Adams-Arapahoe Joint School Dist. No. 28-J v. Continental Ins. Co.

Decision Date11 December 1989
Docket NumberADAMS-ARAPAHOE,Nos. 87-1678,87-1740,s. 87-1678
Citation891 F.2d 772
Parties57 Ed. Law Rep. 789 JOINT SCHOOL DISTRICT NO. 28-J, Plaintiff-Appellee, Cross-Appellant, v. The CONTINENTAL INSURANCE COMPANY, a corporation, Defendant-Appellant, Cross-Appellee.
CourtU.S. Court of Appeals — Tenth Circuit

Wiley E. Mayne (Curt Krechevsky, with him on the briefs), Holland & Hart, Denver, Colo., for plaintiff-appellee, cross-appellant.

Otto F. Becker, Thornton, Taylor & Downs, San Francisco, Cal. (Stephen E. Connor, Wood, Ris & Hames, Denver, Colo., with him on the briefs), for defendant-appellant, cross-appellee.

Before LOGAN, HENLEY * and ANDERSON, Circuit Judges.

STEPHEN H. ANDERSON, Circuit Judge.

Defendant-appellant The Continental Insurance Company ("Continental") appeals from a judgment holding it liable under an insurance policy issued to plaintiff-appellee Adams-Arapahoe Joint School District No. 28-J ("Adams-Arapahoe" or "the District") for expenses incurred after the partial collapse of the roof of Gateway High School in Aurora, Colorado. 1 We affirm the trial court's decision that the loss, if fortuitous, was covered. We reverse the judgment entered on the jury's verdict that the loss was fortuitous, and remand for a new trial on that issue, because of a prejudicially erroneous instruction.

I. BACKGROUND

The construction of Gateway High School took place from 1972 to 1974, with the roof put up during the winter of 1972-73. R.Vol. II at 6. The original plan called for galvanized steel sheets to be placed over the roof beams, then overspread with lightweight concrete and covered with asphalt and gravel. R.Vol. II at 40. During the construction, however, the general contractor received permission to use gypsum-based concrete instead, because the material originally chosen would not cure properly in cold weather. R.Vol. VI at 8.

The roofing subcontractor discussed the proposed change with the concrete manufacturer, who said that some corrosion had been experienced when the gypsum-based concrete was applied to metal decking. R.Vol. IV at 225; Attachment to Opening Brief of Appellant at 16. The subcontractor notified the general contractor, who in turn informed the project's architect. R.Vol. IV at 235-36. After a meeting with the contractors and a District representative, the architect decided to proceed with the change. R.Vol. VI at 11. It is not clear whether the corrosion danger was discussed at this meeting. At the trial, representatives of the District denied ever having been informed of any increased risk. R.Vol. IV at, e.g., 194-95, 201-02.

Continental issued an all-risk insurance policy for the school, effective September 1, 1982. The policy covered "all ... risks of direct physical loss," but excluded any loss caused

"[b]y wear and tear, deterioration, rust or corrosion, mould, wet or dry rot; inherent or latent defect; ... unless such loss results from a peril not excluded in this policy. If loss by a peril not excluded in this policy ensues, then this Company shall be liable for only such ensuing loss."

Attachment to Opening Brief of Appellant at 75 (emphasis added).

On April 23, 1984, a small portion (six to twelve square feet) of the roof collapsed. R.Vol. II at 9. An inspection revealed extensive corrosion throughout that portion of the roof which had been filled with gypsum-based concrete, making continued occupation of the building unsafe. R.Vol. II at 15, 39. Adams-Arapahoe spent about $8.8 million to remove and replace eighty thousand square feet of roofing (approximately forty percent of the total area).

After Continental denied the District's claim, Adams-Arapahoe filed suit in state court. The action was removed to the United States District Court for the District of Colorado. The trial court granted plaintiff's motion for partial summary judgment, holding that (1) defective design and/or construction was a risk covered by the policy, and was the cause of the District's loss, (2) the corrosion exclusion did not preclude coverage, and (3) the District's loss included the entire corroded area of the roof.

A jury trial was held on the remaining issues. Continental argued at trial that the District expected the loss, rendering it non-fortuitous (and therefore not covered). The jury was instructed that the District bore the burden of showing fortuitousness, but that Continental bore the burden of proof on its affirmative defense of the District's expectation, or knowledge of a substantial risk, of collapse. A verdict was returned in favor of the District for $8,674,778.

II. DISCUSSION

The substantive law of Colorado governs our decision in this diversity case. Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 822, 82 L.Ed. 1188 (1934); Farmers Alliance Mut. Ins. Co. v. Bakke, 619 F.2d 885, 888 (10th Cir.1980). With respect to issues which the Colorado Supreme Court has not addressed, we may consider all available resources, including Colorado appellate court decisions, other state and federal decisions, and the general trend of authority, to determine how the Colorado Supreme Court would construe the law in this case. Farmers Alliance Mut. Ins. Co. v. Bakke, 619 F.2d at 888; City of Aurora, Colo. v. Bechtel Corp., 599 F.2d 382, 386 (10th Cir.1979).

