Our attorney Dipak Patel and Laura Wolf of Rathod Mohammedbhai LLC prepared this slide show for a legal education seminar sponsored by the Boulder Bar Association. If you have any questions or comments about it, please email us at .
Our attorney Dipak Patel and Laura Wolf of Rathod Mohammedbhai LLC prepared this slide show for a legal education seminar sponsored by the Boulder Bar Association. If you have any questions or comments about it, please email us at .
Our colleague John Seebohm is moving on to another practice. He has ably advised our clients regarding their estate planning and business formation needs for the last two years. He is joining Buchanan Stouffer, P.C., a firm that specializes in estate planning, and we invite you to contact him there.
We will miss his careful work in the office and his tales of adventure in the mountains. Best of luck, John!
…Ken Robinson and Meghan Hungate announce that Dipak P. Patel has joined the firm. He brings more than 14 years of experience to our litigation practice. Dipak’s practice areas will continue to emphasize civil litigation, domestic relations, and all areas of employment law.
Contractors and suppliers face legal ambiguity when they encounter non-payment on a project that includes both public and private components. Under Colorado law, the mechanisms for securing payment differ for private and public projects—but what about projects that include some of both? What if it quacks like a duck and walks like chicken?
For construction work on private property, the Colorado Mechanic’s Lien Statute provides that a claimant may record a mechanics lien and foreclose on the lien, if necessary. C.R.S. §§ 38-22-101, et seq. But mechanic’s liens on public property are prohibited, in order “to preserve essential public services and functions while protecting those who benefit from public services and facilities.” City of Westminster v. Brannan Sand & Gravel Co., Inc., 940 P.2d 393, 395 (Colo. 1997).
For construction work on public property, the Colorado Public Works statute provides a different means for a claimant: a lien against dispersed construction funds. See Fladung v. City of Boulder, 165 Colo. 244, 252, 438 P.2d, 688, 692-93 (1968). Principal contractors on public projects must provide bonds to ensure payment to subcontractors and suppliers. Unpaid claimants are entitled to file a verified statement of claim directly with the owner, creating a lien on undisbursed construction funds. C.R.S. §§ 38-26-101, et seq.
However, in some situations, it is not clear whether a project is private or public, and a claimant may be unsure whether to file a mechanic’s lien or a verified statement of claim. Under these circumstances, the claimant must sometimes look beyond the status of the underlying real property and even behind the contractual relationships on the project, to determine how to perfect security for a claim.
For example, a project might be owned by a private, non-profit organization, but the underlying property may be owned by a public entity, or the project may be funded, in whole or in part, by public funds. In such situations, it becomes a dispute over fact—which must be determined by a trial—as to which statutory scheme applies. By the time this disputed fact is revealed in a lawsuit for non-payment, it may be too late to perfect a statutory claim.
In situations where both private and public entities might be involved, it is necessary to analyze the specifics to determine whether to perfect a mechanic’s lien against the property and/or the improvements; or to file a verified statement of claim with the owner; or, potentially, both. And there may be other steps possible to protect a claimant’s rights.
A basic mechanism for managing risk on construction projects is insurance. Insurance policies provide two basic benefits: indemnification for losses arising out of covered claims and legal representation for covered claims. There are numerous kinds of insurance coverage available for a construction project. It’s worth carefully assessing your risks and matching them with the appropriate coverage.
Commercial General Liability Insurance (CGL)
CGL coverage is a basic business liability policy. Typically, a CGL policy provides only “first party” coverage: it protects only the parties named in the policy. Third parties, such as an injured bystander, cannot submit a claim to the insurer. It is therefore important to ensure that all of the parties required by contract are included as “named insureds” or “additional insureds.” However, in doing so, the additional insureds are then made first party claimants should they be sued by a third party
Property insurance provides protection against most risks to property, such as fire, theft and possibly weather damage. Special forms of property insurance include flood insurance, earthquake insurance, home insurance, and boiler insurance.
