McGowan v. State Farm Fire and Cas. Co., 03CA0025.

• Decision Date: 22 April 2004
• Docket Number: No. 03CA0025.,03CA0025.
• Citation: 100 P.3d 521
• Parties: Dianne McGOWAN and Donald McGowan, Plaintiffs-Appellants and Cross-Appellees, v. STATE FARM FIRE AND CASUALTY COMPANY, Garnishee-Appellee and Cross-Appellant.
• Court: Colorado Court of Appeals

100 P.3d 521

Dianne McGOWAN and Donald McGowan, Plaintiffs-Appellants and Cross-Appellees, v. STATE FARM FIRE AND CASUALTY COMPANY, Garnishee-Appellee and Cross-Appellant.

No. 03CA0025.

Colorado Court of Appeals, Div. III.

April 22, 2004.

Certiorari Denied October 25, 2004.

Roberts Levin & Patterson, PC, Bradley A. Levin, Jeremy A. Sitcoff, Denver, Colorado, for Plaintiffs-Appellants and Cross-Appellees.

Cross, Sands & Sares, P.C., Jon F. Sands, Denver, Colorado, for Garnishee-Appellee and Cross-Appellant.

Opinion by Judge KAPELKE.

In this dispute concerning exclusions in contractor insurance policies, plaintiffs, Dianne and Donald McGowan, appeal the trial court's judgment denying their traverse to the answer filed by defendant, State Farm Fire and Casualty Company, to a writ of garnishment they issued. State Farm has filed a conditional cross-appeal. We affirm.

In June 1994, the McGowans contracted with Eagle Summit Construction Co., Inc. to build a house for them. Eagle Summit had completed the excavation, foundation, and framing of the house and had constructed three levels encompassing 3,200 square feet, when the McGowans discovered that the house had several structural problems. Specifically, the McGowans noticed bending studs, cut trusses, and warped boards, and they also observed that the house was swaying as a result of problems with the foundation supports. Dissatisfied with Eagle Summit's workmanship, the McGowans terminated the contract. They then engaged another contractor to make the necessary repairs and to complete construction of the house.

In May 1995, the McGowans brought a lawsuit (the underlying action) against Eagle Summit, alleging claims of negligence, fraud, breach of contract, and conversion.

State Farm had issued two consecutive one-year contractors policies to Eagle Summit. The first policy was for the term of March 30, 1994 through March 30, 1995, and the second for the term of March 30, 1995 through March 30, 1996. As relevant here, the policy in effect during the construction of the McGowans' house covered Eagle Summit for sums it was legally obligated to pay as damages because of damage to property caused by an "occurrence" during the policy period.

In August 1998, counsel for the McGowans notified State Farm of the underlying action and agreed to provide any further information required by State Farm. Counsel also provided the name of Eagle Summit's former attorney.

In November 1998, State Farm wrote a letter to the former president of Eagle Summit, informing him that State Farm was denying coverage for the claims involved in the underlying action and also declining to defend, based on policy exclusions and on late notice. State Farm mailed the letter to the individual, however, rather than to the address listed on the policy issued to Eagle Summit, and the letter was apparently returned, unclaimed, to State Farm.

Also in November 1998, the McGowans obtained a default judgment against Eagle Summit for $399,857.93.

In June 1999, the McGowans attempted to collect their judgment against Eagle Summit through a garnishment of insurance proceeds from State Farm. In its answer to the writ of garnishment, State Farm denied owing any money to Eagle Summit. In their traverse to the answer, the McGowans asserted that State Farm had owed Eagle Summit a duty under the policy with respect to the claims in the underlying action.

Following a hearing on the traverse, the trial court concluded that the McGowans' claims in the underlying action were excluded from coverage under provisions of the policy. In denying the McGowans' traverse, the trial court found that the damages alleged by the McGowans in the underlying complaint were for "property damage" under the policy and that the McGowans had sufficiently alleged that the damage had resulted from an "occurrence." The court nevertheless concluded that State Farm owed no duty of indemnity to Eagle Summit by reason of exclusions of the policy.

I.

The McGowans contend that the trial court erred in holding that exclusions in the policy precluded coverage for their claims against Eagle Summit. We disagree.

We review a trial court's interpretation of an insurance policy de novo and apply ordinary principles of contract interpretation. Words in a policy are thus accorded their plain and ordinary meaning, unless the policy evinces a contrary intent. Further, policy provisions should be read as a whole, rather than in isolation. We may not rewrite, add, or delete provisions to extend or restrict coverage. However, ambiguous provisions are to be construed in favor of affording coverage to the insured. Cyprus Amax Minerals Co. v. Lexington Ins. Co., 74 P.3d 294, 299 (Colo.2003); Leprino v. Nationwide Prop. & Cas. Ins. Co., 89 P.3d 487, 2003 WL 22509379 (Colo.App. No. 02CA1863, Nov. 6, 2003).

