United States District Court, D. Colorado
D.R. HORTON, INC. DENVER d/b/a TRIMARK COMMUNITIES, a Delaware corporation; D.R. HORTON, INC., a Delaware corporation, Plaintiffs,
MOUNTAIN STATES MUTUAL CASUALTY COMPANY, a New Mexico corporation; ZURICH AMERICAN INSURANCE COMPANY, a New York corporation, CONTINENTAL WESTERN INSURANCE COMPANY, an Iowa corporation, HARTFORD CASUALTY INSURANCE COMPANY, an Indiana corporation; and HARTFORD FIRE INSURANCE COMPANY, a Connecticut corporation, Defendants
For D.R. Horton, Inc.--Denver, a Delware Corporation, doing business as Trimark Communities, D.R. Horton, Inc., a Delaware corporation, Plaintiffs: George Robert Lyons, Jr., Patrick John Kanouff, Scott Warren Wilkinson, LEAD ATTORNEYS, Davis & Ceriani, P.C., Denver, CO.
For Mountain States Mutual Casualty Company, a New Mexico corporation, Defendant: Cathleen Hopfe Heintz, Jessica Clark Collier, Joseph F. Bermudez, Wilson Elser Moskowitz Edelman & Dicker, LLP-Denver, Denver, CO.
For Zurich American Insurance Company, a New York corporation, Defendant: Todd Evan Jaworsky, Jane E. Young, McElroy Deutsch Mulvaney & Carpenter, LLP-Greenwood Village, Greenwood Village, CO.
For Continental Western Insurance Company, an Iowa corporation, Defendant: Lyndsay K. Arundel, Brian John Spano, Lewis Roca Rothgerber LLP-Denver, Denver, CO.
For Hartford Fire Insurance Company, a Connecticut corporation, Defendant: Lawrence Michael Brooks, Jr., Stephen Eugene Baumann, II, Wells, Anderson & Race, LLC, Denver, CO; Mary Elizabeth Smith, Susan Marie Hogan, Kramon & Graham, P.A., Baltimore, MD; Michelle Brand Muhleisen, Ogletree, Deakins, Nash, Smoak & Stewart, P.C.-Denver, Denver, CO.
FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER
R. Brooke Jackson, United States District Judge.
This case between the plaintiffs and the one non-settling defendant, Mountain States Mutual Casualty Company, was tried to the Court on June 23-25, 2014. The issues remaining for trial after this Court's previous orders on various motions were whether Mountain States unreasonably delayed or denied payment of plaintiffs' costs of defending an underlying construction defect lawsuit, and if so, whet penalty should be imposed under C.R.S. § § 10-3-1115-16. The Court addresses those issues in this Order.
FINDINGS OF FACT
The Court finds that the following facts were either undisputed or were established to a preponderance of the evidence at trial.
1. Plaintiff D.R. Horton, Inc.-Denver, d/b/a Trimark Communities, is a wholly-owned subsidiary of plaintiff D.R. Horton, Inc. I will refer to the plaintiffs collectively in this Order as " Trimark."
2. Between 2002 and 2008 Trimark was the developer and general contractor for the construction of a residential community in Arapahoe County, Colorado known as Windemere. Trimark did not perform any of the construction work itself. Rather, it
engaged approximately 28 subcontractors to perform that work.
3. Each subcontractor was required to sign an " Independent Contractor Agreement" that included an agreement to defend and indemnify Trimark against claims arising from the subcontractor's work. These contracts required the subcontractors to have Comprehensive General Liability (" CGL" ) insurance which also covered Trimark as an additional insured. A representative example of these contracts is Ex. 2.
4. The CGL policies were written on standard printed forms generally in use in the insurance industry at the time. During the trial the parties frequently referred to Ex. A-1, the Mountain States policy sold to A& A Construction for the period 2005-06, as an example of the standard form policies that were typically used, and I will refer to this policy for the same purpose in this Order. To the extent the language of other policies might have differed somewhat, the Court has not observed any substantive difference.
