Insurance Coverage for Defective Workmanship
Part 3 of 4 - Legislative "Clarification"
Albert B. Wolf - Wolf, Slatkin & Madison, PC
It appears that the February 2009 Colorado Court of Appeals decision in the General Security Indemnity Company of Arizona v. Mountain States Mutual Casualty Company decision prompted the Colorado legislature (perhaps at the urging of a couple of lawyer-lobbyists) to attempt a clarification of insurance companies' duties to defend their insureds against defective workmanship claims. To this writer, the legislature's success appears doubtful.
For what may be the only (or at least a very rare) instance in laws passed by the Colorado legislature that a statute expressly criticized a Colorado court decision. That appeared in the Colorado legislature's 2010 statutory enactment that complains:
"The decision of the Colorado court of appeals in General Security Indemnity Company of Arizona v. Mountain States Mutual Casualty Company, 205 P.3d 529 (Colo. App. 2009) does not properly consider a construction professional's reasonable expectation that an insurer would defend the construction professional against an action or notice of claim [for defective workmanship]."
However, the provisions of that statute may do very little to change the result in General Security or Colorado CGL insurance coverage otherwise. The attempt by the statute to alter the result in the General Security case appears to be a provision that creates a presumption that construction defects are "accidents." Recall from an earlier Construction Law Briefs ® columns in this series that the General Security court had observed that an occurrence was an accident under CGL policy language only if there was damage to something or someone other than the insured contractor's defective work itself. If followed by the courts, that presumption would dictate that the contractor's insurance carrier would have a duty-to-defend claims--but not necessarily a duty to indemnify (pay claims). The distinction between those two duties is discussed in the two earlier parts of this series of Construction Law Briefs ®.
However, there is no assurance that Colorado courts would follow the statutory presumption. That provision may likely be construed by the courts to be ineffective because of the differing roles of the legislature and the courts. The legislature's function is to make laws, while the court's function is to interpret laws--and contracts (including insurance contracts). Therefore, that legislative effort may very well be considered by Colorado courts to be an attempt by the legislature to interfere in the courts' business. They might therefore ignore the legislative attempt to overrule General Security.
All this may well be avoided by more appropriate legislative action. The Colorado legislature could simply adopt a law requiring that companies who insure construction industry members write their policies in plain English or be prevented from selling insurance in Colorado. That suggestion is not at all far-fetched.
In the same 2010 legislative session that attempted to "clarify" CGL contractor insurance coverage issues, the same Colorado legislature passed a law requiring the language of automobile insurance policies, health insurance policies, dental plans and long-term care plans to be understandable at or below the tenth-grade reading level as measured by established reading formula.
Since insurance companies have in place an organization, Insurance Services Offices, Inc., that provides insurance policy language used by most companies, there is a fairly easy way to spell out clearly and in plain English what the duty-to-defend and duty-to-indemnify obligations of CGL policies provide.
Issues concerning insurance coverages for defective workmanship on Colorado construction projects are up in the air. The only certainty appears to be that if a poorly installed brick falls off of a building onto the head of an unsuspecting passerby, the mason's CGL insurance will probably cover the loss--unless the mason had a grudge against the passerby and intended the brick to fall--or his insurance policy excluded falling bricks!
(EDITOR'S NOTE: Albert B. Wolf is a principal in the Denver law firm of Wolf Slatkin & Madison P.C. This column was written with the intent of providing general legal information intended to be reasonably accurate although not comprehensive. Readers are therefore urged to consult their attorneys for any specific legal advice they may desire concerning the subject matter of this column.)