Duty to Disclose Latent Defects When Selling a Home

Ronald M. Sandgrund, Esq. and Scott F. Sullan, Esq. (Copyright 2003)

National Business Institute [NBI] Monograph: April 8, 2003

1. Duty to Disclose . Generally, a duty to disclose latent defects is imposed on the seller of a home.

   1. Following the spread of suburbanization, the increase in production home building practices and the recognition of consumer protection laws following World War II, the doctrine of caveat emptor greatly eroded.

   2. In Colorado, a common law duty to disclose latent defects took a significant step forward in Cohen v. Vivian, 349 P.2d 366 (Colo. 1960).
      1. The most frequently cited circumstances giving rise to a duty to disclose is when "equity and good conscience" require such disclosure. See Morrison v. Goodspeed, 68 P.2d 458 (Colo. 1937).
      2. These circumstances may exist when a "special relationship" exists between the parties or when one party has special and superior knowledge about material facts relevant to the transaction. Cf. Sandgrund and Smith, "When the Developer Controls the Homeowner Association Board: The Benevolent Dictator?" Vol. 31, No. 1 The Colorado Lawyer, pp. 91-96 (2002)(discussing potential disclosure duties of developer who retains control over homeowner association board).
      3. Other circumstances triggering a duty to disclose are set out in CJI-Civ. 4^th 19:5.
   3. Often, a statute will give rise to a duty to disclose.
      1. The "Soils and Hazard Analyses of Residential Construction Act," CRS §6-6.5-101, requires every developer or builder to provide to the purchaser of a new residence a copy of a summary report of the "analysis" and "site recommendations" no later than fourteen days prior to closing. One should assume that the "analysis" referenced means a "soil and geologic hazard" analysis applicable to the home site, and the "recommendations" means the various building methods recommended for use during construction of the home. In addition, as to sites where a significant potential for soil expansion is identified, a publication must be provided detailing the problems associated with such soils, the building methods to address these problems during construction, and suggestions for care and maintenance to address such problems.
         1. Violation of a statutory duty to disclose may result in strict liability and may help support a finding of negligent misrepresentation per se. See Deacon v. American Plant Food Corp., 782 P.2d 861 (Colo. App. 1989)(violation of a statute constitutes negligence per se if the resulting injury is of the type sought to be protected against and if the injured party is a member of the class to be protected), rev’d on other grounds, Stone’s Farm Supply, Inc. v. Deacon, 805 P.2d 1109 (Colo. 1991)(.
         2. Violation of a statutory duty to disclose may also serve as some evidence of a violation of an applicable standard of care. Scott v. Matlock, 39 P.3d 1160 (Colo. 2002).
      2. Colorado’s "Consumer Protection Act," in particular its "Deceptive and Misleading Practices" provisions, CRS §6-1-105, also give rise to a statutory duty to disclose, and these provisions are applicable to residential real estate sales transactions.
         1. Standing to sue under the CCPA must be examined against the backdrop of applicable case law, Hall v. Walter, 969 P.2d 224 (Colo. 1998), and the language of the CCPA itself, particularly recent amendments to that law.
         2. The challenged practice or conduct must have a "public impact," the contours of which phrase are just now being explored by our appellate courts.
      3. An example of another law creating a duty to disclose is the "Interstate Land Sales Full Disclosure Act," 15 U.S.C. §§ 1701 et seq., which imposes strict liability under some circumstances.
      4. CRS §§ 24-65.1-101, et seq. defines geologic hazards as geologic phenomena which are "so adverse to past, current, or foreseeable construction or land use as to constitute a significant hazard to public health and safety or to property." Whether a builder-vendor knows or should know of the existence of a "geologic hazard" on or abutting a lot may be relevant to imposing a duty to disclose that hazard.
      5. Real estate brokerage relationships, and attendant duties to disclose, are governed both by the common law and, increasingly, by statute. See, e.g., CRS §§ 12-61-804 to 806. See also, Painter and Leone, Designated Brokerage: Colorado Real Estate Agency Law Evolves Again," The Colorado Lawyer, Vol. 32, No. 3, pp. 11-25 (March, 2003).
   4. Under some circumstances, a party may assume a duty to disclose, particularly where that party is aware that another is relying on such disclosure in lieu of investigating the facts himself.
      1. Often, and by custom in many areas, property disclosure statements are provided by prospective sellers of real property.
      2. In other cases, the purchase contract may contain disclosure provisions, representations and warranties and, in the case of builder-vendor sales, may be preceded or accompanied by marketing and advertising statements.
      3. The custom and practice in some locales may include the disclosure of certain facts.
2. New v. Previously Owned-Homes. While the duty to disclose latent defects exists with regard to the sale of both new as well as previously-owned home, the scope and contours of the duty may vary as between these transactions.
   1. New home sales often are accompanied by attempts by builder-vendors to contractually limit their duty to disclose and any liability arising from the breach of such duty. Courts are loathe to allow a builder-vendor to take advantage of its material non-disclosures, even if innocently made.
