Auto-Owners Insurance Company v. High Country Coatings, Inc.
ORDER granting 14 Motion for Partial Summary Judgment; granting in part and denying in part 23 Motion to Stay by Judge R. Brooke Jackson on 6/12/17. (jdyne, )
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Judge R. Brooke Jackson
Civil Action No 16-cv-03196-RBJ
AUTO-OWNERS INSURANCE COMPANY, a Michigan corporation,
HIGH COUNTRY COATINGS, INC., a Colorado corporation, and
ZURICH AMERICAN INSURANCE CO., a New York corporation,
This matter is before the Court on defendant High Country Coatings, Inc.’s (“HCC”)
motion for a partial summary judgment, ECF No. 14, and its motion to stay, ECF No. 23. For
the reasons below, the Court GRANTS HCC’s motion for a partial summary judgment [ECF No.
14] and GRANTS IN PART and DENIES IN PART its motion to stay [ECF No. 23].
Defendant HCC is a Colorado-based subcontractor that applies floor coatings. See
Compl., ECF No. 2, at ¶4. In November 2012 it subcontracted with Brinkman Construction, Inc.
(“Brinkman”) to install epoxy and urethane coatings and joint caulking on concrete floor slabs in
an airport hangar at Loveland Airport in Loveland, Colorado. Aff. of David Anderson, ECF No.
14-1, at ¶2. After HCC finished its work, Brinkman and the project owner, Otter Aviation, LLC
(“Otter”), allegedly discovered that the coating HCC had applied started to “bubble.” 1 Id. at ¶3.
Brinkman and Otter subsequently demanded that HCC replace its coating. Id. Initially disputing
whether it had any obligation to do so, HCC later agreed to install a new floor covering under a
“Floor System Agreement.” Id. at ¶4; ECF No. 14-2 (Floor System Agreement). That
Agreement required Tennant Company and Tennant Sales and Service Company (“Tennant”)—
the supplier of the original floor coating—to supply a different coating to the job site that HCC
would subsequently install. Id.
Sometime before it signed the Agreement, HCC apparently submitted a claim to its
general liability insurance company at the time, Liberty Mutual, for “damages” at Loveland
Airport. 2 ECF No. 27-11 (ClaimSearch Inquiry). HCC then took out a one-year policy with
Auto-Owners Insurance Company (“AOIC”), the plaintiff in this action. ECF No. 27-2 (HCC’s
Policy). HCC’s commercial general liability policy with AOIC became effective on May 1,
2014—roughly two months before HCC began replacing the floor coating under the terms of the
Agreement. Id.; ECF No. 14-1 at ¶¶4–5.
HCC subsequently finished applying the new coating on August 14, 2014. ECF No. 2 at
¶12. This new coating, however, also allegedly “bubbled.” Id. at ¶12. Again, Brinkman, this
time through its insurance provider, defendant Zurich American Insurance Company (“Zurich”),
The “bubbling” of the coating was allegedly caused by high levels of trapped moisture in the concrete
that activated an “alkali-silica reaction” (“ASR”) that subsequently damaged the concrete floor slabs.
ECF No. 14-1 at ¶7. HCC argues that had did not have knowledge that ASR was present in the concrete
and was therefore not responsible for the resulting damage. See ECF No. 14-1 at ¶¶7–8.
The “claim details” list the “injury” of this claim as “damage to concrete floor and coating.” ECF No.
27-11. As will be discussed in greater detail below, the parties dispute whether HCC had knowledge of
damage to the concrete slabs before taking out a policy with AOIC in 2014. HCC argues that it only had
knowledge of such damage after the second coating it applied allegedly bubble, which was after its policy
with AOIC went into effect. Relying on the claim above and other evidence, AOIC argues that HCC had
knowledge much earlier. However, the date of this claim (May 1, 2012) appears to come months before
HCC subcontracted with Brinkman to perform work at Loveland Airport (November 29, 2012). See
supra. The parties do not explain much less acknowledge what appears to be a chronological
demanded that HCC replace the floor coating. Id. at ¶13. HCC refused. 3 Id. Zurich
subsequently sued HCC in Arapahoe County District Court on November 17, 2016. ECF No.
