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Heritage Thoughts Heritage Thoughts is a periodic article detailing current affairs in the insurance surplus lines market place. It offers us an opportunity to share relevant insight on the industry. Writing broad classes of business, state-wide, with large domestic and international carriers, we are uniquely positioned to comment on the insurance marketplace in a context relevant to Colorado.
House Bill 1394: Myths and Realities In summery, House Bill 10-1394 (HB1394) was passed in May 2010 and came into effect on June 1, 2010. There are two sections of the bill, one dealing with “montrose” exclusions, and the other dealing with “your work” and “your product” exclusions. Agents do not have an E&O exposure solely based upon the attachment of “montrose” or “super-montrose” endorsements. Agents may have an E&O exposure because of the implications of the “your work” and “your product” section of the law; Heritage General has taken specific actions to protect our agents in this case. Can HB1394 jeopardize agents' Errors & Omissions (E&O) if a form is invalidated by a trial court in the event of a claim? Heritage General agency has a relationship built over the last 20 years with our markets covering contractors. Western Heritage has consistently written these contractors during this period. They are familiar with the Colorado contractor environment and have taken carefully considered decisions to remain a market while other insurers were pulling out in a knee-jerk reaction to the new law. Western Heritage stands by the integrity of the product they offer, and Heritage General stands behind the product we offer. Rumors in Colorado have been generating concern among agents regarding the so-called “montrose” exclusions (excluding known prior acts of the insured) and “super-montrose” (excluding known and unknown prior acts of the insured) and whether they are exposed for an E&O claim by selling policies with one of these provisions. The answer is no; Heritage General represents these forms as valid to our agents as our companies represent these forms as valid to us. The bottom line is, in the event of a claim if a form is invalidated under the provisions of HB1394, the court will determine any questions of ambiguity within the policy in favor of the insured. This has been common practice in contract law for decades, if not centuries. This is not, as some have improperly claimed, a matter of discussion or opinion; this is a settled matter of law. Heritage General stands behind our policies, and we can confidently affirm that use of “montrose” and “super-montrose” exclusions on our policies does not expose our agents' E&O solely based upon our, or our companies' attachment or use of these forms. We also invite you to read the full text of the bill and form your own conclusion. It is available directly from the Colorado Legislature's website here. Does HB1394 require agents to tell the insured...? Of course insurance agents are obliged to explain the provisions of coverage and all exclusions to the insured; however, no provision of the House Bill explicitly requires agents or insurers to inform the insured of specific policy forms beyond those obligations, but the text of the bill may have implications for agency errors & omissions (E&O) coverage. So why do your quotes say agents are required to inform the insured of the your work and your products exclusion in the CG 00 01? The CG 00 01 is just the standard ISO insuring agreement. Both the your product and your work exclusions have been on the form for more than a decade (at least since the 1998 version of the form). HB1394 doesn't explicitly require agents to advise the insured of anything; however, Heritage General has added this line to our quotes for all construction contractors and many service contractors: CG 00 01 excludes damage(s) to "your work" and "your product". Colorado House Bill 1394 requires you advise insured of this provision in the CGL policy. This protects our E&O and provide a suggestion to our agents to protect theirs. The text of the law states that a jury must consider a "construction professional's" intent in purchasing coverage with respects to the your work exclusion (which is already common practice in trial courts in cases of insurance contracts). The legislature's intent was not to codify a practice of the courts, and the original draft of the bill included considerably stronger language that would have altered the agreement between the contracting parties (the insured and company). The intent of the lobbyists advocating on behalf of construction defect attorneys who submitted language for the bill was to alter the contract between the company and the insured. The watered down language that made it to the final bill left the question to the jury as was already common practice, but this states it explicitly. In that respect, we do not think this materially changes the contract, but we are also not attorneys, and the info we have gotten from company attorneys is not entirely consistent. This is just a gray area of a new law that courts have not rendered an appellate opinion on and we are erring on the safe side. What are the “your work” and “your product” exclusions? The “your work” and “your product” exclusions have been included in the CG 00 01 for over a decade. They exclude damage a contractor causes to their own work. Coverage to this type of damage is considered a warranty as opposed to insurance. Section I, Coverage A of the CG 00 01 (Bodily Injury and Property Damage Liability) states:
A complete copy of the CG 00 01 (12/07 edition) is available for your reference here. What does HB1394 actually do? In response to GSINDA v. Mountain the Colorado Legislature passed HB10-1394 (H-04/22/10; S-05/04/10). Section 1 states that an insured is assumed to have sought coverage for 'your work' when purchasing a liability policy. It redefines damage to 'your work' as an accident and thus an 'occurrence'. A claim of construction defect (rather than an actual 'occurrence' under policy language) triggers the insurer's duty to defend; however, this does not create a coverage or supersede the 'your work' exclusion for 'property damage'. The section only covers the insurer's duty to defend and explicitly enumerates certain defense (and only defense) actions the insurer must undertake. Section 2 deals with excluding prior acts of the insured. It voids any prior acts or continuing damage exclusion unless the exclusion applies only if the insured had prior knowledge. It also places the burden of proof on the insurer, in the event of a claim, to show with a preponderance of evidence that the insured had 'actual knowledge' of a prior act. The complete text of the bill is available here. Call or e-mail us for more information. We understand that there is a lot of information to digest with respects to HB1394. Heritage General has a heavy book of contractors, and we have diligently followed the legislative process, passage, and relevant court cases surrounding HB1394. We are pleased to share our expertise on the subject with agents. Please feel free to contact David, Sam, or Terry with any questions. |
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