Colorado Bill May Drive Contractors Insurers Out of State

April 28, 2010

The Colorado House of Representatives has passed a bill that may have the unintended consequence of driving insurers that provide contractors coverage out of state, according to the Professional Independent Insurance Agents of Colorado.

House Bill 1394 attempts to address a court decision in General Security Indemnity Company of Arizona v. MountainStates Mutual Casualty Company, 205 P.3d 529 (Colo. App. 2009), that excluded claims for certain construction defects claims and imposed no obligation to defend in a contractor’s professional liability insurance policy. “The decision stated that there is no duty to defend faulty construction work claims for faulty work performed by a general contractor’s subcontractors,” PIIAC explained.

The decision of the Colorado Court of Appeal in that case “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,” the bill text states.

So to correct the decision, the bill would require, “The work of a construction professional that results in property damage, including damage to the work itself or other work, is an accident unless the property damage is intended and expected by the insured.”

The problem is that language “would require a general liability policy to guarantee the quality of a contractor’s work, much like a performance bond or warranty,” PIIAC said. “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.”

Additionally, PIIAC said additional provisions in the bill would prohibit carriers from using any type of prior acts exclusions or Montrose endorsements. So If a contractor discloses prior acts that caused a loss or could cause a loss and the insurer writes a policy, the insurer would be on the hook for the coverage of the 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,” PIIAC said.

The association believes that if passed, the bill would push many carrier to stop writing general liability insurance for contractors in the Colorado marketplace, and that carriers that remain in the marketplace would raise premiums, which would be passed onto customers.

As such, the American Subcontractors Association of Colorado also is opposed to the bill. “If passed, you will see an exodus of insurance companies leaving the state, which in turn will drive premium costs through the roof. Many construction companies will be unable to obtain insurance and will be available only at a price far beyond the reach of most small and medium sized subcontractor businesses. This bill encourages poor workmanship and lower safety standards by requiring insurance companies’ to cover improperly performed work,” the association said.

PIIAC is asking the insurance industry to contact state senators about the “adverse” effect the bill would have on the construction industry.

The bill has been introduced in the Senate and assigned to the Business, Labor and Technology Committee to hear the bill today.

Sources: Colorado Legislature, PIIAC

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