When Does an "Occurrence" Occur?

by Sherman & Howard L.L.C.

Two federal courts in Denver recently addressed a fundamental question that exists in almost every construction defect case - when did the property damage that gives rise to liability, and the insurer's obligation, occur?  The answer to the question of when the damage occurred helps determine which policy is triggered and whether the insurer has a coverage obligation.  The Courts' resolution of this question in two different cases offers encouraging news for insureds.

The insurer in Bituminous v. Hartford Casualty Insurance Co. had argued that it had no obligation to defend a contractor from the HOA's property damage allegations because its policy terminated before the project achieved completion and before the HOA's formation.  The Court rejected the HOA's date of formation as determinative of when the property damage occurred.  Instead, the Court looked to the specific allegations of property damage in the complaint.  Based on the allegation that damage occurred as soon as "areas" of the project "were first put to their intended use," the Court determined that the HOA had alleged property damage to various project areas that began before the project's final completion.  Although not expressly alleged, this could include the period prior to the termination of the insurer's policy.  Based on Colorado law that created a duty to defend anytime the allegations "could" give rise to covered liability, the Court found the insurer had a duty to defend. 

The Bituminous decision builds on a previous one from another federal court in Denver.  In EMC Insurance Co. v. Mid-Continent Insurance Co., the court addressed several arguments related to when the construction work was complete as compared to when the alleged property damage occurred.  The question arose upon consideration of a policy provision that provided coverage to the insured only during "ongoing operations."  The insurer argued there was no coverage because the complaint alleged the property damage occurred after the work was put to its intended use.  The Court noted that the Complaint actually alleged the damage occurred after "various elements" and "areas" of the project were put to their intended use.  The Court concluded that, as alleged, some of the property damage could have occurred to "areas" (e.g., grading, roofs) put to their intended use before final project completion.  Conversely, the Court determined exclusions that separately defeated coverage for ongoing operations also did not defeat the duty to defend because the complaint could be read to allege that certain elements of damage occurred after completion.

These decisions have favorable implications for insureds, especially when considering the insurer's obligation to provide a defense to construction defect allegations.  First, when considering coverage provisions and coverage exclusions triggered by when the work is complete, these Courts showed a willingness to consider the completion of various project areas, as opposed to the project as a whole.  This is good news for contractors whose projects are phased, involve discrete structures or consist of several disparate work scopes.  This should also help insureds who face arguments from insurers predicated on fixed adherence to completion dates and certificates for the building or project as a whole.  Second, the Courts did not require specific allegations in the Complaint as to when the damage occurred to the various "areas."  They were willing to conclude certain damage could have occurred to certain areas both before total project completion and after. In doing so, the Courts strongly reinforced Colorado law holding that an insurer must provide a defense when the allegations against the insured potentially or arguably allege a claim covered by the insurance policy.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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