RK Mechanical, Inc. v. Travelers Property and Casualty of America
Filing
27
ORDER granting 21 Defendants Motion for Summary Judgment; denying 22 Plaintiff's Motion for Summary Judgment; The Clerk of Court shall enter judgment in favor of Defendant; and Defendant may have its costs by filing a bill of costs pursuant to D.C.COLO.LCivR 54.1. by Magistrate Judge Kathleen M. Tafoya on 8/1/2011.(erv, )
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Magistrate Judge Kathleen M. Tafoya
Civil Action No. 10–cv–02306–WJM–KMT
RK MECHANICAL, INC., a Colorado corporation,
Plaintiff,
v.
TRAVELERS PROPERTY CASUALTY COMPANY OF AMERICA, a Connecticut
corporation,
Defendant.
ORDER
This matter is before the court on cross motions for summary judgment by Plaintiff RK
Mechanical, Inc. (“RK”) (Doc. No. 22 [“RK Mot.]) and Defendant Travelers Property Casualty
Company of America (“Travelers”) (Doc. No. 21 [“Travelers Mot.”]) filed April 15, 2011 and
the parties’ consent to magistrate jurisdiction for purposes of deciding the cross motions for
summary judgment pursuant to 28 U.S.C. § 636(c)(1) (Doc. Nos. 18 & 19).
STATEMENT OF THE CASE
This breach of contract and declaratory judgment action arises out of an insurance
coverage dispute involving a builders’ risk policy for a residential construction project. The
following facts are undisputed for purposes of the present motions. (See Doc. No. 17,
Stipulation of Counsel of Undisputed Facts for Use with Cross-Motions for Summary Judgment
(“Stipulation”); RK Mot. ¶¶ 1-8, 11; Doc. No. 25, Defendant’s Response to Plaintiff’s Motion
for Summary Judgment (“Travelers Resp.”) ¶¶ 1-8, 11.) On April 23, 2007, Travelers issued
Commercial Inland Marine Policy No. QT-660-9469B749-TIL-07 (Compl. Ex. A-1) (“the
Policy”) to Spire Denver, LLC (Spire) for a residential construction project called “The Spire
Denver” (“the Project”). The policy period was April 23, 2007 through July 23, 2009. J.E.
Dunn Rocky Mountain, Inc. (“Dunn”) was the general contractor on the Project. On May 24,
2007, Dunn entered into a subcontract with RK pursuant to which RK was to install heating,
plumbing, ventilating and air conditioning systems at the Project. The parties agree RK was an
additional insured under the Policy.
As part of RK’s plumbing work on the Project, RK installed approximately one hundred
seventy-one CPVC flanges, which were manufactured by Charlotte Pipe and Foundry Company
(the Charlotte flanges). On June 16, 2009, two of the Charlotte flanges located in the Project’s
upper floor mechanical room cracked (the Flange Failure). Water overflowed, either from a
burst pipe caused by a defective flange or directly from one of the cracked flanges, resulting in
water damage to the Project. On June 17, 2009, Dunn notified Travelers of the Flange Failure
and the ensuing water damage caused by the Charlotte flanges involved. RK responded to the
Flange Failure and water damage by removing and replacing the two cracked flanges and
engaging in water remediation. Travelers paid Dunn and RK for the costs associated with the
water damage associated with the Flange Failure.1
1
RK claims that Traveler’s paid RK and Dunn for replacing the two cracked flanges
which were the cause of the water damage. As noted in the Analysis, Section A, Travelers
2
Following the Flange Failure RK examined all the remaining Charlotte flanges installed
at the Project. RK discovered that many of the flanges were cracked and showed signs of
potential failure so RK proceeded to remove and replace the cracked flanges with new Charlotte
flanges. RK continued to monitor both the new and old Charlotte flanges and ultimately
determined that they were all susceptible to failure. Thereafter, RK removed and replaced all the
Charlotte flanges with a different manufacturer’s flanges that were of a different material
configuration and composition. The process of removing and replacing the Charlotte flanges
included the removal and replacement of various building components in order to gain access to
the Charlotte flanges.
Microbac Laboratories, Inc. prepared a report on behalf of RK concluding that the Flange
Failure was due, in part, to an assembly or workmanship defect in addition to manufacturing
defects in the flanges. Higgins & Associates prepared a report on behalf of Travelers concluding
that the flanges failed due to improper installation. Plastic Failure Labs prepared a report on
behalf of the flange manufacturer concluding that the flanges failed due to improper installation
by RK.
On December 18, 2009, RK tendered a notice of claim and demand for indemnity to
Travelers in connection with the costs to remove and replace the Charlotte flanges, including the
two flanges involved in the Flange Failure (Notice & Claim). Less than one month later, on
denies payment for the cracked flanges and the documentary evidence does not support a
contention that Travelers paid for any damages other than that caused by water.
3
January 13, 2010, Travelers denied RK’s claim based on Exclusions B.3.d and B.4.f of the
Policy. RK brings suit for breach of insurance contract and declaratory relief.
PROCEDURAL HISTORY
RK initially filed its complaint against Travelers in state court on August 26, 2010. (Doc.
No. 1-3.) Travelers removed the action to this Court on September 20, 2010. (Doc. No. 1.) The
parties agreed to a cross motions procedure to resolve the discreet insurance coverage dispute at
issue. (Doc. No. 15 at ¶ F; Doc. No. 16.) The parties filed cross motions for summary judgment
on April 15, 2011 (Doc. Nos. 21 and 22) and response briefs on May 13, 2011. (Doc. Nos. 24
and 25). No reply briefs were allowed. The parties consented to this court’s jurisdiction to
render a final resolution of these two motions pursuant to 28 U.S.C. § 636(c)(1). (Doc. Nos. 18
and 19.) The motions are ripe for review and ruling.
LEGAL STANDARD
Summary judgment is appropriate if “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).
The moving party bears the initial burden of showing an absence of evidence to support the
nonmoving party’s case. Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). “Once the moving
party meets this burden, the burden shifts to the nonmoving party to demonstrate a genuine issue for
trial on a material matter.” Concrete Works, Inc. v. City & County of Denver, 36 F.3d 1513, 1518
(10th Cir. 1994) (citing Celotex, 477 U.S. at 325). The nonmoving party may not rest solely on the
allegations in the pleadings, but must instead designate “specific facts showing that there is a
genuine issue for trial.” Celotex, 477 U.S. at 324; see also Fed. R. Civ. P. 56(c). A disputed fact
4
is “material” if “under the substantive law it is essential to the proper disposition of the claim.”
Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 670 (10th Cir.1998) (citing Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 248 (1986)). A dispute is “genuine” if the evidence is such that it might lead a
reasonable jury to return a verdict for the nonmoving party. Thomas v. Metropolitan Life Ins. Co.,
631 F.3d 1153, 1160 (10th Cir. 2011) (citing Anderson, 477 U.S. at 248).
When ruling on a motion for summary judgment, a court may consider only admissible
evidence. See Johnson v. Weld County, Colo., 594 F.3d 1202, 1209-10 (10th Cir. 2010). The
factual record and reasonable inferences therefrom are viewed in the light most favorable to the
party opposing summary judgment. Concrete Works, 36 F.3d at 1517. At the summary judgment
stage of litigation, a plaintiff’s version of the facts must find support in the record. Thomson v. Salt
Lake Cnty., 584 F.3d 1304, 1312 (10th Cir. 2009). “When opposing parties tell two different stories,
one of which is blatantly contradicted by the record, so that no reasonable jury could believe it, a
court should not adopt that version of the facts for purposes of ruling on a motion for summary
judgment.” Scott v. Harris, 550 U.S. 372, 380 (2007); Thomson, 584 F.3d at 1312.
ANALYSIS
Travelers removed this action from state court based on diversity jurisdiction. In a case
removed to federal court based on diversity jurisdiction, the federal court applies the substantive
law of the forum state. Berry & Murphy, P.C. v. Carolina Cas. Ins. Co., 586 F.3d 803, 808 (10th
Cir. 2009). Interpretation of an insurance contract is a question of law for the court. USAA Cas.
Ins. Co. v. Anglum, 119 P.3d 1058, 1059 (Colo. 2005). Colorado courts construe an insurance
policy’s terms according to principles of contract interpretation. Berry & Murphy, 586 F.3d at
5
808 (citing Thompson v. Maryland Cas. Co., 84 P.3d 496, 501 (Colo. 2004)). The Colorado
Supreme Court has said:
In interpreting a contract, we seek to give effect to the intent and
reasonable expectations of the parties. Accordingly, unless the parties intend
otherwise, terms in an insurance policy should be assigned their plain and
ordinary meaning.
We also recognize that unlike a negotiated contract, an insurance policy is
often imposed on a “take-it-or-leave-it” basis. Therefore, we assume a
“heightened responsibility” in reviewing insurance policy terms to ensure that
they comply with public policy and principles of fairness. Accordingly,
ambiguous terms in an insurance policy are construed against the insurer.
Thompson, 84 P.3d at 501-502. See also Bangert Bros. Const. Co., Inc. v. Americas Ins. Co. ,
888 F. Supp. 1069, 1072 (D. Colo. 1995).
The issue in this case is whether RK is entitled to indemnity for the costs it incurred
investigating potential flange failure, removing and replacing cracked Charlotte flanges and,
ultimately, removing and replacing all Charlotte flanges with those of a different manufacturer.
RK posits several theories supporting its claim for coverage from Travelers.
A.
Waiver and Estoppel
RK contends that by indemnifying Dunn and RK for the costs “associated with the
Flange Failure and water damage,” Travelers has implicitly conceded that there is coverage
under the Policy for mitigation costs. (RK Mot. at 7.) RK claims that Travelers “indemnified its
insureds for removal and replacement of the cracked Charlotte Flanges in addition to the
damages the Project sustained as a result of the water damage” claiming that Travelers initially
paid to replace the two cracked flanges in the mechanical room. (Id.)
6
Travelers contends that it indemnified and reimbursed Dunn and RK for the costs
resulting from the water damage caused by the Flange Failure, but that these costs did not
include the cost to remove and replace any of the Charlotte Flanges at the Project, including the
two flanges whose failure resulted in the water damage. (Travelers’ Resp. at 7-8.) Travelers
points to RK’s Complaint, the invoices submitted by RK with its Notice & Claim, and Travelers’
Denial Letter in support.
In the Complaint, RK asserts that it submitted a Mitigation Notice and two Contract
Change Proposals (CCPs) to Travelers. (Compl. at ¶¶ 20, 21.) CCP-155.0 for “Belfor
Restoration Service Invoices due to Water Damage” was for $24,115.00. (Compl. at ¶ 21;
Travelers Resp. at Ex. A-4.) RK was paid for this invoice. (Compl. at ¶ 22.) The invoice does
not reference any repair or replacement of any flanges or plumbing. CCP-171.0 included three
items: 1) Cracked and Failed Defective CPVC Flange Water Leak Incident of 6/16/2009, which
included “Penthouse Mechanical Room CPVC Flange and Piping Repairs”; 2) Removal and
Replacement of Cracked Defective CPVC Flanges; and 3) Removal and Replacement of NonCracked Defective CPVC Flanges. (Travlers Resp. Ex. A-4.) CCP-171.1 included a fourth item
for J.E. Dunn CPVC Cost Reconciliation. (Id.) Together, CCP-171.0 and 171.1 totaled
$438,525.00. Travelers did not pay RK for any portion of these invoices. (Compl. at ¶ 22.)
RK does not address the documentary evidence set forth above, apparently entirely
basing its claim that Travelers paid to replace the two cracked flanges in the mechanical room on
the parties’ Stipulation of Undisputed Facts. In Stipulation ¶ 12, the parties agree that “Travelers
indemnified Dunn and RK for the costs associated with the Flange Failure and water damage.
7
Travelers did not provide coverage for any costs associated with RK’s removal and replacement
of all the Existing Flanges.” In Stipulation ¶ 6, the parties agree that “[o]n or about June 16,
2009, two of the Charlotte Flanges located in the Project’s upper floor mechanical room cracked
(the “Flange Failure”). Water overflowed from one of the cracked flanges, resulting in water
damage to the Project.” Neither of these stipulated facts specifically state that Travelers’
indemnification included the costs for the two cracked flanges. In light of the undisputed invoice
evidence, the court concludes that, while Travelers did indemnify and pay Dunn and RK for the
loss resulting from the water damage due to the Flange Failure, Travelers did not pay either
Dunn or RK for the removal and replacement of any of the Charlotte flanges, including the two
flanges involved in the Flange Failure. Accordingly, RK’s waiver and estoppel arguments fail
on the facts.
Moreover, in Colorado, “the doctrines of wavier and estoppel cannot create coverage
where none exists under the policy.” Mgmt. Specialists, Inc. v. Northfield Ins. Co., 117 P.3d 32,
37 (Colo. App. 2004) (citing Compass Ins. Co. v. City of Littleton, 984 P.2d 606 (Colo. 1999)
and Empire Cas. Co. v. St. Paul Fire & Marine Ins. Co., 764 P.2d 1191, 1198 (Colo. 1988)).
The Colorado Supreme Court has said:
The rule is well established that the doctrines of implied waiver and of estoppel,
based upon the conduct or action of the insurer, are not available to bring within
the coverage of a policy risks not covered by its terms, or risks expressly
excluded therefrom, and the application of the doctrines in this respect is
therefore to be distinguished from the waiver of, or estoppel to assert, grounds of
forfeiture. Thus, while an insurer may be estopped by its conduct or its knowledge
from insisting upon a forfeiture of a policy, the coverage, or restrictions on the
coverage, cannot be extended by the doctrine of waiver or estoppel. While it is
true that if the insurer, with knowledge of facts which would bar an existing
8
primary liability, recognizes such primary liability by treating the policy as in
force, he will not thereafter be allowed to plead such facts to avoid his primary
liability, the doctrine of waiver cannot be invoked to create a primary liability and
bring within the coverage of the policy risks not included or contemplated by its
terms.