14-3 (Zurich’s Complaint). In its complaint, Zurich alleges that HCC relied on improper floor
testing when applying its coatings, failed to let the floor slab properly dry out before performing
its work, and that both of HCC’s floor coatings subsequently damaged the Airport hangar’s
concrete floor. Id. at ¶¶12–16. For purposes of this case, that lawsuit will be referred to as the
With the Underlying Action pending, AOIC filed suit against both HCC and Zurich on
December 29, 2016. 4 ECF No. 2. Here, AOIC asserts a claim for declaratory relief against
HCC. Id. It contends that AOIC has neither a duty to defend HCC in the Underlying Action nor
an obligation to indemnify it should Zurich ultimately prove successful in that case. Id. at ¶18;
see also Constitution Assocs. v. N.H. Ins. Co., 930 P.2d 556 (Colo. 1996), as modified on denial
of reh’g (Jan. 13, 1997) (permitting anticipatory declaratory judgment actions to determine the
“duty to defend”).
HCC answered AOIC’s complaint on February 3, 2017. Def.’s Answer, ECF No. 13. In
its answer, HCC asserts two counterclaims against AOIC for: (1) breach of contract; and (2) bad
faith and unfair dealing. Id. at 6–8 (¶¶1–14); supra note 3. That same day, HCC filed a motion
for a partial summary judgment. ECF No. 14. In that motion, HCC argues that, based on the
After refusing to replace the coating, HCC filed a claim with AOIC which AOIC subsequently denied.
ECF No. 2-4 (Denial Letter). HCC’s counterclaims concern this denial. This Order does not address the
merits of those claims.
AOIC named Zurich as a defendant even though no claims are filed against it here because the Colorado
Supreme Court has held that “[w]hen declaratory relief is sought, all persons shall be made parties who
have or claim any interest which would be affected by the declaration[.]” Constitution Assocs. v. N.H.
Ins. Co., 930 P.2d 556, 562 (Colo. 1996), as modified on denial of reh’g (Jan. 13, 1997).
allegations Zurich has made in the Underlying Action, that AOIC does in fact have a duty to
defend it in that underlying case. See generally id.
AOIC responded to HCC’s motion for a partial summary judgment on March 6, 2017.
ECF No. 27. As part of its response, AOIC asked the Court to conduct limited discovery on the
question of whether HCC had knowledge of damage to the concrete at Loveland Airport before
its policy with AOIC incepted. Id. at 11–12. HCC subsequently filed a motion to stay any such
discovery, to bifurcate and stay a determination of whether AOIC has a duty to indemnify HCC,
and to bifurcate and stay both of HCC’s counterclaims. ECF No. 23. Both of HCC’s motions
are fully briefed and ripe for review.
II. STANDARD OF REVIEW
The Court may grant summary judgment if “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 has the burden to show that there is an absence of evidence to support the
nonmoving party’s case. Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). The nonmoving
party must “designate specific facts showing that there is a genuine issue for trial.” Id. at 324. A
fact 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 material fact is genuine if “the evidence is such that a
reasonable jury could return a verdict for the nonmoving party.” Anderson, 477 U.S. at 248.
The Court will examine the factual record and make reasonable inferences therefrom in the light
most favorable to the party opposing summary judgment. Concrete Works of Colo., Inc. v. City
& Cnty. of Denver, 36 F.3d 1513, 1517 (10th Cir. 1994).
Because my resolution of HCC’s motion for a partial summary judgment affects the
outcome of HCC’s motion to stay, I address HCC’s motion for a partial summary judgment first.
A. HCC’s Motion for a Partial Summary Judgment [ECF No. 14].
HCC’s motion for a partial summary judgment raises one discrete issue: does AOIC have
a duty to defend HCC in the Underlying Action under Colorado law? For the reasons below, I
A. The “Complaint Rule.”
Colorado, like other states, follows the “complaint rule” in actions such as these to
determine whether an insurance company has a duty to defend an insured in an underlying
action. See Pompa v. American Family Mutual Ins. Co., 520 F.3d 1139, 1145–47 (10th Cir.
