Century Surety Company v. Environmental Property Investigations, Inc. et al

Filing 37

ORDER. Plaintiff Century's 19 motion for summary judgment pursuant to Federal Rule of Civil Procedure 56 is denied. Plaintiff shall show cause why, given this ruling, summary judgment should not be entered in favor of defendants on the plaintiff's duty to defend claim and why plaintiff's duty to be dismissed without prejudice as premature. Show Cause Response due by 8/30/2011. By Judge Philip A. Brimmer on 8/22/11.(mnf, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Judge Philip A. Brimmer
Civil Action No. 10-cv-01932-PAB-BNB
CENTURY SURETY COMPANY, an Ohio corporation,
Plaintiff,
v.
ENVIRONMENTAL PROPERTY INVESTIGATIONS, INC., a Colorado corporation;
RONALD G. WEST, a natural person;
MUSCANTO, LLC, a Colorado limited liability company; and
BONGIL HO, a natural person,
Defendants.

ORDER

This matter is before the Court on plaintiff’s motion for summary judgment
[Docket No. 19]. The motion is fully briefed and ripe for disposition.
I. BACKGROUND
Plaintiff Century Surety Company (“Century”) seeks summary judgment based
upon the provisions of an insurance policy held by one of the defendants,
Environmental Property Investigations, Inc. (“EPI”). Specifically, Century seeks a
declaratory judgment that the policy held by EPI does not obligate Century to defend
EPI against claims that Muscanto, LLC (“Muscanto”) and Bongil Ho have asserted
against EPI in state court. Century also argues that, because it has no duty to defend,
the Court should also rule that Century has no duty to indemnify. See Docket No. 19 at
14-15.
The policy in question provides professional and general liability coverage to EPI.

See Docket No. 1-1. The policy includes a provision obligating Century to defend the
insured from lawsuits or claims directly resulting from “wrongful acts” covered by the
policy. Id. at 21. The policy’s Professional Liability Retroactive Date limits coverage to
wrongful acts that “occurred on or after” August 1, 2008, id. at 5, 21, and its Time
Estimate Exclusion excludes coverage for “[a]ny ‘claim’ arising out of or based upon an
insured’s estimate of cost or time required to complete a project.” Id. at 23.
In March 2010, defendants Muscanto and Ho, a principal member and manager
of Muscanto, filed a complaint in the District Court for Jefferson County, Colorado
against EPI and its president, Ronald G. West (“West”). See Docket No. 19-1. In the
state complaint, Muscanto and Ho allege that Muscanto hired EPI in 2004 to perform
environmental studies on commercial property that Muscanto was acquiring. Id., ¶¶ 6,
14. EPI identified sub-surface contamination of the property, which it attributed to the
property’s former use as a dry cleaner. Id., ¶¶ 7-8. EPI advised Muscanto that
environmental remediation of the property would take no longer than three years and
estimated the cost of the remediation to be $240,000. Id., ¶ 12. Based on these
findings, Muscanto entered into an agreement with the property’s seller to escrow funds
totaling $250,000 for four years to pay for the remediation. Id., ¶ 13. Muscanto then
authorized EPI to proceed with the proposed remediation process. Id., ¶ 14.
EPI took steps to decontaminate the property. Id., ¶¶ 21-23, 27. However,
these steps were allegedly neither prompt nor effective. Id., ¶ 34. The four-year
escrow period expired on March 12, 2008 without EPI successfully completing the
remediation. Id., ¶ 24. In February 2009, the Colorado Department of Public Health

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and Environment advised Muscanto that the results of soil analysis of the site indicated
an additional source of contamination beyond that identified by EPI. Id., ¶ 31. Despite
this fact, EPI assured Muscanto that it had correctly identified the source of the
contamination. Id., ¶¶ 32, 38.
Muscanto and Ho’s state complaint alleges that, as a result of EPI’s failed
remediation attempts, Muscanto could not refinance the property in late 2008 and early
2009, when its original loan was set to mature. Id., ¶ 35. This forced Muscanto to
accept a renewal from the original lender on less favorable terms than it might
otherwise have received. Id. Muscanto also alleges that it incurred, and continues to
incur, additional expenses due to EPI’s failure to complete the remediation. Id., ¶ 72.
Muscanto believes that EPI utilized flawed procedures in its attempted remediation. Id.,
¶¶ 43-46. It also alleges that, both during and after the escrow period, West and EPI
misrepresented and failed to disclose material facts about the status of the remediation.
Id., ¶¶ 54, 58-60. Muscanto has brought claims against West and EPI alleging breach
of agreement, negligence, and fraudulent misrepresentations and omissions. Ho’s
claim against West and EPI is for intentional and negligent infliction of emotional
distress.
II. STANDARD OF REVIEW
Summary judgment is warranted under Federal Rule of Civil Procedure 56 when
the “movant shows that there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a); see Anderson
v. Liberty Lobby, Inc., 477 U.S. 242, 248-50 (1986); Concrete Works, Inc. v. City &

