Two more jury verdicts in Colorado construction defect lawsuits

While reading through some recent volumes of the Jury Verdict Reporter of Colorado, I came across two construction defect cases which went to trial earlier this year.  The first case, Peggy Foster and Heidi Daughan v. James Sparr was tried in Gunnison County District Court from January 25-28 in front of the Honorable Roger Ogborn.  In that case, the homeowners alleged that James Sparr acted as the general contractor for their home in Gunnison and that his negligence led to sinking of the home. Plaintiffs sought $467,000 in repair damages for stabilizing the house, releveling it, and making necessary cosmetic repairs.  Mr. Sparr stipulated that this was a reasonable cost of repair, but denied that he was the general contractor for the plaintiffs' home and that he was simply trying to help his friend, Ms. Foster, who acted as her own general contractor. 


The final demand before trial was $250,000, according to the defendant's attorney, or $100,000, according to the plaintiffs' attorney.  The final offer before trial was $0, according to the defendant's attorney, or $10,000, according to the plaintiffs' attorney. 


The experts who testified on behalf of the plaintiffs were Ali Marvi, PE, with AKM Engineering, Mr. John Wagener, with Palace Construction, and Ron McOmber, PE, with CTL/Thompson.  The defendant had no expert witnesses testify on his behalf.  After the trial, the jury returned a verdict in favor of the defendant.  According to the person involved in the case with whom I spoke, the jury did not find that the plaintiffs had proven that the defendant acted as the general contractor.


The other case recently reported in the Jury Verdict Reporter of Colorado was Kristopher P. Lecciso and Antonia Gaona v. 2247 Lowell Boulevard, LLC and Nicholas Mystrom d/b/a Alco Construction, which was tried from January 11-21 before the Honorable John W. Madden, IV in Denver County District Court.  In that case, the plaintiffs alleged that they bought a 120-year-old home from 2247 Lowell Boulevard, LLC in the Highlands neighborhood next to a vacant lot.  Nicholas Mystrom then constructed a duplex on the adjoining lot and attached it to the plaintiffs' home, creating a tri-plex.  The plaintiffs alleged that as a result of Mystrom's negligence in designing and constructing a retaining wall, the retaining wall failed, causing major foundation problems.  They also claimed that the defendants made misrepresentations to induce them into purchasing the house, which they also claimed to have various construction defects.  The plaintiffs never moved into the home and sought damages including the cost of repairing the home ($192,817.18, including engineering fees) and for mortgage payments they made on the home ($67,763).


The final demand before trial was that the defendants buy the house for $299,500 (the purchase price in 2007) and payment of $104,000 for attorneys' fees and costs.  The final offer before trial was that the defendants would purchase the home for $287,000 and pay $54,000 for attorneys' fees and costs. 


The experts who testified for the plaintiffs included Ed Fronapfel, PE, with SBSA, and Mr. Kevin McCallister (regarding the cost of repair).  Based on the jury's verdicts, the court entered judgment in favor of the plaintiffs and against the defendants, jointly, for $282,188.71, including $31,250 in non-economic damages, and in favor of plaintiffs and against 2247 Lowell Boulevard, LLC in the additional amount of $9,641.47, netting a total judgment of $291,830.18.      


To learn more about construction defect litigation in Colorado, please contact me for a copy of our Overview of Construction Defect Litigation in Colorado. I can be reached at by telephone at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.

IRMI Weighs in on Colorado House Bill 10-1394

For those of you not familiar with IRMI, it is the International Risk Management Institute, Inc., a powerhouse in terms of providing accurate and insightful information regarding insurance and insurance coverage.  According to its website, IRMI's " mission is to be the premier authority in providing expert advice and practical strategies for risk management, insurance, and legal professionals. We will continuously earn our customers' trust and confidence by empowering them with the most reliable and accurate information, maintaining the highest levels of integrity in all that we do, and quickly responding to their needs."

In its June 17, 2010 Construction Risk Manager newsletter, Ann Rudd Hickman, CPCU, CRIS, ARM, commented:

[T]he Colorado Legislature took action recently to shore up coverage under contractors' liability policies for damage arising out of defective construction. It was a controversial move that some observers expect to be challenged, and many expect to create a vacuum, at least in the short term, in the Colorado construction insurance market.

One of the two most controversial aspects of this law is its instruction that courts presume that damage arising out of defective work was an accident unless the insurer can show evidence that the contractor expected or intended the damage. But contrary to what some opponents have claimed, this law does not turn the commercial general liability (CGL) policy into a performance bond. Presuming damage caused by defective construction to be the result of an accident, thus satisfying the policy's "occurrence" requirement, does not guarantee coverage; it merely triggers the policy, allowing the contractor to make an argument for coverage based on the language of the entire policy and the facts of the claim.