2008). As the Colorado Supreme Court has explained, that rule essentially tasks a court with
reading the complaint in the underlying action and the parties’ insurance policy in order to
determine whether the facts alleged against the insured “might fall within the coverage of the
policy.” Miller v. Hartford Cas. Ins. Co., 160 P.3d 408, 410 (Colo. App. 2007). In other words,
under the complaint rule a court determines without the aid of any additional extrinsic evidence
whether the allegations in the underlying action “state a claim which is potentially or arguably
within the policy coverage[.]” Hecla Min. Co. v. N.H. Ins. Co., 811 P.2d 1083, 1089 (Colo.
1991) (internal quotation marks and citation omitted).
Importantly, even if there is “some doubt as to whether a theory of recovery within the
policy coverage has been pleaded” in the underlying action, “the insurer must accept the defense
of the claim.” Id.; see Colo. Farm Bureau Mut. Ins. Co. v. Snowbarger, 934 P.2d 909, 911
(Colo. App. 1997) (“The actual liability of the insured to the claimant [in the underlying action]
is not the criterion which places upon the insurance company the obligation to defend.”); see also
Hecla, 811 P.2d at 1089 (“An insurer seeking to avoid its duty to defend an insured bears a
heavy burden.”); C.R.S § 13-20-808 (discussing the duty to defend and stating that “[t]he longstanding and continuing policy of Colorado favors a broad interpretation of an insurer’s duty to
defend the insured under liability insurance policies and that this duty is a first-party benefit to
and claim on behalf of the insured”).
Because the complaint rule tasks a court with deciding only whether the claims in the
underlying action might be covered by the parties’ policy, a determination of an insurance
company’s duty to defend does not necessarily decide whether the company must ultimately
indemnify the insured should the claimant in the underlying action prevail. Minn. Lawyers Mut.
Ins. Co. v. King, 10-CV-00916-WYD-MEH, 2010 WL 4449371, at *3 (D. Colo. Nov. 1, 2010).
Instead, the court’s determination of whether an insurance company has a duty to defend is
merely a means by which all parties can obtain clarity regarding their respective rights and
obligations during the pendency of the underlying action. See also Pompa, 520 F.3d at 1146
(explaining the two rationales the Colorado Supreme Court has given for the complaint rule: (1)
that “the rule protects the insured’s legitimate expectation of a defense[;]” and (2) that it
“prevents the insured’s defense in the underlying action from being compromised,” because no
extrinsic evidence is utilized) (internal quotation marks and citations omitted).
The issue of whether a company has a duty to defend and whether it must indemnify are
therefore ostensibly separate inquiries, the latter inquiry becoming “ripe” once liability of the
insured in the underlying action has been determined. See Hecla, 811 P.2d at 1086 n.5.
However, if a court determines that an insurance company does not have a duty to defend, it
logically follows that the company also does not have a duty to indemnify the insured. See King,
2010 WL 4449371, at *3 (“Where there is no duty to defend, it follows that there can be no duty
B. Exception to the “Complaint Rule.”
No state appellate court in Colorado has recognized any exceptions to the complaint
rule’s bar on the use evidence besides the underlying complaint and policy. See, e.g., KF 103CV, LLC v. Am. Family Mut. Ins. Co., 630 F. App’x 826, 830 (10th Cir. 2015) (unpublished).
The Tenth Circuit, however, has. See Pompa, 520 P.3d at 1147. In Pompa, the court adopted a
widely-recognized exception used in other jurisdictions that “an insurer should not have a duty to
defend an insured when the facts alleged in the complaint ostensibly bring the case within the
policy’s coverage, but other facts that are not reflected in the complaint and are unrelated to the
merits of the plaintiff’s action plainly take the case outside the policy coverage.” Id. (emphasis
added). Importantly, as this exception makes clear, the extrinsic “facts” sought to be introduced
to defeat a duty to defend have to be widely known and undisputed in order to be allowed in.
See id. at 1147–48.
