By Joe Ramirez
Insurance coverage litigation and construction defects seem to go hand in hand in Colorado. And this summer has produced some of the most significant changes in insurance coverage litigation in Colorado in decades. First, the State Legislature amended Colorado’s Unfair Claims Practices Act to provide policyholders with substantial remedies against insurers who unreasonably delay or deny benefits under an insurance policy. The statute provides much needed help for policyholders who are forced by their insurers to litigate claims to obtain coverage. Meanwhile, the Colorado Court of Appeals ruled in favor of property insurers who use Anti-Concurrent Causation language in their exclusions. The decision is extremely important for businesses who own and insure real or personal property; such businesses must be vigilant against such language in their commercial property policies. Finally, the Court of Appeals ruled that lawyers who represent clients on behalf of an insurance company have a duty to recommend independent counsel where the client’s interests conflict with the insurers. All of these developments have changed the landscape of insurance coverage litigation in Colorado.
Amendment of Unfair Claims Practices Act
Effective August 6, 2008, C.R.S. §10-3-114, 115 and 116 helped level the playing field for policyholders. Prior to the enactment of this legislation, policyholders had to incur the costs of suing insurance companies who wrongfully denied coverage. Unless an insurer’s conduct was egregious enough to prevail on a tortious breach of contract claim, a policyholder could only recover the amount of the benefit at issue. Under this system, insurers had little disincentive to deny claims knowing that their liability would be capped at the loss amount. Many a policyholder had to abandon good insurance claims because it did not make economic sense to incur litigation costs only to recover a claim of the same value.
The amendment of the Unfair Claims Practices Act added the following: 1) §10-3-114 provides a private cause of action for policyholders against insurers who unreasonably delay or deny payment of a claim; 2) §10-3-115 defines unreasonable delay or denial as a delay or denial of payment without a reasonable explanation for the action; and, 3) §10-3-116 provides for the recovery of attorneys fees and two times the covered benefit against insurers who unreasonably delay or deny insurance benefits. The ability to recover attorneys fees and costs and collect twice the amount in controversy provides an incentive to policyholders to challenge their insurers’ spurious delays or denials but, more importantly, the amendment creates a strong disincentive to insurers to delay or deny legitimate claims.
Anti-Concurrent Causation Exclusion
Insurers developed Anti-Concurrent Causation (“ACC”) clauses to preclude coverage for uninsurable risks, such as War, Nuclear Hazard or Flood, regardless of whether they occurred concurrently with a covered cause of loss. The typical ACC exclusion reads:
We will not pay for a loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event that contributes concurrently or in any consequence to the loss
Some insurers expanded the use of ACC clauses to apply more broadly than just to uninsurable hazards. For example, ACC language has been added to exclusions for faulty construction or design, inherent vice, or changes in temperature. These type of exclusions have traditionally been analyzed under the efficient proximate cause doctrine which holds that where two perils contribute to a loss, the predominant peril determines if the policy provides coverage.
The Court of Appeals addressed the efficient proximate cause doctrine where an insurer relied on an ACC clause to deny coverage. In Colorado Intergovernmental Risk Sharing Agency v. Northfield Ins. Co., 2008 WL 2837517, a building that housed a swimming pool collapsed due to the weight of ice and snow accumulation on its roof. The policy contained an exclusion for decay subject to an ACC clause. The jury found that 90% of the cause of loss was attributed to weight of ice and snow, a covered peril, but also attributed 10% to decayed trusses from the pool’s moisture. The Court found that the ACC clause unambiguously excluded coverage for the whole claim and refused to apply the efficient proximate cause analysis which would have required the insurer to pay it.
Because of the Northfield decision, a prudent business owner should make sure that her commercial property policies do not include a broad application of ACC clauses or risk the possibility that an expected covered claim would be denied because an excluded peril contributed to a loss. Under an ACC clause like in Northfield, a total fire loss of a building could be excluded if a contractor’s faulty work contributed to the loss.
Insurance Defense Counsel Has a Duty To Advise Client to Seek Personal Counsel
An insured acquires two separate and distinct protections when he pays the premium for a typical general liability policy. Most policyholders recognize that general liability policies protect them against legal liability for covered claims; however, the broader, and arguably more important coverage, is an insurer’s duty to provide a defense. Where an insurance company hires a lawyer to defend a policyholder in a lawsuit, the lawyer often finds himself in a conflict of interest situation where he cannot properly advise the client. Such conflicts are created where the policyholder faces the possibility of an excess judgment or where the insurance company has provided a defense subject to a reservation of rights. In Morris v. COPIC Ins. Co. Inc., 2008 WL 2684122, the Court of Appeals held that insurance defense counsel has an obligation to recommend to the policyholder personal counsel to advocate against the insurer. Many policyholders mistakenly assume that insurance defense counsel can fully represent their interests. The limitation of insurance defense counsel’s representation comes to light after the litigation is over and the insurer files suit against the policyholder seeking a declaration that it does not owe coverage. At this point, insurance defense counsel drops out of the picture and the policyholder must scramble to find representation, often times too late to deal with critical facts that have already been developed in the underlying case. Morris provides a safeguard against this by requiring defense counsel to recommend personal counsel before reaching such critical points.
These recent developments both help and hurt policyholders so it imperative that business owners stay abreast of changes in insurance law to ensure their risk management strategies are sound.
