On November 1, 2011, the United States Court of Appeals for the Tenth Circuit weighed in on the issue of whether defective construction constitutes an occurrence triggering coverage under a commercial general liability policy pursuant to Colorado law.  In Greystone Construction, Inc. v. National Fire & Marine Insurance Company, __ F.3d __, 2011 WL 51486688, the Court reversed the Federal District Court’s decision granting summary judgment in favor of the insurance companies and held that damages caused by defective construction constitute an occurrence under the policies provided that the resulting damage is to non-defective property and was caused without expectation or foresight by the insured. 

 

The question of whether defective construction work is covered by insurance has been contentious in Colorado over the last few years.  Most of the recent litigation activity was spurred by the Colorado Court of Appeals’ decision in General Security Indemnity Co. of Arizona v. Mountain States Mutual Casualty Co., 205 P.3d 529 (Colo. App. 2009) in which the Court held that claims for injuries caused by poor workmanship were generally not an occurrence under the typical CGL insurance policy because such poor workmanship could not be considered an accident.  The Federal District Court’s summary judgment order in Greystone was primarily based upon the General Security opinion.

 

The General Security decision was not appealed to the Colorado Supreme Court.  Instead, the decision prompted the Colorado General Assembly to pass C.R.S.  §13-20-808 which superseded General Security and instructed courts to construe that construction work which results in property damage is an accident unless the property damage was intended or expected by the insured.   C.R.S. §13-20-808(3) (2011).

 

In the subsequent Greystone appeal the Tenth Circuit addressed two primary issues: whether the statutory change applied to insurance policies expired prior to its enactment and if not whether defective construction could be an occurrence under Colorado law as it existed prior to the statute.  After the Colorado Supreme Court declined to consider the Tenth Circuit’s certified question, the Tenth Circuit found that the statute was not retroactive.  However, even without relying upon the statute, the Tenth Circuit predicted the Colorado Supreme Court would have reversed General Security and held property damage caused by defective construction could be an occurrence in certain circumstances.  It is important to note the Court did not find that all damage caused by defective construction would be covered.  Only damages to the non-defective portions of the property are covered.  Damages related to the correction of the defective work are not necessarily covered.