Over the past few years, we have monitored the efforts of some in the insurance industry to deny coverage for construction defect claims brought by construction professionals. These insurers' assault on construction professionals began with the Colorado Court of Appeals decision in General Security 205 P.3d 529 (Colo. App. 2009), in which a panel of the Colorado Court of Appeals held faulty workmanship does not constitute an "occurrence" under a general liability policy. Various subsequent decisions wrestled with this question ultimately culminating in the 10th Circuit's decision in Greystone Construction, Inc. v. National Fire & Marine Ins. Co., 661 F.3d 1272 (10th Cir. 2011) in which the court held faulty workmanship constitutes an "occurrence" if it causes damage to property other than the faulty work itself.
In 2010, the Legislature passed C.R.S. § 13-20-808 for the express purpose of confirming that faulty workmanship constitutes an "occurrence" under Colorado law even if the faulty workmanship causes damage to the faulty work itself.
Notwithstanding the passage Section 13-20-808, certain insurers continue aggressive efforts to avoid coverage for construction defect claims under general liability policies. In 2012, the Colorado Court of Appeals issued two opinions addressing this issue - TCD, Inc. v. American Family, --- P.3d ----, 2012 WL 1231964 (Colo. App.), 2012 COA 65, and Colorado Pool Systems, Inc. v. Scottsdale Insurance Company, --- P.3d ----, 2012 WL 5265981 (Colo. App.), 2012 COA 178. In both cases, the Court of Appeals held Section 13-20-808 did not apply because the events relevant to those claims pre-dated the statute. As such, both opinions applied the Greystone test to determine whether an "occurrence" existed under the specific facts of each case - i.e., whether the faulty workmanship caused damage to property other than the faulty work itself (the TCD court found no "occurrence" while the Colorado Pool court found an "occurrence"). Notably, both courts stated that had Section 13-20-808 applied, there would have been no question as to whether the claims asserted against the insureds arose from an "occurrence."
While many aspects of the TCD and Colorado Pool decisions raise questions, it is clear certain members of the insurance industry will continue to challenge the very concept of coverage for construction defects, at least until no further disputes exist as to whether the "occurrence" statute applies.
Nevertheless, there are certain lessons that can be drawn from TCD and Colorado Pool. First, it is essential construction professionals purchase policies from insurers firmly rooted in insuring the construction industry. Not all insurers are created equal. Certain insurers are serious about insuring the construction industry, and understand and accept the concept that faulty workmanship constitutes an "occurrence". These insurers are more likely to seek to protect their insured construction professionals against construction defects.
Second, it is equally important for construction professionals to hire qualified insurance brokers with specific expertise in insuring the construction industry. Many of these brokers know which insurers are serious about insuring the construction industry and have developed good relationships with those insurers. Moreover, these brokers can work with construction professionals to obtain the broadest coverage reasonably available.
Third, construction professionals should never buy general liability insurance on price alone. As with other products, construction professionals get what they pay for. If one insurer's quote for coverage is significantly less than another insurer, the construction professional would be well advised to be skeptical of the less expensive policy, and should carefully inquire with its broker about the insurer's reputation for insuring the construction industry and covering construction defect claims.
Fourth, the construction professional should engage an experienced coverage attorney to assess pursuing coverage when an insurance company denies coverage for a construction defect claim. Simply because an insurer says its policy does not cover a construction defect claim does not make it so. Given the TCD and Colorado Pools decisions, it is critical that insureds clearly articulate their coverage positions to satisfy the nuances of Colorado law. We believe Colorado courts are beginning to reaffirm coverage for construction defect claims notwithstanding aggressive challenges by certain insurers.