The Colorado federal district court’s decision in Rockhill Insurance Company v. CFI-Global Fisheries Management, No. 16-2760 (D. Colo. Mar. 2, 2020) is brief.  But it still has a lot to say, and an important lesson to offer, about allocation between covered and uncovered damages. 

Heirloom initiated arbitration proceedings against CFI-Global Fisheries Management after a fisheries enhancement project, that CFI had been hired to design and construct for Heirloom, went south.  CFI sought coverage under a professional liability policy issued by Rockhill Insurance Company.  Rockhill undertook CFI’s defense, under a reservation of rights, and then filed an action seeking a declaratory judgment that it had no obligation to defend or indemnify CFI in the arbitration.

Heirloom was ultimately awarded $600,000 by the arbitrators and the parties stipulated to an award of $265,000 in attorney fees and costs.  As noted by the court: “The arbitrators’ decision was not accompanied by an explanation of reasoning because neither party requested a ‘reasoned’ award.” 

The court in the coverage action held that Rockhill was not liable for the arbitration award on account of the faulty workmanship exclusion in the professional liability policy.

However, the Tenth Circuit reversed, “finding that the intent behind the faulty workmanship exclusion was ‘to distinguish non-covered construction work from covered professional services.’”  Therefore, Rockhill was not entitled to summary judgment “as to the design components of CFI’s work for Heirloom.”

Back at the trial court, the issue was whether the arbitration award could or should be allocated between design and construction damages.  The court held that it could not be.  Translation: Coverage owed for the entirety of the arbitration award. 

Putting aside some issues unique to the facts, the court’s general message was that the insurer could not meet its burden to prove that some of the damages were excluded under the faulty work exclusion.  The court stated: “ To begin with, there is no dispute that Plaintiff controlled CFI’s defense. As a result, Plaintiff had a corresponding duty to ensure that the damages were allocated between those that were covered under CFI’s policy and those that were not. Because Plaintiff failed to request an allocated award, the arbitrators issued ‘a standard award without explanation of [the arbitrator’s] reasoning’ that says nothing with respect to allocating Heirloom’s damages.  Under these circumstances, the damages awarded are presumed to be covered under CFI’s policy.”