      1. Disclaimers.
      2. Integration Clauses.
      3. Adhesion Contracts.
      4. "Common Interest Ownership Act," CRS §§38-33.3-101 et seq.
   2. Although most previously-owned home sales involve vendors less sophisticated than the ordinary builder-vendor, Colorado still imposes a duty to disclose latent defects on the seller.
      1. The "latent v. patent" defect distinction has long been a keystone in analyzing liability to subsequent purchasers. See Cosmopolitan Homes, Inc. v. Weller, 663 P.2d 1041, 1045 (Colo. 1983).
         1. When is a defect "patent?" Is the mere "presence" of a concrete slab-on-grade floor that is alleged to be an inadequate flooring system when used over expansive soils a "patent defect?" Probably not, since actual or constructive knowledge of the failure to comply with pertinent geotechnical recommendations against the use of such a flooring system is likely necessary to "close the liability loop." What if the floor has minor ("normal") surface cracking at the time of purchase? Also, probably not, because the nature and extent of the condition (i.e., just "hairline" cracks or something more) may raise a question of fact for the jury as to what actually caused the particular crack to arise (i.e., normal concrete shrinkage, normal settlement or something else).
      2. "As Is" Clauses.
3. Nature of Defect. Many cases focus on the nature of "defect" that must be disclosed, as such "defects" can take many forms, and the kinds of "defects" that must be disclosed has expanded over time.
   1. Generally, physical defects in a home, if material, should be disclosed
      1. Some cases hold that the fact that the home does not comply with the applicable building code should be disclosed.
      2. Other facts that may need to be disclosed include:
         1. A failure to build the home so as to effectively address soil conditions.
         2. A failure to employ construction method alternatives that materially increase the risk of structural or other failures.
         3. The extent of the increased risk of structural or other failures in light of the construction techniques used and the site.
   2. Depending on the circumstances, physical defects in the land should be disclosed.
      1. When to disclose the presence of expansive or collapsing soils and what should be disclosed.
         1. The duty of care owed by the supplier of information is measured by the use to which the information will be put, weighed against the magnitude and probability of loss that might attend that use if the information proves to be incorrect or incomplete. See Restatement (Second) of Torts § 553, comment a.
      2. When to disclose the presence of geologic hazards and what should be disclosed.
      3. Expanding population pressures and the development of geologically fragile areas have broadened the circumstances when disclosures should be made by builder-vendors.
         1. When is a geologic hazard "open and obvious" and when is such an alleged "patent" hazard more a matter of informed perception?
            1. "The Under the Hill Club": home sold under a bluff in neighborhood known as the "Under the Hill Gang."
            2. The ebb and flow of geologic cycles may make geologic hazards appear dormant, only to be reactivated by developmental and environmental pressures.
            3. Variations in weather patterns, such as wet and dry cycles, may affect geologic hazards.
            4. Geologic "quiescence" means that there will be long periods of geologic inactivity interrupted by moments of violent change.
            5. Strangers to the geologic community may not appreciate dangers familiar to long-tome residents.
            6. Disclosing a general risk may obscure the threat of a specific risk.
               1. Green Mountain (danger from above)
               2. Vista Del Rio (danger from below)
               3. Cedar Heights (danger on the way home)
            7. Improved construction technologies may mask or have no effect on a specific risk
               1. Technological improvements may create a false sense of security: "They wouldn’t build here if they didn’t know what they were doing."
                  1. Foundations "engineered" for soil conditions
                  2. Deeply Dipping Bedrock Areas – "but the County says it is okay to build here!"
            8. A builder-vendor should fairly assess and fairly disclose the risk in plain English.
   3. Depending on the circumstances, nonphysical defects in the land should be disclosed.
      1. Zoning issues generally are matters of public record but an owner may have special or peculiar knowledge relating to zoning issues or proceedings likely to affect the property.
      2. Knowledge that a home is in noncompliance with applicable building codes may give rise to a duty to disclose. See Iverson v. Solsberry, 641 P.2d 314 (Colo. App. 1982) (original vendor’s failure to disclose non-compliance with building code in remodeling four-plex, and negligent failure to comply with code when remodeling, actionable; lack of privity of contract no bar to claim).
      3. While other jurisdictions have recognized causes of action against a seller for failing to disclose the existence of ancient graveyards or the occurrence of murders at a property, Colorado has statutorily limited such claims. See CRS § 38-35.5-101 ("Facts or suspicions regarding circumstances occurring on a parcel of property which could psychologically impact or stigmatize such property are not material facts subject to a disclosure requirement in a real estate transaction," including murders and suicides).
      4. What about conflicting engineering reports pertaining to problems with a home?
