Colorado Legislature Passes Law Restoring Insurance Coverage for Construction Defect Claims

By:  Christopher R. Mosley, Katherine D. Varholak, Jerome H. Sturhahn and Brooke Pates

Over the past 18 months, Colorado law has been in flux on the question of whether general liability policies provide coverage for construction defect claims due to conflicting rulings by the Colorado Court of Appeals.  On May 21, 2010, however, Governor Ritter signed into law House Bill 10-1394 which confirms that faulty workmanship constitutes an "occurrence" and, thus, construction defect claims generally fall within a general liability policy's insuring agreement.  Construction defect claims present the most significant liability risk for construction professionals.  Consequently, such claims are the primary reason why construction professionals purchase general liability insurance.  Accordingly, the passage of HB 10-1394 is of critical importance to the construction industry as it directly addresses the question of coverage for the industry's principal risk.

House Bill 10-1394, in essence, reaffirms the Court of Appeals' decision in one of the lawsuits - Monterra Homes - and overrules the Court's decision in the other- General Security.  In Monterra Homes (2005), a panel of the Colorado Court of Appeals held that faulty workmanship constitutes an "occurrence" and, hence, construction defect claims fall within a general liability policy's insuring agreement.  Hoang v. Monterra Homes (Powderhorn) LLC.[1] In General Security (2009), a different panel of the Colorado Court of Appeals issued a conflicting opinion holding faulty workmanship does not constitute an "occurrence" and, hence, construction defect claims generally do not fall within the policy's insuring agreement.  General Security Indemnity Co. of Arizona v. Mountain States Mutual Casualty Co.[2] Because General Security did not overrule Monterra Homes, Colorado has been left with two differing opinions on this issue.

In the aftermath of General Security and a subsequent federal court decision, Greystone Construction Company, Inc. v. National Fire & Marine Ins. Co.,[3] many insurers began to challenge or deny coverage for construction defect claims.  In doing so, these insurers deprived their insureds of the primary benefit for which they purchased the general liability policies - coverage for construction defect claims.  In our experience, most of these insurers did not advise their insureds of the insurers' intent not to cover construction defect claims at the time the insureds purchased their policies.  Accordingly, many construction professionals paid premiums believing they were purchasing coverage for a risk their insurers never intended to provide. 

HB 10-1394 addresses this issue by confirming that faulty workmanship constitutes an "occurrence" and that claims for faulty workmanship fall within a general liability policy's insuring agreement. The scope of HB 10-1394, however, is limited to this narrow issue, and the bill expressly states that all policy exclusions and terms remain valid and applicable to construction defect claims. Accordingly, coverage for construction defect claims may still be precluded by properly drafted policy exclusions, such as the "your work" exclusion, and all policy endorsements.  By expressly including this language in HB 10-1394, the Legislature made certain general liability policies would not guarantee a construction professional's work or serve as a performance bond.

Contrary to what some in the insurance industry have stated publicly, HB 10-1394 does not effect a radical or wholesale change in the law of insurance coverage for construction defects.  Rather, the statute simply confirms Colorado law as it existed pre-General Security - i.e., under Monterra Homes.  In doing so, the Colorado Legislature has followed the judicial direction taken by many other states, including two states with significant construction industries - Texas and Florida - which have held that faulty workmanship constitutes an "occurrence."  Moreover, HB 10-1394 is consistent with the insurance industry's original intent to cover construction defect claims as evidenced by the old broad-form property endorsement and various insurance industry publications dating back nearly 25 years.[4]

HB 10-1394 should positively impact the construction industry.  While certain insurers have announced an intent to vacate the Colorado construction market as a result of the new law[5], we believe that these insurers never intended to provide coverage for construction defect claims.  As such, the general liability policies these insurers issued had questionable value, at best, for construction professionals, and the failure of these insurers to disclose their intent not to cover construction defect claims both surprised and caused problems for many construction professionals involved in construction defect claims.  The net result of HB 10-1394 should be that Colorado's insurance market is left only with insurers willing to cover a construction professional's primary risk - construction defects.

[1]129 P. 3^rd 1028 (Colo. Ct. App. 2005), rev'd on other grounds sub nom. Hoang v. Assurance Co. of Am., 149 P.3^rd 798 (Colo. 2007).

[2] 205 P.3^rd 259 (Colo. Ct. App. 2009).

[3] 649 F. Supp. 2d 1213 (D. Colo. 2009).

[4] See, e.g.. ISO Circular, Commercial General Liability Program Instructions Pamphlet (1986); FC&S Bulletin: Public Liability, M.10-3 (February, 2002).

[5] By contrast, several insurers have reaffirmed their intent to insure the Colorado construction industry against construction defect claims. 

Attorneys in the Sherman & Howard Insurance Recovery Practice Group are available to assist with these and other issues.  

©2010 Sherman & Howard L.L.C.                                                       June 16, 2010