As previously reported, HB 10-1394 was introduced into the Colorado House of Representatives on April 1, 2010. For information or background regarding the bill, you can read our previous blog entry here. The bill was amended by the House Business Affairs and Labor Committee and passed out of the committee on an 11-0 vote on April 7th. The bill is currently scheduled for Second Reading in the House on April 20th.
Over the last few weeks, the stakeholders have had numerous conversations and meetings regarding the bill to work through differences and to determine whether compromises can be reached on the insurance carriers’ concerns. The carriers’ first main concern is related to the language in the bill that “the work of a construction professional that results in property damage, including damage to the work itself, is an accident unless the property damage is intended and expected by the insured.” The concern is that this clause will turn the typical CGL policy into a surety bond or warranty. The carriers’ second concern is the prohibition, in section two of the bill, on “Montrose” and “super-Montrose” type endorsements. The carriers’ position can best be summed up in the following “call to action,” which has been circulated throughout the Capitol:
CALL TO ACTION — HB 10-1394 CONCERING COMMERCIAL LIABILITY INSURANCE POLICIES ISSUED TO CONSTRUCTION PROFESSIONALS
IT IS IMPORTANT TO CONTRACT YOUR STATE REPRESENTATIVE TODAY!!
This bill is an attempt to address a court decision, General Security Indemnity Company of Arizona v Mountain States Mutual Casualty Company 205 P.3D 529 (Colo. App. 2009), which adversely interpreted coverage under a general liability policy according to the Colorado Association of Homebuilders (CAHB) and others. The decision stated that that there is no duty to defend faulty construction work claims for faulty work performed by a general contractor’s subcontractors. To correct this decision the bill requires that “The work of a construction professional that results in property damage, including damage to the work itself (boldface is used here for emphasis) other work, or property, is an accident unless the property damage is intended and expected from the standpoint of the insured.”
Our concern is that this language would now require a general liability policy to guarantee the quality of a contractor’s work much like a performance bond or warranty. This is contrary to our understanding of the intent of the general liability policy, which is to cover the consequential damage resulting from faulty work, but not the faulty work itself.
Section 2 of the bill poses additional problems. Page 7, line 3 (2) is as follows: “…..an insurer shall not issue a liability insurance policy to a construction professional that includes a provision that excludes or limits coverage under the policy for one or more claims arising from bodily injury, property damage, advertising injury, or personal injury that occurred before the inception date of the policy and is otherwise afforded coverage by the policy.” The effect of this wording would prohibit carriers from using any type of prior acts exclusions or Montrose endorsements (continuous or progressive damages not known, but occurring prior to the effective date of coverage). The only exception in the bill would be prior acts that could lead to a claim the insured had “actual knowledge” of and failed to disclose to the insurer. In other words if a contractor discloses prior acts that caused a loss or could cause a loss and the insurer writes a policy the insurer would on the hook for the coverage of these prior acts.
To put it simply, the bill would make insurers guarantors of the quality of a contractor’s work and require insurers to cover occurrences, including faulty work, which took place prior to the effective date of a policy. It is our opinion that this bill would result in many carriers deciding to no longer write general liability insurance for contractors. Carriers that decide to stay in the marketplace will undoubtedly be offering general liability policies with substantially higher premiums than what is currently available.
Also, since carriers would now have to price to cover prior occurrences it is our belief that the preferred rating approach will be to now write contractors on a claims made policy form. Since the statute of repose in Colorado is eight (8) years these claims made policies would have a retro date of eight years prior to the effective date, which would make these policies very expensive.
This bill passed out of the House Business Affairs committee by an 11-0 vote. It is scheduled for second reading in the House on Friday April 16, 2010. While our side continues to work with the proponents of the bill on alternative language, the vote looms and we need to get our message out to your representatives about the adverse effect this bill would have on the construction industry.
Your message to your representatives should be as follows:
• The Professional Independent Insurance Agents of Colorado oppose the passage of HB 1394.
• This bill would legislate policy language for a general liability policy. This is something that no other state has enacted.
• The proposed bill will cause carriers to either refuse to write general liability insurance for contractors or offer a product with significantly higher premiums that will negatively impact Colorado business.
• Legislation that would have this kind of effect on Colorado business will negatively impact job creation in an industry that already has an unemployment rate in excess of 20%.
• The increased insurance costs to contractors will be passed along to the State and other public entities and there may be fewer contractors in business to provide bids for public entity work.
For their part, the proponents of the bill have been circulating the following talking point throughout the Capitol:
HB-1394 – Myth vs. Reality
Myth – The bill allows the “stacking” of insurance policies.
Reality – Under HB-1394, insurance companies will not be able to exclude coverage for damages that the builder did not know about but became apparent during the policy’s term. HB-1394 DOES NOT change the current ability of insurance companies to exclude damages that a builder knew existed in subsequent insurance policies to cover construction defects. The Bill also does not affect existing Colorado law requiring equitably pro-rating on a percentage basis an insured loss among various insurers on the risk when property damage occurs over several policy periods. In other words, the “years on the risk” percentage formula that insurers have relied on when dividing up a covered loss among themselves remains unaffected.
