Even where insureds clear the “property damage” and “occurrence” hurdles to finding coverage for construction defect claims under liability insurance policies, additional coverage obstacles remain. Consider the “business risk exclusions,” for example. Those exclusions, which are found at paragraphs 5 and 6 of the current ISO commercial general liability coverage form’s “Damage to Property Exclusion,” preclude coverage for “property damage” to: (1) “that particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the ‘property damage’ arises out of those operations” (j(5)); and (2) “that particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it” (j(6)). See CG 00 01 10 01 at § I.2.j(5), (6). A Colorado federal court recently applied j(6) to bar coverage for an underlying construction defect action in Mt. Hawley Insurance Co. v. Creek Side at Parker Homeowners’ Association, Inc., No. 11-CV-2658-RBJ, 2013 WL 104795 (D. Colo. Jan. 8, 2013), albeit with a twist.
In Mt. Hawley, the homeowners’ association of the Creek Side at Parker residential development (the HOA) sued Creek Side’s developer and builder (MV Homes) in Colorado state court seeking damages for alleged construction defects. The HOA alleged that subcontractors defectively performed work that damaged both the work itself and other parts of the project. For example, the HOA alleged that the plumbing contractor’s faulty installation of sewer and water lines damaged the lines themselves, caused surrounding asphalt and concrete to crack and deteriorate, and resulted in water intrusion.
After it was sued by the HOA, MV Homes demanded coverage under its commercial general liability insurance policies issued by Mt. Hawley Insurance Co. and National Fire and Marine Insurance Co. (National Fire). Mt. Hawley denied coverage, but National Fire agreed to defend MV Homes in the underlying action. Ultimately, National Fire settled the HOA’s claims against MV Homes, and the settlement reserved or assigned claims against Mt. Hawley – presumably to the HOA – for alleged “property damage” that occurred while the policies Mt. Hawley issued were in effect. Mt. Hawley, thereafter, filed a declaratory judgment action against MV Homes and the HOA in Colorado federal court, and moved for summary judgment on grounds that the HOA’s claims against MV Homes did not allege an “occurrence” or were otherwise excluded from coverage under j(5) and j(6).
Although it concluded that the faulty workmanship alleged by the HOA qualified as an “occurrence” because it damaged otherwise non-defective work, the court granted Mt. Hawley’s motion based on j(6).¹ Specifically, citing Advantage Homebuilding, LLC v. Maryland Casualty Co., 470 F.3d 1003 (10th Cir. 2006), the court concluded that j(6) applies to all “property damage” that “directly or consequentially occurs from the faulty workmanship of the insured and its contractors/subcontractors (i.e., work that ‘was incorrectly performed’) while the work is ongoing.” Additionally, although it noted that j(6) expressly did not apply to “property damage” falling within the “products-completed operations hazard,” the court further pointed out that an endorsement to each of the Mt. Hawley policies expressly provided that they did not cover “property damage” included within the “products-completed operations hazard.” Thus, because the policies only provided coverage for “property damage” occurring while MV Homes’ operations were ongoing, the court concluded that j(6) precluded coverage for the claims made against MV Homes in the underlying action.
As disputes over coverage for construction defect claims continue to populate dockets around the country, Mt. Hawley certainly will not be the last we hear of the business risk exclusions. Indeed, as the Mt. Hawley court put it, “this is not my first foray into the mind-numbing task of interpreting and applying these exclusions in the construction defect context, nor, I fear, will it be the last.” But more than just providing guidance regarding the application of j(6), Mt. Hawley is a powerful illustration about how, in addition to the insuring agreement and applicable policy exclusions, insurers and their counsel must also consider the impact of the policy’s endorsements in evaluating coverage issues.