FILED
United States Court of Appeals
UNITED STATES COURT OF APPEALS Tenth Circuit
FOR THE TENTH CIRCUIT July 24, 2019
_________________________________
Elisabeth A. Shumaker
Clerk of Court
ROCKHILL INSURANCE COMPANY,
Plaintiff - Counter Defendant -
Appellee
v. Nos. 18-1201 & No. 18-1207
(D.C. No. 1:16-CV-02760-RM-MJW)
CFI-GLOBAL FISHERIES (D. Colo.)
MANAGEMENT; HEIRLOOM I, LLC.,
Defendant - Counterclaimant -
Appellant.
_____________________________
ORDER AND JUDGMENT*
_________________________________
Before BRISCOE, LUCERO, and MORITZ, Circuit Judges.
_________________________________
CFI-Global Fisheries Management (“CFI”) and Heirloom I, LLC.,
(“Heirloom”) appeal a district court order granting summary judgment in favor of
Rockhill Insurance Company (“Rockhill”). The district court concluded that an
exclusion in CFI’s professional liability policy for faulty workmanship barred
recovery for damages related to poor design and construction of a river enhancement
project. It further ruled that CFI’s bad faith claims failed because the company did
*
This order and judgment is not binding precedent, except under the doctrines
of law of the case, res judicata, and collateral estoppel. It may be cited, however, for
its persuasive value consistent with Fed. R. App. P. 32.1 and 10th Cir. R. 32.1.
not show Rockhill caused a business loss. We affirm the district court’s order as to
CFI’s common law bad faith claim. However, we conclude the faulty workmanship
exclusion does not apply to damages caused by negligent design work. We reverse
the district court’s rulings on coverage under the professional liability policy and
CFI’s statutory bad faith claim. Exercising jurisdiction under 28 U.S.C. § 1291, we
affirm in part, reverse in part, and remand for further proceedings consistent with this
order and judgment.
I
Heirloom owned property in southwestern Colorado. In 2012, it contracted
with CFI to design and construct a fisheries enhancement project on the property.
CFI completed the project, but its work was defective and the project was destroyed
by natural processes four times in three years. Heirloom paid more than $800,000 to
CFI under the contract.
On July 20, 2015, Heirloom initiated arbitration proceedings against CFI for
breach of contract and negligence related to the design and execution of the project.
CFI requested that Rockhill, its professional and general liability insurer, defend it in
the arbitration. CFI had taken out an insurance policy with Rockhill, which included
three coverage components: (1) commercial general liability coverage, which
generally applies to “‘bodily injury’ or ‘property damage’” but excludes coverage for
liability arising from professional services; (2) contractor’s pollution liability
coverage; and (3) professional liability coverage. The professional liability coverage
form applies to damages arising from a “[p]rofessional services incident,” defined as
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“any negligent act, error or omission” in “your rendering, or your failing to render,
‘professional services’” that “results in injury or damage.” It also states that “your
work” means: “(1) Work or operations performed by you or on your behalf; and (2)
Materials, parts or equipment furnished in connection with such work or operations.”
On August 21, 2015, Rockhill sent CFI a letter agreeing to defend the
arbitration but reserving its right to deny coverage. In outlining Rockhill’s coverage
position, the insurer implied some of the damages could fall within the policy, but
discussed several exclusions that might apply. Rockhill identified Exclusion M of
the professional liability policy, which reads in full:
M. Faulty Workmanship
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”. This includes, but is not limited to, the cost to investigate
“your work”, or the cost of any materials, parts, labor or equipment
furnished in connection with such withdrawal, recall, inspection, repair,
replacement, adjustment, removal or disposal.
Rockhill also noted Exclusion P of the professional liability policy, which states:
P. Expressed or Implied Warranties
Based upon, as a consequence of or arising out of:
(1) Any expressed or implied warranties or guarantees, or
(2) Any cost or other estimates for construction, renovation, removal or
demolition being exceeded or inaccurate.
However, this exclusion does not apply to a warranty or guaranty by you
that your “professional services” are in conformity with generally
accepted architectural or engineering standards.