Builder’s Risk Insurance
Standard property insurance policies do not cover losses to new improvements to the property. Builder’s risk insurance provides coverage to new improvements for damage to the work during construction, including installed materials and equipment as well as permanent structures. Typical exclusions from builder’s risk policies are land, existing structures, tools and machinery not part of the new permanent structure, contractual liabilities and faulty workmanship. Builder’s risk insurance does not provide liability coverage in the case of loss to another party. Both the owner and the general contractor are typically named insureds under a builder’s risk policy. Subcontractors are sometimes also named insureds.
Professional Liability Insurance
Professional liability insurance provides malpractice coverage to construction designers such as architects and engineers for defects or deficiencies in the design aspects of the project, and for any deficiencies in the project administration responsibilities undertaken by the design professional. To the extent that a construction manager or the general contractor has a licensed designer on its staff, or if they have design responsibilities, the GC or CM should have an additional design insurance policy.
Additional coverage for construction parties is readily available in the form of “excess” or “umbrella” policies. It is a good practice for construction contractors to procure liability insurance in addition to their CGL coverage in the form of excess insurance policies. The additional coverage is implicated only when the underlying insurance is exhausted. It is important to give prompt notice to both insurers if a claim arises. This is so even if the two policies are issued by the same insurer as the insurer typically assigns two adjusters to the claim, one for each policy.
Besides the policies described above, there are also other policies typical on construction projects including worker’s compensation, automobile/vehicles, directors and officers, so called “wrap” policies (essentially insuring all parties to the project), and products completed operations hazard policies.
or Caveat Venditor?
In re Estate of Gattis, Residential Property Sellers, and the Economic Loss Rule
It is not always the buyer who is at risk in a real estate transaction.
The Economic Loss Rule (“ELR”) was adopted by the Colorado appellate courts in an attempt to clarify the often murky waters between the battleships of tort and contract law. Unfortunately, the courts’ formulation has long been a source of confusion to construction law practitioners. The Colorado ELR states that a party who suffers only economic loss from the breach of a contract may seek redress for such breach in contract only, and may not assert a tort claim unless the breaching party owed a duty of care independent of the duties laid out in the contract. Put differently, whether a tort claim is precluded by the ELR depends on the source of the duty being breached — in order to recover in tort, the plaintiff must prove the breach of a duty separate from any duties imposed by the contractual relationship between the parties. See, generally, Town of Alma v. AZCO Constr., Inc., 10 P.3d 1256 (Colo. 2000); A.C. Excavating v. Yacht Club II Homeowners Ass’n, Inc., 114 P.3d 862 (Colo. 2005); BRW, Inc. v. Dufficy & Sons, Inc., 99 P.3d 66 (Colo. 2004).
In November 2013, the Court of Appeals handed down In re Estate of Gattis, further clarifying the parameters of the ELR. 318 P.3d 549 (Colo. App. 2013). The Court held that sellers of residential property owe an independent duty to disclose latent defects to the potential homeowners, and this duty exists independently of any disclosure terms included in the real estate contracts. The result is that the ELR is inapplicable in such cases and a homeowner may sue either in tort or in contract, or both. While Colorado courts had previously imposed this independent duty on home builders, Gattis extended this duty to residential sellers as well.
In Gattis, the Court further held that a seller’s independent duty to disclose defects was not subsumed by the standard form purchase and sale agreement. On the contrary, even had the form contracts not required disclosure, the sellers had a common law duty to disclose the existence of latent property defects independent of their contractual relationship with the buyers.
The policy considerations outlined by the Gattis court evidence a growing protective instinct towards homeowners, who are traditionally seen as less sophisticated than builders or sellers of residential properties, and whose claims against construction professionals the courts are increasingly hesitant to bar. While it remains to be seen just how broadly the case will be interpreted, Gattis may well be considered a herald of a limiting of the ELR in construction cases as well as of a change in policy considerations coming from Colorado benches.