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County of Denver, 36 F.3d 1513, 1517 (10th Cir. 1994); see also Ross v. The Board of
Regents of the University of New Mexico, 599 F.3d 1114, 1116 (10th Cir. 2010). A
disputed fact is “material” if under the relevant substantive law it is essential to proper
disposition of the claim. Wright v. Abbott Labs., Inc., 259 F.3d 1226, 1231-32 (10th Cir.
2001). Only disputes over material facts can create a genuine issue for trial and
preclude summary judgment. Faustin v. City & County of Denver, 423 F.3d 1192, 1198
(10th Cir. 2005). An issue is “genuine” if the evidence is such that it might lead a
reasonable jury to return a verdict for the nonmoving party. Allen v. Muskogee, 119
F.3d 837, 839 (10th Cir. 1997). When reviewing a motion for summary judgment, a
court must view the evidence in the light most favorable to the non-moving party. Id.;
see McBeth v. Himes, 598 F.3d 708, 715 (10th Cir. 2010).
III. DISCUSSION
Under Colorado law, the duty to defend is separate and distinct from an insurer’s
obligation to indemnify its insured. See Hecla Mining Co. v. N.H. Ins. Co., 811 P.2d
1083, 1086, n.5 (Colo. 1991). While “[t]he duty to indemnify relates to the insurer's duty
to satisfy a judgment entered against the insured, . . . [t]he duty to defend concerns an
insurance company’s duty to affirmatively defend its insured against pending claims.”
Cyprus Amax Minerals Co. v. Lexington Ins. Co., 74 P.3d 294, 299 (Colo. 2003)
(internal quotations and citations omitted).
“An insurer seeking to avoid its duty to defend an insured bears a heavy burden.”
Hecla Mining, 811 P.2d at 1089. “[T]he insured need only show that the underlying
claim may fall within policy coverage; the insurer must prove it cannot.” Compass Ins.

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Co. v. City of Littleton, 984 P.2d 606, 614 (Colo. 1999) (internal citations and quotations
omitted). “An insurer has a duty to defend unless it can show that: (1) the allegations in
the complaint against the insured describe only situations which are within the policy
exclusions; and (2) there is no factual or legal basis on which the insurer might be held
liable to indemnify the insured.” TerraMatrix, Inc. v. U.S. Fire Ins. Co., 939 P.2d 483,
486 (Colo. App. 1997). The obligation to defend is not determined by the insured’s
actual liability to the claimant; instead, the duty to defend arises when the allegations in
the complaint, if sustained, would impose a liability covered by the policy. See Hecla
Mining, 811 P.2d at 1089. “[W]here the insurer’s duty to defend is not apparent from
the pleadings in the case against the insured, but the allegations do state a claim which
is potentially or arguably within the policy coverage, or there is some doubt as to
whether a theory of recovery within the policy coverage has been pleaded, the insurer
must accept the defense of the claim.” Id. (internal citations and quotations omitted).
Furthermore, when a complaint alleges multiple claims, if at least one claim is
potentially covered, an insurer must defend against all claims in the action. See
Management Specialists, Inc. v. Northfield Ins. Co., 117 P.3d 32, 37 (Colo. App. 2004).
However, when the complaint “alleges facts which would establish a reasonable
likelihood that the alleged tortious conduct of [the insured] is excluded from coverage
. . . , the insurer may seek a declaratory judgment to determine the insured’s duty to
defend.” Hecla Mining, 811 P.2d at 1089, n.9 (internal citations and quotations
omitted).
A court’s determination of whether an insurer has a duty to defend is confined to

