Setting the Record Straight: The Colorado Association of Home Builders’ Response to the ASA’s Claims Regarding HB 10-1394

Yesterday I posted the American Subcontractors Association of Colorado’s opposition piece to Colorado House Bill 10-1394.  Upon returning to my office, I found in my inbox the documents prepared by the Colorado Association of Home Builders to set the record straight.

Correcting the Record:

Response to American Subcontractors Association of Colorado

Opposition to HB-1394

What this bill does:

• Myth: It dismantles the current Commercial General Liability (CGL) form.
• Fact: All the bill does is require certain rules of interpretation be followed when interpreting a CGL policy. For example, the court would be required to:
• Read the entire policy harmoniously;
• Reach a just and reasonable result; and
• Construe ambiguous policies in favor of coverage.
• Fact: It defines an “accident” as it was always understood before General Security was decided. It does NOT require the insurance company to fix mere faulty work. It DOES say that if the work causes damage to other property, that it is an accident.
• Most importantly, the bill says, “NOTHING IN THIS [DEFINITION OF AN ACCIDENT] CREATES INSURANCE COVERAGE NOT INCLUDED IN THE CONTRACT OF INSURANCE.”
• Therefore all exclusions to coverage remain untouched – for example the “Your Work Product” exclusion which excludes coverage for faulty workmanship is not affected because that exclusion does not even mention the word “accident,” the only definition the bill deals with.
• Myth: If passed, insurance companies will leave the state and premiums will go through the roof.
• Fact: both allegations have been proven wrong historically.
• First, before the Court issued its decision on General Security, the insurance industry issued policies in this state and paid claims under the exact same definition of an “accident” as is contained in the bill. Reversing General Security merely puts us back where we were and ensures contractors have the coverage for which they have paid premium dollars.
• Second, many insurance companies issued policies for years with the basic “Montrose” exclusion that excluded coverage for damage that the insured knew existed before the policy was issued. This bill merely puts us back where we were then and prohibits the abusive practice of denying claims based on damage no one knew about before the policy was issued. What these insurance companies are doing would be akin to a health insurer saying you had a “pre-existing condition” if you had a tumor that had started to grow before you became insured EVEN IF NO ONE KNEW ABOUT IT.
• Myth: The bill is unnecessary because CGL policies have properly covered contractors for claims.
• Fact: In the General Security and Greystone and decisions, the Court held that there is NO coverage for construction defects under a CGL policy.
• Those Courts did not look beyond the definition of an “occurrence” and through this myopic view found no coverage. HB-1394 would require courts to look at the ENTIRE policy, a much for fair and reasonable approach.
• Myth: No other state has seen the need to make such sweeping changes.
• Fact: General Security is a Colorado decision, hence HB-1394 is a Colorado solution.
• Fact: these are not “sweeping changes’, they merely return the policy of the state to that which existed before General Security and Greystone took away coverage that clearly exists for contractors.
• There is a FUNDAMENTAL MISUNDERSTANDING in the subcontractors’ position that is being driven by the fear mongering of the insurance industry:
• This bill does NOT require coverage for faulty work.
• It defines an accident as including the work of the contractor, but leaves intact the ability of the insurance company to exclude coverage for bad workmanship EVEN if caused by an accident (the statute expressly says it does not create coverage not otherwise included in the contract of insurance).
• The only place in an insurance policy where the word “accident” is even mentioned is in the definition of an “occurrence.” All policies, if properly interpreted, start out covering everything caused by an accident and then exclude that which the insurer does not wish to cover. HB-1394 does not change the ability of the insurer to exclude coverage for faulty work, even if caused by an “accident” which gives rise to an “occurrence.”

The other responsive piece being circulated by the CAHB states:

Correcting the Record

Response to the American Subcontractors Association of Colorado

Opposition to HB-1394

What the bill does:

