Interpreting the Scope of Colorado’s Anti-Indemnity Statute

Rachel Burkhart | Faegre Baker Daniels | April 12, 2019

A common feature of construction contracts is the indemnity or “hold harmless” provision, which transfers the risk of loss due to a third-party claim from one party to another. Several states have enacted laws that limit the enforcement of indemnity provisions in construction contracts. Colorado’s anti-indemnity statute, enacted in 2007, is relatively broad compared to other states’ statutes. Before assuming that the Colorado anti-indemnity statute applies to your contract, however, you should consider some of its key provisions.

Forms of Indemnity Prohibited in Colorado

Anti-indemnity statutes can be categorized based on the types of indemnity provisions that they target. Although indemnity provisions vary from contract to contract, they typically fall within one of three categories. The first type is the “fault-free” provision, which requires indemnification so long as the indemnitor’s mere work or presence is involved, or where the loss arises out of the indemnitee’s sole fault. The second category includes provisions that require indemnification where the negligence or fault of the indemnitor was a partial cause of the loss, even though the loss may also have been due in part to the indemnitee. The third category of indemnity provisions requires indemnification only where the loss is due entirely to the indemnitor’s negligence.

In Colorado, the anti-indemnity statute addresses the first and second categories of indemnity provisions. Under the anti-indemnity statute, an indemnitor can only be held responsible for damages caused by the fault or negligence of the indemnitor and its subcontractors, suppliers and agents. The extent of an indemnitor’s liability is limited to the degree or percentage of its own negligence or fault. Colorado’s anti-indemnity statute prohibits indemnity provisions that require an indemnitor to pay for damages caused by the indemnitee’s own fault or negligence, or that of its agents. Such provisions are void as against public policy and not enforceable.

Limitations on the Scope of Colorado’s Anti-Indemnity Statute

In many respects, Colorado’s anti-indemnity statute is quite broad. For example, the statute addresses “construction businesses” as a whole and does not distinguish between indemnification of owners, designers, contractors, subcontractors and their agents. Colorado’s statute is also unusual in that it prohibits provisions that require the indemnitor to obtain insurance coverage for losses caused by an indemnitee’s own fault or negligence.

However, before you assume that these broad prohibitions apply to your contract, you should consider whether it falls under one of the statute’s exceptions.

For instance, Colorado defines a “construction agreement” as almost any and every contract in the construction industry, including design contracts. But some courts have still found categories of agreements that fall outside the definition, such as operation agreements and master services agreements. The statute also expressly exempts agreements affecting property owned by railroads, sanitation districts and water districts, as well as lease agreements between landlords and tenants.

Colorado’s anti-indemnity statute is also limited to “liability for damage arising out of death or bodily injury to persons or damage to property caused by the negligence or fault of the indemnitee or any third party under the control or supervision of the indemnitee.” Theoretically, certain categories of damage — such as emotional distress — may escape the prohibition. Indemnification may also be upheld when reimbursement of expenses is sought for a claim that has not yet reached final adjudication or settlement, which is when liability typically attaches. It is also unclear whether the statute applies to indemnification for third party claims based on a theory of strict liability where fault is not an element of the claim.

Overall, Colorado’s anti-indemnity statute contains a relatively broad prohibition against indemnification for indemnitee-caused losses, but some construction contracts may still fall outside its scope, depending on the circumstances.

Certificates of Review in Colorado Construction Defect Litigation

Daniel E. Evans and Kaitlin Marsh-Blake | Gordon Rees Scully Mansukhani | February 28, 2019

The requirement to file a certificate of review early in a lawsuit is often imposed for the purpose of preventing frivolous professional malpractice actions and avoiding unnecessary time and cost in defending such claims. These statutory obligations vary between states and are often dependent on the type of professional named as a defendant. The certificate of review requirement, sometimes called an affidavit of merit, is often seen in the healthcare context, and does not always extend to other areas of professional negligence. For example, in Missouri, a certificate of review is required in any medical malpractice action, but not in actions against other licensed professionals. In Kansas, instead of an affidavit of merit, any party to the action may request a professional malpractice screening panel review the matter and determine if there was a departure from the standard of care. Construction defect cases often involve licensed engineers, architects, and surveyors. In Colorado, these individuals are state-licensed professionals and are subject to a certificate of review.

Plaintiffs in Colorado must file a certificate of review in every professional negligence action against a licensed professional. C.R.S. § 13-20-602. The certificate of review must be filed within sixty days after service of the complaint. The certificate of review must indicate that the claimant’s attorney consulted with an expert in the area of the alleged negligent conduct, and that the consulting expert determined that the claim does not lack substantial justification. C.R.S. § 13-20-602(3). In the construction context, the certificate of review requirement applies to Colorado-licensed engineers, architects, and surveyors. Arguably, this requirement also applies to certain trades such as electricians and plumbers, as these contractors are also regulated by the Colorado Department of Regulatory Agencies and licensed through the State of Colorado.

