Who Pays? Construction Defect Lawsuits, Insurance, and Liability in Colorado
“Who Pays”
When construction defects emerge at Colorado properties, the question of "who pays?" quickly becomes the center of complex legal battles. Whether you're a property owner discovering water intrusion, a general contractor receiving a defect notice, or a subcontractor being named in a lawsuit, understanding the intersection of liability and insurance coverage is critical to protecting your financial interests.
Construction defect cases rarely involve just two parties. Instead, they typically involve a web of finger-pointing among developers, contractors, subcontractors, design professionals, and their respective insurance carriers. At Structura Law, our unique combination of construction litigation and insurance coverage expertise provides clients with a significant advantage in navigating these challenging waters.e.
Identifying Legally Responsible Parties
Colorado construction defect claims may involve multiple potentially responsible parties:
Developers
Developers can be held liable for defects in overall site planning, improper soil testing, inadequate drainage systems, and other development-level decisions. They may also face liability for the actions of contractors they hire, particularly when they maintain significant control over the construction process.
General Contractors
General contractors typically bear primary responsibility for construction quality. They have a duty to ensure work is performed according to plans, specifications, and applicable building codes. Even when defective work is performed by a subcontractor, the general contractor may remain ultimately responsible to the property owner under their primary contract.
Subcontractors
Specialized trade contractors—framing, plumbing, electrical, roofing, waterproofing, and others—can be liable for defects in their specific scope of work. In Colorado, subcontractors are frequently brought into lawsuits through third-party claims by general contractors.
Design Professionals
Architects and engineers may be liable for design errors, incorrect specifications, or failure to properly oversee implementation of their designs. These claims often involve professional liability policies rather than standard commercial general liability coverage.
Material Suppliers
Companies that provide defective building materials may also bear responsibility, though these claims typically fall under product liability theories rather than traditional construction defect principles.
Once the potentially responsible parties are identified, the next critical question is whether insurance coverage exists to pay for the damages and defense costs associated with the alleged defects. The Commercial General Liability (CGL) policy is typically the first place we look.
The Primary Insurance Policy: Commercial General Liability (CGL)
Commercial General Liability (CGL) insurance forms the backbone of risk management in the construction industry. These policies typically provide coverage for bodily injury and property damage caused by an "occurrence" (generally defined as an accident, including continuous or repeated exposure to harmful conditions).
In construction defect cases, CGL policies are usually the first line of defense for contractors and subcontractors. However, navigating CGL coverage for construction defects presents challenges often requiring specialized legal expertise.
CGL and Construction Defects: A Complex Coverage Landscape
Interpreting "Occurrence"
One of the most contentious issues in construction defect insurance claims involves whether faulty workmanship constitutes an "occurrence" triggering coverage. Colorado courts have evolved in their interpretation of this issue over time.
By statute, Colorado law provides that work of a construction professional that results in property damage, including the work itself, is an accident and therefore an “occurrence.” However, for coverage to exist under a CGL policy, there must be both an “occurrence” and “property damage.”
"Property Damage" Nuances
CGL policies cover "property damage," but the application of this coverage in construction defect cases is nuanced. Per Colorado courts, defective work itself, and damage to that defecitve work, is not “property damage.” To qualify as “property damage,” the damage must be to non-defective work of a third party. Generally:
Damage to other property caused by defective work is typically covered
The cost to repair or replace the defective work itself is excluded
For example, if defective plumbing installation causes water damage to drywall, flooring, and personal property, the water damage would typically be covered, while the cost to repair the defective plumbing itself would not be.
"Your Work" / "Your Product" Exclusions
Standard CGL policies contain exclusions for damage to "your work" or "your product." These exclusions are designed to prevent insurance from serving as a warranty for poor workmanship.
This means a contractor's CGL policy typically won't pay to tear out and replace the defective concrete foundation they poured, but it might cover the cost of repairing the walls and floors that cracked as a result of the faulty foundation.
Important Note: The "your work" and "your product" exclusions may be altered or deleted by endorsement.
Additional Insured Status: Critical Protection for General Contractors
General contractors typically require subcontractors to name them as "additional insureds" on their CGL policies. This status can provide general contractors with direct access to the subcontractor's insurance coverage when defects are alleged in the subcontractor's scope of work.
