Insurance Coverage for Defective Workmanship
Part 4 of 4 - What's a Contractor to do?
Albert Wolf - Wolf, Slatkin & Madison, PC
The past three installments of these Construction Law Briefs ® dealing with insurance coverage for defective workmanship explored the present state of confusion over when comprehensive general liability (CGL) insurance carriers who write insurance for contractors and subcontractors are obligated to provide defenses and indemnification for defective workmanship claims against their policyholders. This part will focus on where the matter is now as related to what contractors and subcontractors might consider in buying CGL insurance.
Colorado law is not clear on whether typical CGL insurance policies cover defective workmanship claims against contractors if a defect does not cause personal injury to someone or property damage to something other than the defective work itself. What that "something" is is whether it is other soundly constructed portions of the same construction project or it must be some other "property" remains uncertain in Colorado.
Buying Insurance. Until or unless these issues are finally settled, contractors and subcontractors should consider several matters concerning their insurance coverage. Primarily, they should consult with their insurance professionals to determine whether and to what extent they will be covered for defense costs and indemnification in the event that defective workmanship claims are made against them. It would be helpful for them to have that information in writing either from their insurance professional or, at a minimum, by taking notes of what is said during the consultation. In short, they should know what they are getting for their premium dollar.
Getting a Claim. If and when, unhappily, a claim of defective workmanship is made against a contractor or subcontractor the claim will likely be in the form of a notice pursuant to the Colorado Construction Defective Action Reform Act that requires detailed notices of defects.
Under a 2010 Colorado statute addressing construction-related insurance an insurance company that has a duty-to-defend has its duty triggered by a policyholder's receipt of such a Notice of Claim (or a court pleading if litigation had already been commenced). The statutory provision requires the insurance company to reasonably investigate the claim and reasonably cooperate with its insured in the notice-of-claim process that allows inspection and a possible resolution short of litigation.
Policyholders should therefore give prompt and written notice to all of their insurance companies that had provided policies effective from the date of the allegedly defective work on the particular project until the time that they receive any notice of claims. That is not only because the 2010 statute requires that insurance company's obligations to defend commence when such notices are received by their policyholders, but there may be questions about which policy or policies apply. For example, if the defective workmanship caused a condition that progressively causes damages over time, one or more of the policies issued after the work is done may still cover claims, especially if the insured was unaware of the condition when later insurance was written.
Refusal of Company to Act Timely and in Good Faith. The 2010 Colorado statute also has a provision defining an insurance company's duty to defend as a "first party benefit." That could make an insurance company liable for attorneys' fees and double damages if it unreasonably refuses to provide a defense or fails to act in good faith and fair dealing. That provision places the risk upon the insurance company. Given the present uncertainty concerning insurance coverages under CGL policies, insurance companies are not likely to bear that risk. Instead, they are more likely to defend their insureds and have the coverage issues resolved later.
Performance Bonds. Additionally, in the present state of Colorado law over whether defective workmanship is covered by CGL insurance, it behooves owners to give careful consideration to whether they should have their contractors bonded.
Performance bonds would certainly cover defective workmanship claims. The same consideration should be given to whether contractors should have their subcontractors bonded. Many general contractors do routinely have at least their principal subcontractors bonded on major construction projects unless they are satisfied with the expected work quality and financial strength of their subcontractors.
Possible Solutions. Perhaps the various Colorado chapters of contractor, subcontractor and developer trade organizations such as AGC, ABC, ASA, NAHB and others should attempt to have the insurance-coverage-for-defective work resolved in Colorado. There are two likely vehicles to address the problem: through the insurance carriers or the Colorado legislature. With the "buying power" of the organizations it might be possible for them to convince the insurance companies who write CGL insurance for the construction industry to either use plain English in their policies or agree to interpretations sufficient to allow potential policyholders to determine whether to insure and to know what coverage they are getting.
Addressing the issue to the Colorado legislature may be less productive in view of the legislative product in the past has not been altogether successful.
The question of CGL insurance/coverage for defective workmanship will continue to be unsettled in Colorado until the Supreme Court, legislature or insurance companies take appropriate action to address the dilemma.
Again, stay tuned.
(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.)