• Myth: The bill attempts to correct recent court decisions involving construction defect cases in Colorado.
• Fact: The bill targets two CGL policy provisions that insurers have been abusing to deny claims: (a) Insurance industry attorneys have already admitted in their testimony during a House committee hearing that both the General Security and Greystone cases were wrongly decided and must be fixed – this is accomplished by Part 1 of the Bill; (b) The insurance industry has been collecting premiums to cover long-term progressive damage claims, but then they deny those claims by the use of “Super-Montrose” exclusions. Part 2 of the Bill curtails these unfair practices.
• Myth: The bill dismantles the insurance industry’s comprehensive general liability policy, (CGL), designed and approved by the National Association of Insurance Commissioners (NAIC) and other insurance professional associations.
• Fact: Wrong. The Bill is narrowly targeted to two problems insurers themselves created by taking unfair advantage of anti-trust exemptions that allow them to impose standardized policy forms.
• Myth: The bill denies insurance companies the tools they need to protect insureds (subcontractors) from fraudulent and unsubstantiated construction defect claims.
• Fact: Wrong. Nowhere in the Bill does it do this.
• Myth: If passed, you will see an exodus of insurance companies leaving the state, which in turn will drive premium costs through the roof. Many construction companies will be unable to obtain insurance and will be available only at a price far beyond the reach of most small and medium sized subcontractor businesses.
• Fact: Wrong. Currently, insurers are arguing there is zero coverage for property damage arising from latent construction defects, yet they have taken contractors’ premiums for years while representing there is such coverage. If a structure burns down after sale because of an unknown and hidden construction defect, such as a wiring short, insurers are telling builders “tough luck.”
• Myth: This bill encourages poor workmanship and lower safety standards by requiring insurance companies to cover improperly performed work.
• Fact: Wrong. Nowhere does the Bill require insurers to pay for the cost of redoing substandard work, or to pay for delays, or to pay for completing punch lists, or for anyone to take chances with safety.

The Truth: If developers and builders cannot restore the basic coverage that insurers have represented since 1986, in their marketing materials and presentations to insurance commissioners, that these CGL policies afford coverage for actual property damage caused by negligence, developers and builders will not be able to build and subcontractors will have no work.


The Truth: Florida and Texas have done by court decision what this Bill accomplishes with its Part 1 by legislation. In neither state did premiums abnormally rise or was there a loss of insurance availability.


The Truth: Part 2 of the Bill still allows insurers to use “Montrose” exclusions to avoid insuring losses known to the insured before a policy issues. Part 2 simply prevents them from using self-serving “Super-Montrose” exclusions from avoiding insuring losses completely unknown to the insured that is, protecting against the kind of risk for which insurance is obtained.


Why the bill is UNNECESSARY: The existing comprehensive general liability policy (CGL) is the standard in the construction industry. It has properly covered all policy holders for claims that have arisen for damage to other parties from work of the insured. Nothing has occurred in any Colorado Court findings that justifies altering the fundamental principles on which these policies have been written.


The Truth: Insurers are denying claims once covered by their policies due to a recent Court decision that was set-up by insurers on both sides of the case – no builders, contractors or property owners were parties to this decision.


No other state has seen any need or made any attempt to enact such sweeping change.


The Truth: This is because states across the nation, like Florida, Texas, Tennessee, Mississippi, Montana, etc. have eliminated these abusive insurance positions by court decision. Colorado construction professionals cannot wait for a case to wind its way through our over-burdened judicial system to the Colorado Supreme Court for a fix years down the line.

The Truth: Even while our economy turns around, developers and builders cannot and will not build when their insurers are telling them their standardized CGL policies will not cover them if the structure they are building burns or collapses or otherwise suffers serious property damage after sale due to an unknown and hidden construction defect.


The Bottom Line: Without this Bill, construction professionals have no insurance. With this Bill, they will again have insurance. The insurance industry’s BIG LIE is that the policies they are selling today offer protection. In fact, they offer none. The insurance industry’s other BIG LIE is that they will stop writing insurance if the Bill passes (how many times have we heard this over the years?). This has not occurred in other states that have fixed the same problems that this Bill fixes.

What I have a hard time figuring out is how the builders and subcontractors can be at odds over this bill.  In the end, do they not both rely on CGL policies to respond and protect them from construction defect claims?  The only thing I can figure is that the subcontractors have never borne the brunt of paying out big judgments or settlements in construction defect cases.  Consequently, they may care less than do builders whether they actually get the coverage for which they bargained when purchasing CGL policies.  In the long run, the benefit to subcontractors of having premiums remain as low as possible is probably more important to them than that the policies respond to construction defect claims.  Then again, I may be wrong.

Colorado House Bill 10-1394 will be heard this afternoon in the Senate Business, Labor & Technology Committee in Senate Committee Room 354.  If you cannot make it down to the Capitol this afternoon, you can listen to the hearing live over the internet by visiting this page.

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