Insurer’s Failure to Obtain Allocation in Arbitration Award Results in Coverage for Full Award
On remand from the Tenth Circuit, the United States District Court for the District of Colorado, applying Colorado law, has held that an insurer failed to satisfy its burden of proof on allocation where it neglected to ensure that an arbitration award was sufficiently detailed. Rockhill Ins. Co. v. CFI-Global Fisheries Mgmt., 2020 WL 996882 (D. Colo. Mar. 2, 2020). As a result, the District Court entered judgment against the insurer for the full amount of the arbitration award.
The insured contracted to design and implement alterations to streambeds and banks in a fishery. The insured was allegedly ill-prepared to execute the contract, and the improvements were washed away several times. The claimant eventually hired another contractor to redesign and complete the improvements. The claimant commenced arbitration against the insured seeking damages for the unsuccessful design and construction. The arbitration panel awarded the claimant a lump sum in a “non-reasoned” award (meaning that there was no accompanying narrative of how the award was calculated). Aside from the final number, there was only a spreadsheet showing the invoices that the claimant had asserted were its damages.
The insured sought coverage from its professional liability insurer and coverage litigation ensued. The District Court initially held that the arbitration award consisted entirely of uncovered losses, see Rockhill Ins. Co. v. CFI-Global Fisheries Mgmt., 2018 WL 1886805 (D. Colo. Apr. 17, 2018). That decision turned on the District Court’s interpretation of the term “your work” in the policy’s Faulty Workmanship exclusion. Under the District Court’s initial interpretation, the Faulty Workmanship exclusion was broad enough to encompass both faulty construction and negligent design work, rendering an allocation between the two irrelevant. The Executive Summary’s coverage of that decision, which includes more on the factual background, can be found here.
On appeal, the Tenth Circuit rejected the District Court’s holding that the Faulty Workmanship exclusion extended to losses arising from negligent design services. Rockhill Ins. Co. v. CFI-Global Fisheries Mgmt., 782 F. App’x. 667 (10th Cir. Jul. 24, 2019). While the District Court had looked to a dictionary definition of “work” as an activity involving “mental or physical effort” to conclude that the exclusion included design services, the Tenth Circuit placed more emphasis on the context of the Faulty Workmanship exclusion. First, the Tenth Circuit reasoned that because the exclusion appeared in a professional liability policy, “‘mental or intellectual’ undertakings” would not naturally be understood as excluded "work." Second, the Tenth Circuit gave more weight to the word “workmanship” in the heading of the exclusion, which it associated with construction as opposed to design. Finally, the Tenth Circuit concluded that other terms used in the exclusion itself (materials, parts, labor) supported that it did not apply to design services. Based on its determination that the Faulty Workmanship exclusion did not encompass design services, the Tenth Circuit remanded the case to the District Court for a determination on “whether the [arbitration award] should or can be apportioned between design and construction.”
On remand, the insured sought judgment against the insurer for the entirety of the arbitration award. Finding no Colorado law on point regarding the burden to allocate, the District Court found “helpful guidance” in two Tenth Circuit cases applying Oklahoma law, both of which placed the burden on the insurer. Based on this case law, the District Court concluded that it had been the insurer’s obligation to seek an allocated award in the underlying arbitration, which it had failed to do.
The insurer argued that the allocation could be reasonably deduced from the spreadsheet attached to the award, because it showed separate payments by the claimant to a design firm and a construction firm. The District Court rejected this argument, noting that, on the facts of this case, the replacement construction firm’s work could have been needed to remedy the negligent design. The District Court accordingly entered judgment against the insurer for the full value of the arbitration award.