A. Partial Summary Judgment

The trial court interpreted the policy to cover the loss in question, if the loss was fortuitous. The construction of an insurance policy is a matter of law. Marez v. Dairyland Ins. Co., 638 P.2d 286, 288-89 (Colo.1982). The language of the policy is interpreted according to its common usage, with ambiguities construed against the insurer. Reed v. United States Fid. & Guar. Co., 176 Colo. 568, 491 P.2d 1377, 1379 (1971).

1. Whether defective design and/or construction was a covered risk.

An all-risk insurance policy covers any fortuitous loss not resulting from an excluded risk or from fraud by the insured. Kane v. Royal Ins. Co. of Am., 768 P.2d 678, 679 n. 1 (Colo.1989); Steamboat Dev. Corp. v. Bacjac Indus., Inc., 701 P.2d 127, 128 (Colo.Ct.App.1985); 13A G. Couch, Cyclopedia of Insurance Law § 48:141 (2d rev. ed. 1982). Continental contends, however, that defective design and/or construction is not a risk at all; it is merely a condition of the insured property.

In Wolfe v. LeVasseur-Hinson Construction Co., 147 So.2d 747 (La.Ct.App.1962), the floors of a house were negligently installed prior to the purchase of an all-risk policy. Later, the floors buckled. The court denied coverage because the acts which caused the loss occurred before the coverage began. Id. at 750; accord 80 Broad St. Co. v. United States Fire Ins. Co., 88 Misc.2d 706, 389 N.Y.S.2d 214, 215 (Sup.Ct.1975), aff'd per curiam, 54 A.D.2d 888, 390 N.Y.S.2d 768 (1976).

Yet, most of the decisions addressing this question hold that defective design and/or construction is a risk of physical peril, even if it predates the policy. See, e.g., Texas E. Transmission Corp. v. Marine Office--Appleton & Cox Corp., 579 F.2d 561, 564-66 (10th Cir.1978); Essex House v. St. Paul Fire & Marine Ins. Co., 404 F.Supp. 978, 992-93 (S.D.Ohio 1975); Garvey v. State Farm Fire & Cas. Co., 770 P.2d 704, 711 (Cal.1989). See generally Annotation, Property Damage Resulting from Inadequate or Improper Design or Construction of Dwelling as Within Coverage of "All Risks" Homeowner's Insurance Policy, 41 A.L.R. 4th 1095 (1985). We agree with the trial court's decision that the Colorado Supreme Court would hold that a loss so caused is covered by an all-risk policy.

Still, an all-risk policy does not cover losses which were not fortuitous. Texas E. Transmission Corp. v. Marine Office--Appleton & Cox Corp., 579 F.2d 561 at 564; Essex House v. St. Paul Fire & Marine Ins. Co., 404 F.Supp. at 987. While this implied requirement of fortuitousness is universally recognized, Annotation, Coverage Under "All Risks" Insurance, 88 A.L.R.2d 1122, 1126 (1963), there is some disagreement regarding just what is or is not fortuitous.

One group of cases holds that a loss is not fortuitous if it was inevitable when the policy was issued. See, e.g., Greene v. Cheetham, 293 F.2d 933, 937 (2d Cir.1961); Glassner v. Detroit Fire & Marine Ins. Co., 23 Wis.2d 532, 127 N.W.2d 761, 764 (1964). Under this rule, a loss caused by defective design and/or construction which preceded the issuance of the policy is not fortuitous. Compagnie des Bauxites de Guinee v. Insurance Co. of N. Am., 566 F.Supp. 258 (W.D.Pa.1983), rev'd without opinion, 735 F.2d 1348 (3d Cir.1984). Obviously, the conclusion that a loss was inevitable at the time of contracting, and therefore non-fortuitous, often involves the use of hindsight.

A more recent line of decisions rejects the use of hindsight and holds that a loss caused by a pre-existing defect is fortuitous so long as neither party knew of the defect or expected the loss. See, e.g., Standard Structural Steel Co. v. Bethlehem Steel Corp., 597 F.Supp. 164, 192 (D.Conn.1984); Fidelity & Guar. Ins. Underwriters, Inc. v. Allied Realty Co., 238 Va. 458, 384 S.E.2d 613, 615 (1989).

"A fortuitous event ... is an event which so far as the parties to the contract are aware, is dependent on chance. It may be beyond the power of any human being to bring the event to pass; it may be within the control of third persons; it may even be a past event, ... provided that the fact is unknown to the parties."

Texas E. Transmission Corp. v. Marine Office--Appleton & Cox Corp., 579 F.2d at 564 (quoting Restatement of Contracts § 291 comment a (1932)) (emphasis added). Under this view, defective design and/or construction, even if it exists before the policy is issued, can cause a fortuitous loss. Compagnie des Bauxites de Guinee v. Insurance Co. of N. Am., 724 F.2d 369, 373 (3d Cir.1983); Kilroy Indus. v. United Pac. Ins. Co., 608 F.Supp. 847, 857-58 (C.D.Cal.1985); Essex House v. St. Paul Fire & Marine Ins. Co., 404 F.Supp. at 992-93. These decisions represent the...

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