Hartford Live Stock Ins. Co. v. Phillips, 372 P.2d 740, 742 (Colo. 1962) (quoting 29A Am. Jur.
Insurance § 1135). Accordingly, even if Travelers had paid RK for replacement of the two
cracked Charlotte flanges, the doctrines of waiver and estoppel would not create coverage for the
replacement of all the other Charlotte flanges installed throughout the project if that coverage did
not otherwise exist in the Policy.2
B.
Policy Coverage and Exclusions
The Policy states that Travelers “will pay for ‘loss’ to Covered Property from any of the
Covered Causes of Loss.” (Stipulation, ¶ 15.)3 Loss is defined as “accidental loss or damage.”
(Id.) Covered Cause of Loss is defined as “risks of direct physical ‘loss’ except those causes of
‘loss’ listed in the Exclusions.” (Id.)
RK contends that a “loss” resulting from a “covered cause of loss” has occurred and that
either the Policy Exclusions do not apply or they are internally inconsistent, creating an
ambiguity that must be construed in favor of RK. (RK Mot. at 7, 14-18.) Travelers insists that
RK’s costs to investigate, remove and replace the Charlotte flanges with those from a different
2
RK relies on authority addressing an insurer’s failure to timely assert an affirmative
defense based on the actions or inactions of the insured that forfeited coverage. (RK Mot. at 8.)
Such authority does not support RK’s argument made here but similar authority is discussed
below with regard to the Policy’s “sue and labor” clause.
3
The policy in its entirety is found at Compl., Ex. A-1 (Doc. No. 1-3) at 9-53.
9
manufacturer are excluded under the Policy’s exclusions for faulty workmanship and defective
materials. (Travelers Mot. at 8-13.)
1.
Applicability of Exclusions
When an insurance company seeks to limit or exclude coverage under the terms of an
insurance policy, the insurer bears the burden of proving that a particular loss falls within an
exclusion in the contract. Ark. Valley Drilling, Inc. v. Continental Western Ins. Co.,
703 F. Supp. 2d 1232, 1238 (D. Colo. 2010), citing Colo. Intergovernmental Risk Sharing
Agency v. Northfield Ins. Co., 207 P.3d 839, 842 (Colo. App. 2008). Colorado courts have
approved clauses that exclude coverage for the costs of correcting defects. See, e.g., A.D. Irwin
Investments, Inc. v. Great Am. Ins. Co., 475 P.2d 633, 635 (Colo. App. 1970) (insurance
company did not become “a guarantor of perfect performance” concerning maintenance of air
conditioning system which caused damage.); Bangert Bros. Const. Co., 888 F. Supp. at 1073.
However, under Colorado law, “exclusionary clauses designed to insulate particular conduct
from general liability coverage provisions must be drafted in clear and specific language.” Am.
Family Mut. Ins. Co. v. Johnson, 816 P.2d 952, 953 (Colo. 1991). The insurer bears the burden
of showing that an exemption applies in a particular case and the exclusion is not subject to any
other reasonable interpretation. Id. If the insurer shows that the exclusion applies, the burden
shifts back to the insured to prove the applicability of an exception to the exclusion. Rodriguez
ex. rel. Rodriguez v. Safeco Ins. Co. of Am., 821 P.2d 849, 853 (Colo. App. 1991) (citing Watkins
v. Sec. Benefit Ass’n, 255 P. 452 (1927)).
10
The Policy provides coverage for any loss due to a “covered cause of loss.” While a
“covered cause of loss” includes the risk of of loss, not just an actual loss, the plain language
exempts from the definition of “covered cause of loss” “those causes of ‘loss’ listed in the
exclusions.” (Stipulation, ¶ 15.) Faulty, inadequate and defective materials, workmanship and
maintenance are all causes of loss listed in the Exclusions and therefore cannot be read to be
“covered cause(s) of loss.”
Exclusion B.3 states:
3.
We will not pay for ‘loss’ caused by or resulting from any of the
following. But if ‘loss’ by a Covered Cause of Loss results, we
will pay for the resulting ‘loss.’4
***
d.
Omission in, or faulty, inadequate or defective:
(1)
Planning, zoning, development, surveying, siting,
design or specifications; or
(2)
Materials, workmanship or maintenance.
***
(Stipulation, ¶ 16.) Given this clear and unambiguous language, the cracked and potentially
defective Charlotte flanges are not “covered cause(s) of loss.”
2.
Ensuing Loss Provision
It is not disputed that the costs to remediate and repair covered property damaged by the
water which escaped the plumbing system when the Charlotte flanges cracked, falls within the
4
Travelers refers to this second sentence in Exclusion B.3 as the “ensuing loss
provision.” (See Travelers Mot. at 9 n.2.)
11
ensuing loss provision of the policy.5 Travelers reimbursed funds to indemnify for this loss to
RK as part of the ensuing loss provision. Pursuant to that same provision, RK contends that each
of the remaining Charlotte flanges posed a “risk of direct physical loss” because each was at risk
of failing and, when they did fail, they would contribute to or cause pipes to break that would
result in more water damage to the Project, a covered loss under the ensuing loss provision. (RK
Mot. at 15.) RK argues, then, that the replacement of the flanges was therefore a “covered cause
of loss” because the water damage is not a loss listed in the exclusions.
An ensuing loss clause, however, “does not reinsert coverage for excluded losses, but
rather reaffirms coverage for secondary losses ultimately caused by excluded perils.” Cooper v.
Am. Family Mut. Ins. Co., 184 F. Supp. 2d 960, 964 (D. Ariz. 2002). The cost of making good
on faulty work or defective products is not contemplated nor covered by the policy at issue since
this kind of loss is specifically excluded. See, e.g., Bangert Bros. Const. Co., 888 F. Supp. at
1073 (citing Allianz Ins. Co. v. Impero, 654 F.Supp. 16, 18 (E.D. Wash. 1986) (contractor not
allowed to recover under all-risk policy for cost of making good faulty concrete work.) As in
Bangert, if this Court were to ignore the nature of the policy and its exclusions in order to allow
coverage, the result would be to “turn these policies into something they are not: performance
bonds or guarantees of contractual work.” Id.; See also Hartford Acc. & Indem. v. Pacific Mut.
Life Ins., 861 F.2d 250, 253 (10th Cir.1988); Gerrity Co. v. CIGNA Property & Cas. Ins., 860
P.2d 606, 609 (Colo. App. 1993).
5
Travelers paid CCP-155.0 for restoration due to water damage presumably pursuant to
the ensuing loss provision in the policy.
