Senate Bill 17-045 Undermines Insurance Protection for Construction Professionals

By Katie Varholak, Chris Mosley, John Mill and Jason Gumer

Construction professionals should be very wary of Colorado Senate Bill 17-045 (“SB 45” or the “Bill”) introduced on January 11, 2017. In a myriad of ways, the Bill threatens to substantially reduce insurance coverage available to construction professionals and substantially increase a construction professional’s litigation costs. The Bill seeks to amend the Colorado Construction Defect Action Reform Act (“CDARA”) in several ways. These changes include:

  • Eliminating An Insurer’s Duty to Defend a CDARA Notice of Claim When Two or More Insurers Have a Duty to Defend an Insured

First, in situations where two or more insurers have a duty to defend an insured, which most commonly occurs when a general contractor or homebuilder is an additional insured on multiple subcontractors’ liability policies, the Bill removes existing statutory language requiring an insurer to defend an insured against a CDARA Notice of Claim. The Bill also deletes existing statutory provisions requiring that when multiple insurers have a duty to defend they each must reasonably investigate the claim and reasonably cooperate with the insured. CDARA provides for a notice, inspection and offer of settlement process before a defect lawsuit is filed. That process takes at least 2½ months and sometimes longer. As of 2010, insurers were statutorily required to provide and pay for defense counsel to represent an insured during the Notice of Claim process regardless of whether another insurer also had a duty to defend. This was an important protection for insureds. If the Bill becomes law, when multiple insurers have a duty to defend we expect none will pay for defense costs until after a defect lawsuit is filed. When multiple insurers have a duty to defend, construction professionals will be required to either pay for defense counsel out of their own pocket or go without defense counsel during the Notice of Claim process, including any potential repairs and all legal expenses. Those construction professionals who cannot afford to engage outside counsel will be forced to navigate the Notice of Claim process on their own. This may expose construction professionals to greater liability because responding to a CDARA Notice of Claim without the guidance of a qualified attorney can irreparably prejudice the defense against a later defect suit.

  • The Early Allocation Hearing May Prejudice Construction Professionals

Second, when multiple insurers have a duty to defend an insured, the Bill allows an insurer to file a second lawsuit against other insurers that also have a duty to defend the insured. This second lawsuit would be filed when the construction defect suit is in its earliest stages. In the second lawsuit, the court must schedule an expedited evidentiary hearing within 90 days to preliminarily apportion between insurers the responsibility to pay past and future defense costs of the insured. This allocation hearing procedure runs a substantial risk of forcing construction professionals to defend against construction defect claims without insurer assistance where more than one insurer has agreed to defend the construction professional. Specifically, insurers may be incentivized not to pay any defense costs until the court issues a ruling following the allocation hearing. SB 45 does not provide a specific time frame for a trial court to issue an order – only that such order be issued “promptly.” Given the heavy burden our trial courts face, “promptly” could be several months (or more), during which time insurers may not fund a construction professional’s defense at all – thus leaving the construction professional essentially defenseless. This allocation requirement conflicts with existing Colorado law, under which each insurer has a joint and several obligation to defend the insured in full. One purpose of joint and several liability is to protect the insured from being left without a defense while the insurers fight amongst themselves over allocation. As mentioned above, the Bill will make this problem worse, not better. An early allocation hearing also potentially puts the insureds in a compromised position of having to get involved in the battle between insurers over the insured’s potential liability to establish the allocation of defense costs, while disputing liability in the construction defect case. It is unclear whether the Bill contemplates the insureds’ involvement in the allocation hearing, but it may be risky for insureds to stand on the sidelines while the insurers adjudicate the insured’s percentage fault. The early allocation hearing arguably conflicts with Constitution Associates v. New Hampshire Ins. Co., 930 P.2d 556 (Colo. 1996), which protects insureds from having to litigate coverage actions while their liability is still in dispute. The early allocation hearing may also benefit the plaintiffs’ bar substantially as those attorneys will be able to watch the insurers litigate in an evidentiary hearing the percentage of fault that should be allocated to various construction professionals. Thus, the hearing effectively gives plaintiffs a free opportunity to develop their construction defect case.

  • The Final Allocation Hearing Gives Insurers Another Bite at the Apple

Third, the Bill states that a final allocation of defense costs shall be made after the construction defect action is concluded, “among the insurers in a manner that accounts for the damages liability arising from the named insured’s work in relation to the damages liability arising from an additional insured’s work.” The meaning of this provision is not crystal clear, but it appears to require allocation of defense fees and costs between those insurers with a duty to defend based upon the percentage of liability imposed on the parties found responsible for the defect. This manner of allocation is contrary to long-standing Colorado law and standard policy forms, in which allocation of defense costs is typically based on either a pro-rata share according to the limits of the policies or simply shared on an equal basis between participating insurers. The Bill is also problematic because it permits a final allocation determination at the conclusion of the underlying suit but does not require insurers to be bound by the result of the underlying suit. This effectively gives the insurer “two bites at the apple” and encourages insurers to claim that the insured should bear more of the defense, regardless of the outcome of the defect suit.

  • The Bill Allows Insurers to Go After Their Own Insureds With No Prior Notice

Finally, the Bill elevates the interests of insurers over those of the insureds. The Bill deletes existing statutory language that prohibits an insurer from withdrawing a defense or seeking to recover defense costs from the insured unless (i) the insurer reserved that right in writing, and (ii) doing so is authorized by law. Moreover, the Bill permits insurers to seek contribution from an insured who “chose not to procure liability insurance for any period of time implicated by the underlying action.” This would benefit insurers but harm insureds.

Status

The Senate Business, Labor and Technology Committee held a hearing on the Bill on February 8, 2017. Insurance industry representatives testified for the Bill. A number of construction industry organizations testified against the Bill. The Committee adopted minor amendments that do not address construction professionals’ concerns with the Bill. The Bill has a fiscal note projected cost of over $250,000 per year for additional personnel in the Judicial Branch necessitated by the early allocation hearing. As of the date of this advisory the Bill has not been heard by the Senate Appropriations Committee.

If you have any questions regarding this advisory or its possible impact on your activities and operations, please contact any member of our Insurance Recovery Practice Group or our Construction Industry Practice Group.


Sherman & Howard has prepared this advisory to provide general information on recent legal developments that may be of interest. This advisory does not provide legal advice for any specific situation and does not create an attorney-client relationship between any reader and the Firm.

©2017 Sherman & Howard L.L.C.                                                                                   March 10, 2017