By David A. O’Neill, JD

Since damage to real property caused by poor workmanship is usually “neither expected or intended,” it may qualify as an “occurrence” under Colorado law construing commercial general liability policies and coverage may apply.  Such was the ruling of the U.S. Tenth Circuit Court of Appeals in the case styled Greystone Const. Inc. v. National Fire & Marine Ins. Co., No. 09-1412 (10th Cir., Nov. 1, 2011).

The Greystone case was an appeal from the U.S. District Court of Colorado’s 2009 grant of summary judgment on the basis that homeowners’ allegations of faulty workmanship did not allege accidents amounting to covered occurrences under the contractor’s CGL policies.   In that case, Greystone employed subcontractors to build two houses. The houses were built on soils containing expansive clays and over time, soil expansion caused the foundations to shift, causing extensive damage to the houses.  The homeowners sued Greystone in 2005 asserting negligent design and construction by its subcontractors.  Greystone tendered its claim to its insurers but one refused to defend. Greystone and its defending insurer brought suit against the non-defending insurer, seeking to recover a portion of the defense costs.

The District Court granted summary judgment to the non-defending insurer, relying on the Colorado Court of Appeals General Sec. Idem. Co. of Arizona v. Mountain States Mut. Cas. Co. ruling. The General Security holding had been that “a claim for damages arising from poor workmanship, standing alone, does not allege an accident that constitutes a covered occurrence…” What was missing, the court said, was the fortuity implied in the term “accident” as used in CGL policies.

In response to the General Security decision, just after oral argument in the Greystone appeal, the Colorado legislature passed a law to provide some guidance to Colorado courts interpreting insurance policy language.  C.R.S. 13-20-808 requires courts to construe insurance policies to favor coverage if reasonably and objectively possible.  However, the Tenth Circuit determined that it was bound by recent Colorado court decisions holding that C.R.S. 13-20-808 does not apply to insurance policies whose policy periods had already expired. The Tenth Circuit ruled that the statute “does not apply retroactively and does not apply to this appeal.”

The Tenth Circuit could find no consensus among federal or state courts to determine the issue of “whether, under principles of Colorado insurance law, property damage arising from poor workmanship is an ‘occurrence’ under the standard CGL definition.”  It declined to follow the Colorado Court of Appeal’s decision in General Security, finding that it took too restricted a view of CGL policy language and characterized it as persuasive but not binding.  The Tenth Circuit did take notice of several cases from other jurisdictions to interpret the term “occurrence” to include unanticipated damage to nondefective property resulting from poor workmanship.”  It predicted that the Colorado Supreme Court would construe “occurrence” as a CGL policy term to include unforeseeable damage to non-defective property arising from faulty workmanship.

In its Greystone opinion, the Tenth Circuit stated that “injuries flowing from improper or faulty workmanship constitute an occurrence so long as the resulting damage is to nondefective property, and is caused without expectation or foresight.”  In reference to the Colorado Court of Appeal’s General Security opinion, it stated that “fortuity is not the sole prerequisite to finding an accident under a CGL policy.” “To the contrary,” it continued, “an unanticipated or unforeseeable injury to person or property—even in the absence of true fortuity—may be an accident and, therefore, a covered occurrence.”  The Tenth Circuit concluded that “CGL policies are meant to cover unforeseeable damages—a category that encompasses faulty workmanship that leads (to) physical damage of nondefective property.”

The Greystone decision may be a beacon of light in what is otherwise a murky labyrinth of  construction defect decisions throughout the fifty states.  The fact that the Tenth Circuit found pertinent construction defect cases from other jurisdictions interpreting the term “occurrence” to embrace damages from poor workmanship suggests that a fledgling national jurisprudence is now developing so as to be discernable, at least as to the issues decided in this case.