5. Ex. A-1 contains a provision (¶ II.5.a.) that states: " Any person or organization to whom or to which you are obligated by virtue of a written contract, agreement or permit to provide such insurance as afforded by this policy is an insured, but only with respect to liability resulting from . . . your work." This is the " additional insured" clause. It is undisputed that Trimark is an additional insured under each of the CGL insurance policies sold by Mountain States to the subcontractors it insured.
6. The CGL policies also provided: " We will have the right and duty to defend any 'suit' seeking those damages to which this insurance applies." Ex. A-1, ¶ I.A.
7. On June 4, 2008 the Windemere Townhome Association, Inc. (the " homeowners' association" ) served Trimark with a notice of claim of construction defects, which is a prerequisite for the filing of a construction defect action in Colorado per C.R.S. § 13-20-803.5 (1). The notice asserted a wide variety of complaints including problems with roofs, windows, doors, tiles, drywall, kitchen cabinets, countertops, plumbing, electrical, insulation, cracking in floors and garage slabs, concrete, exterior cracking, drainage, decks, hardwood flooring, carpeting, heating, air conditioning, painting, sprinklers and landscaping. Ex. 4.
8. Trimark, through counsel, sent letters to its subcontractors tendering the defense of the claim and potential suit and requesting that the subcontractors notify their insurers and demand a defense and indemnification on behalf of both the subcontractor and Trimark. See, e.g., Ex. 5.
9. Among the subcontractors or insurers who received these letters were:
(1) Mike's Stucco, which was engaged in July 2002 to provide stucco and stone masonry. Trimark tendered its defense to Mike's Stucco and its insurer, Continental Western Insurance Company, on or about June 6, 2008.
(2) Concrete Express, which was engaged in November 2002 to provide concrete flatwork and other work.
Trimark tendered its defense to Concrete Express and its insurer, Zurich American Insurance Company, on or about March 11, 2008 (even before Trimark received the homeowners' association's formal statutory notice).
(3) A& A Construction Services, which was engaged in April 2004 to provide exterior finish work. Trimark tendered its defense to A& A Construction and its insurer, Mountain States, on or about June 9, 2008.
(4) Horizon Drywall, which was engaged in March 2004 to install drywall. Trimark tendered its defense to Horizon Drywall and its insurer, Mountain States, on or about September 8, 2008.
(5) Tri-Star Drywall which was engaged in May 2005 to install drywall. Trimark tendered its defense to Tri-Star Drywall and its insurers, Mountain States and The Hartford Fire Insurance Company, on or about March 23, 2010.
See Ex. A-33 at Bates #MSI003015.
10. There is no dispute about the timeliness of Trimark's tenders of its defense to Mountain States under the various policies.
11. Mountain States initially denied the tender of the defense.
12. On January 5, 2009 Trimark proposed that the two insurers who had by that time acknowledged their duty to defend, Zurich and Continental Western, share the defense costs equally. Ex. 3 (first page misdated January 5, 2008). Neither insurer accepted the proposal or paid defense costs in accordance with it.
13. On February 19, 2009 the Colorado Court of Appeals issued its decision in General Security Indemnity Co. v. Mountain States Mutual Casualty Co., 205 P.3d 529 (Colo. App. 2009). The significance of this decision is discussed later in this Order.
14. On September 1, 2009 the Windemere homeowners' association filed a construction defect lawsuit in the district court for the 18th Judicial District (Arapahoe District Court) naming Trimark, various individuals, and several subcontractors as defendants. Ex. 9. The subcontractors named included Mike's Stucco, Concrete Express, and A& A Construction, among others. It did not include Horizon Drywall or Tri-Star Drywall. Id.
15. Trimark filed a third party complaint against the subcontractors that had been named as defendants by the homeowners' association. Id.