      5. What about earlier litigation involving construction defects?
      6. What about earlier claims or other expressions of concern?
   4. Depending on the circumstances, "defects" in neighboring properties should be disclosed.
      1. Off-site pollution and toxic spills.
      2. Impending and proximate landslides.
   5. Other matters. See Burman v. Richmond Homes Ltd., 821 P.2d 913 (Colo. App. 1991) (no duty to disclose fact homes subject to additional tax assessments).
4. Nondisclosure v. Concealment. Nondisclosures (omissions) and concealments may be actionable depending on the circumstances.
   1. A nondisclosure is often referred to a "passive" omission while a concealment often implies an "active" or intentional omission.
   2. Nondisclosures and concealments of fact generally do not involve an affirmative misrepresentation; however:
      1. If a statement or representation is made but an important fact is omitted, thus creating a false impression of the listener, the claim may involve a mixture misrepresentation and nondisclosure/concealment.
      2. Some have said that every misrepresentation involves an omission "of the true facts." See, e.g., Rosenthal v. Dean Witter Reynolds, Inc., 908 P.2d 1095, 1104 (Colo. 1995), quoting Little v. First Cal. Co., 532 F.2d 1302, 1305 n.4 (9^th Cir. 1976) ("The categories of 'omission' and 'misrepresentation' are not mutually exclusive. All misrepresentations are also nondisclosures, at least to the extent that there is a failure to disclose which facts in the representation are not true.")
   3. "The gist of a fraudulent misrepresentation is the producing of a false impression upon the mind of the other party . . . the means of accomplishing it are immaterial" "a statement literally true is actionable if made to create an impression substantially false." Cahill v. Readon, 273 P. 653, 655 (Colo. 1928).
      1. Misrepresentations may consist of: spoken words; written words; symbols; model homes; walk-out basements; hillside lots; "stakes" in the ground; conduct. See C.J.I. Civ-4^th 19:3.
5. Materiality. The omitted fact must be material. Courts have adopted varying tests of "materiality":
   1. A fact is material if a reasonable person under the circumstances would regard it as important in deciding what to do. CJI-Civ. 4^th 19:4.
   2. The buyer would have purchased the property "but for" the omitted fact.
   3. The omitted fact has an effect on the objective value of the property.
   4. Usually an objective test is employed, "what effect would the omitted fact had on the decision of a reasonable person in deciding whether to purchase the property." Sometimes, however, a subjective test is employed, viewing the importance of the fact from the standpoint of the particular purchaser. See, CJI-Civ. 4^th 19:4.
   5. In the case of the nondisclosure of a material fact, the test of "material inducement is not whether the plaintiff’s action would, but rather whether it might, have been different if the misrepresentation had not been made." Ackmann v. Merchants Mortg. & Trust Corp., 645 P.2d 7, 14 (Colo. 1982), quoting Morrison v. Goodspeed, 68 P.2d 458 (Colo. 1937).
   6. Statements of opinion and puffing generally are not actionable, but there are exceptions to this rule.
      1. "Community roads" represented to be:
         1. "Built to City Standards"
         2. In "Good Condition"
         3. Needing $50,000 in maintenance over the next ten years.
   7. Statements as to future events and estimates are actionable when:
      1. person making the misrepresentation has, or claims to have, special knowledge.
      2. person supplying estimate made no reasonable effort to verify the estimate.
      3. person providing the estimate does so with the intent of inducing the person to whom the estimate is conveyed not to conduct an investigation into the accuracy of the estimate .
      4. person providing the estimate, opinion or representation relating to future action is a fiduciary.
      5. a statutory duty exists to provide a good faith estimate (see, e. g., 24 C.F.R. § 1710.10(c)(4), every prospective buyer to be provided "with a good faith written estimate of the cost. . . over the first ten years of ownership")
6. Intentional, Reckless, Negligent and Innocent Nondisclosures. There are differences in pleading, proof, available theories of recovery and damages among intentional, reckless, negligent and innocent nondisclosures.
   1. It is an undecided issue in Colorado whether actual knowledge of a latent defect is necessary before liability for a failure to disclose the existence of the defect will be imposed on a builder-vendor.
   2. Dicta in Cohen v. Vivian, 349 P.2d 366 (Colo. 1960), and a line of cases from Georgia, suggests that constructive knowledge is sufficient. The later case of Denver Business Sales Co. v. Lewis, 365 P.2d 895 (Colo. 1961) inveighed against placing any reliance on such dicta where the claim sounds in fraud.
      1. Query: If a builder-vendor is under a duty of care to investigate the nature of the underlying soil and geologic conditions and fails to do so, then the builder-vendor likely would be liable for what it "should have known" in this regard and any damages resulting from its failure to build appropriately in light of these conditions. Since this is true, why is it unfair to charge the builder-vendor with the duty to disclose that which it "should have known" and to impose liability on the builder-vendor for any prejudicial detrimental reliance on the part of a home buyer flowing from such failure to disclose?
