Court sides with insurer in bad faith construction case
The lawsuit considered whether certain policy exclusions apply to defects to a retaining wall.
Upholding a lower court’s decision, a federal appeals court ruled an insurer is not obligated to defend a land developer charged with negligent design and construction under exclusions in its policies.
Western Heritage Insurance Company (Western) provided commercial general liability insurance coverage to HT Services, LLC, a land developer in Colorado Springs, Colo. The covered property included four acres of land on which a residential community stood. In 2016, the development’s homeowners’ association sued HT Services, among others, for construction defects relating to a retaining wall, asserting that they were caused by the negligent conduct of the developer. Western denied coverage and refused to defend.
HT Services settled the homeowners’ litigation and filed suit against Western for breach of contract and bad faith. The U.S. District Court in Denver ruled in Western’s favor — a finding that was affirmed by a unanimous three-judge appeals court panel.
According to the ruling, the allegations of the homeowners’ association fell within exclusions in the coverage, including an exclusion for “habitational new construction.” HT Services argued that a retaining wall was not a “residential structure,” but the terms of the exclusion were broad, applying to lawsuits “arising out of, relating to, or in any way connected with” the construction of residential structures.” The policies also excluded coverage for “faulty workmanship.” The decision noted that the appeals court agreed with the district court that the allegations of the homeowners’ association’s complaint fell “squarely within this exclusion” in affirming the lower court’s dismissal of the case.
In this case, the insurer owed no duty to defend the insured under not one but two separate exclusions. The habitual new construction exclusion mirrors the typical “your products” and “your work” exclusions in traditional CGL policies, including the ISO policy.
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