16. On May 5, 2010 Trimark added Horizon Drywall, Tri-Star Drywall, and various other subcontractors not named as defendants by the homeowners' association as third-party defendants in an amended third-party complaint. Ex. 10.
17. In response to the Colorado Court of Appeals' ruling in General Security, the Colorado General Assembly enacted C.R.S. § 13-20-808. The statute, effective as of May 21, 2010 and applicable to all pending and future actions, clarified the insurers' duty to defend in construction defect cases. Included in this statute was the following provision: " An insurer shall defend a construction professional who has received a notice of claim made pursuant to section 13-20-803.5 regardless of whether another insurer may also owe the insured a duty to defend the notice of claim unless authorized by law." Id. § 7(b)(I).
18. By letter dated June 17, 2010, Stacey E. Scherer, Corporate Insurance Counsel for Mountain States, notified Trimark that it would provide a defense to Trimark under the policies Mountain
States had sold to A& A Construction Services, subject to a reservation of the right to deny coverage and, if it were later determined that there was no coverage, a reservation of the right to terminate the defense and to seek reimbursement of defense costs paid. Ex. 12. Ms. Scherer qualified the agreement to defend by indicating that Mountain States would pay " the applicable portion" of Trimark's defense costs; that the applicable portion would be determined at the termination of the underlying claim by settlement or judgment; and it would be calculated either by the percentage of the underlying liability ultimately attributed to A& A Construction Services' work or by the relative limits of Mountain States' policies implicated by their " time-on-the-risk" in relation to other triggered liability policies. Id. at 8.
19. On June 22, 2010 Ms. Scherer notified Trimark of Mountain States' acceptance of Trimark's tender of its defense under the policies Mountain States had sold to Horizon Drywall, subject to the same reservation of rights and other limitations as had qualified its acceptance of Trimark's defense under the A& A Construction Services policies. Ex. 13.
20. On October 21, 2010, by agreement of the parties, the homeowners' association's lawsuit was re-filed as a complaint in arbitration before former judge Sandy Brook of the Judicial Arbiter Group in Denver, Colorado.
21. On November 15, 2010 Ms. Scherer notified Trimark of Mountain States' acceptance of Trimark's tender of its defense under the policies Mountain States had sold to Tri-Star Drywall, again subject to the same reservation of rights and other limitations as had qualified its acceptance of Trimark's defense under the A& A Construction Services policies. Ex. A-17.
22. When the group of insurers that had accepted the tender of defense expanded from the original two (Continental Western and Zurich) to four (including Mountain States and Hartford), Trimark proposed a cost-sharing arrangement pursuant to a formula that was based primarily on the number of subcontractors each insurer insured but also took into consideration the dates the defense was tendered to them. The formula did not take into consideration any assessment of a subcontractor's likely contribution to the alleged property damage.
23. Trimark made this proposal without waving its position that the duty to defend is joint and several.
24. Trimark (allegedly with the consent of the insurers) engaged a data management company, JDI Data Corporation, to handle the ministerial tasks of calculating each of the insurers' shares according to the formula and billing them accordingly.
25. JDI's initial billing under the new proposed sharing arrangement, and therefore the first billing of any kind to Mountain States and Hartford, was dated April 8, 2011. Ex. A-33 at Bates #MSI003006, 3010, and 3015.
26. Because the formula was based largely on the number of subcontractors insured by the insurer, and because Mountain States was the only insurer with more than one insured subcontractor, it was allocated a larger share under Trimark's formula than the other three insurers. Specifically, in the first invoice Mountain States' share of the then unpaid balance of $542,840 was $136,952 with respect to the A& A Construction policies (25.2%); plus $124,065 with respect to the Horizon policies (22.9%%); plus $31,772 with respect to the Tri-Star policies (5.9%) (because the Tri-Star allocation was divided between Mountain States and Hartford). Thus, it
was allocated 54% of the unpaid defense costs. Ex. A-33 at Bates #MSI00315.
27. Neither Mountain States nor any other insurer except Continental Western had paid anything towards defense costs to that date. Id.