The fact sought to be introduced in Pompa provides one such example. Plaintiff David
Pompa pled guilty to negligent homicide after an altercation he had with Mr. Steven Domianus
resulted in Mr. Domianus’ death. Id. at 1141. Mr. Domainus’ heirs subsequently brought a
wrongful death action against Mr. Pompa in Colorado state court. Id. While that action was
pending, Mr. Pompa’s homeowner’s insurance company, American Family Mutual Insurance
Company (“AFM”), refused to defend Mr. Pompa or commit to indemnify him. Id. Mr. Pompa
subsequently brought a declaratory action against AFM, arguing, among other things, that under
a pure application of Colorado’s “complaint rule” AFM was required to defend him since Mr.
Domanius’ heirs had not alleged the crucial fact (i.e. his conviction) that took their claim outside
the scope of his policy. 5 Id. at 1141–45.
Affirming the district court’s granting of AFM’s motion for summary judgment, the
Tenth Circuit acknowledged that it was true that Mr. Pompa’s “conviction” for negligent
homicide was not an element of the wrongful death action and therefore not a “fact” that Mr.
Domanius’ heirs had necessarily pled in their complaint. Id. at 1145–49. Nevertheless, the court
reasoned that because this extrinsic fact of Mr. Pompa’s “conviction” was clearly undisputed and
widely known (indeed, the court could take judicial notice of it), and because it undoubtedly took
Mr. Pompa’s potential liability far outside the scope of his policy with AFM, this case warranted
a break from the complaint rule’s bar on the use of extrinsic evidence. See id.
The Tenth Circuit thereby adopted the “exception” described above, explaining that
Colorado courts would also likely reach the same result for three reasons. Id. at 1147–48. First,
because Mr. Pompa had no reasonable expectation of a defense given that an indisputable fact
defeated his arguments for coverage. Id. Second, because such an exception would not
jeopardize Mr. Pompa’s defense given that his conviction was widely known. Id. at 1148. And
finally, because such an exception served the beneficial purpose of freeing AFM from “having to
defend an action that from the outset clearly [fell] . . . outside the policy’s coverage[,]” which the
Tenth Circuit recognized was one reason the Colorado Supreme Court permitted anticipatory
declaratory actions to determine a duty to defend in the first place. Id. (citing Constitution
Assocs., 930 P.2d at 563).
The underlying action in Pompa resulted in a judgment against Mr. Pompa that he could not pay. See
Pompa, 520 F.3d at 1141. Mr. Pompa subsequently entered into a settlement agreement with Mr.
Domainus’ heirs whereby “he agreed to bring an action against AFM and assign to them the bulk of the
proceeds he obtained.” Id. The Tenth Circuit noted that a “close cousin” to that kind of claim was “a
bad-faith allegation framed to trigger an insurance policy[.]” Id. at 1149 (internal quotation marks and
citations omitted). For that additional reason, the Tenth Circuit rejected a strict application of the
complaint rule to Mr. Pompa’s lawsuit. See id.
C. AOIC has a Duty to Defend HCC in the Underlying Action.
Here, AOIC gives three reasons why it believes the parties’ policy does not cover the
allegations made in the Underlying Action and therefore why it does not have a duty to defend
HCC in that case. ECF No. 27 at 6–18.
First, it contends that the exception as described in Pompa should apply because it is
“undisputed” that HCC had prior knowledge of damage at the project site before HCC’s policy
with AOIC incepted and therefore clear that the allegations Zurich makes in the Underlying
Action are outside the scope of the policy. Id. at 6–10. Second, AOIC argues that given HCC’s
prior knowledge, the “Known Loss” doctrine—i.e., the doctrine that states that insurance cannot
be obtained on prior or ongoing losses—similarly defeats any duty to defend. Id. at 10–12.
Finally, AOIC argues that even under a rigid application of the complaint rule—i.e., without
extrinsic evidence regarding HCC’s knowledge of damage—the parties’ policy plainly does not
cover the allegations made in the Underlying Action. Id. at 12–18. For its part, HCC argues that
a rigid application of the complaint rule is warranted, and that it subsequently results in a duty to
defend. ECF No. 14 at 5–10; ECF No. 31 at 2–4. As explained below, I agree with HCC that
the complaint rule applies, and that it results in a duty to defend on the part of AOIC.