   3. The Colorado Court of Appeals has permitted a claim for negligent misrepresentation to be asserted based on a failure to disclose. See Robinson v. Poudre Valley Fed. Credit Union, 654 P.2d 861 (Colo. App. 1982) (evidence of credit union’s failure to inform car purchasers of credit union’s inexperience with out-of-state transactions supported a finding of negligent misrepresentation)
      1. Haney v. Castle Meadows, Inc., 839 F.Supp. 753 (D. Colo. 1993), held that Colorado would not recognize a cause of action for "negligent concealment." Haney does not appear to consider the situation where a party can be aware of a material fact yet accidentally fail to disclose it, without the necessity of "scienter" (evil motive) or an intent to defraud.
      2. There are many cases contra to Haney: See Sullan and Sandgrund, Residential Construction Defect Litigation (A View From the Trenches) (Seattle: 2000), at page 60, note 224 (collecting cases). And see, CJI-Civ 4^th 19:1, Notes on Use, ¶9 (referencing "negligent deceit").
      3. Since nearly every nondisclosure occurs in the context of the provision of other information, most claims involving nondisclosures can be equally characterized as a claim of misrepresentation. In fact, a "negligent nondisclosure" likely can be properly characterized as a subset or species of "negligent misrepresentation." Thus, the debate whether Colorado recognizes the tort of "negligent nondisclosure’ in most instances need not be resolved by the court.
   4. The Relevance of Intent.
      1. Proof of an actionable negligent misrepresentation does not require proof of scienter (evil motive), CJI-Civ. 4^th 9:3A, but in some circumstances may require proof of an intent that recipient (or class of recipients) of the information act or not act in reliance on the information, CJI-Civ. 4^th 9:3B.
      2. Proof of an actionable intentional misrepresentation requires proof of both an intent to cause reliance on the representation and scienter – knowledge of the falsity of the represented facts or awareness on the part of the provider of the information that he or she did not know whether the facts as represented were true or false. CJI-Civ. 4^th 19:1.
         1. Proof of an actionable intentional nondisclosure (i.e., deceit based on fraud or concealment) requires proof of the concealment of facts known to the provider of the information coupled with the intent on the part of the provider to create a false impression of the actual facts in the mind of the recipient of the information and the intent that the recipient so rely. CJI-Civ. 4^th 19:2.
         2. A fraudulent concealment may involve covering up the truth or preventing the plaintiff from discovering the actual facts. CJI-Civ. 4^th 19:6.
      3. Corporations: One hand doesn’t know what the other hand is doing.
         1. Material information may become known to a particular corporate agent or employee who is responsible for soils and construction issues, but the information is not shared with, disseminated to, or appreciated by another employee or agent who is responsible for making necessary disclosures to home buyers. Since a corporation is constructively deemed to have all the knowledge of its employees and agents, it may be just as likely that a fact the corporation has a duty to disclose will be negligently omitted or intentionally withheld.
   5. Detrimental Reliance
      1. A plaintiff generally will be found to have relied on a representation if, believing it to be true, the plaintiff took action he or she otherwise would not have taken, or decided against taking action he or she otherwise would have taken. CJI-Civ. 4^th 19:7.
      2. Reliance resulting in pure economic loss/financial injury. CJI-Civ. 4^th 19:3B.
      3. Reliance resulting in property damage or bodily injury. CJI-Civ. 4^th 19:3A.
      4. Circumstantial evidence of reliance is sufficient. Kopeikin v. Merchants Mortgage & Trust Co., 679 P.2d 599, 602 (Colo. 1984)
      5. Under some circumstances, a presumption of reliance may arise. Cf. CRS §42-6-202(5) (reliance presumed where odometer readings falsified).
      6. Under some circumstances, proof of reliance may be dispensed with. See Belvedere Condominium Unit Owners’ Assoc., v. E.E. Roark Companies, 617 N.E.2d 1075 (Ohio 1993) (violation of developer’s disclosure statute results in the imposition of strict liability).
   6. Privity and Secondary Purchasers. A secondary purchaser may assert claims against the original builder-vendor based either on misrepresentations or nondisclosures made to the original purchaser. See Schnell v. Gustafson, 638 P.2d 850 (Colo. App. 1981); Iverson v. Solsberry, 641 P.2d 314 (Colo. App. 1982); Wolther v. Schaarschmidt, 738 P.2d 25 (Colo. App. 1986).
      1. Proof of the necessary reliance by a secondary purchaser is generally simpler where the claim is founded on a nondisclosure.
         1. While this issue has not been addressed in Colorado within the context of home sales, our Supreme Court has commented in the context of a securities law violation claim. In Rosenthal v. Dean Witter Reynolds, Inc., 908 P.2d 1095, 1104 (Colo. 1995), the Colorado Supreme Court said that "reliance as a practical matter is impossible to prove" in a concealment case, and, thus, a class of defrauded securities purchasers need not claim or prove, on an individual basis, "reliance," just "causation" of the damages claimed flowing from the alleged concealment of material facts. See also, Carver v. Roberts, 337 S.E.2d 126, 128 (N.C. App. 1985) (reliance reasonably inferred from builder's concealment of soil conditions)
   7. Direct Communication With Injured Party Unnecessary. See Hall v. Walter, 969 P.2d 224 (Colo. 1998)( property owners had standing to sue developer of neighboring land where developer’s misrepresentations resulted in injury to property owners) . See also, CJI-Civ. 4^th 9:3A, Notes on Use, ¶4; CJI-Civ. 4^th 9:3B, Notes on Use, ¶4; CJI-Civ. 4^th 19:1, Notes on Use, ¶12.