12
In construing an insurance policy, “words should be given their plain meaning according
to common usage and strained constructions should be avoided.” Allstate Ins. Co. v. Starke, 797
P.2d 14, 18 (Colo. 1994) (internal citations omitted). A “determination of an insurance
contract’s meaning . . . is not answered by reference to what those who are experts in the
construction of insurance contracts or those with a clear understanding of the legal effects of
specific language might understand by reading a policy.” Simon v. Shelter Gen. Ins. Co., 842
P.2d 236, 240 (Colo. 1992). To the contrary, the construction “must be ascertained by reference
to what meaning a person of ordinary intelligence would attach to it.” Id.
The court finds RK’s circular reading of the ensuing loss provision to be strained. Such
an interpretation would render meaningless any exclusions since all the excluded items would
ultimately be covered losses if there was damage to the property for which indemnity was
allowed because of an ensuing loss. An ensuing loss provision does not cover loss caused by the
excluded peril; it covers loss caused to the property wholly separate from the defective property
itself, in this case the escaping water, not the cracked flange. Swire Pac. Holdings, Inc. v. Zurich
Ins. Co., 139 F. Supp. 2d 1374, 1383 (S.D. Fla. 2001). See also Laquila Constr., Inc. v.
Travelers Indem. Co., 66 F. Supp. 2d 543, 544-45 (S.D.N.Y. 1999) (Faulty concrete resulted in
floor in multi-story building being demolished and replaced; court recognized that had floor
collapsed and damaged machinery or other property such losses would have been covered as
ensuing loss, but since the loss had not occurred there was no coverage under policy that
excluded defective workmanship or materials.) The costs of correcting defects does not
constitute “loss” under the ensuing loss provision. Laquila, 66 F. Supp. 2d at 544-45. In arguing
13
that the defective flanges constitute a “covered cause of loss” because they pose a “risk of direct
physical loss” because of potential ensuing water damage, RK ignores the second part of the
definition “except those causes of ‘loss’ listed in the Exclusions.” (Stipulation, ¶ 15 (emphasis
added).) Faulty workmanship and defective materials are listed in the Exclusions to the Policy.
Therefore, a plain reading of the ensuing loss policy provision requires a finding that
replacement of the faulty flanges is not “a covered cause of loss.”
3.
Internal Conflict Between Exclusions
RK also argues that Exclusion 4.f is in direct conflict with Exclusion 3.d and such
internal inconsistency creates an ambiguity in the Policy that must be construed against the
insurer. (RK Mot. at 16-18 (discussing Simon, 842 P.2d at 240).) RK notes that “Exclusion 3.d
purports to exclude coverage for ‘loss’ caused by or resulting from faulty or defective materials
or workmanship, [while] the exception to that exclusion restores such coverages to the extent a
loss from a ‘risk of loss’ results.”6 (Id. at 17.) RK contends that “Exclusion 4.f attempts to
exclude coverage for business costs occurring after a ‘loss’ resulting from the construction or
repair of property” and thus, Exclusion 4.f “purports to exclude the very coverage that was
restored by the exception to Exclusion 3.d.” (Id.)
Exclusion B.4 states:
4.
6
We will not pay the ‘amount of loss’ that is directly or indirectly
due to an increase in the ‘post-loss period of construction’ caused
by any of the following. Such ‘amount of loss’ is excluded
The court reads this to be a reference to the ensuing loss provision.
14
regardless of any other cause or event that contributes concurrently
or in any sequent to the following:
***
f.
Deficiencies in the original designs, specifications,
materials, or construction;
***
(Stipulation, ¶ 16.)
The policy states “amount of loss is defined as “the sum of your actual ‘soft costs,’ as
covered by this policy. (Stipulation, ¶ 17.) Soft costs are “your actual and necessary business
costs in excess of your budgeted amount for the ‘project’ consisting only of type shown in the
declarations.” (Id.) “Post-loss period of construction means the period of time that a) begins
with the ‘planned completion date’; and b) ends on the date when the ‘project’ should be
completed using reasonable speed and similar materials and workmanship.” (Id. ¶ 18.)
Thus, Exclusion 4.f provides that Travelers will not pay RK’s actual and necessary
business costs in excess of the budgeted amount that arise from an increase in the post-loss
period of construction caused by deficiencies in the original designs, specifications, materials, or
construction.
Simon, the case relied on by RK, involved a general liability insurance policy providing
coverage for bodily injury and property damage. 842 P.2d at 238. The policy excluded coverage
for contractual liability but an exception to this exclusion restored coverage for warranties of
fitness, quality and workmanlike performance. Id. The policy also contained endorsements for
products hazards and completed operations hazards which themselves excluded coverage for
damage arising from reliance on a warranty. Id. at 238-39. The Colorado Supreme Court noted
15
a clear conflict between the exception for warranties of fitness, quality, and workmanlike
performance in the general grant of coverage and the exclusion for damage arising from reliance
on a warranty in the endorsements. Id. at 240. The Colorado Supreme Court held that such
conflict must be construed against the insurer in favor of coverage. Id. at 241.
The court does not find such an internal conflict in the Policy in this case. In fact, the
court does not see any inconsistency between Exclusion 3.d and Exclusion 4.f. While Exclusion
3.d. excludes loss to a property resulting from faulty workmanship or defective materials,
Exclusion 4.f excludes increases in actual and necessary business costs associated with losses
caused by deficient design, specifications, materials or construction. The two exclusions address
different types of losses that may result from faulty workmanship or defective materials and
therefore are not in conflict. Moreover, Exclusion 4.f does not exclude coverage which is
restored by the ensuing loss provision of Exclusion 3.d because, as described in the preceding
section, the ensuing loss provision does not restore coverage for losses that result from faulty
work or defective materials. Accordingly, there is no internal inconsistency that must be
construed in favor of coverage.
C.
Duty to Mitigate
RK also argues that it was obliged both under the terms of the Policy and at common law
to mitigate losses and, therefore, Travelers must indemnify RK for its mitigation costs.
1.
Contractual Duty to Mitigate
RK contends that the Policy required RK to “take all reasonable steps to protect the
Covered Property from further damage, . . . .” (RK Mot. at 9.) The Policy provides:
16
C.
Duties in the Event of Loss
You must see that the following are done in the event of loss or damage to
Covered Property:
***
4.
Take all reasonable steps to protect the Covered Property from further
damage, and keep a record of your expenses necessary to protect the
Covered Property, for consideration in the settlement of the claim. This
will not increase the Limit of Insurance. However, we will not pay for any
subsequent loss or damage resulting from a cause of loss that is not a
Covered Cause of Loss. Also, if feasible, set the damaged property aside
and in the best possible order for examination.
***
(Stipulation, ¶ 19 (emphasis added).) The parties treat this provision as a “sue and labor” clause.
(See Travelers Mot. at 13; RK Resp. at 1.) They agree that no Colorado court has had occasion
to construe a sue and labor clause or similar provision in an insurance contract. (Travelers Mot.
at 14; RK Resp. at 5 n.2.) The court also is aware of no Colorado case law dealing with the
issue. When there is no case law from the forum state directly on point, the federal court “must
determine what decision the state court would make if faced with the same facts and issue.”
