A lower court interpreted a professional liability insurance policy’s faulty workmanship exclusion too broadly, said a federal appeals court, in overturning a District Court ruling in the insurer’s favor.

In 2012, Dallas-based Heirloom I LLC contracted with Fort Collins, Colorado-based CFI-Global Fisheries to design and construct a fisheries enhancement project on its property, according to Wednesday’s ruling by the 10th U.S. Circuit Court of Appeals in Denver in Rockhill Insurance Co. v. CFI-Global Fisheries Management; Heirloom I, LLC.

Heirloom paid CFI more than $800,00 under the contract, but the work was defective, and the project was destroyed by natural processes four times in three years, according to the ruling.

In July 2015, Heirloom initiated arbitration proceedings against CFI for breach and negligence related to the project’s design and execution.  CFI requested that its professional and general liability insurer, Columbus, Ohio-based Rockhill, represent it in the arbitration, Rockhill agreed to defend the arbitration subject to a reservation of rights.

The arbitrators awarded Heirloom $610,000 plus pre-judgment interest and the parties subsequently stipulated to an additional $265,000 award of attorneys fees.

Rockhill filed suit in U.S. District Court in Denver, seeking a declaration it had no duty to defend and indemnify CFI in connection with the arbitration.

The District Court ruled in Rockhill’s favor, but was overturned by a unanimous three-judge appeals court panel.

The lower court held that the Faulty Workmanship exclusion’s reference to “your work” in the policy 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,” said the ruling.

The “words in the body of the exclusion are more naturally read as related to construction, rather than design,” it said.

“The district court should not have granted summary judgment to Rockhill as to the design components of CFIO’s work for Heirloom,” the ruling said.

“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 be or can be apportioned between design and construction.

“We thus leave that issue for the district court to consider in the first instance,” said the ruling, in reversing the district court’s grant of summary judgment on the exclusion and CFI’s claim of statutory bad faith, and remanding the case for further proceedings.

“It’s a very positive ruling,” said Alan C. Bradshaw, of Manning Curtis Bradshaw & Bedmar PLLC in Salt Lake City, who represented CVI-Global. Rockhill’s attorney had no comment.