by the negligence or fault of the indemnitee or any third party under the control or supervision of the indemnitee…" 

This is but another ambiguity in the Colorado laws that remains to be resolved. 

D.R. Horton v. The Travelers Indemnity Company, et al.

(A party can only release claims which it owns, and DRH did not own the subcontractors' carriers' contribution claims; also the defense obligation between co-additional insured carriers is joint and several.)

D.R. Horton, Inc.-Denverd/b/a Trimark Communities ("DRH") was the general contractor for the Summit at Rock Creek project in Colorado.  The Summitat Rock Creek owners association ("HOA") sued DRH for construction defects.  DRH sued several subcontractors implicated in the claim and tendered its defense of the HOA's claims to the insurers for the implicated subcontractors.  Travelers accepted the additional insured tender, but did not pay the full amount of the defense fees allocated to it by DRH.

DRH settled with the subcontractors in the HOA action and provided a release. 

DRH ultimately filed an action against certain insurers, including Travelers, for their failure to pay the defense fees allocated to it as a result of the HOA action.  In the coverage action, certain subcontractors were named by Travelers as third party defendants.  Those subcontractors claimed that they could not be sued as policy holders in the insurance coverage action because of the release provided by DRH in the underlying action.  The judge for the United States District Court for the District of Colorado disagreed and allowed the case to proceed against the subcontractors.  The crux of the ruling was that DRH did not own Travelers' contribution claims and therefore did not, and could not, release them. 

The ripple effect of this particular portion of the decision was immediate in the defense community.  Subcontractor counsel raised this issue in settlement discussions with developers and general contractors and asked for indemnity against any such potential future coverage claims.  To our knowledge, these requests have been denied on the grounds that developers and general contractors have no control over what claims an insurer may make.

The District Court held that as to the issue of whether the defense obligation between and among the various insurers for DRH was joint and several, "there is sufficient authority indicating that, if the Colorado Supreme Court were to address the issue, it would hold that each liability insurer has a duty to provide a complete defense, such that a liability insurer who breaches this duty can be found liable for the entire amount of defense fees and costs (and that insurer can then seek equitable contribution from any co-insurers)." 

Travelers also argued that the allocation of defense fees between and among co-additional insured carriers should follow indemnity.  In other words, if one subcontractor is responsible for 5% of the total liability for construction defects, then the defense obligation of the additional insured carrier should also be 5% of DRH's fees and costs.  The District Court flatly rejected that approach in this case, but left open the possibility that it could be the proper method to use in some other case.  The District Court relied upon the fact that there was a settlement with the subcontractors rather than a judgment against them and therefore there was no reliable method for identifying the respective liability of each subcontractor for the underlying construction defects. 

The District Court ultimately declined to decide how the apportionment should occur between co-additional insured carriers.  This issue remains undecided and the subject of great debate in Colorado.

Another interesting ruling was on a subcontractor's request that the court declare that it did not have a broad duty to defend DRH arising from its failure to procure the insurance for DRH that it had contractually agreed to procure.  The District Court denied that request saying that by failing to acquire the contractually-required additional insured coverage, the subcontractor "assumed the risk of having to itself insure DRH for any such claims."  The judge went on to clarify that the subcontractor's duty was to provide a complete defense, not just a defense arising from the liabilities of the subcontractor.

We have already seen this order turned into a motion for determination of law in another case by a developer and general contractor on the subcontractor's duty to defend.  In that particular case, the court denied the motion relying on specific language in the subcontract agreement saying the defense obligation would be limited to liabilities of the subcontractor.  We expect to see more motions like this in the future.

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