Phillips v. State Farm Mut. Auto. Ins. Co., 73 F.3d 1535, 1537 (10th Cir. 1996). In doing this,
the court may consider a number of authorities, including analogous decisions by the highest
appellate court in the forum state, the decisions of lower state courts in the forum state, the
decisions of federal courts and other state courts, and “the general weight and trend of
authority.” Id. (internal quotations and citations omitted).
As the California Supreme Court has explained:
17
The ‘sue and labor’ clause appearing in most marine and inland marine insurance
policies is of ancient lineage, its forebears extending back—according to a
leading case on the subject—at least into the seventeenth century. (Reliance
Insurance Company v. The Escapade (5th Cir. 1960) 280 F.2d 482, 488-489, fn.
11.) Such a clause makes express the duty implied in law on the part of the
insured to labor for the recovery and restitution of damaged or detained property
(WINTER, MARINE INSURANCE (3d ed. 1952), p. 393) and it contemplates a
correlative duty of reimbursement separate from and supplementary to the basic
insurance contract. ‘Its purpose is to encourage and bind the assured to take steps
to prevent a threatened loss for which the underwriter would be liable if it
occurred, and when a loss does occur to take steps to diminish the amount of the
loss. Under this clause the assured recovers the whole of the sue and labor
expense which he has incurred . . . and without regard to the amount of the loss or
whether there has been a loss or whether there is salvage, and even though the
underwriter may have paid a total loss under the main policy.’ (White Star S.S.
Co. v. North British & Merc. Ins. Co. (E.D. Mich. 1943) 48 F.Supp. 808, 813; see
Reliance Insurance Company v. The Escapade, Supra, 280 F.2d 482, 488-489, fn.
11; 15 COUCH ON INSURANCE, 2D (1966) § 55:123, p. 552; VANCE ON INSURANCE
(2d ed. 1930) § 255, pp. 864-865.)
There is, however, a fundamental limitation upon the insurer’s duty under a ‘sue
and labor’ clause to compensate the insured for expenses incurred in the
preservation and protection of insured property: the expenses in question must be
incurred to preserve the insured property from a peril insured against under the
basic policy. ‘Since an assured has the duty toward his underwriter to exercise the
care of a prudent uninsured owner to protect insured property in order to
minimize or prevent the loss from the occurrence for which the underwriter would
be liable under the policy, the clause undertakes to reimburse the assured for these
expenditures which are made primarily for the benefit of the underwriter either to
reduce or eliminate a covered loss altogether. . . . (Par.) Taking the analysis
through the next step, it is obvious that since the clause is to reimburse the
assured for expenses incurred in satisfying the assured’s duty to the underwriter,
there is no such duty where the policy, for one reason or another . . . does not
apply. . . . The obligation comes into being only when the action taken is to
minimize or prevent a loss for which the underwriter would be liable. If the
underwriter would not be liable at all . . . there would be no contractual obligation
to repay sue and labor.’ (Fn. omitted; italics added.) (Reliance Insurance
Company v. The Escapade, Supra, 280 F.2d 482, 488-489; see also Home Ins. Co.
v. Ciconett (6th Cir. 1950) 179 F.2d 892, 895; White Star S.S. Co. v. North British
& Merc. Ins. Co., Supra, 48 F. Supp. 808, 812-813; Berns & Koppstein, Inc. v.
Orion Insurance Co. (S.D.N.Y. 1959) 170 F. Supp. 707, 719; 15 COUCH ON
18
INSURANCE 2D (1966) § 55:125, pp. 552-553; VANCE INSURANCE (2d ed. 1930) §
255, pp. 864-865.
Young’s Mkt. Co. v. Am. Home Assur. Co., 481 P.2d 817, 820 (Cal. 1971). Professor Vance has
further elaborated,
The loss or damage which the insured labors to avoid must be such that it would
be chargeable to the insurer if it should occur. The purpose of the clause is not to
stimulate philanthropic heroism, but to lessen the loss for which the underwriter
would be liable. The insurer is certainly not commercially interested in securing
protection of the venture against a misfortune for which he had declined to
assume responsibility.
VANCE INSURANCE at 865.
The great weight of authority from other jurisdictions holds that an insured’s ability to
recover mitigation costs under a sue and labor cause is tied to the insurer’s obligations under the
general insuring provisions of the policy. In an early case dealing with recovery under a sue and
labor clause, the United States Supreme Court said,
If this clause be construed with reference to what is most evidently its
subject-matter, that is a loss within the policy, and in connection with other parts
of the instrument, it seems impossible to misunderstand it, or that it should
receive so extensive an application as the plaintiff is desirous of giving to it. The
parties certainly meant to apply it only to the case of those losses or injuries for
which the insurers, if they had happened, would have been responsible. Having,
in such cases only, an interest in rescuing or relieving the property, it is
reasonable, that then only they should defray the charges incurred by an effort
made for that purpose; but when a loss takes place, which cannot be thrown on
them, it would require a much stronger and more explicit stipulation than we find
in the policy, to render them liable to contribute to such expenses.
Biays v. Chesapeake Ins. Co., 11 U.S. (7 Cranch.) 415, 419 (1813) (emphasis in original). Other
federal and state cases have held the same. See, e.g., Reliance, 280 F.2d at 489 (“The
underwriter has no right to demand that the assured take the sue and labor steps unless the policy
19
is applicable.”); John S. Clark Co., Inc. v. United Nat’l Ins. Co., 304 F. Supp. 2d 758, 767 (M.D.
N.C. 2004) (“[A] sue and labor clause does not extend or create coverage; the recovery . . . is
tied irrevocably to the obligations undertaken by the insurers in the basic insurance policy.”);
Swire, 139 F. Supp. 2d at 1383 (“Whether sue and labor expenses are covered at all . . . is tied
directly to the policy’s insuring provisions.”); S. Cal. Edison Co. v. Harbor Ins. Co., 83 Cal.
App. 3d 747, 758, 148 Cal. Rptr. 106 (Cal. Ct. App. 1978) (“[R]ecovery under a sue and labor
clause is tied irrevocably to the obligations undertaken by the insurer in the basic insurance
policy.”); Young’s Mkt., 481 P.2d at 820.
The court has already concluded that losses caused by faulty workmanship or defective
materials are excluded under the policy and that losses suffered to repair or replace such
defective materials or fix such faulty workmanship do not magically become “covered causes of
loss” solely by virtue of an ensuing loss provision. The claim by RK is essentially one of taking
“remedial measures” given their assessed probability that the Charlotte flanges would crack and
leak, causing further water damage to the property. The plain language of the sue and labor
clause, however, reiterates that Travelers will not pay for subsequent loss or damage “resulting
from a cause of loss that is not a Covered Cause of Loss.” (Stipulation, ¶ 19.) Accordingly,
although the Policy requires an insured, in the event of loss or damage, to take all reasonable
steps to protect Covered Property from further damage, it clearly provides that Travelers will not
pay for loss or damage due to an excluded cause of loss.7 See John S. Clark at 768 (means used
7
RK also suggests that the Policy’s “cooperation clause” imposes a duty to mitigate. It
provides:
20
to mitigate damages were excluded under the policy and therefore not recoverable under sue and
labor clause); Swire at 1385(same); Edison at 758 (same); Nat’l Hous. Bldg. Corp. v. Acordia of
Va. Ins. Agency, Inc., 591 S.E.2d 88, 253 (Va. 2004) (policy did not permit the plaintiff “to
circumvent the exclusion from coverage” by recovering remediation expenses under a sue and
labor clause).
