“Rip and Tear” Damage Remains Covered Under CGL Policy as “Accident”—for Now.

The Colorado Supreme Court has approved a settlement between the parties to an appeal of the 2012 Colorado Pool Systems v. Scottsdale Insurance Company Court of Appeals case, leaving that ruling intact.  The ruling parses a fine line between uncovered costs of repairing defective work and covered costs of damage caused to nondefective work while repairing defective work.  This nuanced opinion, which is now established Colorado law, is worth a second look.

In Colorado Pool Systems, Inc. v. Scottsdale Insurance Company, the Colorado Court of Appeals determined that so-called “rip and tear” damage caused by a construction professional to nondefective work while correcting defective work is covered as an “accident” under standard Commercial General Liability insurance language.  317 P.3d 1262 (Colo. App. 2012).  A pool company excavated and built a rebar frame in order to construct a pool, but it hired a subcontractor to pour the concrete.  An inspector later noticed that some of the rebar was too close to the surface, and the pool company agreed to demolish and replace the pool after an agent of its insurer represented that this loss would be covered.  But the agent was wrong, the insurer denied coverage, and litigation ensued.

After determining that the Colorado Builder’s Insurance Act (which creates a presumption that property damage caused by construction work is an accident) could not apply retroactively, the court set about interpreting the contract.

This question came down to whether the faulty workmanship was an “accident” under the policy. The policy did not define “accident,” and the court found that its common meaning was ambiguous; it could mean either a chance occurrence or an unintentional one.  The court sided with the insured’s unintentional reading, in line with Colorado’s requirement that ambiguous provisions in insurance contracts construed in favor of the insured.

With this reading in mind, the court borrowed a test from the 10th Circuit case Greystone Constr., Inc. v. Nat’l Fire & Marine Ins. Co., 661 F.3d 1272, 1289 (10th Cir. 2011).  Under Greystone, “injuries flowing from improper or faulty workmanship constitute an ‘occurrence’ so long as the resulting damage is to nondefective property, and is caused without expectation or foresight.”  661 F.3d at 1284.

Applying this test, the court determined that the policy did not cover repair of the defective work because construction professionals both expect and foresee that they must correct defective work. However, the court held that damage that the pool company caused to other non-defective work while correcting its defective work was covered under the policy.  This so-called “rip and tear” damage—inflicted upon a non-defective deck, sidewalk, retaining wall, and electrical conduits—was deemed an “accident” that was covered under the policy.

This decision raises some interesting policy questions, especially given the multi-subcontractor specialist environment in modern construction litigation.  Regardless, Colorado Pool Systems remains the law in Colorado, and construction professionals and insurers alike should take note of the fine line between uncovered losses incurred while correcting defective work and covered “rip and tear” damage caused to nondefective work while correcting defective work.