The letter states that Heirloom’s “allegations relative to CFI’s designs potentially
implicate a ‘professional services incident’ that would trigger coverage” but “[t]o the
extent that the damages sought arise out of . . . faulty workmanship apart from your
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professional services . . . the [Professional Liability] Form will not provide coverage
for such damages.”
In November 2015, Rockhill offered to settle with Heirloom for $15,000.
Heirloom promptly rejected this offer, demanding $990,000. A year passed with no
additional settlement offers. On October 3, 2016, two weeks before the arbitration
was set to begin, Rockhill wrote to CFI that the entirety of the damages claimed were
excluded from coverage. The insurer proposed CFI agree to fund a settlement with
Heirloom in which CFI would pay 75% of settlement costs up to $500,000, with
Rockhill paying the remaining 25%. CFI responded on October 11, stating
Rockhill’s proposal was a breach of its duties as an insurer and demanding Rockhill
immediately pursue and fund settlement with Heirloom. Three days later, Heirloom
made a settlement proposal of $750,000. CFI asked Rockhill to accept and fund the
offer. Rockhill responded that it would be willing to pay $150,000 towards the
settlement.
The arbitration proceeded from October 17 to 21, 2016. During the
arbitration, Rockhill informed CFI it had offered an updated settlement of $260,000
to Heirloom, after CFI explained it could contribute only $10,000 to a settlement
offer. Internal communications indicate Rockhill authorized a potential offer up to
$400,000. The arbitrators awarded Heirloom $609,994.91 plus pre-judgment interest.
The parties subsequently stipulated to an additional $265,000 award of attorney’s
fees and costs. Neither party requested the arbitrators’ decision be accompanied by
an explanation of reasoning. However, attached to the final award is a spreadsheet
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identifying invoices paid to third party contractors who worked on the river
enhancement project following CFI’s failures, and a line item for remaining
construction.
Rockhill filed a declaratory-judgment action against CFI and Heirloom prior to
the issuance of the award. It sought a declaration that it had no duty to defend and
indemnify CFI in connection with the Heirloom arbitration. CFI and Heirloom
asserted counterclaims for declaratory judgment and breach of contract. CFI also
asserted statutory and common law bad faith claims against Rockhill based upon its
failure to timely settle. The district court granted summary judgment for Rockhill,
holding the entirety of the damages awarded to Heirloom were excluded under the
policy’s Faulty Workmanship exclusion, along with the attorneys’ fees and costs. On
CFI’s bad faith claims, the court held that CFI failed to present any evidence to prove
any business loss caused by non-settlement. CFI and Heirloom timely appealed.
II
We review de novo the grant of summary judgment. MarkWest Hydrocarbon,
Inc. v. Liberty Mut. Ins. Co., 558 F.3d 1184, 1189 (10th Cir. 2009). In doing so, we
view the facts in the light most favorable to the non-moving party. Id. at 1189-90.
Summary judgment is proper if “there is no genuine dispute as to any material fact
and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a).
We apply Colorado substantive law in this diversity action. See Specialty
Beverages, L.L.C. v. Pabst Brewing Co., 537 F.3d 1165, 1175 (10th Cir. 2008). We
“look to the rulings of the highest state court” to guide our interpretation of state law.
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Stickley v. State Farm Mut. Auto. Ins. Co., 505 F.3d 1070, 1077 (10th Cir. 2007)
(quotation omitted). If the highest state court has not addressed a question, we
predict how it would rule after giving “proper regard to relevant rulings of other
courts of the State.” Id. (quotation omitted).
A
Under Colorado law, “[a]n insurance contract is subject to the general rules of
contract interpretation.” Am. Family Mut. Ins. Co. v. Hansen, 375 P.3d 115, 120
(Colo. 2016). “It is axiomatic that a contract must be construed to ascertain and
effectuate the intent of the parties as determined primarily from the language of the
contract.” E. Ridge of Fort Collins, LLC v. Larimer & Weld Irr. Co., 109 P.3d 969,
974 (Colo. 2005). We apply “the plain and generally accepted meaning of the words
used,” id., but “ascertain the meaning of the contract by examining the entire
instrument and not by viewing clauses or phrases in isolation.” Copper Mountain,
Inc. v. Indus. Sys., Inc., 208 P.3d 692, 697 (Colo. 2009) (quotation omitted).
