805 F. Supp. 2d 1125
D. Colo.2011Background
- Milender White was the general contractor on a Grand County, Colorado construction project and entered into three Shay subcontracts for framing, siding, and related work.
- Shay’s commercial general liability policy with Continental Western covered Shay until cancellation for non-payment around April 27, 2009.
- Two Shay subcontractors, Wood Source and Chase Lumber, sued in state court (Underlying Lawsuit) for nonpayment and to enforce mechanics’ liens, naming Milender White and Shay as defendants.
- Milender White asserted cross claims against Shay in the Underlying Lawsuit, alleging Shay breached the subcontracts, triggering a duty to defend and indemnify.
- Continental Western filed this diversity-action seeking declaratory relief that the Policy does not cover Milender White’s cross-claims; Shay counterclaimed for breach and bad-faith insurance claims.
- The court granted Continental Western summary judgment, finding no duty to defend because Exclusions (j)(5) and (j)(6) apply and the alleged damages are not within the insuring clause.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does the insuring clause cover damages arising from contract? | Continental Western: coverage requires tort-like 'occurrence' and damages; contract-based damages fall outside. | Shay/Milender: scope includes damages arising from Shay’s work, regardless of theory; unambiguous under policy terms. | No; court construes ambiguity against insurer and finds potential coverage arguments insufficient; proceeds to other issues. |
| Are the cross-claims alleging property damage from an 'occurrence' under the policy? | Continental Western: most cross-claims are contract-based; only damaged work and repair-derived damage could constitute an occurrence. | Shay/Milender: defective work causing third-party damage or repair-related damage can be an occurrence under the policy. | Cross-claims could implicate an occurrence via corollary in which third-party damage results from Shay’s repair of faulty work, but not clearly within policy as written. |
| Do Exclusions (j)(5) and (j)(6) bar coverage? | Continental Western: these faulty-workmanship exclusions preclude coverage for damage arising from Shay’s ongoing operations or from repair of its own work. | Shay/Milender: exclusions may not apply or are misinterpreted; could be limited to certain contexts. | Exclusions (j)(5) and (j)(6) apply to damage arising from Shay’s ongoing operations and to repair costs, excluding coverage. |
| Does the court have a duty to defend Shay against Milender White’s cross-claims? | Continental Western: duty to defend not triggered if exclusions apply and claims fall outside insuring clause. | Shay/Milender: there is some ambiguity in policy language that could support defense obligation. | Duty to defend not triggered; policy exclusions bar coverage for the underlying claims. |
Key Cases Cited
- General Security Indemnity Co. of Arizona v. Mountain States Mutual Casualty Co., 205 P.3d 529 (Colo.App.2009) (poor workmanship generally not an 'occurrence' unless third-party damage occurs)
- Advantage Homebuilding, LLC v. Maryland Casualty Co., 470 F.3d 1003 (10th Cir.2006) (corollary: damage to third party or property other than work product may constitute an occurrence)
- Compass Ins. Co. v. City of Littleton, 984 P.2d 606 (Colo.1999) (heavy burden on insurer to show no duty to defend)
- Chacon v. American Family Mut. Ins. Co., 788 P.2d 748 (Colo.1990) (interpretation of insurance contracts in light of plain language and rules of construction)
- Am. Family Mut. Ins. Co. v. Johnson, 816 P.2d 952 (Colo.1991) (exclusions and limitations are to be construed narrowly in coverage disputes)