10th Circuit: Missing Fence Didn’t Void Builders’ Risk Policy

An insurance policy purchased by Axia Contracting from Praetorian Insurance Co. required a six-foot chain link fence to completely surround the job site. That is a standard term for all policies underwritten by QBE North America, according to its lawyers.

But was the purpose of the fence to deter theft, fire, or something else?

Because the policy did not say, Praetorian was not entitled to a declaratory judgment excusing it from covering fire damage to a partially-constructed motel even though everyone agreed no fence had been erected, the 10th Circuit Court of Appeals decided.

In a 3-0 decision, the appellate panel reversed a ruling by the federal district court in Denver finding that Axia has materially breached its insurance contract. The court said in an opinion written by Carlos F. Lucero that the district court erred by ruling that the failure to fence the job site was a material breach of contract.

District Judge William J. Martinez had granted summary judgment in favor of Praetorian on his own motion, without even considering the question of whether coverage was excluded under the specific terms of the policy.

The appellate court, in its unpublished decision, said that was a step too far.

“As defendants argue, treating the failure to fence as a material breach could excuse Praetorian’s obligation to cover damage from a tornado,” the court said. “Such a result is clearly inconsistent with the parties’ expectations as indicated by the policy’s plain terms.”

Axia Contracting was building a 139-room Courtyard by Marriott near a light-rail station in the Denver suburb of Aurora, Co. Someone set fire to the partially-constructed building early in the morning of June 19, 2017. No fence had been erected, so Praetorian denied coverage.

The carrier filed suit seeking a declaratory judgment that it was not liable. Axia and the property owner, North Dakota-based 225 Blackhawk Hospitality, filed suit alleging breach of contract and bad faith.

The policy had a protective devices endorsement that required the insured to maintain a list of protective devices listed on a protective devices schedule. A six-foot tall chain link fence with gates that are always locked after working hours was on that list.

The policy stated that fire coverage was excluded if any of the required protective devices was missing, but it did not say whether the fence was a fire protection device. The policy covered other perils, including theft, and also listed theft-protection devices on the schedule of protective devices.

“Nothing in the PDE or PDS comes close to clearly and unequivocally telling the insureds that Praetorian would have no obligations whatsoever under the policy if the insureds did not maintain a six-foot chain link fence around the project,” Denver attorney Scott W. Wilkinson argued to the appellate court.

In a telephone interview, Wilkinson noted that the trial court judge never ruled on the question of whether the fence was a protective device intended to protect from fire. Instead, he essentially adopted an argument that hadn’t even been argued by the insurer and decided that failure to install a fence was a material breach of contract.

Wilkinson said the circuit court’s decision will require him to decide whether a chain link fence is a fire-protection device. He said he thinks he can win that argument. QBE in its own underwriting materials states that a six-foot chain-link fence is not enough to deter arson and recommends fire-protection materials in addition to crawl-over protection to guard against arson.

“It’s pretty easy for someone to hop a fence with a can of gas and set a fire,” Wilkinson said.