28. On May 19, 2011 Ms. Scherer reiterated the restrictions it had imposed on Mountain States' acceptance of the defense. Ex. 16.
29. Trimark was not willing to agree to postponing reimbursement of its defense costs until the conclusion of the litigation, nor was it willing to agree that the amount of Mountain States' contribution would be based on either of the alternatives demanded by Ms. Scherer.
30. Prior to Ms. Scherer's May 19, 2011 letter Trimark's third-party claims against Tri-Star Drywall and Horizon Drywall had apparently been settled for $68.37 and $1,034.58 respectively. In the letter Ms. Scherer offered to settle Trimark's claims for defense costs attributed to the Tri-Star Drywall and Horizon Drywall policies based on a formula whereunder $68.37 and $1,034.58 would be divided by the total costs ultimately paid to the homeowners' association, and the result would then be multiplied by the defense costs incurred through the dates of those settlements. However, in lieu of waiting until the end of the underlying case to be able to plug the numbers into her formula, she offered to settle Trimark's claims for defense costs under those policies for $500 and $2,500 respectively. Alternatively, she requested copies of " all defense statements for analysis of which defense costs may be covered by the Mountain States policies."
31. Trimark did not accept the offer nor did it, at that time, provide copies of the invoices of its lawyers in the underlying case.
32. In two emails dated May 26, 2011, one concerning the A& A Construction Services policies and the other concerning the Horizon Drywall policies, Ms. Scherer advised JDI that Mountain States would not make any payment towards defense costs until there was an agreement on the allocation of defense costs among the insurers. Ex. 17 and Ex. 18.
33. None of the four insurers ever accepted Trimark's proposed allocation formula, nor did they agree to an alternative allocation formula.
34. Nevertheless JDI continued to submit monthly invoices to Mountain States and the other insurers based on the formula. Ex. A-33 at Bates #MSI003006 through #DRIWM_JDI_000138. None of the insurers paid the amounts billed to them, and with the exception of Continental Western, none of them made any payment at all through the September 6, 2011 billing. By that time Trimark's total defense costs were $900,142. Only $142,711 of that amount had been paid, all by Continental Western. Mountain States' allocated (but unpaid) share of the unpaid balance by that time was $427,986. Ex. A-33 at Bates #DRHWM_JDI_000061.
35. On September 21, 2011 Mountain States sent Trimark a check for $10,000 under an A& A Construction policy. When asked to explain this payment during her deposition, Ms. Scherer testified that she determined the amount, and that " It just seemed like a good-faith amount of a payment to make towards a disputed obligation of whether there was an allegation of property damage arising out of A& A's work. It was just a contribution towards D.R. Horton's defense costs." Ex. 33 at 246-47. She added that the amount
was not based on any specific fact or policy provision. When asked why she had decided to make a payment, she answered, " Because we were getting invoices from JDI, and I was making a payment towards a potential obligation." Id. at 247. When asked why Mountain States decided to make a payment in September as opposed to April, she answered, " No reason." Id.
36. On October 14, 2011, frustrated that its defense costs were not being paid, Trimark's counsel sent letters to the four insurers abandoning its proposed allocation formula and demanding that each insurer, either on its own or in conjunction with the other insurers, provide a complete (100%) defense. E.g. Ex. 20 (copy of the letter sent to Ms. Scherer). As of that date Trimark had incurred more than $1 million in defense costs and had paid nearly $900,000 of that amount itself. Id.
37. The letter to Ms. Scherer cited Colorado law and other authorities imposing a joint and several duty to defend on each insurer whose duty to defend is triggered and holding that disputes among insurers as to allocation may not be used to deny the insured a prompt and proper defense. Id. at 2-3. Similarly, the letter disputed Ms. Scherer's position that Mountain States' obligation to defend Trimark was proportional to its insureds' share of the liability to be determined in the underlying arbitration or on a contribution by limits basis. Id. at 4-7. ...