Although the state's method is unique, the coverage outcome is not. Currently, courts in 24 states subscribe to the position that damage caused by a construction defect can be the result of an accident and thus satisfy the CGL policy's definition of "occurrence." (emphasis added)

In another article from the same newletter, IRMI reported:

Colorado Instructs Courts on How To Interpret Liability Policies Issued to Contractors

In May 2010, HB10-1394 was signed into law by the governor of Colorado, despite opposition from a variety of insurance industry organizations. Drafted in response to the judicial trend of denying claims alleging damage caused by defective work, the bill instructs courts in Colorado on how to interpret various provisions of liability insurance policies issued to contractors. The law applies to all policies currently in existence or issued on or after the effective date of this Act.

Among other things, the law requires a presumption that faulty construction work was an accident unless the contractor intended or expected the damage. This counters the various arguments raised by some insurers that defective work does not satisfy the policy's "occurrence" requirement because it is not an accident. (This issue has been litigated in almost every state, with varying results. . .)

Nothing in the Colorado law requires insurers to offer coverage for damage caused by construction defects, and insurers who do not wish to do so can attach an endorsement that removes all coverage for damage to "your work." Standard endorsements of this type are readily available. In this way, insurers who wish to exclude this coverage can do so directly rather than having to rely on a court's determination of a contractor's intent.

The bill also adds to the state insurance code a prohibition of what are frequently referred to as "Super Montrose" provisions, which are used by some insurers to prevent the triggering of multiple policies for damage that "occurs" over multiple policy periods, as is often the case in construction defect claims. The Colorado revised statute provides that, with respect to liability policies issued to construction professionals, any provision that purports to exclude coverage for claims that take place prior to the policy period, but continue, worsen, or progress within the policy period, are void unless the exclusion applies only when the insured had "actual knowledge" of the claim prior to the policy period.

Standard CGL policies provide that once an insured is aware of a loss, no future policies will be triggered for that loss, but any prior policies that were in effect during the progression of the damage may be triggered. This is commonly known as a Montrose provision. A Super Montrose provision, in contrast, typically says that only the policy that is in effect when the insured first becomes aware of the loss is triggered by the claim; past policies will not respond to the loss even if they were in effect when the property damage occurred and even though the insured had no knowledge of the loss during the coverage period. The new Colorado law in essence prohibits the use of Super Montrose provisions on contractor's policies and voids such provisions on previously issued policies, which has created a stir within the insurance industry.

Despite strong opposition from some insurance and subcontractor associations, which expressed concerns about the availability and affordability of construction insurance in Colorado, the bill passed with strong bipartisan majorities. Some insurance professionals believe the law will result in a dramatic increase in premiums and/or a loss of liability insurance markets for Colorado contractors. 

We are now starting to see the effects of HB 10-1394, with various carriers either pulling out of the state entirely, threatening to do so, or underwriting the new risk by increasing premiums.  We will continue to keep you informed as this saga is sure to continue.  If you have any questions regarding HB 10-1394 or Colorado construction litigation, generally, please contact David M. McLain at (303) 987-9813 or mclain@hhmrlaw.com.
 
 

Responding to a Notice of Claim Pursuant to C.R.S. § 13-20-803.5

A key feature of the Construction Defect Action Reform Act (C.R.S. §§ 13-20-801, et seq.), was to establish the Notice of Claim ("NOC") process, found in C.R.S. § 13-20-803.5. There are several deadlines and important factors for a construction professional to consider when responding to a NOC.

Before a homeowner, homeowners association, or owner of a commercial building (a "claimant") can file a construction defect lawsuit against a construction professional, the claimant must send or deliver a written NOC to the construction professional. The statute includes within the definintion of "construction professional" an architect, contractor, subcontractor, developer, builder, builder vendor, engineer, or inspector, and in the case of commercial property, the prior owner during construction.

The statute defines a NOC as a written notice sent by a claimant to the last known address of a construction professional against whom the claimant asserts a construction defect claim. The NOC must describe in reasonable detail the general nature of the defect, a general description of the type and location of the construction that the claimant alleges to be defective, and any other damages that have been caused by the defect.

The NOC process, defined in C.R.S. § 13-20-803.5, mandates a construction professional's right to inspect the real property, the alleged defects, and communicate a monetary settlement offer or offer to repair before the property owner may proceed with litigation.