- Builders obtain and pay for policies on a yearly basis.
- Each policy is responsible only for damage that occurs within that policy period.
- Unlike a car accident where all of the damage occurs at once, damage to a building can progress – for example from a roof leak, to the roof leak rotting the support beams, to a roof leak causing rot to roof beams that then collapse.
- Under such circumstances, the builder’s policies cover the damage that occurs within the policy period, not the entire damage. So the insurer who insured during the year when the roof leak began only pays for that damage, the insurer provided coverage for the year in which the rot occurred pays only for that damage, and the insurer that provided the coverage for the year of the collapse pays only for that damage.
- That is NOT stacking, that is giving the builder what it paid for when it bought the policies.
Myth – The bill will turn commercial general liability insurance policies into performance bonds.
Reality – Wrong. The Bill is limited simply to reaffirming the insurance industry’s admitted intent, as expressed in their own interpretive and marketing materials going back to 1986, that their liability policies cover property damage resulting from the insured’s negligence. In no way does the Bill require a liability insurer: (a) to pay to remedy defective work that does not cause property damage; (b) to pay for the completion of unfinished or non-conforming work; (c) to pay delay damages or (d) to pay for punchlist or warranty repairs. This is what the insurance industry has said in the past about the coverage afforded by the liability policies that are the subject of the measure:
- Insurance Services Organization (ISO) is the insurance industry trade group that creates the industry’s standardized policies and underwriting guidelines pursuant to a federal anti-trust exemption. ISO Circular, Commercial General Liability Program Instructions Pamphlet (1986): “. . . covers damages caused by faulty workmanship to other parts of work in progress; and damage to, or caused by, a subcontractor’s work after the insured’s operations are completed.”
- Fire, Casualty and Surety Bulletins (FC&S) are published by the National Underwriter, an insurance industry trade and publication group. FC&S Bulletin: Public Liability, Aa 16-17 (1993): “Example: An insured general contractor builds an apartment house with many subcontractors’ services. After construction is complete a defect in the building’s wiring, which wiring was installed by a subcontractor, causes the building, including the work of the general contractor and other subcontractors, to sustain substantial fire damage. The insured is sued by the building owner. Result: Although the insured’s policy excludes damage to “your work” arising out of it or any part of it, the second part of the exclusion makes it clear that the exclusion does not apply to the claim.”
- FC&S Bulletin: Public Liability, M.10-3 (February, 2002): “Example: Stucco work peels and chips, but which work was performed by the insured’s subcontractor. Result: “The insured may have hired the subcontractor and may be ultimately held legally responsible for the subcontractor’s work, but when it comes to the your work exclusion, the CGL form considers the insured and the subcontractor as two separate entities. The insured will not be penalized for the faulty work.”
Myth – The bill voids existing contracts.
Reality – As with any other law, the bill’s procedural aspects regarding what type of evidence that may be considered by a court in resolving a dispute as to what a complicated insurance contract means are effective immediately; however, any other aspect of the bill that some are arguing would unconstitutionally rewrite an existing contract would be ineffective to do so.
Myth – The bill voids “Montrose exclusions.”
Reality – Wrong. HB-1394 expressly allows “Montrose exclusions” as the insurance industry originally adopted them following the Montrose decision in California, which exclusion bars coverage for lawsuits and claims that the insured is aware of before his insurance policy issues. However, the bill limits recent and unfair changes to this exclusion which disregard whether the insured has any knowledge of such lawsuits or claims before purchasing his policy and, instead, exclude coverage for losses of which the insured was completely unaware. These more recent, unfair provisions, when combined with Colorado’s pro rata rule which limits each insurer’s liability only to that percentage of the property damage which occurs during its particular policy, was allowing insurers to keep the insured’s multiple premiums while simultaneously “squeezing” all of the insurance liability under a single policy, leaving the construction professional completely uninsured for its liability for property damage occurring afterwards.
- Example: By coupling its Montrose provisions with Colorado’s insurance apportionment rule, insurers, whose policies defined a covered “occurrence” as including property damage resulting from “continuous or repeated exposure to substantially the same general harmful conditions,” were arguing that, in the event of the insured’s liability for $100,000 in damages for long-term, progressive property damage spanning three policy years, the Montrose provision barred coverage during the last two years while Colorado’s apportionment rule only allowed allocation of one third of the damages ($33,333) to the first policy year. Thus, the insured is left on the hook for $66,667 of the $100,000 loss even though the insured had no idea of the loss and potential liability until long after it paid its premiums for all three insurance policies.
It is my understanding that a compromise has been reached on section two of the bill, regarding the prohibition on Montrose and super-Montrose exclusions. I believe that there have been compromises on other parts of the bill also and that the main point of resistance left pertains to the fear that section one of the bill will turn a typical CGL policy into a surety bond or warranty. The parties are still working through this issue with the hope that a compromise can be reached.
If you have any questions regarding HB 10-1394 or the current negotiations, please feel free to contact David M. McLain at (303) 987-9813 or by e-mail at firstname.lastname@example.org.