Exclusionary clauses exempting the insurer from providing coverage in certain circumstances must be written in clear and specific language and construed in favor of coverage. Bohrer v. Church Mut. Ins. Co., 965 P.2d 1258, 1262 (Colo.1998). The insurer therefore has the burden of demonstrating that the policy exclusion applies in the particular circumstances at issue and that it is not susceptible of any other reasonable interpretation. Compass Ins. Co. v. City of Littleton, 984 P.2d 606, 614 (Colo.1999).

The duty to defend and the duty to indemnify are separate and distinct obligations of the insurer. Hecla Mining Co. v. New Hampshire Ins. Co., 811 P.2d 1083, 1086 n. 5 (Colo.1991). In determining whether a duty to defend exists, a trial court must restrict its examination to the four corners of the underlying complaint. Cyprus Amax Minerals Co. v. Lexington Ins. Co., supra, 74 P.3d at 299.

Whether an indemnity obligation exists depends upon the nature of the ultimate verdict, judgment, or settlement against the insured and typically cannot be determined until the claims involved in the underlying action have been resolved. Cyprus Amax Minerals Co. v. Lexington Ins. Co., supra, 74 P.3d at 301.

In determining whether an insurer has a duty to indemnify, a court must begin by liberally examining the underlying complaint, construing broadly the alleged facts, legal claims, and claims for relief so as to provide coverage to the greatest extent possible. If the insured makes no colorable claim invoking a duty to indemnify by the insurer, coverage presumably does not exist. However, if a broad reading of the complaint indicates that coverage may possibly attach, additional evidence supporting or defeating the existence of coverage, including the factual record developed at trial and the ultimate judgment, may be taken into account. Cyprus Amax Minerals Co. v. Lexington Ins. Co., supra, 74 P.3d at 297, 301.

Whether State Farm owes a duty of indemnification to Eagle Summit depends on the extent of coverage under the policy. As pertinent here, the policy provides:

We will pay those sums that the insured becomes legally obligated to pay as damages because of ... property damage ... to which this insurance applies.... This insurance applies only:

1. to bodily injury or property damage caused by an occurrence which takes place in the coverage territory during the policy period.

...

property damage means:

a. physical injury to or destruction of tangible property, including all resulting loss of use of that property; or

b. loss of use of tangible property that is not physically injured or destroyed, provided such loss of use is caused by physical injury to or destruction of other tangible property;

...

occurrence means:

a. an accident, including continuous or repeated exposure to substantially the same general harmful conditions which result in ... property damage.

The policy specifically excludes coverage for:

11. property damage to:

e. that particular part of real property on which you or any contractor or subcontractor working directly or indirectly on your behalf is performing operations, if the property damage arises out of those operations; or

f. that particular part of any property that must be restored, repaired or replaced because your work was incorrectly performed on it. This part of this exclusion does not apply to property damage included in the products-completed operations hazard.

...

your work:

a. means:

(1) work or operations performed by you or on your behalf; and

(2) materials, parts or equipment furnished in connection with such work or operations.

...

products-completed operations hazard:

a. includes all ... property damage arising out of your product or your work except products that are still in your physical possession or work that has not yet been completed or abandoned.. . .

Your work will be deemed completed at the earliest of the following times:

(1) when all of the work called for in your contract has been completed;

...

(3) when that part of the work done at a job site has been put to its intended use by any person or organization other than another contractor or subcontractor working on the same project.

Work that may need service, maintenance, correction, repair or replacement, but which is otherwise complete, will be treated as completed.

(Emphasis added.)

Exclusion 11(f) excludes from coverage damage to property that must be restored, repaired, or replaced because of incorrectly performed work by the contractor or someone acting on its behalf. Policy exclusions such as this one have been described as "faulty workmanship" provisions. See Century Indem. Co. v. Golden Hills Builders, Inc., 348 S.C. 559, 561 S.E.2d 355, 358 (2002)(involving a policy exclusion with language mirroring that here).

Comprehensive general liability policies normally exclude coverage for faulty workmanship based on the rationale that poor workmanship is considered a business risk to be borne by the policyholder, rather than a "fortuitous event" entitling the insured to coverage. 9 Lee R. Russ & Thomas F. Segalla, Couch on Insurance § 129:11, at...