In effect, RK attempts to bootstrap its remediation expenses to correct its own
substandard workmanship and use of defective products in the Project into a covered claim
through the “Duties in the Event of Loss” provision, despite the clear exclusion from coverage
for loss caused by “faulty, inadequate or defective . . . [m]aterials, workmanship or
maintenance.” (Policy, Compl., Ex. A-1, Exclusions, Section 3.d.) Although there was a “risk
of loss” from flanges cracking it was not a loss attributable to a “covered cause of loss” and
therefore did not give rise to a duty to mitigate.
RK asserts that coverage under the sue and labor clause is distinct from coverage under
the basic insurance policy. (RK Resp. at 4.) To the extent RK is arguing that the sue and labor
clause provides supplemental coverage and is not subject to the exclusions in the general policy,
its argument fails. “Although certain cases have referred to a Sue and Labor provision as a
C.
Duties in the Event of Loss
You must see that the following are done in the event of loss or damage to
Covered Property:
***
10.
Cooperate with [Travelers] in the investigation or settlement of the
claim.
(Doc. No. 20, Commercial Inland Marine Conditions, ¶ C.10.) The court finds no basis to infer a
duty to mitigate from this provision.
21
‘separate’ insurance provision, see, e.g., White Star S.S. Co. v. North British & Mercantile Ins.
Co., 48 F. Supp. 808, 812-13 (E.D. Mich. 1943), it is separate only in the sense that the insured’s
losses are not subject to deductibles or to the limits of liability set forth in the policy.” Swire,
139 F. Supp. 2d at 1383; see also Am. Home Assur. Co. v. J. F. Shea Co., Inc., 445 F. Supp. 365,
369 (D.C. D.C. 1978); cf. Reliance, 280 F.2d at 488 (rejecting this type of argument based on the
history, function and purpose of the sue and labor clause).
Moreover, the terms of the instant policy make clear that the sue and labor clause is not a
separate insuring agreement. The sue and labor clause is found in ¶ 4 of Section C of the
Commercial Inland Marine Conditions. (See Doc. No. 20, Commercial Inland Marine
Conditions, ¶ C.4.) The Commercial Inland Marine Conditions state: “The following conditions
apply in addition to the Common Policy Conditions and applicable Additional Conditions in
Commercial Inland Marine Coverage Forms:.” (Id. Commercial Inland Marine Conditions.) The
sue and labor clause is not contained within the “coverage section” nor does it contain any
standard insuring agreement language. By its terms, the sue and labor clause is simply a
condition of coverage which must be read in conjunction with the Common Policy Conditions
and the Commercial Inland Marine Coverage Forms. See Swire at 1383 (same).
RK distinguishes between cases involving the recovery of costs of prevention, as
opposed to mitigation costs under a sue and labor clause. RK contends that its expenses were
incurred in mitigation of further losses to the Project, not prevention of future losses.
Nevertheless, RK maintains that a covered loss does not have to occur before the sue and labor
clause requires indemnification. (See RK Resp. at 5 (discussing Wolstein v. Yorkshire Ins. Co.,
22
Ltd., 985 P.2d 400 (Wash. App. Div. 1, 1999)); but see RK Resp. at 10 (acknowledging case law
holding that a covered loss is a condition precedent to any compensation under a sue and labor
provision).)
The court need not address this distinction because, regardless of whether costs were
incurred to minimize further loss or to prevent future loss, the law is clear that costs must relate
to a covered cause of loss. RK’s request for indemnification fails because the means it used to
address a problem that was excluded from coverage that could have led to a covered loss (i.e.,
water damage) via the ensuing loss provision, were excluded under the policy.
In Edison, 83 Cal. App. 3d 747, prior to the commencement of commercial operations,
the foundations of two newly constructed buildings began to settle differentially due to faulty
foundation design. Id. at 751, 755. Plaintiff undertook mudjacking operations to raise the
foundations to their initial level to prevent damage to the superstructure. Id. The insurer denied
a claim for indemnification under a sue and labor clause similar to the one here based on an
exclusion for the “cost of making good faulty workmanship, construction or design.” Id. at 750.
The exclusion did not apply “to damage resulting from such faulty workmenship, [sic]
construction or design.” Id. (error in policy). The California Court of Appeals held that damage
to the superstructure, if it had occurred, would have been an insurable loss. Id. at 755-56.
However, the court determined that the means and methods the Plaintiff used “to prevent or
mitigate such damages were excluded under the policy” because they corrected design defects.
Id. at 758-69. Although “mudjacking may have prevented or mitigated loss to the superstructure
23
. . . the costs of mudjacking were not primarily for the benefit of the insurers. The benefit
incurring to the insurers was only incidental.” Id. at 760.
The Southern District of Florida was persuaded by Edison’s reasoning in another similar
case. In Swire, the plaintiff demolished portions of a finished building in order to access and
repair defectively designed portions of the building. 139 F. Supp. 2d at 1377. The insurer
refused to indemnify based on an exclusion for losses incurred to correct a design defect. Id.
Relying on Edison, the Florida district court noted that “a court looks not to whether the
insured’s actions may potentially benefit the insurer in some way, but rather, whether the actions
correlate to an excluded loss (in which case the sue and labor expenses do not benefit the insurer
because the loss would not be covered) or correlate to a covered loss (in which case the actions
benefit the insurer by reducing or eliminating the loss for which the insurer would be liable). Id.
at 1385. The court concluded that, although the plaintiff’s expenditures to remedy the design
defect may have had an incidental benefit to the insurer by possibly preventing the collapse of
the building at some unknown point in the future, those expenditures were made directly and
primarily to correct design defects in the building, which were excluded expenses under the
terms of the policy. Id.
John S. Clark also involved a construction project. Portions of the construction project
collapsed due to strong winds and poor construction. 304 F. Supp. 2d at 762. Other portions
sustained damage due to faulty workmanship. Id. at 762-63. The plaintiff sought reimbursement
for the costs to cleanup and reconstruct the collapsed portions of the construction project as well
as the costs to repair other defectively built portions of the project and to correct its own faulty
24
workmanship. Id. at 763. The insurer reimbursed the plaintiff for the costs related to the
collapse due to strong winds and poor construction, but denied the costs to repair defectively
built portions that suffered no wind damage and to correct faulty workmanship. Id. The court
found that the costs due to faulty workmanship or negligent construction were not covered by the
insuring agreement and therefore were not covered by the sue and labor provision. Id. at 766768 (discussing Edison and Swire.)
