Buyer Beware: Insurance Agents May Have No Duty to Sell Construction Contractors an Insurance Policy Covering Likely Claims

Construction contractors in the market for insurance coverage have few legal protections if their insurance agent fails to provide insurance that covers likely claims against the contractor.  As construction defect lawsuits continue to be a frequent occurrence throughout Colorado, we have seen an increase in the number and complexity of coverage endorsements and exclusions in insurance policies.  Some of these exclusions result in insurance policies that are essentially useless to the contractor who purchased them.  For example, we have seen dirt work contractors with earth movement exclusions or an earth movement sublimit that turns their $2 million policy into a $100,000 policy.  We have seen contractors who primarily build tract homes in subdivisions with tract home exclusions.  We have seen general contractors whose policies state that every subcontractor must name the contractor as an additional insured or else the general contactor’s policy converts from a seven-figure policy to a five-figure policy with eroding limits (meaning that the attorney’s fees, expert fees, and litigation costs reduce the coverage limits).  The list goes on and leads to an unfortunately high number of contractors who pay significant sums for their insurance policies, finding themselves uninsured or underinsured.

Faced with the complexity of some policy exclusions, some contractors may wonder if their insurance agent has a duty to advise them of the impact of exclusions, to warn them of the need to purchase additional or different insurance, and generally to sell them a policy providing coverage for the contractor’s work.  Having protection for the types of work the contractor performs is, after all, why contractors spend significant sums on their policies.  Colorado follows the general rule that an insurance agent has no duty to provide warnings about policy exclusions and their impact on coverage or to advise a contractor about what insurance they should be purchasing.  In Kaercher v. Sater, the Colorado Court of Appeals summarized the law in Colorado as follows:

Colorado follows the general rule that insurance agents have a duty to act with reasonable care toward their insureds, but, absent a special relationship between the insured and the insurer’s agent, that agent has no affirmative duty to advise or warn his or her customer of provisions contained in an insurance policy.  The general duty of the insurer’s agent to the insured is to refrain from affirmative fraud, not to watch out for all rights of the insured and inform the latter of them.  The general duty of reasonable care which an insurance agent owes his client does not include the obligation to procure a policy affording the client complete protection, but insured has responsibility to advise agent of the insurance he or she wants, including the limits of the policy to be issued.  The nature of an insurance agent’s duty does not impose upon the agent the affirmative obligation, absent special circumstances, to inform about or recommend policy limits higher than those selected by the insured.  Insurance agents or brokers are not personal financial counselors and risk managers, approaching guarantor status, and it is well settled that agents have no continuing duty to advise, guide, or direct a client to obtain additional coverage.

Kaercher v. Sater, 155 P.3d 437, 441 (Colo. App. 2006).

Thus, insurance agents have no duty to provide advice on the impact of an insurance policy other than to avoid fraud unless a special relationship exists.

While an insurance agent typically has no duty to provide advice on the impacts of an insurance policy, the same case confirms that insurance agents must sell construction contractors the insurance they specifically request.  See id. (summarizing the law that, “where an insurance agent promises to obtain a specific type of insurance requested by the insured, the agent assumes a duty to act reasonably in procuring the requested insurance”).  Thus, while an insurance agent has no duty to advise a construction contractor regarding what insurance they should purchase or of the impacts of their current policy absent a special relationship, an insurance agent must make reasonable efforts to purchase the insurance a contractor requests.  So, contractors may have a cause of action against their insurance against if, for example, they request a policy with no earth movement exclusions or earth movement sublimit and the policy the agent sells the contractor contains such exclusions and/or sublimit.  While contractors likely are not looking to sue their insurance agent, a claim by the contractor against the insurance agent’s own insurance, such as their E&O policy, is sometimes the only means of securing coverage for an uninsured claim.

The central takeaway is that contractors must be hyper-vigilant in confirming their own insurability because they should not rely solely on their insurance agent in most cases.  Contractors should carefully review their insurance policies and should strongly consider having an attorney with knowledge of the construction industry review their policy.  Further, careful drafting of a general contractor’s master subcontractor agreements can reduce liability where the subcontractor agreements can and should contain a checklist of minimum insurance coverage requirements as well as common exclusions that must not be included in subcontractor policies of insurance.  Counsel familiar with construction defect litigation can prepare a similar check list for a general contractor to bring to their agent for purposes of purchasing the general contractor’s next insurance policy.  The potential pitfalls for contractors continue to grow but can be mitigated with proper planning and guidance.