7. Effect of Buyer's Investigation. Generally, a home buyer’s failure to conduct an investigation into the existence of hidden defects in property will not bar a claim for misrepresentation. Cf. CJI-Civ. 4^th 19:10. However, where the buyer conducts his or her own investigation and relies on it rather than any misrepresentation by the seller, then a jury may properly find that the element of reliance has not been proven. CJI-Civ. 4^th 19:11.
   1. Effect of existence and/or buyer’s knowledge of public records and recorded documents
   2. A real property purchaser generally has the right to rely on the seller’s honesty. See CJI-Civ. 4th 19:9.
   3. Robinson v. Poudre Valley Fed. Credit Union, 654 P.2d 861 (Colo. App. 1982) recognized application of the doctrine of comparative fault/negligence to a negligent misrepresentation claim.
8. Effect of Status of Transacting Party.
   1. Builder-Vendor.
   2. Ordinary Seller.
   3. Ordinary Buyer.
   4. Commercial or Sophisticated Buyer.
   5. Broker. See, Painter and Leone, "Designated Brokerage: Colorado Real Estate Agency Law Evolves Again," The Colorado Lawyer, Vol. 32, No. 3, pp. 11-25 (March, 2003).
      1. Vicarious Liability of Disclosed Principal.
9. Effect of Professional Consultation During Sale.
   1. The scope of any legal representation obtained by a purchaser relative to the purchase of a home likely will have a significant impact on both a court’s analysis of the law and the fact finder’s analysis of the facts relating to a claim for nondisclosure. Merely hiring an attorney to review the legal sufficiency of closing papers is unlikely to significantly alter the usual rules of law applicable to misrepresentation and nondisclosure claims.
   2. Where a "home inspector" or engineer is retained to examine a home pre-closing, the scope of their work is typically limited to a visual examination of readily accessible building components and, rarely, the review of construction and soils information made available by the seller. The effect of such a professional’s involvement on any later misrepresentation and nondisclosure claims is likely to be fact specific and shaped by the scope of the professional’s assignment.
10. Causation.
    1. Typically, actual damages reasonably resulting from a property purchaser’s detrimental reliance on the seller’s false representations are recoverable.
    2. Where money damages are sought for violation of CRS § 6-1-105, the Colorado Consumer Protection Act, the plaintiff need only show a "causal connection between the alleged violation and the amounts he seeks to recover." Hall v. Walter, 969 P.2d 224, 230 (Colo. 1998).
11. Damages.
    1. Actual/Compensatory.
    2. Nominal.
    3. Punitive.
    4. Rescission/Restitution.
12. Pleading Nondisclosure With "Particularity."
    1. There usually is a need to conduct some discovery before the specific facts underlying the alleged nondisclosure can be identified. The material, undisclosed facts often are wholly in the possession and/or control of the property seller.
    2. Until these facts are discovered, it is impossible for the property purchaser to explain how the nondisclosure of the facts influenced his or her decision to purchase the property.
    3. There is an obvious tension between Colorado’s "notice" pleading rules, the requirement that fraud be pled with particularity, the potential running of statutes of limitation if a misrepresentation or nondisclosure claim is not timely brought, and the unanswered question whether a negligent nondisclosure is subject to any "pleading with particularity" requirements under the Rules.
13. Personal Liability.
    1. Personal liability may, under proper circumstances, be imposed on a corporate officer, director or employee for his tortious or fraudulent conduct even when committed in a representative capacity. See Snowden v. Taggart, 17 P.2d 305 (Colo. 1932); Klockner v. Keser, 488 P.2d 1135 (Colo. App. 1971); People ex re. MacFarlane v. Alpert Corp., 660 P.2d 1295 (Colo. App. 1982); Sanford v. Kobey Bros. Const. Corp., 689 P.2d 724 (Colo. App. 1984); LaFond v. Basham, 683 P.2d 367 (Colo. App. 1984); American Airlines v. Christensen, 967 F.2d 410 (10^th Cir. 1992).
    2. Vicarious liability may be imposed on a principal for the misrepresentations of the principal’s agent. See Erickson v. Oberlohr, 749 P.2d 996 (Colo. App. 1987); Restatement (Second) of Agency § 229 cmt. a (1958).
    3. The damages provisions of the CCPA are available to any person in a civil action for any claim against "any person who has engaged in or caused another to engage in any deceptive trade practice. . . ." CRS § 6-1-113.CRS § 6-1-102(6) defines "person" broadly as "an individual, corporation, business trust, estate, trust, partnership, unincorporated association, or two or more thereof having a joint or common interest, or any other legal or commercial entity."
14. Recent Cases of Note.
    1. Rocky Mountain Rhino Lining, Inc. v. Rhino Linings USA, Inc., 62 P.3d 142 (Colo. 2003).
    2. Anson v. Trujillo, 56 P.3d 114 (Colo. App. 2002).
15. Liability insurance Coverage. Colorado’s appellate courts are examining the question whether the standard liability insurance policy (the current ISO CGL policy form) affords coverage for negligent misrepresentations and nondisclosure.
    1. A proper analysis of insurance coverage depends on the facts and the law underlying the predicate liability of the insured.
       1. Analysis of the insurer’s duty to defend requires a comparison of the four corners of the Complaint against the four corners of the insurance contract.