1. Because the Issue of HCC’s Prior Knowledge of Damages is Disputed the Pompa
Exception Does Not Apply.
First, I find that the exception to the complaint rule as described in Pompa does not apply
here. As discussed above, the Tenth Circuit adopted an exception to the complaint rule in
Pompa because the fact of Mr. Pompa’s conviction for negligent homicide, although it had not
been pled in the underlying action, was clearly known, undisputed, and made Mr. Pompa’s claim
for insurance coverage unreasonable on its face. Pompa, 520 F.3d at 1145–49. Here, by
contrast, the “extrinsic” fact that AOIC argues defeats its duty to defend—i.e., that HCC had
prior knowledge of the damage at the project site before inception of its policy with AOIC—is
vigorously contested by HCC. 6 See ECF No. 14-1 at ¶11 (testifying that “[p]rior to May 1, 2014
HCC had no notice of any claim of alleged property damage at the Project to the concrete
slabs.”). For that reason alone, Pompa is distinguishable. See Pompa, 520 F.3d at 1148.
What’s more, since Pompa the Tenth Circuit has expressly stated its preference to refrain
from creating more exceptions to the complaint rule until the Colorado Supreme Court provides
“clear authority” for courts to go beyond the “plain language of [that] . . . rule[.]”7 See, e.g.,
United Fire & Cas. Co. v. Boulder Plaza Residential, LLC, 633 F.3d 951, 961 (10th Cir. 2011)
(refusing to consider extrinsic evidence on the issue of an insurer’s knowledge of damages to the
floors installed by the insured). Although this pronouncement did not “undo” the Pompa
exception to the extent the facts of a given case fit that rule, Landmark Am. Ins. Co. v. VO
Remarketing Corp., 619 F. App’x 705, 711 n.2 (10th Cir. 2015) (unpublished), the Tenth Circuit
has nevertheless clearly expressed a desire to adhere to the complaint rule as rigidly as possible
to prevent federal courts from altering Colorado law as established by the Colorado Supreme
Court. United Fire, 633 F.3d at 961. For those reasons, the complaint rule must be the standard
by which I determine whether AOIC has a duty to defend. 8
AOIC even acknowledges that it needs to conduct additional discovery to “flesh out” to what extent
HCC knew about damages caused by its allegedly defective coating. ECF No. 27 at 11–12. Furthermore,
HCC disputes whether damages to the concrete at Loveland Airport in fact occurred, which is an issue
that is central to the claims and defenses in the Underlying Action. ECF No. 14-1 at ¶7. That disputed
issue additionally renders Pompa inapplicable here. See Pompa, 520 F.3d at 1147 (rationalizing the
exception to the complaint rule because the fact of Mr. Pompa’s conviction for negligent homicide was
neither an element of the cause of action in the underlying wrongful death suit nor a defense in that
The Tenth Circuit recognized a second exception to the complaint rule in Apartment Inv. & Mgmt. Co.
(AIMCO) v. Nutmeg Ins. Co., 593 F.3d 1188, 1190 (10th Cir. 2010) for allegations contained in separate
but factually related complaints. It has nevertheless refused to expand the list since then.
Given how the Tenth Circuit has interpreted Colorado’s complaint rule and my discussion of that rule
supra, I also find unavailing AOIC’s reliance on Hamlet Homes Corp. v. Mid-Continent Cas. Co., 2013
2. The “Known Loss” Doctrine Also Does Not Apply Either.
Similarly, I find unpersuasive AOIC’s attempt to invoke the “Known Loss” doctrine to
defeat its duty to defend. The central issue with that doctrine is whether HCC had prior
knowledge of alleged damages at Loveland Airport before taking out a policy with AOIC. Given
that answering this question requires the use of extrinsic evidence, application of the doctrine in
this case would amount to an exception to Colorado’s complaint rule. See Am. Family Mut. Ins.
Co. v. Teamcorp., Inc., CIV.A. 07-CV-00200WY, 2009 WL 321679, at *5 (D. Colo. Feb. 10,
2009) (rejecting the application of the “Known Loss” doctrine because the evidence surrounding
knowledge offered in that action “would impact the merits of the underlying case” and,
importantly, because “the Colorado Supreme Court has not adopted an exception to the
complaint rule”). For the same reasons discussed supra Part III.C.1, then, I conclude that the
“Known Loss” doctrine has no application here.
