H.b. 10-1394: New Law Governing Insurance Coverage for Construction Defect Claims
| Publication year | 2010 |
| Pages | 89 |
| Citation | Vol. 39 No. 8 Pg. 89 |
2010, August, Pg. 89. H.B. 10-1394: New Law Governing Insurance Coverage for Construction Defect Claims
August 2010
Vol. 39, No. 8 [Page 89]
Tort and Insurance Law articles provide information concerning current tort law issues and insurance issues addressed by practitioners representing either plaintiffs or defendants in tort cases. They also address issues of insurance coverage, regulation, and bad faith.
House Bill 10-1394, codified at CRS §§ 10-4-110.4 and 13-20-808, significantly affects insurance coverage for construction defect claims. This article discusses this new law's technical provisions and examines its important implications for Colorado liability insurers, construction professionals, and construction defect claimants.
In response to concerns regarding how courts were applyingthe insurance coverage case General Security Indemnity Co. of Arizona v. Mountain States Mutual Casualty Co. (General Security),(fn1) and the broadening scope of insurance policy "loss in progress" and "known loss" provisions, House Bill (H.B.) 10-1394, codified at CRS §§ 10-4-110.4 and 13-20-808: (1) provides courts guidance when interpreting liability policies issued to construction professionals; (2) deems property damage resulting from construction defects, including damage to a construction professional's own work, an "accident," unless the construction professional intended and expected the resulting damage; (3) requires insurers to defend notices of potentially covered claims under Colorado's Construction Defect Action Reform Act (CDARA);(fn2) and (4) prescribes that "loss in progress" and "known loss" provisions are effective only if they apply to damage or injury known to the insured construction professional before the policy's inception date. This article provides an overview of this new law.
Act Summary
H.B 10-1394 (Construction Professional Commercial Liability Insurance Act or Act) amends CDARA and the Colorado Insurance Code by codifying certain interpretive rules for occurrence-based liability policies insuring construction professionals. The Act allows courts to consider: (1) an insured's objective, reasonable expectations concerning coverage; and (2) insurance industry and internal insurance company explanatory materials to help interpret and apply certain policies.(fn3) The Act declares that an insurer's duty to defend is triggered if a potentially covered liability is described in a CDARA notice of claim.(fn4)
The Act also declares that property damage, including damage to construction work performed by an insured, is presumed to be an "accident" unless the damage was intended and expected by the insured.(fn5) It clarifies and confirms that the "duty to defend" is a first-party insurance benefit and, thus, likely subject to CRS §§ 10-3-1115 and -1116, sometimes referred to as Colorado's "prompt payment" statute.(fn6) This law provides for double damages and attorney fees in the event an insurer unreasonably delays or denies payment of insurance contract benefits to a first-party claimant.(fn7) Finally, the Act declares that Montrose(fn8) provisions, purporting to exclude coverage for damage or injury that begins before a policy's inception date and that continues into, worsens, or progresses during the policy period, are ineffective unless the insured knew of the damage or injury before the policy's inception.(fn9)
The new law applies to insurance policies in existence on or issued after the Act's effective date that cover occurrences of damage or injury during the policy period and that insure a construction professional's liability arising from construction-related work.(fn10) The Act's procedural and remedial aspects, such as its evidentiary and burden of proof provisions, probably will be applied retroactively; retrospective application of its substantive elements to previously existing insurance policies depends on the circumstances and awaits court review. If a court can resolve a coverage dispute under the common law and reach the same result provided by the statute, such retrospective analysis would be moot.
Although the Act applies only to liability policies issued to construction professionals, because the same, standardized wording is used in policies insuring most other Colorado business risks, the Act's effects may broadly resonate. Colorado insureds can be expected to argue that the adoption of the Act supports the conclusion that some standardized insurance policies issued to construction professionals are adhesion contracts; Colorado courts appear to have already tentatively embraced this conclusion.(fn11)
The Act's History
Support for the Act arose after a series of construction defect insurance coverage decisions issued, followed by a number of liability insurers relying on those decisions to deny any duty to defend or indemnify Colorado construction professionals against claims arising from construction-related defects.(fn12) The first of these decisions, General Security, and two later U.S. District Court for the District of Colorado decisions, were the subject of a November 2009 article in The Colorado Lawyer.(fn13) That article noted that the procedural posture of the General Security coverage appeal was unusual insofar as it involved only insurers. The article suggested that the parties did not bring pertinent legal arguments and Colorado precedent to the court of appeals' attention, and that large parts of the opinion may constitute dicta.
Three U.S. District Court opinions followed, two of which read General Security broadly as precluding coverage for, and any duty to defend arising from, property damage to the insured's previously performed work arising from construction defects.(fn14) Both of these cases, Greystone Construction, Inc. v. National Fire and Marine Insurance Co. (Greystone),(fn15) and United Fire and Casualty Co. v. Boulder Plaza Residential(fn16) are on appeal. On June 3, 2010, the U.S. Tenth Circuit Court of Appeals certified the following question framed by the Greystone appeal to the Colorado Supreme Court for its consideration: "Is damage to non-defective portions of a structure caused by conditions resulting from a subcontractor's defective work product a covered 'occurrence' under Colorado law?"(fn17) On June 23, 2010, the Colorado Supreme Court declined to accept the certified question, and a ruling by the Tenth Circuit in Greystone may issue soon.(fn18)
The Act suggests that aspects of General Security were decided or were being viewed in a way that the legislature believed contravened Colorado precedent and public policy. Consistent with published insurance industry policy interpretive materials allegedly contradicting the insurers' coverage position in Greystone,(fn19) an insurance industry attorney and lobbyist testified during the legislative hearings that General Security and Greystone were a "shock" to the insurance industry and "not the rule of law," "not the way courts have ruled in other jurisdictions," and that the rulings "took it too far."(fn20) The Act found bipartisan cosponsorship.(fn21)
Support for the Act also sprung from the insurance industry's use of what are commonly referred to as Montrose provisions, intended to bar coverage when an insured knows before its policy's inception date of damage or injury that later gives rise to a covered claim. These Montrose provisions morphed into what are now frequently referred to as super-Montrose provisions that bar coverage without regard to whether the insured knew of the injury or damage before the policy's inception date, as long as the injury or damage, even if hidden and unknown to anyone, began before that date.
The Act's Framework
The Act consists of two main parts. The first part, CRS § 13-20-808, formalizes certain rules for construing coverage for construction professionals under "occurrence-based" commercial liability insurance policies, such as commercial general liability insurance, multi-peril insurance, and liability coverages found in builder's risk policies. Occurrence-based insurance coverage typically is triggered by the occurrence or happening of injury or damage during the policy period, but the statute's reach is limited to policies that insure a "construction professional for liability arising from construction-related work."(fn22) The Act was not intended to apply to errors and omissions coverage written on a "claims made" basis for persons such as design professionals.
The first part also addresses an insurer's duty to defend a construction professional against a property owner's notice of claim served under CDARA. The second part, CRS § 10-4-110.4, voids as against public policy under certain conditions insurance provisions that purport to exclude coverage for property damage that, unknown to the insured, begins before an occurrence-based policy's inception date and that continues or worsens during the policy period.
First Part-Policy Construction and Duty to Defend
The Act begins by finding that insurance policies "have become increasingly complex, often containing multiple, lengthy endorsements and exclusions conflicting with the reasonable expectations of the insured."(fn23) The Act codifies and modifies certain rules of insurance policy construction approved by the Colorado Supreme Court. The Act declares that insurance coverage and an insurer's duty to defend shall be...
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