IRMI Weighs in on Colorado House Bill 10-1394

For those of you not familiar with IRMI, it is the International Risk Management Institute, Inc., a powerhouse in terms of providing accurate and insightful information regarding insurance and insurance coverage.  According to its website, IRMI’s ” mission is to be the premier authority in providing expert advice and practical strategies for risk management, insurance, and legal professionals. We will continuously earn our customers’ trust and confidence by empowering them with the most reliable and accurate information, maintaining the highest levels of integrity in all that we do, and quickly responding to their needs.”

In its June 17, 2010 Construction Risk Manager newsletter, Ann Rudd Hickman, CPCU, CRIS, ARM, commented:

[T]he Colorado Legislature took action recently to shore up coverage under contractors’ liability policies for damage arising out of defective construction. It was a controversial move that some observers expect to be challenged, and many expect to create a vacuum, at least in the short term, in the Colorado construction insurance market.

One of the two most controversial aspects of this law is its instruction that courts presume that damage arising out of defective work was an accident unless the insurer can show evidence that the contractor expected or intended the damage. But contrary to what some opponents have claimed, this law does not turn the commercial general liability (CGL) policy into a performance bond. Presuming damage caused by defective construction to be the result of an accident, thus satisfying the policy’s “occurrence” requirement, does not guarantee coverage; it merely triggers the policy, allowing the contractor to make an argument for coverage based on the language of the entire policy and the facts of the claim.

Although the state’s method is unique, the coverage outcome is not. Currently, courts in 24 states subscribe to the position that damage caused by a construction defect can be the result of an accident and thus satisfy the CGL policy’s definition of “occurrence.” (emphasis added)

In another article from the same newletter, IRMI reported:

Colorado Instructs Courts on How To Interpret Liability Policies Issued to Contractors

In May 2010, HB10-1394 was signed into law by the governor of Colorado, despite opposition from a variety of insurance industry organizations. Drafted in response to the judicial trend of denying claims alleging damage caused by defective work, the bill instructs courts in Colorado on how to interpret various provisions of liability insurance policies issued to contractors. The law applies to all policies currently in existence or issued on or after the effective date of this Act.

Among other things, the law requires a presumption that faulty construction work was an accident unless the contractor intended or expected the damage. This counters the various arguments raised by some insurers that defective work does not satisfy the policy’s “occurrence” requirement because it is not an accident. (This issue has been litigated in almost every state, with varying results. . .)

Nothing in the Colorado law requires insurers to offer coverage for damage caused by construction defects, and insurers who do not wish to do so can attach an endorsement that removes all coverage for damage to “your work.” Standard endorsements of this type are readily available. In this way, insurers who wish to exclude this coverage can do so directly rather than having to rely on a court’s determination of a contractor’s intent.

The bill also adds to the state insurance code a prohibition of what are frequently referred to as “Super Montrose” provisions, which are used by some insurers to prevent the triggering of multiple policies for damage that “occurs” over multiple policy periods, as is often the case in construction defect claims. The Colorado revised statute provides that, with respect to liability policies issued to construction professionals, any provision that purports to exclude coverage for claims that take place prior to the policy period, but continue, worsen, or progress within the policy period, are void unless the exclusion applies only when the insured had “actual knowledge” of the claim prior to the policy period.

Standard CGL policies provide that once an insured is aware of a loss, no future policies will be triggered for that loss, but any prior policies that were in effect during the progression of the damage may be triggered. This is commonly known as a Montrose provision. A Super Montrose provision, in contrast, typically says that only the policy that is in effect when the insured first becomes aware of the loss is triggered by the claim; past policies will not respond to the loss even if they were in effect when the property damage occurred and even though the insured had no knowledge of the loss during the coverage period. The new Colorado law in essence prohibits the use of Super Montrose provisions on contractor’s policies and voids such provisions on previously issued policies, which has created a stir within the insurance industry.

Despite strong opposition from some insurance and subcontractor associations, which expressed concerns about the availability and affordability of construction insurance in Colorado, the bill passed with strong bipartisan majorities. Some insurance professionals believe the law will result in a dramatic increase in premiums and/or a loss of liability insurance markets for Colorado contractors. 

We are now starting to see the effects of HB 10-1394, with various carriers either pulling out of the state entirely, threatening to do so, or underwriting the new risk by increasing premiums.  We will continue to keep you informed as this saga is sure to continue.  If you have any questions regarding HB 10-1394 or Colorado construction litigation, generally, please contact David M. McLain at (303) 987-9813 or mclain@hhmrlaw.com.