The policy provisions in Nat’l Housing Bldg. Corp., 591 S.E.2d 88, were nearly identical
to the provisions in the present case.8 In Nat’l Housing, a construction project was built on a
steep slope requiring multiple retaining walls. Id. at 90. Due to structural concerns regarding
the lowest wall, which supported the other walls and foundations of the uphill apartment
buildings, the plaintiff instituted remedial measures and eventually replaced the first wall. Id.
The plaintiff also instituted remedial measures to underpin the foundations of the uphill
buildings so as to prevent any loss or damage. Id. The parties did not dispute that all the
8
The policy provided coverage “for ‘loss’ to Covered Property from any of the Covered
Causes of Loss.” Nat’l Housing at 91. “Covered Causes of Loss” was defined as “Risks of
Direct Physical ‘Loss’ to Covered Property except those causes of ‘loss’ listed in the exclusion.”
Id. (emphasis added by the Virginia court). The policy also contained a provision for “duties in
the event of loss” which provided that the insured must
take all reasonable steps to protect the Covered Property from further damage and
keep a record of your expenses necessary to protect the Covered Property, for
consideration in the settlement of the claim. This will not increase the Limit of
Insurance. However, we will not pay for the subsequent ‘loss’ resulting from a
cause of loss that is not a Covered Cause of Loss.
Id. Further, an ensuing loss provision read: “We will not pay for a ‘loss’ caused by or resulting
from any of the following: e) Defective materials or poor workmanship, error, omission or
deficiency in designs, plans or specifications. This exclusion does not apply to resultant “loss”
to other Covered Property.” Id.
25
remediation expenses were based on the defective design of the lower wall. Id. at 91. The
Virginia court determined that the remediation expenses were not subject to indemnification
because they resulted from a cause of loss that is not a covered cause of loss and the policy
“[did] not permit [the plaintiff] to circumvent the exclusion from coverage in this manner and
recoup its remediation expenses.” Id. at 92 (citing Edison, 83 Cal. App. 3d at 759-760).
The court concludes, based on the great weight of authority from other jurisdictions, that
Colorado courts would hold that an insured’s ability to recover mitigation costs under a sue and
labor clause is tied to the general insuring provisions of the policy. Because RK’s actions to
remove and replace the defective flanges corrected faulty workmanship and/or defective
materials they “correlated to an excluded loss” and any benefit incurring to Travelers was
incidental. The court therefore concludes that RK is not entitled to indemnification for
mitigation costs under the sue and labor clause.
2.
Waiver/Estoppel Regarding Mitigation
RK claims that Travelers was made aware of the purported basis for denying coverage on
June 17, 2009, but “stood silent as RK expended large sums of money” to remove and replace
the Existing Charlotte Flanges” and that by taking a position reflecting continuing coverage,
Travelers waived or is estopped from denying indemnity under the sue and labor provision. (RK
Resp. at 9.) In Reliance, a private yacht that had been chartered for a week’s voyage, in
violation of a private use warranty in the insurance agreement, ran aground in the Bahamas. Id.
at 484. The insurer, aware of the breach of warranty, directed the yacht owner to undertake
salvage operations or face forfeiture of the policy. Id. at 485. Thereafter, the insurer continued
26
to direct the salvage operations. Id. at 485-86. The insurer eventually refused to indemnify the
owner for the salvage operations based on the breach of private use warranty. Id. at 484. The
Fifth Circuit found that the insurer was estopped from asserting the private use warranty as it
“stood silent while at the same time asserting the imperative demands that the Assured take these
costly actions or run the risk that he would have no insurance.” Id. at 490. In response to the
insurer’s argument that estoppel cannot be applied to extend coverage, the circuit found that the
policy expressly covered “damage from perils of the seas.” Id. at 487. Because “an assured has
the duty toward his underwriter to . . . protect insured property in order to minimize or prevent
the loss from the occurrence for which the underwriter would be liable under the policy,” id. at
488, the salvage costs were recoverable, id. at 490.
RK asserts that Traveler’s was aware that RK was undertaking expenses to correct a
defect, the basis it later provided in denying coverage, yet stood silent while RK expended large
sums of money to remove and replace the defective flanges. (RK Resp. at 9.) The parties’
Stipulation of Undisputed Facts indicates that Dunn notified Travelers of the Flange Failure and
ensuing water damage on June 17, 2009. (Stipulation, ¶ 7.) The parties also agree that RK
removed and replaced all the Charlotte Flanges based on its belief that they were susceptible to
failure, and that this process included removal and replacement of various building components
in order to gain access to the Charlotte Flanges. (Stipulation, ¶ 7.) RK tendered its Notice &
Claim on December 18, 2009. (Stipulation, ¶ 13.) However, there is no evidence before the
court that Travelers was aware of RK’s remediation efforts with respect to the existing Charlotte
flanges, nor any suggestion that Travelers directed RK to take such efforts or made any other
27
demands to suggest continued coverage. The Project was new construction and, as a
subcontractor, RK likely had duties of its own to Dunn and others regarding its workmanship on
the Project. Accordingly, the court concludes that Travelers is not estopped by its actions from
refusing to indemnify RK under the sue and labor clause.
Moreover, even if waiver or estoppel applied, it would not change the results on the facts
of this case. In Reliance, the Fifth Circuit found coverage under the policy for the mitigation
costs the yacht’s owner incurred. In contrast here, the court has already determined that RK’s
expenses to address faulty workmanship or defective materials are excluded under the policy.
Accordingly, applying estoppel in the manner that RK suggests would impermissibly supply
coverage were not existed. Mgmt. Specialists, Inc. v. Northfield Ins. Co., 117 P3d 32, 37 (Colo.
App. 2004).
3.
Common Law Duty to Mitigate
In addition to the contractual language, RK argues that it had a common law duty to
mitigate because “[i]t is well-settled law in Colorado that an injured party may not recover
damages for injuries which could reasonably have been avoided.” (RK Mot. at 10 (citing Fair v.
Red Lion Inn, 943 P.2d 431, 437 (Colo. 1997)).) RK asserts that the corollary to this rule is that
a plaintiff is entitled to compensation for expenditures made in attempting to mitigate damages.
(Id. (citing Tull v. Gundersons, Inc., 709 P.2d 940, 946 (Colo. 1985)).)
In Colorado, the common law duty to mitigate damages arises from a breach. See Fair,
943 P.2d at 437 (holding that employee had duty to mitigate damages following breach of
employment contract by accepting offer of reinstatement); Tull, 709 P.2d at 946 (holding that
28
plaintiff was entitled to compensation for efforts to mitigate damages by finding other work
following breach of construction contract); Technical Computer Servs., Inc. v. Buckley, 844 P.2d
1249, 1255 (Colo. App. 1992) (holding evidence of money earned from another employer was
proper to reduce damage from breach of employment contract); see also Ballow v. PHICO Ins.