The NOC process requires a residential claimant to send a NOC no later than 75 days before filing an action against a construction professional, and no later than 90 days before filing an action against a construction professional in a commercial project. The claimant shall provide the construction professional and its contractors reasonable access to the claimant's property for inspections, which shall be completed within 30 days of the notice. Within another 30 days after inspections (or 45 days in the case of a commercial property) the construction professional may send to the claimant, by certified mail, return receipt requested, a monetary offer to settle or an offer to repair the claimed defect(s). Unless the claimant accepts the offer within 15 days, the offer is deemed rejected. If no offer is made, or if the offer is rejected, the property owner may then file a lawsuit.

The following discusses what steps a construction professional should follow to respond to a NOC:

1.  Notify your insurance agent and your insurance carrier representatives, and give them a copy of the NOC letter you received and other project records your insurance representatives may request. Your insurance carrier will not cover any of your legal costs until they have been notified of a potential claim. Your insurance carrier will likely send you a "reservation of rights" letter, specifying how they interpret their obligations to defend you, cover legal costs, or cover amounts paid in settlement or judgment.

2.  Review the NOC. Does it provide a sufficient description of what is alleged to be defective and the location of the condition? The NOC may not provide a description that complies with the statute. An insufficient NOC may be no NOC at all.

3.  Review your records regarding the subject construction. Identify all of the subcontractors, materialmen, and other construction professionals that worked on the project and whose work is implicated in the NOC. Forward a copy of the NOC to those subcontractors and suppliers. If you have sufficient information at this point, you should describe in a letter to the subcontractor or supplier how they may be involved, with as much detail as is available.

4.  Follow the instructions that should accompany the NOC to schedule an inspection of the subject property. The inspection must be completed within 30 days of receiving the NOC. It is helpful to have experts and the subcontractors at the inspection to evaluate the issues that the owner contends are defective or need repair.

5.  Determine how to respond. Should you make an offer to repair the condition or any part of it? Should you make a monetary offer to settle the dispute or a portion of it? The purpose of the NOC process is to resolve construction defect disputes without a lawsuit being filed. This is not always possible, and defending against the claimants allegations in litigation is sometimes the better option. You will need to decide, with the help of any experts or attorney you may have working for you, whether to address all, some, or none of the claimant's allegations. Pursuant to the statute, an offer to repair must include a report of the scope and findings of the inspection, a description of the work necessary to remedy the claimed defect and damages described in the NOC, and a timetable for completing the repairs. Your response to the property owner must be made within 30 days after the inspection (or within 45 days for commercial property). If you intend for your insurance carrier to cover any part of the offer, make sure the carrier is fully informed before making the offer.

6.  All of the deadlines can be modified by agreement between the claimant and construction professionals.

A property owner may amend the NOC, but construction professional is entitled to another opportunity to inspect and more time to respond to the new allegations. If the property owner files a lawsuit without sending a proper NOC or before the NOC process is completed, the court may stay the action until the NOC process is completed.

If you have any qeustions regarding the notice of claim procedure, or Colorado construction litigation, please contact Bret Cogdill at cogdill@hhmrlaw.com or by telephone at (303) 653-0046.

HHMR Meets with the Construction Defect Claim Manager Association regarding Colorado HB 10-1394

On June 10, 2010, I had the privilege of speaking to members of the Construction Defect Claim Managers Association (“CDCMA”) in Irvine, California.

The CDCMA’s purpose is to foster communication and trust amongst its membership and to permit continuing education, leading to effective and efficient claims handling methods and mechanisms for the benefit of insureds, insurers, claimants, attorneys, the legislature, the judiciary and all of those who are involved in construction defect claims handling and litigation. The members that make up the CDCMA include leading insurance companies that underwrite insurance for construction professionals in Colorado and across the country.

The topic of discussion for the June 10th meeting was Colorado’s recently enacted House Bill 10-1394, regarding  insurance carriers' duties to defend construction professionals in relation to construction defect claims and the invalidation of certain types of prior work exclusions. I was joined at the meeting by Robert Ferm and Cathleen Heintz of Hall & Evans, LLC. Together we discussed the recent Colorado case law and legislative process that led to the creation and enactment of House Bill 10-1394. Additionally, we addressed the concerns of the insurance companies regarding the impact of this bill.

While the legislation is new and will certainly be subject to interpretation by the courts, much of the language causing concern within the insurance community was derived from existing Colorado case law and is simply a return to the status quo prior to the holdings in General Security Indemnity Company of Arizona v. Mountain States Mutual Casualty Company, 205 P.3d 529 (Colo. App. 2009) and Greystone Const., Inc. v. National Fire & Marine Ins. Co., 649 F.Supp. 2d 1213 (D. Colo. 2009).

For additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.