Construction Law Briefs: How to Interpret �Plain� Language Insurance
The 2010 session of the Colorado legislature passed a law requiring that automobile insurance policies be written in plain language not exceeding 10th-grade reading levels. Rather than doing the same for construction professionals� insurance policies, the legislature, in the very same session, passed laws relating to those complex policies on how they should be interpreted and applied by the courts.
The term �construction professionals� means architects, contractors, subcontractors, developers, builders, builder-vendors, engineers and inspectors performing or furnishing the design, supervision, inspection, construction or observation of construction of real property improvements like houses, buildings, etc.
Those industry members are commonly insured by comprehensive general liability or professional liability insurance policies that the 2010 Colorado legislature decided had �become increasingly complex, often containing multiple, lengthy endorsements and exclusions conflicting with the reasonable expectations of the insured.�
The new law is actually a legislative reaction to the frequent debate over whether construction professionals� policies cover poor workmanship that does no harm to someone or something other than the work itself.
Accordingly, the new construction professionals� insurance law does a number of things. It declares that Colorado policy requires interpretation of the insurance coverage broadly in favor of insured parties and imposes upon insurers duties to defend claims made against their insureds. It also emphasizes that insurance policies must be interpreted in accordance with the reasonable expectations of insureds.
The new law also requires that courts presume that work of a construction professional that results in property damage is, under insurance coverage, an accident triggering coverage unless the damage is intended and expected by the insured. It allows that damage to the work itself to be included in that presumption unless otherwise expressly provided otherwise in the policy.
The law also requires that if there is a conflict in the policy provisions between coverage and non-coverage, the policy is to be construed in favor of coverage. It also imposes the burden of proving that policy limitations, exclusions or conditions apply upon insurance companies.
Also, the law requires that insurance companies be required to defend claims against construction professionals that are triggered by notices of claims of construction defects (that are required by other Colorado statutes) as well as claims in lawsuits involving actions against construction professionals that assert construction defects.
The insurance companies are required by the new statute to defend claims against construction professionals even if other insurers are likewise required to provide defenses and insurance companies are required to reasonably investigate claims and cooperate with insureds when claims are made against them when they are covered. Also, insurance companies may not withdraw their defenses or seek reimbursement for defense costs incurred on non-covered claims unless authorized by law or when they have reserved such rights in writing when they undertake to defend claims against their insureds.
Lastly, the law invalidates policy provisions that attempt to exclude or limit coverage for claims arising from bodily injury, property damage, advertising injury or personal injury that continues, worsens or progresses while the policy is in effect if the injury or damage had been unknown to the insured at the policy�s inception date.
For example, under that law, if a construction defect was caused by a contractor in one year, but damages (such as building movement) continue for several years thereafter, later insurance policies would cover the loss if the insured had been unaware of the defect when later policies were purchased.
Two recent Colorado court decisions, one of the Colorado Court of Appeals and one of a Colorado U.S. District Court judge, appeared to have prompted the new law. Both ruled that there would be no insurance coverage under CGL policies unless poor workmanship resulted in damage to something other than the work itself or to third parties. The new statute states that the Colorado Court of Appeals decision � . . . 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 . . .�
Your guess is as good as mine!
The laws� reasonable expectations provisions appear to suggest that when construction professionals arrange for insurance, they should inform their insurance companies or brokers that they expect their policies to cover everything�particularly any poor workmanship of their people and their subcontractors.
It may have been more effective for the Colorado legislature to simply require that construction professionals� insurance be written in language not exceeding fifth grade reading levels. That may have scared both insurance companies and lawyers away.
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.