       2. An insurer seeking to avoid its duty to defend an insured bears a heavy burden. An insurer's duty to defend arises when the underlying complaint against the insured alleges any facts that might fall within the coverage of the policy. The actual liability of the insured to the claimant is not the criterion which places upon the insurance company the obligation to defend. Rather, the obligation to defend arises from allegations in the complaint, which if sustained, would impose a liability covered by the policy. Where the insurer's duty to defend is not apparent from the pleadings in the case against the insured, but the allegations do state a claim which is potentially or arguably within the policy coverage, or there is some doubt as to whether a theory of recovery within the policy coverage has been pleaded, the insurer must accept the defense of the claim. Hecla Mining Co. v. New Hampshire Ins. Co., 811 P.2d 1083, 1089 (Colo. 1991)
       3. Analysis of the duty to indemnify requires a comparison of the factual and legal basis of the legal liability actually imposed on the insured against the four corners of the insurance contract.
          1. CJI-Civ 4^th 9:3A : requires proof that reliance on negligent misrepresentation caused "physical harm to the person or property of the plaintiff."
          2. CJI-Civ 4^th 9:3B: requires proof that "reliance on negligent misrepresentation caused "damage to the plaintiff."
    2. Occurrence-based policies provide that: "This insurance applies to . . . ‘property damage’ only if [t]he ‘property damage’ is caused by an ‘occurrence’ . . . ."
       1. An "occurrence" is defined as: "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."
       2. The word "accident" as used in the definition of "occurrence" is undefined by the policy and will be given the broadest, reasonable, non-technical definition by our courts. In analyzing what constitutes an "accident" one must consider:
          1. Intentional torts v. volitional acts
          2. Intended and expected harms v. foreseeable injuries
          3. Whether reckless conduct reaches the level of expecting or intending the resulting injury:
          4. ". . . what makes injuries or damages expected or intended rather than accidental are the knowledge and intent of the insured. It is not enough that an insured was warned that damages might ensue from its actions, or that, once warned, an insured decided to take a calculated risk and proceed as before. Recovery will be barred only if the insured intended the damages, or if it can be said that the damages were, in a broader sense, "intended" by the insured because the insured knew that the damages would flow directly and immediately from its intentional act. . . . (emphasis added) Hecla Mining Co. v. New Hampshire Ins. Co., 811 P.2d 1083, 1088 (Colo. 1991), quoting with authority City of Johnstown v. Bankers Standard Ins. Co., 877 F.2d 1146, 1150 (2^nd Cir. 1989).
       3. Many insurers seek to rely on the "fortuity" doctrine, including the concepts of "known loss" and "loss in progress," in resisting claims sounding in misrepresentation or nondisclosure.
          1. The "fortuity" doctrine has not been expressly recognized in Colorado, has been greatly limited in most jurisdictions where it is recognized, and generally overlaps with the common law prohibition against fraud in the inducement and the standard policy exclusions excepting coverage for intended or expected harms.
       4. The policy defines "Your Work" as including(a) Warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of "your work"; and (b) The providing of or a failrue to provide warnings or instructions.
          1. One must ask why the insurance industry bothered to define "your work" to include warranties and representations while simultaneously arguing that neither can constitute a covered "accident" or "occurrence" under any circumstances?
          2. Vandenberg v. Superior Ct., 982 P.2d 229 (Cal. 1999), held that, under the circumstances before the court, a liability policy may indemnify against contractually-based liabilities. The standard CGL policy by its own terms covers certain contractually imposed liabilities, such as contractual indemnity provisions and sidetrack agreements.
       5. It is well-accepted that words may serve as "operative conduct," in the form of instructions and warnings. Whether a claim is characterized as a negligent failure to warn or a negligent omission, if the underlying facts underlying the imposition of liability meet the policy’s coverage grant and are not expressly excluded from coverage, then coverage should obtain.
    3. Property Damage: The insurance company will pay, "sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’" to which this insurance applies."
       1. "Property damage" is defined as: "a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or b. Loss of use of tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the ‘occurrence’ that caused it."
          1. Tangible property usually means property that is capable of being touched or felt.
          2. "Injury" is undefined.
          3. The word "use" as used in the phrase "loss of use" is undefined, and the phrase likely includes a complete or partial loss of use.
       2. Only if the injury involves merely and solely economic damages in the nature of loss of investments, anticipated profits and financial interests or the like, without the antecedent "property damage," will coverage not attach. See, e.g., Lamar Truck Plaza, Inc. v. Sentry Ins., 757 P.2d 1143 (Colo. App. 1988) (no coverage under commercial general liability policy for employment discrimination claims).
    4. Legally Liable to Pay Damages "Because of" Property Damage.