We agree with the district court that the damages awarded by the arbitrators
resulted from a “professional services incident.” Thus, the only issue is whether an
exclusion places the damages award outside of otherwise available coverage.
“Exclusions must be clear and specific to be enforceable.” Hoang v. Assurance Co.
of Am., 149 P.3d 798, 802 (Colo. 2007). In determining whether the Faulty
Workmanship exclusion barred coverage, the district court focused on a broad
definition of “work” as an “activity involving mental or physical effort done in order
to achieve a purpose or result.” New Oxford American Dictionary 1990 (3d ed.
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2010). It thus held the Faulty Workmanship exclusion’s references to “your work”
applied to both design and construction.
We disagree, and conclude the district court failed to assess the context in
which the term work is used. “A word may take on a variety of meanings in different
contexts. Dictionaries can inform us of all the accepted meanings, but not which of
those meanings fits in a particular context.” Pompa v. Am. Family Mut. Ins. Co., 520
F.3d 1139, 1143 (10th Cir. 2008). And we pay particular attention to context when a
term has some definitions that are “virtually boundless.” See Reg’l Bank of Colo.,
N.A. v. St. Paul Fire & Marine Ins. Co., 35 F.3d 494, 498 (10th Cir. 1994) (quotation
omitted). Three contextual guideposts convince us that the Faulty Workmanship
exclusion was not intended to cover design failings.
First, the clause appears in a professional liability policy. As a general matter,
such policies cover damages arising from professional services rendered—in this
case, CFI’s professional design service in providing a plan for the stream
modification. Professional services are those “arising out of a vocation, calling,
occupation, or employment involving specialized knowledge, labor, or skill, and the
labor or skill involved is predominantly mental or intellectual, rather than physical or
manual.” Zurich Am. Ins. Co. v. O’Hara Reg’l Ctr. for Rehab., 529 F.3d 916, 924
(10th Cir. 2008) (quotation omitted). Thus, the overall purpose of the professional
liability coverage was for CFI to obtain insurance for its “mental or intellectual”
undertakings rather than its “physical or manual” work. Accordingly, the cases
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Rockhill cites construing similar exclusions in commercial general liability policies
do not govern our interpretation of a professional liability policy.
Second, the heading “Faulty Workmanship” clearly evinces the narrower scope
of the exclusion.1 As Rockhill itself stated to CFI: “To the extent that the damages
sought arise out of . . . faulty workmanship apart from your professional services . . .
the [Professional Liability] Form will not provide coverage for such damages.” The
term “workmanship” typically refers to “the art or skill of a workman,” which is an
individual “employed or skilled in some form of manual, mechanical or industrial
work.” See Random House Webster’s College Dictionary (2d ed. 2000). Consistent
with the general purpose of professional liability coverage, the term distinguishes
manual and physical work from professional undertakings. See Mack Trucks Inc. v.
BorgWarner Turbo Systems, Inc., 508 F. App’x 180, 184 (3d Cir. 2012)
(unpublished) (holding that design services fall outside the ordinary definition of
workmanship).
Finally, the words in the body of the exclusion are more naturally read as
relating to construction, rather than design. The exclusion removes coverage for the
costs to “withdraw, recall, inspect, repair, replace, adjust, remove or dispose of”
work, including “any materials, parts, labor or equipment furnished.” Read as a
1
The district court did not give any weight to this phrase, concluding it was
merely a heading. But Colorado courts refer to headings in interpreting contracts.
See, e.g., Fed. Deposit Ins. Corp. v. Fisher, 292 P.3d 934, 937 (Colo. 2013). And
CFI correctly notes that the exclusion is incoherent absent the “Faulty Workmanship”
heading. Without those words, the policy would read: “This insurance does not
apply to: . . . Based upon, arising out of or for any loss . . . .”
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whole and in the context of the coverage agreements, we thus conclude the parties
intended the Faulty Workmanship exclusion to distinguish non-covered construction
work from covered professional services.