3. The Complaint Rule Results in a Duty to Defend.
All of that brings me, finally, to the application of the complaint rule. As discussed
above, that rule requires that I determine whether the allegations made in the underlying
complaint might be covered under the parties’ policy. See supra Part III.A. Here, AOIC cites
three portions of the parties’ policy that it believes preclude coverage for Zurich’s allegations in
the Underlying Action. 9
WL 124504 (D. Utah 2013) (interpreting Utah’s complaint rule but allowing extrinsic evidence in to
determine a duty to defend).
In its complaint, AOIC additionally argues that exclusions “¶j(6)” and “¶j(7)” of the parties’ policy
defeats its duty to defend. ECF No. 2 at ¶28. AOIC, however, does not appear to raise those arguments
in its response to HCC’s motion.
First, it cites the “COVERAGE A, ¶k” portion of the parties’ policy, which excludes
from coverage “property damage” to “your product arising out of it or any part of it.” ECF No.
14-4 at 9 (Policy).
Second, it cites “¶l” of that subsection, which excludes coverage for “property damage” if
it arises out of HCC’s work or any part of it and if it is “included in the ‘products-completed
operations hazard.’” Id. In plain English, that means that damages to HCC’s work that occur
after the work at issue was fully completed are not covered. Id. at 22; see McGowan v. State
Farm Fire & Cas. Co., 100 P.3d 521, 525 (Colo. App. 2004) (“[W]ork must be ‘deemed
completed’ for the property damage at issue to constitute a products-completed operations
Finally, AOIC cites “¶m” of that subsection, which excludes coverage for “impaired
property” arising out of a defect, deficiency, or inadequacy in HCC’s work. ECF No. 14-4 at 9.
“Impaired property” is subsequently defined as tangible property other than HCC’s product or its
work “that cannot be used or is less useful because” it either: (a) “incorporates” HCC’s product
or work “known or thought to be defective, deficient, inadequate[,] or dangerous[;]” or (b)
because HCC failed to fulfill the terms of a contract or agreement. Id. at 20. Furthermore, in
order to constitute “impaired property,” it must be true that such property can be restored to use
by either “repair, replacement, adjustment[,] or removal of” HCC’s product or work or by HCC
fulfilling the terms of its underlying contract or agreement. Id.
For the reasons below, I find that none of these exceptions definitively brings Zurich’s
allegations out from under the scope of the parties’ policy and therefore that AOIC has a duty to
defend HCC in the Underling Action.
For starters, the exclusions contained at ¶k and ¶l, which exclude coverage for damages
to HCC’s property or work, are inapplicable for the simple reason that Zurich’s main allegation
in the Underlying Action is that HCC caused damages to Otter’s property (i.e., concrete slabs)
rather than HCC’s own “work” or part of it (i.e., the coating). See ECF No. 14-3 at ¶16 (“As a
result of both the failed first application and installation of the floor system and the failed second
installation and application of the floor system the concrete slab has been damaged requiring
both repair of the concrete and application of the new floor system.”) (emphasis added); ECF
No. 14-4 at 24 (definitions of HCC’s “work” and “product”). See also KF 103, 630 F. App’x at
831 (“If some of the allegations in the complaint may fall within the policy coverage while other
allegations do not, the insurer must defend against the entire complaint because there may be
some basis on which the insurer is ultimately liable.”) (emphasis added).
To be fair, it could be argued that the concrete slabs became “part of” HCC’s “work”
after HCC finished coating them. 10 See ECF No. 14-4 at 24 (defining “[y]our work” to include
“[w]ork or operations performed by you or on your behalf”). However, given how Zurich has
alleged that HCC caused damages in the Underlying Action, there are significant problems with
that interpretation. See ECF No. 14-3 at ¶¶12, 16 (separating out “the concrete” and “the floor
system” in discussing damages and defining the latter as consisting of HCC’s work). In any
event, because the complaint rule results in a duty to defend if it is even remotely possible that
there is policy coverage, see KF 103, 630 F. App’x at 813, these exclusions do not defeat
AOIC’s duty to defend HCC here.