       1. The insurance company agrees to pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies." Once the antecedent "property damage" occurs, caused by an occurrence, all damages for which the insured is found legally obligated to pay must be indemnified under the policy barring an applicable policy exclusion or public policy bar.
    5. Policy Exclusions.
       1. An insurance company bears the heavy burden of proving the application of a policy’s exclusion from coverage. Public Service Co. of Colorado v. Wallis and Companies, 955 P.2d 564 (Colo. App. 1997), rev’d on other grounds, Public Serv. Co. v. Wallis, 986 P.2d 924 (Colo. 1999). In order to avoid policy coverage, an insurer must establish that the exemption claimed applies in the particular case, and that the exclusions are not subject to any other reasonable interpretations. Hecla Mining Co. v. New Hampshire Ins. Co., 811 P.2d 1083 (Colo. 1991). bb
       2. The policy excludes coverage for "’property damage’ expected or intended from the standpoint of the insured." This exclusion was previously embedded in the definition of "occurrence" in predecessor policy forms.
          1. Why this language was moved from the definition of "occurrence" and made a stand-alone exclusion is a matter of debate. Insurers argue the change was intended to underscore the "fortuity" requirement integral to a finding of an "occurrence." Policyholder counsel argue that it was done simply to clarify that the insurer bears the burden of proving the application of the exclusion since the insured generally is found to bear the burden of proving the happening of an "occurrence."
       3. Various so-called "business risk" exclusions may need to be analyzed and their applicability considered. See Sullan and Sandgrund, Residential Construction Defect Litigation (A View From the Trenches) (Seattle: 2000), at page 187-98.
    6. Are negligent misrepresentations and nondisclosures covered occurrences not excluded from coverage?
       1. Resolution of the issue likely depends on the facts underlying the imposition of liability on the insured.
          1. A negligent misrepresentation or nondisclosure may or may not require an intent to induce reliance. Either way, this fact alone should not obviate coverage.
          2. A negligent misrepresentation or nondisclosure does not require proof of an intent to misrepresent or mislead.
          3. Only where the claim of negligent misrepresentation or nondisclosure is predicated factually on a subjective intent to cause injury would it appear that coverage might be obviated. In such a case, one is really dealing with fraud by deceit.
          4. Coverage may turn on whether the falsity of the statement (and/or the failure to disclose all material information) and the resulting injury caused by such misrepresentation (or nondisclosure) was "accidental."
          5. The negligent misrepresentation or nondisclosure may have to be proven to have caused "property damage," and the Colorado Supreme Court’s decision in Cyprus Amax (discussed below) likely will provide great guidance on this question.
16. Recent Cases of Note :
    1. Cyprus Amax Minerals Co. v. Lexington Insc. Co., 55 P.3d 200 (Colo. App. 2002), cert granted. This case held that because the underlying complaint "sought to hold [the insured] liable for fraud and misrepresentation in connection with the sale of the mine," "[exposing the insured not] to liability for causing damage to the property, but rather for economic losses resulting form the alleged misrepresentation of the valued of the mine," no claim seeking to impose legal liability on the insured because of "property damage" was alleged and the insurer had no duty to defend or indemnify its insured. In dicta, the Court of Appeals noted that while courts are divided on whether a negligent misrepresentation can constitute an "occurrence," it need not reach this issue in disposing of the case.
    2. Issues on certiorari: Is their a sufficient "causal nexus" between the predicate environmental property damage claims and the legal liability sought to be imposed on the insured so as to trigger coverage; or, is the proper analysis whether the alleged "property damage" resulted from the alleged misrepresentations? The Court of Appeals held that there was no causal connection between the alleged misrepresentations and the alleged physical damage, that there was only a causal connection between the misrepresentations and the alleged resulting economic losses. Specifically, our Supreme Court granted certiorari on the following issues:
       1. Whether the court of appeals erred in determining the respondent insurance companies’ ("Insurers") duty to indemnify Cyprus by applying a duty to defend analysis, i.e., restricting its review of the underlying case to the four corners of the complaint and ignoring other evidence of what was at issue in the underlying litigation and settlement.
       2. Whether the court of appeals erred in holding that damages sought by Coeur d’Alene Mining Company ("Coeur"), based on allegations that negligent misrepresentations by Cyprus led it to purchase mining property that was subsequently damaged by a landslide causing Coeur to incur remediation costs, were purely "economic" losses and not "property damage" as defined in the subject insurance policies.
       3. Whether the court of appeals erred in effectively holding that, even if there was a sufficient "causal connection" for Cyprus to have been held liable for the costs of repairing property damaged by a landslide due to its alleged negligent misrepresentation, there was not a sufficient "causal connection" to bring such liability within the coverage provided by the subject insurance policies.

