Governor Ritter Signs HB 10-1394 Into Law

As previously discussed over the last few months in this blog, HB 10-1394 has been creating a lot of waves in the Colorado insurance industry and among those that it insures in the construction industry.  A compendium of previous entries related to HB 10-1394 can be found here. 

The latest news is that Governor Ritter signed HB 10-1394 into law last Friday afternoon.  As reported in the Insurance Journal:

Colorado Governor Bill Ritter has signed into law a bill changing retroactively the duty of insurers to defend contractor professionals in construction liability cases.

The bill (HB 1394) was opposed by insurers and agents, who have warned it could make liability insurance for contractors hard to find or very expensive. For that same reason, it was also opposed by the American Subcontractors Association of Colorado.

It was passed in response to a 2009 court decision in General Security Indemnity v. Mountain States Mutual, which excluded claims for certain construction defects and imposed no obligation to defend in a contractor’s professional liability insurance policy. The decision held that there was no duty to defend faulty construction work claims for faulty work performed by a general contractor’s subcontractors.

Lawmakers were concerned that the Colorado Court of Appeal decision did not adequately consider a construction professional’s reasonable expectation that an insurer would defend against a defect claim.

The bill was meant to restore some duty of the insurer to defend contractors in such claims. The new law now considers damage caused by the work of a construction professional — even damage to the work itself — as accidental, and eligible for coverage.

But critics say it goes too far, requiring the liability policy to almost guarantee the quality of a contractor’s work much like a bond. They say the general liability policy is meant to cover the consequential damage resulting from faulty work, but not the faulty work itself.

Also, the law makes the new rules retroactive, placing insurers in a position of having to defend claims that they never envisioned when current policies were written and priced.

“It is likely that the bill will have adverse effects on the availability and affordability of insurance for construction professionals in Colorado,” said Kelly Campbell, vice president for Property Casualty Insurers of America (PCI). PCI had urged the governor to veto the measure.

Campbell said the retroactive rewriting of policies is likely unconstitutional. “One thing is certain, this bill will spawn litigation on these issues, which is not in the best interests of Coloradoans or the judicial system of this state,” Campbell said.

PCI said the law overturns existing Colorado law, “creating a set of insurance unique rules that would be applicable only to construction professionals, and is underscored by poor public policy that will only serve to incentivize poor workmanship in the construction industry.”

According to Campbell, the bill creates incentives for general contractors to use the least expensive subcontractors, regardless of the quality of their work, and serves to insulate construction professionals from the consequences of poor workmanship.

For additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.