Colorado Construction Defect Litigation: More than You Might Want to Know – But Should! (Part 3: Navigating CDARA Claims)

On February 24, 2012, Ken Robinson, Esq., and John Tweedy, Esq., of Robinson Tweedy, PC, presented a Continuing Legal Education program through the Boulder County Bar Association focused on the legal and factual contexts of construction defects in relationship to the larger practice of construction litigation.  This is Part 3 of the CLE presentation, addressing the navigation of CDARA claims.

Part 1     Part 2     Part 4     Part 5

A.         Pre-Suit Considerations for Property Owners.

The first step any owner should take, upon perceiving a problem or defect in any improvement to real property, is to determine whether there are any express warranties which are still in force covering the problem.  If so, the owner should promptly request warranty service, in writing.  No Notice of Claim or other CDARA procedures are required for such “ordinary warranty service,” and if the problem is not solved at that stage, an owner’s position may be later bolstered with claims for breach of warranty and negligent repair.

If express warranties have run, or if the requested warranty service was not satisfactory, an owner’s next step should be to assess and document the nature and extent of the defects, in order to draft and issue a Notice of Claim, that is, a “CDARA Letter.”  This often requires the engagement of an expert, whether an engineer, architect, or other construction professional with relevant experience, and with enough communication abilities to identify and describe the defect at issue, and ultimately to testify about it if necessary.  The construction expert will help the owner: (i) describe the defects in the clearest, most specific terms for the Notice of Claim; (ii) identify any related defects that the owner may not yet have perceived; (iii) understand the defective construction techniques that may have given rise to the defect; (iv) identify building codes and industry standards that are being violated; (v) investigate the extent of property damage that has already occurred as a result; and (vi) opine as to the likelihood of future damage to persons or property.  Although only the first two items on this list are likely to be spelled out in the Notice of Claim, all of these issues will quickly become important, either in evaluating any offer to remedy or settle, or for prosecuting the litigation that may ensue.  Although additional defects are commonly discovered later in the process, giving rise to amended and supplemental Notices of Claim, the process proceeds most efficiently if all relevant defects are identified as early as possible, ideally in the initial Notice of Claim.  Hiring an expert (in consultation with one’s lawyer) is an owner’s best first step in moving the claim forward.

The Notice of Claim should comply with the procedural requirements of §803.5 (read the statute!), and it should spell out all defects as specifically as possible.  Moreover, an owner should consider all possible “construction professionals” who may be responsible for the defects alleged.  On a residential project, the general contractor is an obvious choice, but an owner may need also to notify any relevant developer, builder/vendor, subcontractors, the architect, the engineer, the landscape architect and installer, or others.  On a commercial property, a previous owner may also be served with a Notice of Claim.  The more relevant “construction professionals” who receive a Notice of Claim at the outset, the better the owner’s chances of resolving the claim early, and the less likely it is that a potentially-liable defendant can claim lack of CDARA notice or opportunity to inspect down the road if the claim is not resolved.  If there are suppliers and vendors involved who are not subject to CDARA, an owner may consider copying them with the Notice as well.

The owner’s most important next step after issuance of the Notice of Claim is, literally, to do nothing to the defective work, unless emergency conditions dictate otherwise.  No repairs or other alterations to the work at issue should be made until the defendants have had the opportunity to inspect it, or until 30 days have elapsed.  This is often a difficult stage for owners, who will naturally desire to repair defects, especially when those defects are causing ongoing property damage.  However, if an owner repairs defective work before relevant defendants are allowed to inspect, a defendant will very likely claim that the owner has engaged in spoliation of evidence and has violated §803.5, and claims may be barred as a result.  If exigent conditions make it impracticable for the owner to wait 30 days, owner’s counsel should engage at least the primary responsible defendant (usually the general contractor) as promptly as possible to shorten the deadlines of §803.5 and to schedule the inspection and any remediation offer on shorter timeframes.  Defendants should be urged to act quickly as a means of mitigating ongoing or imminent property damage.  If emergency repairs are truly required in order to avert catastrophe, every effort should be made to notify the defendant of the need for these repairs before they are made, and if such notice is impossible, the owner should document the state of pre-repair construction as extensively as possible, through photographs, video, or any other available means.

