Colorado Construction Defect Litigation: More than You Might Want to Know – But Should! (Part 2: Statutory Regulation of Construction Defects).

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 2 of the CLE presentation, addressing statutory regulation of construction defects.

Part 1     Part 3     Part 4     Part 5


Beginning in 1999 with an amendment to the Colorado Consumer Protection Act,[1] the Colorado General Assembly has repeatedly addressed perceived needs to regulate the adjudication of construction defect lawsuits in Colorado.    These statutes are primarily codified at §§13-20-801, et seq., C.R.S.  The legislative changes occurred in four phases, briefly summarized below.  Although enacted at different times and covering different subjects, these statutes are now collectively referred to as “CDARA.”

A.         CDARA I. 

The legislative process began with the Construction Defect Action Reform Act of 2001 (“CDARA I”).  CDARA I required claimants in construction defect cases to file lists of defects within 60 days of the commencement of a suit or arbitration, and it limited construction defect cases to defects which cause “actual damage,” defined as property damage or personal injury, or which threaten future personal injury (more fully discussed below). CDARA I also amended the statute of limitations for indemnity and contribution claims against construction professionals.

B.         CDARA II.  

In 2003, the legislature acted again, passing “CDARA II.”  This statute created a new “Notice of Claim” process which has significantly altered construction defect practice. See § 13-20-803.5.  CDARA II requires that a construction defect claimant serve any accused construction professional with a Notice of Claim, identifying the alleged defects.  The Notice (also commonly referred to as a “CDARA letter”) must be served by certified mail or personal service at least 75 days before filing suit relating to residential property, or 90 days on a claim relating to a commercial property.  For 30 days after service of the Notice, the property owner must permit reasonable access to the property to inspect the alleged defects.  Then, the defendant has another 30 days (45 for commercial property) to provide a written report concerning the inspection, the scope of necessary repairs, an offer to remedy the alleged defects or settle the claim, and a proposed timetable for the repairs or settlement.  The property owner then has 15 days to accept or reject the offer.  If accepted, the settlement or repair is performed.  If the offer is rejected, or if no offer is made, the owner may then commence a suit, or engage in mediation if required.  Because the procedural requirements and timetables of §803.5 are detailed and confusing, there is no substitute for close and repeated reading of this statute as one navigates the Notice of Claim process.

Under CDARA II, the Notice of Claim process tolls the two-year statute of limitations for construction defect actions, and the six-year statute of repose (both codified at §13-80-104, C.R.S.), and arguably, the three-year statute of limitations for claims of breach of contract or breach of warranty (§13-80-101) until 60 days after the process is completed.  §13-20-805.  Such tolling begins with the Notice of Claim itself.  However, it is unclear how long the tolling may extend, because the “process” may be lengthy and because there are various possible paths it may follow, it is often unclear how long this tolling period may extend and when it may be considered “completed.”

CDARA II also added a series of definitions to the regulatory scheme, at §13-20-802.5, though the statute does not define the term “construction defect” itself (more on that below).  Rather, the section defines who is a “construction professional” and on whom a Notice of Claim may be served.  The list includes architects, contractors, subcontractors, developers, builders, builder-vendors, engineers, or inspectors, who furnish design, supervision, inspection, construction, or observation of construction of any improvement to real property.  §13-20-802.5(4).  Interestingly, this list does not include materials suppliers or vendors, such as window or shingle manufacturers.  Claims against such suppliers and manufacturers are not governed by CDARA, but rather by the Uniform Commercial Code and other law.  See Ranta Construction, Inc. v. Anderson, 190 P.3d 835 (Colo. App. 2008).  Nevertheless, if a vendor also installs the supplied item, such installation work is governed by CDARA.

Perhaps for a related reason, requests for “ordinary warranty service” are also excluded from CDARA’s Notice of Claim process.  § 13-20-807.  However, claims for breach of warranty are subject to CDARA, and an improper warranty repair can itself be a construction defect, triggering CDARA, if the repair is “essential and integral to the function of the construction project.”  See Smith v. Executive Custom Homes, Inc., 230 P.3d 1186 (Colo. 2010).

Finally, CDARA II defines “actual damages” as the lesser of (i) the fair market value of the property without the defect, or (ii) the replacement cost of the property, or (iii) the cost of repairs plus relocation costs and, for residential property, loss of use and other fees or costs allowable by contract or law.  §13-80-802.5(2).  “Actual damages” may also include bodily injury as provided by law.   §13-20-806 limits a claimant’s recovery to “actual damages,” meaning no punitive damages, unless the claimant prevails on a claim under the Colorado Consumer Protection Act (“CCPA”).[2]  Even then, if the defendant had made an offer during the Notice of Claim process that was more than 85% of the “actual damages” found at trial, then punitive damages are barred.  If punitive damages and/or attorney’s fees are awarded, they are limited to $250,000, and claims for bodily injury are not subject to punitive damages.

C.         HPA.  

The legislature next acted in 2007, passing the Homeowner’s Protection Act (“HPA”).  HPA renders void, as against public policy, any contractual provisions that purport, in advance, to waive or limit a residential homeowner’s rights to seek redress for a construction defect under CDARA or CCPA, including any clause shortening the applicable statute of limitations or repose.  §13-20-806(7).  HPA does not apply to commercial contracts.  Nor does the statute preclude parties from waiving or releasing claims as part of a settlement of a dispute or claim once it has begun.

D.        Construction Professional Liability Insurance Act. 

Passed in 2010, House Bill 1394 addressed the scope of defendants’ insurance coverage under Commercial General Liability (“CGL”) policies for construction defects.  §13-20-808.  Passed in the wake of General Security Indemnity Co. of Arizona v. Mountain States Mutual Casualty Co., 205 P.3d 529 (Colo. App. 2009), a case that adopted a narrow definition of the term “accident” in CGL policies, thus restricting the scope of coverage, H.B. 1394 creates a presumption that a construction professional’s work that results in property damage, including damage to the work itself, is an “accident” unless the damage was intended or expected by the insured.  The statute also directs courts to interpret insurance policies according to the “reasonable expectations” of insureds, and places the burden of proof on insurers to prove the applicability of any exclusion or limitation on coverage.  Lastly, HB 1394 provides that an insurer’s duty to defend a construction defect claim is triggered by a CDARA Notice of Claim, requiring the insurer to investigate the claim and cooperate with the Notice of Claim process.  Previously, insurers typically would not provide a defense until a lawsuit had been filed.

HB 1394 has been held not to apply retroactively to claims on insurance policies no longer in force at the time of its enactment.  However, in Greystone Construction, Inc. v. National Fire & Marine Insurance Co., 661 F.3d 1272 (10th Cir. 2011), the Tenth Circuit Court of Appeals disagreed with General Security, holding that foreseeability, not fortuity, is the defining characteristic of “accident” in a CGL policy, and that property damage caused by faulty work was “accidental” if the damage was not expected or intended by the person performing the work.  Greystone, if followed by the Colorado Supreme Court, will bring judicial decisions closer to H.B. 1394’s definition of accident, regardless of when the relevant insurance policy was in force.[3]

[1] § 6-1-113,  C.R.S., limiting a builder’s exposure to treble damages to proven “bad faith” conduct.

[2] Commentators question whether punitive damages can still be recovered post-CDARA.  See, e.g.,  Sullen, Sandgrund  and Tuft, Residential Construction Law in Colorado, p. 126  (3rd Ed. 2011).

[3] For an extensive commentary on Greystone, see Sandgrund, “Greystone and Insurance Coverage for ‘Get To’ and ‘Rip and Tear’ Expenses,” p. 69, Colo. Lawyer, March 2012.