Importantly, construing the entire coated floor (i.e., the concrete and HCC’s coating) as HCC’s “work”
or “part of it” results in blowback for AOIC. That is, it renders the exclusion found at ¶m, discussed
infra, inapplicable since no “impaired property” could possibly have been involved. See ECF No. 14-4 at
20 (defining “impaired property” to mean “tangible property, other than ‘your product’ or ‘your work,’
that cannot be used or is less useful . . .”) (emphasis added).
Similarly, the exclusion found at ¶m does not help AOIC for two reasons. First, because
that exclusion can reasonably be interpreted to “appl[y] only to instances where property has not
been physically injured,” and that is simply not true here from the allegations Zurich has made in
the Underlying Action. 11 Am. Family Mut. Ins. Co., 659 F. Supp. 2d at 1134 (interpreting an
identical “impaired property” exclusion and finding it inapplicable for the same reason); DCB
Constr. Co., Inc. v. Travelers Indem. Co. of Ill., 225 F. Supp. 2d 1230, 1233 (D. Colo. 2002)
(finding that an identically-worded “impaired property” exclusion applied because the evidence
did not show any physical damage to hotel walls that a contractor was forced to repair for failure
to meet the contract’s level of soundproofing). And second, because “exclusion m” can be
interpreted not to apply where, as here, there is damage to physical property other than HCC’s
work product. See Am. Family Mut. Ins. Co., 659 F. Supp. 2d at 1134 (finding that the insurance
company had not shown as a matter of law that the ‘impaired property’ exclusion applied
because the underlying complaint in that case alleged damages to physical property other than
the insured’s work product).
For those reasons, I find that under the complaint rule AOIC does have a duty to defend
HCC in the Underlying Action. HCC’s motion for a partial summary judgment on that question
is accordingly GRANTED.
Whether this exclusion applies when property is alleged to have been physically damaged or whether it
only applies to non-physical “loss of use” damages appears to be up for debate. See Harleysville
Worcester Ins. Co. v. Paramount Concrete, Inc., 10 F. Supp. 3d 252, 269 n.4 (D. Conn. 2014) (collecting
cases with differing interpretations). Indeed, I have encountered this exclusion before and found it quite
difficult to construe myself. See, e.g., Am. Family Ins. Co. v. Apartment Builders, LP, 11-CV-01380RBJ-BNB, 2012 WL 5332201, at *6 (D. Colo. Oct. 29, 2012). In any event, as I have found before, I find
here that AOIC has not met its burden under Colorado law to definitively establish the policy exclusion
applies. See Mt. Hawley Ins. Co. v. Creek Side at Parker Homeowners Ass’n, Inc., 11-CV-2658-RBJ,
2013 WL 104795, at *3 (D. Colo. Jan. 8, 2013) (“Exclusion m excludes damage to ‘impaired property or
property not physically injured.’ . . . This case involves property that was physically injured and there is,
at a minimum, a genuine dispute of fact as to whether any of the damage would fall within the policy’s
definition of ‘impaired property.’”); see also Hecla, 811 P.2d at 1090 (“In order to avoid policy coverage,
an insurer must establish that the exemption claimed applies in the particular case, and that the exclusions
are not subject to any other reasonable interpretations.”) (emphasis added).
B. HCC’s Motion to Stay [ECF No. 23].
With that, I now turn to HCC’s motion to stay. That motion seeks to bifurcate and stay
the remainder of this case, which includes: (1) AOIC’s claim regarding a duty to indemnify
HCC; (2) AOIC’s request for additional discovery on HCC’s knowledge of alleged damages at
Loveland Airport; (3) and HCC’s counterclaims. See ECF No. 23.
