Tenth Circuit Court of Appeals Interprets Resulting-Loss Exception in Builder’s Risk Policy
10th Circuit: Colorado Center Development LLC (“CCD”), the owner of certain property in Colorado, hired J.E. Dunn Construction Company to construct an office building on the property. J.E. Dunn hired Plaintiff Rocky Mountain Prestress (“RMP”) as a subcontractor to perform work including installing precast columns at the property. But due to concerns at another site, J.E. Dunn requested RMP to retain a third-party firm to investigate potential structural issues with RMP’s work on the project. That firm concluded that the project required repairs to insufficiently grouted joints between the precast concrete column and pilaster elements at 264 locations.
CCD purchased from Defendant Liberty Mutual Fire Insurance Company a Builder’s Risk insurance policy. RMP submitted a claim to Liberty seeking coverage under the policy. RMP then ended up filing suit against Liberty seeking coverage, and alleged claims for breach of contract, insurance bad faith, and a declaratory judgment on the question of insurance coverage.
The district court granted summary judgment in Liberty’s favor on the basis that RMP’s claim was not entitled to coverage under the policy. RMP appealed.
The Liberty policy provided protection against “direct physical loss or damage caused by a covered peril to buildings or structures while in the course of construction, erection, or fabrication.” It defined “covered perils” as “risks of direct physical loss or damage unless the loss is limited or caused by a peril that is excluded.”
One of the policy’s exclusions was for “loss or damage consisting of, caused by, or resulting from any act, defect, error, or omission (negligent or not) relating to design, specifications, construction, materials, or workmanship.” On appeal, RMP conceded that its claim and work fell within the scope of that exclusion.
However, it argued that coverage was restored by the following exclusion to that exclusion: “if an act, defect, error, or omission as described above results in a covered peril, Liberty does cover the loss or damage caused by that covered peril.”
The Tenth Circuit Court of Appeals disagreed with RMP’s position. “Several courts have concluded that the above-quoted and similar resulting-loss exceptions function to restore coverage only when an excluded peril leads to loss from an independent non-excluded peril.” The Court explained: “For instance, one line of cases holds that there is coverage only if the first, excluded cause results in a separate, covered cause in an unforeseeable way, as when a water leak caused by defective construction shorts an electrical socket and causes a fire, but not when the second cause is the foreseeable result of the first, excluded cause, as when defective construction causes a water leak that in turn causes water damage.”
Regardless of the interpretation, the Court ruled that “the exception cannot be allowed to swallow the exclusion. Thus, a resulting-loss exception to a defective-workmanship exclusion does not provide coverage for the costs of repairing or replacing defectively designed or constructed parts of the structure; rather, the exception only restores coverage for damage sustained when the defective workmanship becomes the cause of additional, separate damage.” As such, the grant of summary judgment in Liberty’s favor was affirmed.
Rocky Mountain Prestress, LLC v. Liberty Mutual Fire Insurance Co., 960 F.3d 1255 (10th Cir., decided June 2, 2020).