Case law authority exists that Colorado’s certificate of review requirement is not limited to negligence claims, but instead may be required for any claim against a licensed professional that requires expert testimony. Ehrlich Feedlot, Inc. v. Oldenburg, 140 P.3d 265, 271 (Colo. App. 2006). When a plaintiff’s claim requires a showing that the licensed professional breached a duty of care, and the duty of care is not within the understanding of a layperson without the assistance of expert testimony, then a certificate of review is required. Williams v. Boyle, 72 P.3d 392, 397 (Colo. App. 2003). Depending on the allegations, the certificate of review requirement may extend to claims of fraud, breach of contract, or violations of the Colorado Consumer Protection Act. See, e.g., Williams v. Boyle, 72 P.3d 392, 399 (Colo. App. 2003) (certificate of review was required for claims involving fraud); Martinez v. Badis, 842 P.2d 245, 251 (Colo. 1992) (breach of contract claims); Teiken v. Reynolds, 904 P.2d 1387, 1398 (Colo. App. 1995) (CCPA claims).

Section 13-20-602, C.R.S., mandates that the failure to file a certificate of review shall result in dismissal of the complaint. However, the court has the discretion to determine that a longer period of time is necessary to file a certificate of review and may extend the deadline. Id. When involved in a construction defect matter in Colorado, it is important to determine whether the named defendant is a licensed professional and note the deadline for a claimant to file a certificate of review. In some instances, a well-timed dispositive motion may result in dismissal of a licensed professional based on the failure to file a certificate of review.

Colorado Division of Insurance Reissues Bulletin on Colorado Homeowners’ Right to Obtain Additional or Enhanced Coverages

Timothy Burchard | Property Insurance Coverage Law Blog | January 5, 2019

Balancing the cost of insurance premiums and the potential costs related to being displaced from your home, repair costs required by local building code, or higher replacement costs can be challenging for a homeowner. For Colorado homeowners, it is important to understand that they have rights to additional and/or enhanced insurance coverage options if they so choose.

On January 1, 2019, the Colorado Division of Insurance reissued Bulletin No. B-5.35 providing guidance on Colorado Statutes §§ 10-4-110.8(6)(a) and 10-4-110.8(6)(b) pertaining to the requirement that insurance carriers offer the option of certain additional coverage or coverage enhancements to Colorado homeowners, including:

  • Extended Replacement-Cost coverage equal to at least twenty percent of the dwelling limit;
  • Colorado Law and Ordinance coverage equal to ten percent of the dwelling limit; and
  • Additional Living Expense coverage for a total of twenty-four (24) months in their homeowners’ insurance policy.

These coverage options are extremely important considerations for any homeowner. First, while the replacement-cost coverage selected when a homeowner may have been appropriate at the time they purchased the insurance policy, costs of repair, building materials, and other related issues can, and usually do, increase over time. Second, city, county, and state building codes also change to meet updated fire and safety standards, and if your policy does not include law and ordinance coverage, you could be stuck with the cost of updating insulation, electrical wiring, and/or plumbing to current code requirements, which may otherwise be excluded without law and ordinance coverage. Finally, if a disaster occurs displacing you from your home, Colorado state law requires insurance carriers to offer the option of Additional Living Expense coverage up to 24 months. This coverage provides the cost of obtaining housing during a period of displacement. While it is likely unfathomable for most to think of being displaced for two years, according to the Colorado state law insurance carriers must provide the option of this added protection.

By reissuing Bulletin No. B-5.35, the Colorado Division of Insurance has made it clear that it continues to believe these additional and/or enhanced coverage options provide significant protections for Colorado homeowners. While not every homeowner may feel the need to include these coverages, it is important to know that your insurance carrier must offer these additional or enhanced options in Colorado.

Colorado Supreme Court Clarifies Bad Faith Standard

Ashley Harris | Property Insurance Coverage Law Blog | November 7, 2018

A recent Colorado Supreme Court opinion in Schultz v. GEICO Casualty Company, clarifies the standard for bad faith in Colorado. In the opinion, the court discusses both claims for common law bad faith and statutory unreasonable delay or denial of benefits.

Most notably, the court concluded that the insurance company’s conduct must be evaluated based on the evidence before it when it made its coverage decision, and that the insurance company may not create new evidence to try to support its earlier coverage decision.

This means that when defending against a bad faith claim by attempting to show it acted reasonably, the insurance company can only present the information it considered at the time it made the decision to delay or deny the claim.

The opinion also restates the standard for common law bad faith, which requires the insured to “establish that the insurer acted unreasonably and with knowledge of or reckless disregard for the fact that no reasonable basis existed for denying the claim.” Travelers Ins. Co. v. Savio, 706 P.2d 1258, 1274 (Colo. 1985).

With regard to a statutory claim, Section 10-3-1115, C.R.S. (2018) provides, in part:

(1)(a) A person engaged in the business of insurance shall not unreasonably delay or deny payment of a claim for benefits owed to or on behalf of ay first-party claimant.

