The Colorado Court of Appeals issued its decision in Melssen v. Auto-Owners Ins. Co. on June 21, 2012.
Breach of Contract—Insurers Duty to Defend.
Defendant Auto-Owners Insurance Company (Auto-Owners) appealed the trial court’s judgment entered on a jury verdict in favor of plaintiffs Gene and Diane Melssen. The judgment was affirmed and the case was remanded for an award of reasonable appellate attorney fees and costs.
The Melssens built the Holleys a custom home. During construction, the Melssens had comprehensive general liability (CGL) coverage with Auto-Owners. Their policy, effective through November 2004, obligated Auto-Owners to defend the Melssens with respect to any “suit” seeking damages for “property damage” occurring during the policy period.
Soon after the house was constructed, cracks developed in the drywall and, later, large cracks formed in the outside stucco and basement slab. In 2007, the Holleys contacted the Melssens, the engineer for the foundation, an attorney, and Auto-Owners. A claims adjuster investigated.
In April 2008, the Holleys sent the Melssens a notice of claim in accordance with the Colorado Defect Action Reform Act (CDARA), asserting approximately $300,000 in damages caused by engineering and construction defects. In June 2008, the Melssens demanded that Auto-Owners defend and indemnify the Melssens. In October 2008, Auto-Owners sent a “coverage position letter,” purportedly denying coverage of claimed damages, because they were sustained outside the policy period. The focus of this appeal is the extent to which Auto-Owners was obligated to defend the Melssens.
The Holleys agreed to an arbitration and mediation settlement with the Melssens and the foundation engineer. The Melssens paid $140,000 toward the cost of the settlement, but Auto-Owners did not receive advance copies of the settlement documents.
In 2009, the Melssens filed this action against Auto-Owners, asserting breach of contract, bad faith breach of contract, and violations of CRS §§ 10-3-1115 and -1116. A jury returned a verdict in favor of the Melssens on all claims and awarded damages. The trial court awarded costs and attorney fees.
On appeal, Auto-Owners argued it was error to submit to the jury the issue of whether the CDARA notice of claim process between the Melssens and the Holleys constituted a “suit,” thus triggering the duty to defend under the policy. The Court of Appeals found the trial court properly submitted to the jury the question of whether Auto-Owners consented to the submission of their dispute to “any other alternative dispute resolution proceeding” or whether they waived that policy provision. However, the Court found that it was error to submit the question as to whether the CDARA notice of claim process otherwise constituted a “suit” under the policy, because this was a legal matter, but that the error was harmless because the CDARA notice is a “suit” within the definition of the policy.
Auto-Owners argued the trial court’s error was not harmless for three reasons: (1) the CDARA notice of claim process was not a civil proceeding because the notice of claim was not a complaint nor was the claim process otherwise an alternative dispute resolution proceeding under the policy; (2) the CDARA notice of claim process failed to satisfy the policy’s definition of “suit” because there was no evidence to show that the Melssens submitted to and settled the Holleys’ claim against them with its express or implicit consent; and (3) the liberal interpretation of a CDARA notice of claim as set forth in CRS § 13-20-808(7) does not apply retroactively to this policy.
The Court rejected each of these. The Court first held that the notice of claim process was an alternative dispute resolution proceeding under the policy. Next, the Court determined that it was a question of fact that was presented to the jury and there was sufficient evidence in the record to support the jury’s decision. Finally, the Court had determined the CDARA notice constituted a “suit” under the policy and did not need to address the third argument.
The Court also took up numerous evidentiary and instruction arguments made by Auto-Owners and rejected them all. It affirmed the award of attorney fees and costs, and granted the Melssens’ request for their appellate attorney fees.
Summary and full case available here.