The specific rights conferred through additional insured status depend on the policy language and endorsements, but typically include:
The right to tender defense directly to the subcontractor's insurer
Coverage for liability arising from the subcontractor's work
Additional insured status may only be available for completed projects, for ongoing operations, or so long as the contract between the general contractor and the subcontractor requires that the general contractor be included as an additional insured. Our experience at Structura Law has shown that additional insured endorsements vary widely, and the specific wording can significantly impact coverage. Having counsel review these endorsements before a claim arises can help identify potential gaps in protection.
Tendering the Defense: A Critical Step
When a contractor or developer receives a construction defect claim, promptly tendering defense to potentially responsible parties and their insurers is crucial. This process involves formally notifying insurers of the claim and demanding they provide a defense and indemnification.
The insurance carrier's duty to defend is broader than its duty to indemnify. An insurer must defend the entire lawsuit if any allegation potentially falls within coverage, even if some claims would not be covered.
Best Practice: When tendering, provide all relevant documentation, including:
The claim or lawsuit with detailed allegations
Relevant contracts showing indemnification obligations
Additional insured endorsements documenting coverage
Evidence connecting the claim to the specific party's scope of work
Common Insurance Coverage Disputes in Construction Defect Cases
Several types of disputes can arise between construction professionals and their insurers:
Denial of Coverage Based on Policy Provisions and Exclusions
For both insurers and construction professionals, navigating coverage disputes often hinges on complex policy language. An insurer may deny coverage if, for example, there is only evidence of faulty work, not “property damage” to a third-party’s work. However, effectively addressing these denials, whether defending a position or challenging it, necessitates a meticulous analysis of the specific policy provisions, applicable endorsements, and relevant Colorado case law, and comparing the policy to the reported facts of the claim.
Disputes Over Additional Insured Status
Conflicts regarding the scope of additional insured coverage are common, particularly when endorsements contain limitations based on:
Time periods (completed operations vs. ongoing operations)
Contractual privity requirements for coverage to apply
Causal connection requirements between work and damage
Conflicts Over Multiple Policy Years
For defects that cause progressive damage over time, determining which policy years are triggered becomes complex.
Allocation Among Multiple Insurers
When multiple insurers are involved across different companies or policy years, disputes over the proportional responsibility of each insurer often emerge, leading to complex coverage litigation.
Insurance Bad Faith Claims
When insurers delay payment or deny claims, they may face bad faith liability under Colorado law, potentially resulting in additional damages beyond policy limits, including:
The covered benefits wrongfully withheld
Statutory penalties of two times the covered benefit (under C.R.S. § 10-3-1116)
Attorney fees and costs incurred in pursuing coverage
The resolution of these disputes requires not just knowledge of insurance law, but also a deep understanding of construction practices and the technical aspects of building defects.
Why Expertise in Both Construction Law and Insurance Coverage is Essential
Construction defect cases require specialized knowledge in two complex areas:
The technical aspects of construction processes and methods, including industry standards
The nuanced world of insurance policy interpretation and coverage litigation
Efficient Resolution: Leveraging knowledge of both fields to identify the most direct path to securing coverage or resolving the claim cost-effectively
At Structura Law, Jennifer Arnett's background as Chief Litigation Officer for a national property and casualty insurance company provides clients with invaluable insights into how insurance carriers evaluate and respond to construction defect claims. This insider perspective, combined with her recognized expertise in Colorado construction defect law, allows our firm to anticipate carrier strategies and develop effective countermeasures.
For contractors and developers, this means knowing exactly how to structure tender letters, documentation, and negotiations to maximize the chances of securing coverage. For insurance carriers, it means having counsel who understands both the technical construction issues and the coverage implications at stake.
Conclusion
The intersection of construction defect liability and insurance coverage in Colorado presents a complex legal landscape that requires specialized expertise to navigate successfully. Whether you're a property owner seeking compensation, a contractor defending against defect claims, or an insurer evaluating coverage obligations, understanding these nuances is crucial to protecting your interests.
At Structura Law, our combined expertise in construction litigation and insurance coverage law provides clients with a strategic advantage in these multifaceted disputes. By leveraging our knowledge of both fields we resolve construction defect claims efficiently.
If you're involved in a Colorado construction defect dispute and have questions about liability or insurance coverage, contact Structura Law for a consultation to discuss your specific situation.
About the Author
Jennifer Arnett combines her Columbia Law School education with extensive construction litigation experience and unique insurance industry insight as a former Chief Litigation Officer for a national property and casualty insurer. This dual expertise in both construction and insurance law gives Structura Law clients a significant strategic advantage in construction defect cases, where understanding both fields is essential to achieving optimal outcomes.