Because, in the late 1800s, the public used a route across what was public domain at the time, that route may be established as a public right of way in the present, according to federal statute R.S. 2477. With no living witnesses from that era, proving such use can be challenging—but it can be done.
Robinson Tweedy recently won a case in Delta County, securing access for our clients across an historic public road dating back to the late 1800s. The Plaintiffs had been denied access to their grazing land Oak Mesa via the historic “Road to Paonia.” Their neighbors had locked several gates across the road which had served a ditch company and various homestead parcels beginning in 1905. Through maps, homestead records, survey analysis, photographs and expert witness testimony, Robinson Tweedy successfully proved that the road was established and used by the public long before the land traversed by the road had been removed from the public domain.
An old law, generally known as “R.S. 2477,” was enacted in the 1860s when the federal government was encouraging settlement of the west through mining, grazing and agriculture. Prior to its repeal in 1976, R.S. 2477 allowed members of the public to establish a public right-of-way over public lands in order to access their homesteads. Thus, even 100 years later, the current landowners whose property is traversed by the road, do not have a right to lock gates across these historic roads. In finding for our clients, the District Court found the Road to Paonia to be a public road under R.S. 2477 and related state statutes, enjoining the offending landowners from obstructing the road in any way, and ordering them to remove the gates they had constructed across the road.
by John Tweedy
There are many variations on the stormy topic of residential contracting gone wrong. But the common theme for lawyers, whether representing homeowners or construction professionals, is a case that is factually dense, procedurally complex, and emotionally charged. As a result, these disputes can sometimes cost as much – or more – to litigate as the amount in controversy. It’s the kind of case that lawyers and clients would love to see resolved in mediation, before the dispute sinks into a welter of fees and frustration.
And yet, early mediation often fails to resolve homeowner construction disputes – precisely because of that same mix of factual density, procedural complexity, and emotional voltage. Lawyers hoping to succeed in mediation can maximize their odds of getting to resolution by bringing five things to the mediation table: 1) a clear project accounting; 2) a reasonable expert report; 3) a handle on the relevant legal procedure; and 4) an aggressive approach to insurance; and 5) an appraisal of the client’s emotional needs.
1. Project Accounting. Any well-run residential construction project involves a system for budgeting project costs and tracking expenditures. Conversely, a common denominator for projects gone wrong is that the project accounting has either run off the rails or never existed to begin with. Thus, the lawyer who assembles the clearest, most accurate project accounting will command the high ground in any mediation where project dollars are at stake. Such an accounting will necessarily identify areas where owner and contractor disagree, where payments may have been misapplied, and where cost overruns occurred. In essence, a good project accounting serves as a “reality principle” on which meaningful settlement conversations can be based. Without it, the mediation will likely be frustrated by the parties’ inability to find a common financial frame of reference.
In practice, however, this advice is easier given than taken, because the parties may lack sufficient information to compile such an accounting without access to the files of the adversary. There are two ways to address this problem. First, counsel can insist on an exchange of project information ten days prior to mediation. Owner and Contractor can agree to exchange emails, bank statements, timecards, materials receipts and other job records that will allow the parties and counsel to create an accounting. If a Contractor refuses, the Owner can point out that a Contractor is required to maintain a separate accounting for every construction project, pursuant to § 38-22-127(4), C.R.S. If an Owner is the recalcitrant party, the Contractor can rely on provisions in the construction contract requiring the Owner to furnish project-related information on request (if the contract has such language).
2. Expert Reports. The other basic “reality principle” in construction defect cases is the expert report. Parties without experts are likely to disagree fundamentally over whether certain workmanship is defective at all. Even with experts involved, there is likely to be disagreement over the extent, severity, and cost to repair a claimed defect. However, the differences between the competing expert reports will at least provide a basis for identifying specific disagreements, and a dollar figure in dispute, as to the defects. These parameters create the basis for a bargaining range, and for the evaluation of possible compromise.
