There are many opportunities for problems, accidents and disputes on a construction project.  The various parties on a construction project, however, often do not ensure that they are adequately covered by insurance, do not timely notify their carrier of a claim, and do not aggressively pursue insurance recovery.

There are many types of insurance products that may be necessary for adequate insurance coverage on a construction project, including workers compensation, builders risk, and comprehensive general liability insurance.  Perhaps the most often used and most often misunderstood policy is the comprehensive general liability or “CGL” policy.

Like most types of insurance, timely notice to your carrier of a claim is the first step under a CGL policy and policy holders should ensure that their carriers receive immediate written notice of a claim or potential claim against them.  Although the Colorado Supreme Court, in Friedland v. Travelers Indem. Co., 105 P.3d 639 (Colo. 2005), recently changed long-standing precedent by now requiring that the insurer prove it was prejudiced by late notice, a policy holder does not want to provide its carrier with an additional coverage defense by delaying notice.  The best practice is to provide written notice as soon as you have any indication whatsoever that there could be a claim against you on a construction project.
After notice is provided, whether there is coverage for a certain loss depends on a close analysis of the policy language.  Although Colorado courts are required to enforce the plain meaning of the language, ambiguous language is automatically construed to provide coverage.  Novell v. American Guar. & Liability Ins. Co., 15 P.3d 775 (Colo. App. 1999).  Moreover, the meaning of a policy is the meaning that an average person would attach to it and not what an insurance professional believes is the meaning of the sometimes technical policy language.  Standard Marine Ins. Co. v. Peck, 342 P.2d 661 (Colo. 1959).  These last two rules of construction have been effectively and creatively used by many policy holders to obtain coverage for construction losses where coverage is seemingly in doubt.

In addition to paying for any settlement or judgment in a covered claim, a CGL policy requires the carrier to pay for the policy holder’s defense of that claim.  This duty to defend is extremely important given the high cost of litigating a construction claim.

Furthermore, the Colorado Supreme Court has defined this duty to defend very broadly.  In particular, an insurer must defend its policy holder unless there is no legal or factual basis on which coverage could be had under the policy.  Hecla Mining Co. v. New Hampshire Ins. Co., 811 P.2d 1083 (Colo. 1991).  If any claim in a lawsuit is covered, the carrier also must pay for the policy holder’s defense of all claims in the lawsuit.  City of Englewood v. Commercial Union Assur. Cos., 940 P.2d 948 (Colo. App. 1996).

In the growing area of construction defect litigation, the business-risk and contractually assumed liability exclusions typically found in a CGL are aimed at preventing coverage for the cost of repairing a policy holder’s sub-par workmanship.  Importantly, however, these exclusions generally do not preclude coverage (including defense costs) in cases where the defect has caused property damage or personal injury.  For example, the repair costs of faulty wiring that does not cause damage to the structure would not be covered, but coverage may be provided for fire damage caused by the faulty wiring.  Moreover, in a case where several defects are alleged, the defense of the entire lawsuit should be paid for by the carrier although only one of the defects caused damage to the structure.

Finally, even if your carrier initially rejects coverage of a construction claim, Colorado law gives a policy holder some potentially strong leverage to convince the carrier to change its mind.  First, a carrier’s failure to act in good faith in investigating and providing coverage can result in an award of attorney fees and exemplary damages against the carrier.  Second, the Colorado Supreme Court has determined that policy holders can bring claims against their carriers under the Colorado Consumer Protection Act which exposes a carrier to treble damages, attorney fees, and exemplary damages.  Carriers may be convinced to cover your claim in order to avoid this increased exposure.

Insurance is a vital part of any construction project.  You should ensure that the proper insurance is obtained before the project is commenced and then take full advantage of that coverage in the event of a claim against you.   

Published in August 2006 edition of On-Site Magazine and reprinted with permission by Associate General Contractors of Colorado and On Site Magazine.