The district court should not have granted summary judgment to Rockhill as to
the design components of CFI’s work for Heirloom. Because the district court
concluded otherwise, it did not consider whether the entire arbitration award
(including attorney’s fees and costs) is covered under a correct reading of the
exclusion or whether the damages should or can be apportioned between design and
construction. We thus leave that issue for the district court to consider in the first
instance.2
B
CFI challenges the district court’s dismissal of its bad faith claim on two
grounds. First, it argues that statutory damages are available. Per Colorado statute,
an insurer may not “unreasonably delay or deny payment of a claim for benefits
owed.” Colo. Rev. Stat. § 10-3-1115(1)(a). An insured “whose claim for payment of
benefits has been unreasonably delayed or denied may bring an action in a district
court to recover reasonable attorney fees and court costs and two times the covered
benefit.” § 10-3-1116(1).
2
Rockhill also argues in the alternative that the exclusion for “Expressed or
Implied Warranties” bars coverage. It points to statements by Heirloom that CFI
failed to warranty and repair work and thus breached its contract and/or warranty. As
the district court explained, Rockhill failed to identify any particular warranty or
show that the arbitration damages were related to the unidentified warranty. It again
fails to do so before this court.
9
Because the district court concluded that the arbitration award was not
covered, it did not consider whether Rockhill unreasonably denied or delayed
coverage. See State Farm Mut. Auto. Ins. Co. v. Fisher, 418 P.3d 501, 506 (Colo.
2018) (“[S]ection 10-3-1115’s plain language is clear, and it imposes the duty it says
it imposes—that is, an insurer can’t unreasonably delay or deny paying a covered
benefit without a reasonable basis for doing so.”). Instead, the bulk of the district
court’s analysis looked to whether Rockhill caused CFI a business loss. But the
statute contains no requirement that an insured provide evidence of specific business
loss or damages. See Hansen v. Am. Family Mut. Ins. Co., 383 P.3d 28, 38 (Colo.
App. 2013), rev’d on other grounds, 375 P.3d 115 (Colo. 2013). Accordingly, the
district court should not have dismissed CFI’s claim for statutory bad faith damages
for failure to demonstrate evidence of business loss. We remand so the district court
may consider whether CFI’s statutory claim meets the required reasonableness
standard in light of our coverage holding.
Second, CFI challenges the dismissal of its common law bad faith claim. CFI
alleges that Rockhill’s refusal to settle with Heirloom caused the destruction of its
business. An insurer’s bad faith breach of an insurance contract can give rise to tort
liability. Nunn v. Mid-Century Ins. Co., 244 P.3d 116, 119 (Colo. 2010). “For an
insured to prevail on a bad faith claim against an insurer, the insured must establish
the insurer acted unreasonably, causing damages to the insured.” Bankr. Estate of
Morris v. COPIC Ins. Co., 192 P.3d 519, 523 (Colo. App. 2008).
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The district court held CFI failed to adduce evidence indicating that non-
settlement caused CFI a business loss. We agree. To prevail on a common law bad
faith claim, CFI must show that both its business declined and Rockhill’s alleged bad
faith actions during settlement negotiations caused the decline. Although CFI
presented evidence that its business declined precipitously after the dispute with
Heirloom arose, it provided no evidence that Rockhill’s actions caused that lost
business. And mere assertions that the timing of its business decline aligned with the
settlement negotiations are insufficient. See Norris v. Baxter Healthcare Corp., 397
F.3d 878, 885 (10th Cir. 2005) (“[C]orrelation does not equal causation.”). Without
evidence of a causational (not correlational) link, CFI’s non-settlement claim
necessarily fails.3
III
For the forgoing reasons, we AFFIRM the district court’s dismissal of CFI’s
common law bad faith claim based on non-settlement. However, we REVERSE the
district court’s grant of summary judgment on the application of the Faulty
3
CFI also argues Rockhill inappropriately advanced a recoupment claim
without having reserved its right to do so. See Colo. Rev. Stat. § 13-20-
808(7)(b)(III). However, the district court correctly held CFI failed to support its
assertion that the company expended resources defending that claim, which was later
abandoned.
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Workmanship exclusion to CFI’s design work and its grant of summary judgment on
CFI’s claim of statutory bad faith. We REMAND for further proceedings consistent
with this order and judgment.
Entered for the Court
Carlos F. Lucero
Circuit Judge
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