In small disputes, it may not be cost-effective to obtain a full-blown expert report. However, at a minimum, an estimate from an independent contractor, engineer, or other construction professional will nevertheless be important to substantiate any claims of defective construction – or to rebut such claims – and to provide evidence of costs.
3. Procedural Context. Construction defects are subject to early notice and inspection requirements under the Construction Defect Action Reform Act (“CDARA”), § 13-20-801 et seq., C.R.S. Unpaid contractors and subcontractors’ lien and disburser rights are subject to early notice and recording requirements of the Mechanics Lien Law, § 38-22-101, et seq., C.R.S., and the Disburser’s Statute, § 38-22-126, C.R.S. Claims against architects and other licensed professionals are subject to a Certificate of Review, pursuant to §13-20-602, C.R.S. If these procedures and deadlines are not attended to before mediation, a party may find itself unable to bargain effectively, even if a case is well shy of any statute of limitation.
4. Insurance Issues. The law of insurance coverage for residential construction defects is contested and evolving. See, e.g., TCD, Inc. v. American Family Mutual Insurance Co., 2012 WL 1231964 (Colo. App. 2012). Both homeowners and contractors have an interest in making sure that insurers are notified, that adjusters have an opportunity to inspect claimed defects, and that policy periods and possible exclusions are identified before mediation occurs. If these issues are not addressed in advance, the mediation is likely to be missing a key participant – the informed insurance adjuster.
5. The Parties’ Emotional Needs. Lawyers should be alert to common patterns of emotional distress in residential construction that can derail an otherwise reasonable settlement discussion. Homeowners, especially those in remodel cases, are likely to have approached the original construction project with excitement and a deep emotional investment in beautifying their personal space. Contractors, in turn, often invest a sense of craft – indeed, artistry — in their work. The initially-shared emotional bond between owner and contractor can cause them to neglect formal safeguards, such as complete contracts and other construction documents. After the project goes awry, personal betrayal and distrust on both sides bites sharply; the Owner may experience shoddy construction as an almost bodily sense of violation, while the Contractor feels attacked in a way that can penetrate to his core sense of self.
Some attorneys do not believe it is their job to venture into such emotional terrain, and some clients may be unable to admit or articulate such emotional needs. However, an attorney who hopes for an early settlement should at least evaluate the likely role of emotions in the mediation process, and should be aware of a few common strategies to address them. For example, some clients may have a strong need to “tell the story,” if not to a judge, then to an empathically-attuned mediator, during a separate caucus that is devoted largely to that activity. Once unburdened of the need to “speak truth,” this person may be psychologically freed-up to focus on the economics of settlement. Conversely, some parties may need to hear an explanation – if not an apology – from the other side, requiring a joint session in which the emotional need is to “understand how all this happened.” If a client has this need, then coordination between counsel may be helpful in advance of the mediation, so that the party who is being asked to “explain” can prepare appropriately. If the need for “explanation” becomes apparent during the mediation itself, the mediator can help the “explaining” party prepare in a caucus (complete with a rehearsal of what the person intends to say) before getting back together in joint session. These steps can minimize the risk that the “explaining” party may admit too much, or deny too much, or attempt to say the right thing in the wrong way.
In sum, successfully mediating residential construction disputes draws on lawyers’ and mediators’ expertise in the areas of project accounting, building science, and procedural construction law, as well as their familiarity with insurance issues and their ability to attend to emotional issues. Despite these challenges, clients can reap huge benefits when residential construction cases are settled fairly at an early stage — before the costs of litigation on all sides mount to the point where every participant becomes a loser.
 John Tweedy mediates and litigates construction disputes, and other civil matters, with Robinson-Tweedy, P.C. This article was originally published in the March 2013 Newsletter of the Boulder County Bar Association.
 For a fuller discussion of the CDARA requirements, see “Statutory Regulation of Construction Defects,” Boulder County Bar Newsletter (Nov. 2012).