Co., 878 P.2d 672, 680 (Colo. 1994) (noting general rule that an “injured party has the duty to
take such steps as are reasonable under the circumstances in order to mitigate or minimize the
damages sustained”). The measure of damages for a breach of contract is the amount it takes to
place the plaintiff in the position it would have occupied had the breach not occurred, taking into
account the plaintiff’s duty to mitigate damages. Schneiker v. Gordon, 732 P.2d 603, 612 (Colo.
1987). In this case, RK incurred what it calls “mitigation costs” prior to any breach. In fact,
Travelers refusal to reimburse RK for those costs already incurred is the basis for RK’s breach of
insurance contract claim. Accordingly, the facts of this case do not give rise to the common law
duty to mitigate.
RK suggests that, in Ballow, the Colorado Supreme Court recognized the potential
applicability of the common law duty to mitigate to insurance contract claims like the one in this
case. In Ballow, 105 doctors sued their insurance carrier, PHICO, for breach of contract when it
refused to renew the doctors’ medical malpractice insurance. 878 P.2d at 676. On appeal, the
doctors argued that the trial court erred in not awarding the costs of defending and settling
certain malpractice claims against two doctors who had not purchased special additional
coverage to protect against claims made after the PHILCO malpractice policy terminated. Id. at
676 n.2, 680. PHICO argued that, by not purchasing such insurance coverage, the doctors failed
29
to mitigate their damages. Id. at 680. The Colorado Supreme Court noted that an injured party
generally may not recover damages for injuries which he or she reasonably might have avoided,
thus suggesting that the two doctors had a duty to purchase additional coverage in anticipation of
a potential breach by PHICO. However, because mitigation is an affirmative defense which the
defendant has the burden of establishing, and because PHICO had abandoned the mitigation
defense, the court did not analyze the mitigation issue and found that the two doctors were
entitled to the cost of defending and settling those malpractice claims. Id. at 680-81. Notably,
the cases cited by the Colorado Supreme Court involve an injured party’s duty to mitigate costs
after a breach has occurred. See Tull, 709 P.2d at 946; Valley Dev. Co. v. Weeks, 364 P.2d 730,
733 (1961); Technical Computer Servs., 844 P.2d at 1255.
Even if Ballow can be read as recognizing a duty to mitigate in anticipation of a breach,
the court finds the facts of Ballow distinguishable from the case at hand. There, by obtaining
additional coverage the doctors would have protected themselves against a potential breach by
PHICO. Here, the mitigation costs expended by RK were not incurred in an effort to avoid
damages from a potential breach of contract by Travelers. To the contrary, it is precisely
Travelers’ refusal to indemnify RK for the costs already expended of replacing the defective
flanges that is the basis for RK’s claim of breach. To present an analogous situation, the doctors
in Ballow would have had to purchase additional coverage prior to PHICO’s nonrenewal and
then sue PHICO for a breach of contract related to the additional coverage. Accordingly, the
court concludes that Colorado has not recognized a common law duty to mitigate on the facts of
this case.
30
4.
Conflict between Exclusions and Mitigation Clause
RK also argues that Exclusions B.3.d and B.4.f conflict with RK’s duties in the event of a
loss, under the mitigation clause. As previously described, Exclusions B.3.d and B.4.f exclude
coverage for different types of losses that may result from faulty workmanship or defective
materials. While the mitigation clause requires an insured to take reasonable steps to protect
Covered Property from further damage, it specifically excludes coverage for “loss or damage
resulting from a cause of loss that is not a Covered Cause of Loss.” Because loss due to faulty
workmanship or defective materials is not a covered cause of loss, the Exclusions do not conflict
with RK’s duties in the event of a loss and in fact are consistent with the exclusion found in the
mitigation clause itself for “loss or damage resulting form a cause of loss that is not a Covered
Cause of Loss.”
D.
Public Policy
Finally, RK appeals to public policy. RK notes the court’s responsibility to “review
insurance contracts and ensure that they comply with public policy and principles of fairness.”
Thompson, 84 P.3d at 501-02. RK claims that Travelers’ construction of the sue and labor
clause provides no incentive for insureds to proactively prevent additional covered losses to
insured property, when such efforts involve addressing alleged defects in materials or
workmanship. (RK Resp. at 15.) RK suggests that the effect of such a construction is contrary
to public policy prohibiting illusory insurance coverage that allows the insurer to receive
premiums without incurring any risk of liability. (Id. at 16.)
31
It is well established that, provided no public policy is violated, an insurer has a right to
decide which risks it will and which it will not insure against. Nat’l Union Fire Ins. Co. of Penn.
v. Carib Aviation, Inc., 759 F.2d 873, 876 (11th Cir.1985). A sue and labor clause “represents a
specific, material provision of the insurance policy that imposes its distinct obligations upon the
insured, separate and apart from any other express or implied duty that may arise by operation of
law.” Am. Home Assur. Co. v. Merck & Co., Inc. 386 F. Supp. 2d 501, 517 -518 (S.D.N.Y.
2005). If RK had failed to comply with its obligations under that clause, it would be in breach of
its obligations under the Policy as well as to any other contractual provisions it may have had
with Dunn or others in connection with its work as a subcontractor.
The court finds RK’s policy considerations inapplicable to the facts of this case. First,
presumably, an insured’s potential liability to third parties outside the insurance contract context
provides powerful incentive to identify, investigate, and correct defects in materials and
workmanship. Travelers simply did not agree to warrant RK’s work. It is undisputed that RK
was the subcontractor in charge of plumbing on the project. RK selected the plumbing products
and installed them in the building. Just as in Edison, 83 Cal.App.3d at 760, RK’s replacement of
the defective or incorrectly installed Charlotte flanges was RK’s responsibility and therefore the
costs of investigation and remediation inured primarily to RK and not to Travelers because
neither defective products nor poor workmanship was a covered cause of loss. See also Young’s
Mkt., 481 P.2d at 820 (“There is, however, a fundamental limitation upon the insurer’s duty
under a ‘sue and labor’ clause to compensate the insured for expenses incurred in the
32
preservation and protection of insured property: the expenses in question must be incurred to
preserve the insured property from a peril insured against under the basic policy.”).
Further, the clause is not illusory as Travelers would face liability for expenses incurred
under the sue and labor clause, if those expenses had not been “ loss or damage resulting from a
cause of loss that is not a Covered Cause of Loss.” (Stipulation, ¶ 19.)
Wherefore, for the reasons set forth herein, it is ORDERED
1.
Defendant’s Motion for Summary Judgment (Doc. No. 21) is GRANTED;
2.
Plaintiff’s Motion and Brief in Support of Motion for Summary Judgment
Pursuant to C.R.C.P. 56 (Doc. No. 22) is DENIED;
3.
The Clerk of Court shall enter judgment in favor of Defendant; and
4.
Defendant may have its costs by filing a bill of costs pursuant to
D.C.COLO.LCivR 54.1.
Dated this 1st day of August, 2011.
33
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?