. . . .

(2)…for the purposes of an action brought pursuant to this section and section 10-3-1116, an insurer’s delay or denial was unreasonable if the insurer delayed or denied authorizing payment of a covered benefit without a reasonable basis for that action.

The court confirmed what both the Colorado Court of Appeals and federal courts interpreting Colorado law have consistently recognized, which is that the proof of a statutory claim differs from the proof required in a common law bad faith claim:

[W]hereas a common law claim requires proof that the insurer acted unreasonably and that it knew or recklessly disregarded the fact that its conduct was unreasonable, ‘the only element at issue in the statutory claim is whether an insurer denied benefits without a reasonable basis.’ (Citations omitted).

This opinion is great for Colorado policyholders, because it limits insurance companies to the information they had at the time they delayed or denied the claim, prohibiting them from hiring “litigation experts” to bolster an unreasonable delay or denial of the claim.

Colorado Notice Standard Update For Residential and Commercial Property Damage

Timothy Burchard | Property Insurance Coverage Law Blog | August 24, 2018

Many of us in Central Colorado remember the hail storm that wreaked havoc on the Denver metro area in May 2017. What happens when hailstorm damage to your property does not manifest itself for a period of months, or even a year later? Should a claim be denied for being reported once discovered? Unfortunately, the standard surrounding late notice continues to be unclear in the Colorado courts today.

Earlier this year my colleague, Jonathan Bukowski, discussed the 2017 Colorado Federal Court decision rendered by Judge Arguello,1 where the trial court applied the Traditional Notice Ruleto the issue of late notice, providing that “failure to notify the insurer within a reasonable time constitutes a breach of that contract requiring a justifiable excuse or extenuating circumstances explaining the delay.” In relying upon the Traditional Notice Rule, Judge Arguello concluded that the policyholder’s lack of familiarity or sophistication in insurance matters was not a justifiable excuse for its delayed notice to the insurance carrier. In short, ignorance of contractual requirements, does not excuse the duty to notify your insurance carrier of a potential covered claim.

More recently, Colorado Federal District Court Judge Martinez, issued an opinion in Sunflower Condominium Association v. Owners Insurance Company,2 in which he applied the Notice-Prejudice Rule, instead of the Traditional Notice Rule. Importantly, unlike the more stringent Traditional Notice Rule which requires proof of a justifiable excuse for delay in notifying a carrier of covered damages, the Notice-Prejudice Rule offers policyholder’s the opportunity requires the court to:

  1. Determine whether an insured provided their notice timely, through evaluation of whether the timing of the notice and the reasonableness of any delay;
  2. If such notice is determined untimely was the delay unreasonable, determine whether the insurance carrier was prejudiced by such untimely notice.

Located in Aurora, Colorado, the Sunflower property is a multi-family complex of condominiums which sustained damages resulting from a hail and wind storm that occurred on September 29, 2014. Sunflower first submitted its claim for storm caused damages over fourteen months later in December 2015. When Sunflower and Owners could not agree upon the amount of loss, Sunflower filed suit for breach of contract and the unreasonable delay and denial of covered benefits.

During litigation, the court considered several facts demonstrating Sunflower may have been aware of the damages much earlier and could have provided notice sooner – a Sunflower board member had filed a claim for damages to her car one month after the hail storm, the board had received a work proposal for the property that indicated hail damage in April 2015, and a contractor informed a Sunflower board member of the hail damage during a phone call that summer.

Agreeing that Sunflower had multiple opportunities to deliver notice to Owners sooner, Judge Martinez ultimately determined that the timing of Sunflower’s notice was untimely and unreasonable. Judge Martinez then turned to the second step of the Notice-Prejudice Rule – did the untimely notice prejudice the insurance carrier’s investigation of the claim. Judge Martinez ultimately determined that Owners investigation had been prejudiced by Sunflower’s unreasonable delay in providing notice of the claimed damages, as multiple hail storms had occurred between the claim and the September 2014 hail storm.

While this decision led to the unfortunate demise of Sunflower’s claim, Judge Martinez’ pivot towards the Notice-Prejudice Rule may provide Colorado policyholders a step towards the majority approach applied throughout the country. This approach provides a more level playing field between policyholders and insurance carriers, and hopefully it is a step towards a new standard in Colorado. However, the Sunflower case provides an important reminder to always provide notice to the insurance carrier at the first sign of damage to your property to avoid any late notice arguments down the road. While you may have strong and supportable reasons for delaying notice to an insurance carrier of covered damages, the court can always see things differently.
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1 Cherry Grove East II Condo. Assoc. v. Philadelphia Indem. Ins. Co., No.1:16-cv-02687 (Colo. D. Dec. 27, 2017).
2 Sunflower Condo. Assoc., Inc. v. Owners Ins. Co., No. 1:16-cv-2946-WJM-NYW (Colo. D. May 14, 2018).