A Colorado federal appellate court recently issued a significant decision which should guide community associations and contractors to make helpful contract and insurance decisions. This court decision addressed the recurring issue of liability insurance coverage for construction projects
In the recent Greystone case, the Tenth Circuit Court of Appeals, a federal court based in Denver, analyzed whether a contractor’s insurance policy provided coverage for a subcontractor’s improper work. The narrow question was whether property damage caused by a subcontractor's faulty workmanship is an “occurrence” for purposes of a commercial general liability (CGL) insurance policy. The court decided that because damage to property caused by poor workmanship is generally neither expected nor intended, it may qualify under Colorado law as an occurrence, and liability coverage should apply.
This decision and its impact on associations and contractors is significant, and could affect almost any type construction, renovation, repair, or maintenance project if insurance is in effect. Nevertheless, the impact is limited to certain circumstances, as discussed below. The scope of the court’s decision arises from the wording and limitations found in most CGL policies, as well as the appropriate circumstances for which such insurance will apply.
Understanding the lessons from this court decision requires a brief recitation the key facts. The owners purchased a house built by a general contractor. The general contractor employed subcontractors to perform all of the work to the house. Expansive soils caused the foundation to shift, causing extensive damage to the home’s living areas. The issue in the lawsuit was whether the general contractor’s CGL policy provided a defense to the owners’ claims against the general contractor.
Typical CGL insurance policies exclude coverage for property damage to the contractor’s work. This is because insurance is not a substitute for a contractor’s warranty. Insurers are not in the business of guaranteeing that a contractor performs properly. Nevertheless, standard CGL policies also provide an exception to this exclusion if the damage to the contractor’s own work, or the work which causes damage, was performed on behalf of the contractor by a subcontractor. This essentially means that coverage is added back if damage to other nondefective work or property arises from the subcontractor’s defective work. In Greystone, this meant that the contractor’s CGL policy provided a defense for the contractor, because of the defective foundation work performed by the subcontractor, which caused damage to another part of the home.
Associations should always investigate the background, credentials, and references of any contractor as part of a proper risk management strategy. In addition, community associations should insert contract provisions requiring contractors to carry CGL insurance, and confirm the coverage is in place. From the standpoint of the contractor, the Greystone decision also teaches that, from an insurance perspective, it may be preferable for the general contractor to utilize subcontractors for all of the work. This is because the contractor’s defective work will not be covered by its CGL policy, but the subcontractor’s defective work may be covered.
These are general guidelines arising from the Greystone decision, which nonetheless interpreted a widely used CGL insurance policy form. Every insurance policy is worded differently, and no decisions should be made without reviewing the specific insurance policy at issue. Nevertheless, the Greystone case represents an important decision in an arena of significant disputes. Many insurers take the position that contractor’s CGL policies cover very few claims similar to the situation analyzed in the Greystone case.
Because many contractors and their customers felt undermined by insurance policies which cost much but provided little in return, the Colorado General Assembly enacted a law in 2010 to clarify how the courts should resolve similar insurance disputes. The impact of this statute has not yet been felt, but the Greystone case should guide Colorado courts in their future decisions.
The attorneys at HindmanSanchez P.C. are well-versed concerning construction law, contract review and insurance issues. Please feel free to contact us concerning your contract and insurance-related issues at 303.432.9999.