Faulty Workmanship Exclusion in Professional Liability Policy Bars Coverage for Faulty Design and Construction
The United States District Court for the District of Colorado, applying Colorado law, has held that an arbitration award for faulty design and construction was potentially recoverable as “damages” under a professional liability policy, but coverage was ultimately precluded by an unambiguous and broad “Faulty Workmanship” exclusion. Rockhill Ins. Co. v. CFI-Global Fisheries Mgmt., 2018 WL 1886805 (D. Colo. 2018).
The insured contracted to design and build a fisheries enhancement project, which involved alterations to streambeds and banks. The insured was allegedly ill-prepared to execute the contract, and several improvements quickly washed away or were otherwise ineffective. The claimant eventually hired another contractor to redesign and complete the fishery. Thereafter, the claimant commenced arbitration against the insured seeking damages related to the faulty design and work on the fishery. The arbitration panel awarded the claimant a lump sum in a non-reasoned award, providing only a spreadsheet outlining various invoices and other line-item components of the damages award. Following the arbitration award, the insured sought coverage from its professional liability insurer. The insurer denied coverage, arguing that a portion of the arbitration award did not constitute “damages,” and that various exclusions precluded coverage. The parties filed cross-motions for summary judgment.
The court first held that the entire arbitration award constituted potentially recoverable “damages” under the professional liability policy. In so holding, the court rejected the insurer’s argument that at least a portion of the award was not “damages” because it constituted amounts the claimant was reimbursed for invoices paid to the insured, and the policy’s definition of “damages” excluded “returns of payment.” The court found that the arbitration panel did not explain its award, and the amount in question could potentially represent something other than reimbursement of amounts paid to the insured, including the amount necessary to replace and repair the faulty construction.
Second, the court held that coverage was precluded by the unambiguous terms of the “Faulty Workmanship” exclusion, which excluded coverage for damages “based upon, arising out of or for any loss, cost or expense incurred to withdraw, recall, inspect, repair, replace, adjust, remove or dispose of ‘your work.’” The policy defined “your work” as “[w]ork or operations performed by you or on your behalf; and … [m]aterials, parts or equipment furnished in connection with such work or operations.” The court concluded that the exclusion was unambiguous, and, given its plain meaning, the definition of “your work” included any work performed by the insured associated with both design and construction. As a result, the court found there was no coverage for any of the arbitration award. The court acknowledged the result appeared contrary to the purpose of professional liability policies, as negligent errors and omissions in the design would typically be covered. Nevertheless, the court ruled that the exclusion unambiguously applied. If that rendered the entire policy a “bad deal,” concluded the court, this was a “problem of the [insured’s] own making” for entering into the insurance contract without a more careful review of its terms.