 Attorneys often fail to appreciate litigation’s emotional toll on clients. For an empirical view of “litigation stress” and its affects, see Picou, “When the Solution Becomes the Problem: The Impacts of Adversarial Litigation on Survivors of the Exxon-Valdez Oil Spill,” 7 U. St. Thomas L.J. 68 (2009).
When unanticipated site conditions are discovered during a construction project, who is responsible for the increased costs? Including an equitable adjustment provision in a contract can be an effective way to distribute the risk of unanticipated site conditions. In Colorado there is much Federal law addressing the use of equitable adjustment provisions in contracts, but Colorado state courts have been silent until now.
The Colorado Court of Appeals recently addressed the issue of equitable adjustment provisions in Parker Excavating, Inc. v. City and County of Denver (October 2012). Parker was hired to construct a dam and signed a contract with an equitable adjustment provision. The provision stated that an adjustment in the contract price would be allowed in the event that an “uncovered” condition caused an increase in cost.
The City paid Parker an additional sum to compensate for the increased cost after muck was discovered at the site, but it was not enough to cover all of Parker’s additional costs, so Parker sued for the remainder. The district court found that Parker’s costs had increased by $2,373,679, but reduced Parker’s award to $1,650,000 finding that Parker shared some of the responsibility for failing to discover the unanticipated muck. Parker appealed, contending that the trial court was wrong to award it equitable relief rather than legal damages, and that the court should have awarded Parker the full amount of its increased excavating costs.
The Court of Appeals affirmed, finding that the plain terms of the contract provided for a fair adjustment to the contract price to account for increased costs caused by unanticipated site conditions (thus, the essence of the remedy Parker sought was equitable). Since no Colorado appellate court had reviewed an award of an equitable adjustment for unanticipated site conditions, the court addressed Parker’s assertion that it should have been awarded the full amount of its increased costs under Federal law. Federal courts have found that the amount of equitable adjustment may be reduced to account for a contractor’s shared responsibility. Finding that Parker should have conducted its own core sampling, the court affirmed the reduced award.
The lesson for both owner and contractor is that Colorado courts may now award an equitable adjustment that is less than a contractor’s increased costs in order to account for the contractor’s share of responsibility, and may look to Federal cases in that area for guidance.
There are many unanswered questions at the intersection of construction and insurance law, one of which the Colorado Court of Appeals recently addressed in Kyle W. Larson Enterprises, Inc., Roofing Experts, d/b/a The Roofing Experts v. Allstate Insurance Company (September, 2012): a contractor may sue an insurer as a “first-party claimant,” and may seek punitive damages when the insurer improperly denies a claim.
The contractor in this case (a roofer), contracted with the owners of four homes insured by Allstate Insurance Company to repair their roofs. The contracts provided that the repair costs would be paid from insurance proceeds and granted the roofer full authority to communicate with Allstate regarding all aspects of the insurance claims. Allstate refused to pay claim amounts for additional repairs required under the applicable building code and the roofer filed suit. The district court dismissed the claim, finding that the roofer was not a “first-party claimant” and thus could not seek relief against Allstate.
Colorado Revised Statute § 10–3–1115 addresses the “[i]mproper denial of [insurance] claims” and states that 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 any first-party claimant.” The section goes on to define “first-party claimant” as, among other things, an individual asserting an entitlement to benefits owed directly to or on behalf of an insured under an insurance policy. This definition is important because when unreasonable delay or denial in the payment of an insurance claim occurs, a first-party claimant may sue to recover attorney fees, court costs, and two times the covered benefit.
The Court of Appeals held that the General Assembly’s intent in passing the sections discussed above was to create a statutory duty for insurers to refrain from unreasonable delay or denial of payment of insurance claims. Given this intent, the Court construed the above statutes to include contractors such as the roofer.
The lesson for contractors is this: when a homeowner/insured gives a contractor the authority to communicate directly with their insurance company regarding claims based on work done by the contractor on the insured’s property, the contractor meets the statutory criteria for “first-party claimant” and may assert a claim directly against the insurance company for unreasonable delay or denial of payment of insurance claims.