The U.S. Court of Appeals for the 10th Circuit, reversing a trial court's decision, has ruled that a faulty workmanship exclusion in a professional liability insurance policy did not preclude coverage for damaged caused by allegedly negligent design work.
The Case
Heirloom I, LLC, contracted with CFI-Global Fisheries Management to design and construct a fisheries enhancement project on property it owned in southwestern Colorado. CFI completed the project, but Heirloom alleged that its work was defective.
Heirloom initiated arbitration proceedings against CFI for breach of contract and negligence related to the design and execution of the project. CFI requested that its insurer, Rockhill Insurance Company, defend it in the arbitration.
Rockhill responded that Heirloom's allegations with respect to CFI's designs potentially implicated a “professional services incident” triggering coverage but “[t]o the extent that the damages sought arise out of . . . faulty workmanship apart from your professional services,” its policy did not provide coverage for those damages.
The arbitrators awarded Heirloom $609,994.91 plus pre-judgment interest. The parties subsequently stipulated to an additional $265,000 award of attorneys' fees and costs.
Rockhill asked a district court to declare that it had no duty to defend and indemnify CFI in connection with the Heirloom arbitration.
The district court granted summary judgment for Rockhill, holding the entirety of the damages awarded to Heirloom were excluded under the policy's faulty workmanship exclusion, along with the attorneys' fees and costs. In reaching that result, the district court focused on a broad definition of “work” and held the faulty workmanship exclusion's references to “your work” applied to both design and construction.
CFI and Heirloom appealed to the Tenth Circuit.
The Tenth Circuit's Decision
The Tenth Circuit, applying Colorado law, reversed.
In its decision, the circuit court agreed with the district court that the damages awarded by the arbitrators resulted from a “professional services incident.”
The Tenth Circuit, however, disagreed with the district court that the faulty workmanship exclusion placed the damages award outside of coverage. The circuit court decided that the faulty workmanship exclusion “was not intended to cover design failings.”
The circuit court concluded that, read as a whole, the parties intended the faulty workmanship exclusion to distinguish non-covered construction work from covered professional services.
The case is Rockhill Ins. Co. v. CFI-Global Fisheries Management, Nos. 18-1201, 18-1207 (10th Cir. July 24, 2019).
Steven A. Meyerowitz
Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. He may be contacted at [email protected].