CONSTRUCTION DEFECTS AND INSURANCE: PROACTIVE STEPS TO PROTECT YOUR COMMUNITY
All the media and legislative talk of construction defect litigation and its impact on condominium construction in Colorado may seem like discussion that does not impact existing communities. But the changes to state and local laws concerning construction defect litigation do affect existing communities by creating owner notice and vote requirements that, in some cases, apply to construction undertaken by associations long after initial development of their communities. The impact of these requirements on communities will likely play out over time as defects occur and associations seek remedies.
While associations cannot unilaterally change the controlling laws, associations can take proactive steps when contracting for new projects. In particular, associations need to know how the potential for construction defects may affect insurance coverage on projects that associations contract to complete on their own. Did you know that many contractors' insurance policies exclude multi-family housing projects from coverage?
Now, more than ever, associations looking to undertake repairs, renovations or other construction projects should work with an attorney to ensure that the work is safeguarded with the proper insurance coverage. Associations with construction projects on the horizon should consider the following with their attorneys:
- Contract for insurance coverage that protects your association. Do not use the bid or the contractor's form contract as the binding agreement between the parties.
- Make sure the association is named as an additional insured on the contractor's policies.
- Ensure that the contractor provides primary, non-contributory coverage and that subcontractors comply with coverage requirements too.
- Obtain the correct endorsements to insure over the exclusions for multi-family projects. Standard insurance forms are available and offer this coverage for an additional, cost effective price.
- Require the contractor to submit the policy declaration pages and copies of endorsements, at a minimum. Do not rely on the certificate of insurance as proof of insurance.
- Negotiate sufficient notice of any policy cancellation. Colorado law only obligates carriers to provide 10 days' notice of cancellation to additional insureds. Association brokers can assist with obtaining a separate endorsement that gives 30 days' notice before coverage ends.
- Require set coverage amounts for the specific location or project. Some contractors carry blanket coverage, with a single aggregate coverage amount, for multiple job sites, meaning that your community could fail to benefit from coverage if other losses exhaust the coverage limits first.
- Consider purchasing an owner controlled insurance policy ("OCIP"), also known as a wrap policy, for large projects to guarantee coverage of the contractor and all subcontractors for the entire time that the association may discover defects. Contractors and subs go out of business and change or cancel coverage without having the assets to protect the associations harmed by defective work. An OCIP affords seamless protection for the association and its owners.
THIS ARTICLE IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT A SUBSTITUTE FOR LEGAL ADVICE. PLEASE CONTACT ONE OF OUR ATTORNEYS FOR ASSISTANCE WITH CONTRACT DRAFTING AND NEGOTIATION.