       Note: The Court of Appeals decision in Cyprus Amax Minerals was reversed in Cyprus Amax Minerals Co. v. Lexington Ins. Co., 74 P.3d 294 (Colo. 2003), and coverage found to exist for property damage related to a negligent misrepresentation.

    3. Hoang v. Monterra Homes v. Assurance Company of America and Maryland Casualty Company, 99 CV 2425 (Jefferson Cnty. Dist Ct., Nov. 13, 2002). This garnishment action resulted in a $4.5 million judgment for a builder against its liability insurer for the use and benefit of three sets of homeowners. Judge Plaut found and ordered as follows regarding coverage for the underlying judgment on the homeowners’ misrepresentation, nondisclosure and CCPA claims:

       ***

       26. The "negligent misrepresentations" and violation of Colorado’s Consumer Protection Act ("CCPA") alleged and proven here both constitute an "occurrence," similar to a negligent warning, instruction, disclosure or omission. As noted above, the jury was instructed only to award damages that were due to ("because of") any property damage sustained by the home caused by such negligent misrepresentations or CCPA violation. Moreover, Jury Instruction No. 10 (Garnishors’ Ex. 24) required that the jury find that Plaintiffs’ reliance on any of Monterra’s negligent misrepresentations "was a cause of physical harm to the Plaintiffs’ property," before awarding any damages on this claim. (Cases like Cyprus Amax Minerals Co. v. Lexington Ins. Co., 55 P.3d 200 (Colo. App. 2002), cert. granted, (although physical damage was described in Complaint, nothing in Complaint alleged that the alleged misrepresentations caused any damage), and M.L. Foss, Inc. v. Liberty Mut. Ins. Co., 885 P.2d 284 (Colo. App. 1994) (pure diminution in value, i.e., economic loss, without any property damage, not covered), both relied upon by Garnishees, only involved claims for purely economic loss. Moreover, M.L. Foss, Inc. involved a claim of intentional fraud and no such claim was submitted to the jury here.)

       There is substantial evidence that Monterra’s negligent misrepresentations (including negligent omissions and/or non-disclosures) and CCPA violations, consisting of its negligent failure to adequately advise Plaintiffs (or their predecessors in interest) of watering, landscaping and grading restrictions applicable to their homes, caused Plaintiffs to rely on such misinformation, resulting in watering, landscaping and grading practices that caused damage to the homes due to (i.e., "because of") the pressures exerted by water associated with such practices.

       27. Public policy does not prohibit an insurer from indemnifying its insured against the insured’s liability for violating the CCPA where such violation occurred negligently and results in covered property damage, such as due to a violation of subsection (g) of Colorado’s Consumer Protection Act, C.R.S. § 6-1-105, the subsection on which the jury was instructed here. In this regard, it is important to recognize that one purpose of the attorney fee and litigation cost provision of the CCPA is to encourage consumer-homeowners to act as private attorneys general, by promoting "private enforcement" of this important consumer protection law, and that the statute does not exist simply for purposes of punishment. See Showpiece Homes Corp. v. Assurance Co. of America, 38 P.3d 47, 50-51 (Colo. 2001). Another rationale for the remedies available under the CCPA is "remediation." Lexton-Ancira Real Estate Fund, 1972 v. Heller, 826 P.2d 819, 822, note 3 (Colo. 1992). Where multiple purposes underlie a statutory award, and punishment is only one of these purposes, no public policy stands in the way of indemnifying against such an award. See, e.g., Wojciak v. Northern Package Corp., 310 N.W.2d 675, 681 (Minn. 1981); Cieslewicz v. Mutual Service Cas. Ins. Co., 267 N.W.2d 595, 601 (Wis. 1978); Ethicon, Inc. v. Aetna Cas. and Sur. Co., 737 Supp. 1320, 1336 (S.D.N.Y. 1990).

       Whatever public policy reasons Garnishees urge relieve an insurer from indemnifying its insured against damages awarded under the CCPA for intentional or knowing violations of that law (which the Court finds do not apply here because Monterra’s violation of the CCPA was merely negligent), such public policies do not relieve an insurer of its obligation to pay all costs taxed against its insured, including attorney fees, where such obligation arises from the insurer’s duty to defend, rather than its duty to indemnify. The duty to defend is much broader than the duty to indemnify. See discussion at Paragraph 35 below. Unlike a punitive damage award, an award of attorney fees under the CCPA is intended to reimburse the injured consumer and help render him whole. Cf. Lira v. Shelter Ins. Co., 913 P.2d 514, 517 (Colo. 1996) (punitive damages not insurable because they are "not meant to reimburse an injured plaintiff for harm suffered by that individual, but rather are intended to punish the defendant for his wrongful acts and to deter similar conduct in the future." (emphasis added))

       ***

       November 13, 2002, Findings of Fact, Conclusions of Law, Order, and Judgment on Plaintiffs’ Traverse, at 26-27.

       Note: The case was appealed and coverage for the negligent misrepresentation claim affirmed, but coverage was limited to 80% of the damages award due to the presence of an "earth movement" exclusion: See Hoang v. Monterra Homes LLC, No. 99CV2425 (Jefferson County Dist. Ct. Nov. 13, 2002), aff’d in part, rev’d in part, 129 P.3d 1028 (Colo. App. 2003), rev'd and remanded, 2007 WL 38997, --- P.3d ---, January 8, 2007).

    4. CU Lloyds’ of Texas v. Main Street Homes, 79 S.W. 3d 687 (Tex. App. 2002)(holding that allegations that general contractor built homes after learning that foundation designs were inadequate for soil conditions and failed to disclose knowledge to purchasers stated an accident and thus an occurrence and no business risk exclusion applied).
    5. Annot., "Negligent Misrepresentation as "Accident" or "Occurrence" Warranting Insurance Coverage," 58 A.L.R. 5^th 483 (1998), collecting cases.