William S. Bennett | SDV Insights
The 10th Circuit Court of Appeals, applying Colorado law, recently extended Colorado’s broad application of the phrase “arising out of” in insurance interpretation, barring an insured real estate developer from receiving a defense to a suit alleging liability for construction of a defective retaining wall and associated resulting damage.1 The decision also included a questionable analysis of the commercial general liability (“CGL”) policy’s exclusion j(6), contradicting both the plain meaning of the exclusion as well as existing 10th Circuit case law.
The underlying dispute concerned a land developer, HT Services, LLC, who was sued by the homeowner’s association (“HOA”) of one of its developments. The HOA alleged that HT Services negligently designed and constructed a retaining wall in the community. HT Services had CGL policies from Western Heritage Insurance Company in place from 2010 to 2013 that insured it for liability associated with four acres of land that the community was built upon.
HT Services tendered the HOA’s lawsuit to Western Heritage, which declined to defend and indemnify HT Services. After that matter settled, HT Services sued Western Heritage, alleging breach of contract and bad faith. Western Heritage moved for summary judgment, asserting two exclusions, and the District Court granted the motion in Western Heritage’s favor. In upholding the District Court’s decision, the 10th Circuit discussed two exclusions that the District Court determined precluded coverage.
The first was a “habitational new construction” exclusion present in the policies, comparable to many residential construction exclusions common across the industry. In pertinent part, the exclusion applied to bar coverage “arising out of, relating to or in any way connected with … the development, construction, conversion and/or demolition of [residential structures].”
Seeking to avoid this exclusion, HT Services argued that the retaining wall in question must be within a certain proximity of a residence to qualify as a “residential structure.” The court disagreed, and explained that the phrase “arising out of, relating to or in any way connected with” clearly encompassed the damages associated with the allegedly defective retaining wall, which “was constructed as a part of the development of the Willow Creek residential community.” This result was unsurprising.
However, the court next turned to and discussed exclusion j(6), which the court found “squarely applied” to the allegations of the HOA’s complaint, “including that it suffered damages resulting from HT Services’ defectively … constructed retaining walls.” Quoting another 10th Circuit case from 2006, Advantage Homebuilding LLC v. Maryland Cas. Co., the court stated that, in Colorado, this exclusion “was intended to exclude ‘property damage’ that directly or consequentially occurs from the faulty workmanship of the insured and its contractors/subcontractors … while the work is ongoing.”2
The court’s assertion that j(6) precludes coverage for HT Services contradicts the plain language of the j(6) exclusion and fails to cite the Advantage Homebuilding decision in full context.
Exclusion j(6) bars coverage for damage to “that particular part of any property that must be restored, repaired, or replaced because ‘your work’ was incorrectly performed on it.” The plain language of the exclusion contradicts the statement from Advantage Homebuilding that the court selectively quotes. The exclusion only applies to that particular part of any property that must be restored, repaired, or replaced due to faulty work. Consequential damage caused by the failure of that particular part faultily constructed is not barred from coverage by j(6). Accordingly, the Advantage Homebuilding court explained that “the express exception to exclusion j(6), though, allows an insured to recover consequential damages that arise out of his or her faulty workmanship after the completion of the work.”
The court here indicated that the HOA “suffered damages resulting from HT Services’ defectively constructed retaining walls.”3 Because j(6) does not apply to consequential damage to other parts of the broader project which are not defective, it is unclear why the court extended its application here, when it did not need to address the exclusion in the first instance.
Another issue with the j(6) analysis is its failure to discuss the “products-completed operations hazard.” A standard CGL provides that the j(6) exclusion does not apply to property damage included in the “products-completed operations hazard.” Given that the retaining wall was completed in February 2012, and the HOA sued HT Services in 2016, it is hard to reconcile the court’s failure to address this exception, especially in a duty to defend case with allegations stating that there was consequential, resulting damage when a court need only find a single allegation that could potentially be covered in order to extend the insured a defense.
The policies held by HT Services also contained a CG 21 04 exclusion, which bars coverage for all property damage included within the products completed operations hazard.4 The presence of this exclusion makes the court’s reliance on j(6) all the more surprising, as this exclusion would have been a far more appropriate basis for the court’s decision than j(6).
The impact of this case is uncertain, as it is not entirely clear that the court understood its statements about j(6) seemed to undermine j(6)’s exception for completed operations liability. However, policyholders should be prepared for this case to be cited by insurers in Colorado construction defect situations. Fortunately, the case casts Advantage Homebuilding, which seems to properly outline the framework for application of j(6) and coverage for damage resulting from faulty work, in a positive light. In any construction defect claim in Colorado, the policyholder’s focus should continue to be identifying and focusing on the components of the claim that constitute damage resulting from faulty work and the “rip and tear” amounts necessarily incurred to access and fix such work.
1HT Services, LLC v. Western Heritage Ins. Co., 2021 WL 2206323 (10th Cir. 2021).
2Advantage Homebuilding LLC v. Md. Cas. Co., 470 F.3d 1003, 1012 (10th Cir. 2006).
4Letter from Nationwide/Western Heritage, Pl’s. Mot. For Partial Summ. J., Ex. 10 at 13, ECF No. 26-11