Whether to stay the remainder of this anticipatory declaratory action is a relatively
straightforward inquiry. As the Colorado Supreme Court has explained, a court should only
decide issues in anticipatory declaratory actions (such as an insurance company’s duty to
indemnify) when those issues are, among other things, “independent of and separable from the
underlying action.” Constitution Assocs., 930 P.2d at 562 (“In addition to presenting a
justiciable controversy and satisfying the finality standard, an anticipatory action for declaratory
relief must also concern issues that are independent of and separable from those in the
underlying case. Without meeting this standard, a trial court should refuse to hear the action
because of the potential prejudice to the parties in the underlying case.”); see also String Cheese
Incident, LLC v. Stylus Shows, Inc., 1:02-CV-01934-LTB-PA, 2006 WL 894955, at *2 (D. Colo.
Mar. 30, 2006) (“The Federal Rules of Civil Procedure do not expressly provide for a stay of
proceedings. Rule 26(c) does however, permit the court to ‘make any order which justice
requires to protect a party . . . from annoyance, embarrassment, oppression, or undue burden or
Here, because the remainder of this case is intimately intertwined with the Underlying
Action, to the extent HCC’s motion seeks a stay of the remainder of this case pending the
resolution of the Underlying Action it is GRANTED IN PART. After all, in order to decide
AOIC’s duty to indemnify claim, I will have to determine, among other things, whether damages
occurred at the project site, whether HCC was responsible for such damages, and to what extent
HCC had prior knowledge of damages before its policy with AOIC incepted. 12 Several of those
issues—namely, causation and damages—are precisely what the court in the Underlying Action
will decide. To force HCC to litigate those issues now in front of Zurich (a defendant here and
the plaintiff in the Underlying Action) would therefore substantially prejudice HCC’s defense in
the Underlying Action—an outcome the Colorado Supreme Court sought to avoid in requiring
that anticipatory declaratory actions be independent and separate from any underlying case. See
Constitution Assocs., 930 P.2d at 562–63.
For that same reason, discovery into HCC’s alleged prior knowledge of damages must
also be stayed pending the resolution of the Underlying Action. In essence, AOIC seeks
additional discovery to determine whether HCC had knowledge about damage to the concrete at
Loveland Airport before its policy with AOIC incepted. Put another way, it wants additional
discovery to determine whether HCC knew or should have known before it applied the second
coating that its work may have already damaged the concrete slabs at the project site. To allow
discovery into that issue could very well substantially prejudice HCC by opening it up not only
to liability in the Underlying Action for the claims Zurich has already asserted, but it might also,
depending on what is revealed, give Zurich reason to file additional claims against HCC. See
ECF No. 23 at 8.
AOIC argues that the sole issue that I must decide with respect to its duty to indemnify claim is whether
HCC had prior knowledge of damages at the project site and that this issue is not raised in the Underlying
Action. However, in its complaint AOIC cites several additional exclusions within the parties’ policy
unrelated to HCC’s prior knowledge and argues that they, too, defeat AOIC’s duty to indemnify. See,
e.g., ECF No. 2 at ¶33 (“Furthermore, even to the extent that coverage may exist under the insuring
agreement, which Auto-Owners disputes, one or more of the policy exclusions cited above operate,
clearly and unequivocally, to negate any such coverage. Therefore, Auto-Owners has no duty to defend
or indemnify HCC with respect to Zurich’s claims in the underlying action.”) (emphasis added). Thus,
this case is much more than merely a dispute over HCC’s prior knowledge of damages.
Finally, it is clear that HCC’s own counterclaims are also tied up with the issues in the
Underlying Action because they hinge on HCC’s liability in that case and, secondarily, AOIC’s
duty to indemnify. For those reasons, the Court GRANTS HCC’s motion to the extent it seeks
as stay on the remainder of this case until the Underlying Action is resolved. 13
For the reasons above, the Court GRANTS HCC’s motion for a partial summary
judgment [ECF No. 14] and GRANTS IN PART and DENIES IN PART its motion to bifurcate
and stay the remainder of this case [ECF No. 23]. Accordingly, the Court finds that AOIC has a
duty to defend HCC in the Underlying Action and stays the remainder of this case pending the
ultimate resolution of that underlying case.
DATED this 12th day of June, 2017.
BY THE COURT:
R. Brooke Jackson
United States District Judge
Because I have already decided AOIC’s duty to defend, to the extent HCC seeks to bifurcate the
remainder of this case from a determination of that issue HCC’s motion is DENIED as moot.
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