If a recipient of the Notice of Claim does not arrange for an inspection within 30 days, then that defendant has failed to take advantage of the Notice of Claim process.  The owner must nevertheless wait the remainder of the 75 days for residential property (or 90 days for commercial property) before proceeding with a complaint, arbitration demand, or other means of prosecuting the claim against that defendant.  Moreover, if the Notice of Claim recipient fails to inspect by the deadline, the owner is free to commence remediation of the defect, on the theory that the defendant had an opportunity to inspect and failed to do so.  However, if there are likely to be “construction professionals” who did not receive CDARA Notices of Claim, they may claim that evidence was subject to spoliation if a defect was repaired before they were notified.  Thus, there may be practical reasons why an owner may wish to delay repairs until all relevant “construction professionals” have had an opportunity to inspect, in order to avoid “spoliation” defenses down the road.

B.         Pre-Suit Considerations for Construction Professionals.

A construction professional’s first step in responding to a request for warranty service, or a CDARA Notice of Claim (after contacting counsel), should be to determine whether it or any other party has ongoing warranty obligations.  Roofs, windows, and mechanical systems may still be subject to warranties for years after a general contractor’s standard one-year warranty has expired.  If there is a “live” warranty that can be brought to bear to solve the problem quickly, a claim on it should be made.

If no warranties are currently in force, or if warranty service has not resolved the issue, a construction professional should notify its CGL carrier.  Given that the insurer’s “duty to defend” is now expressly triggered by a Notice of Claim, there is good reason to notify the carrier promptly.  Construction professionals are often leery of giving such notice, mindful of the potential effect on future insurance premiums.  However, failure to give timely notice may void or limit an insurer’s duty under many policies to cover, or at least defend, a potential defect claim — a much more expensive loss than a rise in premiums.

Insurer-provided counsel is likely to assist with the claimed defects asserted in the Notice, but insurance defense counsel will ordinarily not assist with a construction professional’s affirmative counterclaims against the property owner such as for non-payment.  Therefore, a construction professional should also assess the status of the owner’s payments on the project, and if there are any unpaid balances, look to lien rights or other mechanisms for enforcing payment.  It is quite possible that separate legal counsel will be necessary to enforce these payment claims.  As noted below, mechanic’s lien recording and foreclosure statutes carry much tighter statutes of limitation than do construction defect claims, and CDARA probably does not toll the statutes for enforcing payment rights.  It is therefore possible that a claim for payment must be filed with the Court while the CDARA Notice of Claim process is still pending. It is not uncommon for lien foreclosure suits to be filed, and then stayed by stipulation of the parties, pending completion of the CDARA process.  See Mountain Plains Constructors, Inc. v. Torrez, 785 P.2d 928 (Colo. 1990).  Even if lien rights have expired, there may be claims for breach of contract, quantum meruit, wrongful termination, tortious interference with actual or prospective economic advantage, and/or trade libel to consider.

Upon receipt of the Notice of Claim, the construction professional should consider whether the notice has been served on all other construction professionals who should receive it.  From the defense perspective, forwarding the Notice of Claim to all relevant parties permits the allocation of responsibility for any defect to the correct party, and to that party’s insurer, at the earliest juncture.

Like the homeowner, a construction professional should consider hiring an expert to help assess the alleged defect and to articulate the scope of proposed remediation of the alleged defects, if any.  It is likely the defendant will disagree with the owner over the scope of necessary repairs, and perhaps even over the existence of a defect at all.  One or more experts, in coordination with counsel, can articulate the defendant’s position on these issues, and can also comply with the construction professional’s duty to investigate and provide a written report under § 803.5.  Payment of the cost of experts is commonly considered to be within the scope of the insurer’s duty to defend.  Therefore, the hiring of experts should be coordinated through insurance defense counsel.

Finally, even if there are no non-payment counterclaims, a construction professional facing a construction defect claim should consider consulting with separate counsel besides the lawyer provided by the insurance company, to assure that the insurer is complying with its duties to the insured.  Referred to as “coverage counsel,” this separate attorney can apply pressure on the insurer, if necessary, to settle claims, provide additional experts, or simply to give the construction professional an independent assessment of how things are proceeding.