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its examination of the four corners of the underlying complaint. See Weitz Co., LLC v.
Mid-Century Ins. Co., 181 P.3d 309, 311 (Colo. App. 2007) (internal quotations and
citations omitted). “[T]he duty to defend must be determined based solely on a
comparison of the allegations of the complaint made against the insured with the
insuring provisions of the policy.” Employers’ Fire Ins. Co. v. W. Guar. Fund Serv., 924
P.2d 1107, 1110 (Colo. App. 1996). The interpretation of the policy provisions is
“based upon the principles of contract interpretation.” Hecla Mining, 811 P.2d at 1090
(internal citations omitted). Although the determination of the insured’s ultimate liability
is a question of fact, see Hecla Mining, 811 P.2d at 1089, both the interpretation of an
insurance contract and the determination of a duty to defend are questions of law. See
Bumpers v. Guarantee Trust Life Insurance Co., 826 P.2d 358, 360 (Colo. App. 1991);
see also Apartment Inv. and Management Co. (AIMCO) v. Nutmeg Ins. Co., 593 F.3d
1188, 1193 (10th Cir. 2010) (internal citations omitted).
Century argues that Muscanto and Ho’s claims against EPI and West are based
solely upon the alleged failure to complete the remediation project within the four-year
escrow period and upon “wrongful acts” occurring before the policy’s retroactivity date
of August 1, 2008, and are therefore denied coverage by the policy’s Time Estimate
Exclusion and Professional Liability Retroactive Date. The Court’s analysis begins and
ends with the state court complaint’s third claim for relief, which alleges fraudulent
misrepresentations and omissions by EPI.1 That claim appears to depend, at least in
1

Century alleges that the policy’s exclusion for intentional acts precludes
coverage for the intentional infliction of emotional distress and fraud claims. Docket No.
1, ¶ 31, citing Docket No. 1-1 at 22. Furthermore, the policy defines a “wrongful act” as
an “act, error, or omission, negligently made.” Docket No. 1-1 at 32 (emphasis added).
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part, upon Muscanto’s allegation that EPI assured Muscanto in February 2009 that it
had identified the sole source of contamination, despite being confronted with evidence
to the contrary. See Docket No. 19-1, ¶ 32. The state court complaint also contains
allegations of misrepresentations and omissions “[d]uring the period following the
expiration of the 4-year escrow period.” Docket No. 19-1, ¶¶ 58, 60. Although it is not
entirely clear when all of the alleged misrepresentations and omissions occurred, the
February 9, 2009 statement certainly fell, and the other referenced misrepresentations
and omissions at least “potentially” fall, within the policy coverage period. Moreover, in
light of the potential timing of the statements, it is far from clear that all of the alleged
misrepresentations and omissions “aris[e] out of or [are] based upon an . . . estimate of
cost or time required to complete,” Docket No. 1-1 at 23, the remediation. See Docket
No. 19-1, ¶ 32 (alleging a misrepresentation regarding contamination source despite
contrary evidence in February 2009). Therefore, Century “must accept the defense of
the claim.” Hecla Mining, 811 P.2d at 1089. Because, as noted above, if at least one
claim is potentially covered, an insurer must defend against all claims in the action, see
Management Specialists, 117 P.3d at 37, the Court need not address whether the other
claims in the state court complaint would independently trigger Century’s duty to
defend.
For the foregoing reasons, summary judgment for the plaintiff on the issue of its
duty to defend is not appropriate. Because the determination of an insurer’s duty to

Century also alleges that Muscanto’s breach of contract claim was excluded by the
policy’s Contractual Liability Exclusion. Docket No. 1, ¶ 30, citing Docket No. 1-1 at 22.
However, the plaintiff has not sought summary judgment on either of these grounds.
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defend is restricted to an examination of the “four corners of the underlying complaint,”
Weitz, 181 P.3d at 311, and “[w]hether claims against an insured are excluded from
coverage by an insurance contract is a matter of law,” Fire Ins. Exchange v. Sullivan,
224 P.3d 348, 351 (Colo. App. 2009), the Court has the necessary information to rule
on this issue. Although the defendants have not moved for summary judgment, a court
may, after giving notice and a reasonable time to respond, grant summary judgment for
a nonmovant. Fed. R. Civ. P. 56(f)(1). Therefore, the court will give the plaintiff the
opportunity to show why partial summary judgment should not be entered for the
defendant on the issue of the plaintiff’s duty to defend.
Although the focus of Century’s motion is the duty to defend, it has included a
paragraph at the end of its motion arguing that, if no duty to defend exists, no duty to
indemnify can arise. See Docket No. 19 at 14. Because the Court finds that Century
does have a duty to defend, the Court will not address the duty to indemnify.
IV. CONCLUSION
For the foregoing reasons, it is
ORDERED that plaintiff Century’s motion for summary judgment pursuant to
Federal Rule of Civil Procedure 56 [Docket No. 19] is DENIED. It is further
ORDERED that, on or before August 30, 2011, plaintiff shall show cause why,
given this ruling, summary judgment should not be entered in favor of defendants on
the plaintiff’s duty to defend claim and why plaintiff’s duty to indemnify claim should not
be dismissed without prejudice as premature.

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DATED August 22, 2011.
BY THE COURT:

s/Philip A. Brimmer
PHILIP A. BRIMMER
United States District Judge

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