Sunday, May 30, 2010

Smith v. Executive Custom Homes: Is the end of the repair doctrine in Colorado construction defect cases?

On May 10, 2010, the Colorado Supreme Court issued its decision in Smith v. Executive Custom Homes, Inc., 2010 WL 1840828 (Colo. May 10, 2010).  The facts and procedural history of the case are as follows:
The Smiths live in a newly-constructed “patio home” built by ECH, which is located in a retirement community managed by a homeowners association. The homeowners association employs a professional property management company, Z & R Property Management (“Z & R”), to maintain the community properties. The property manager furnished by Z & R apparently serves as a liaison between homeowners and ECH to handle complaints related to the construction of the residences.
On February 6, 2004, James Smith sent an e-mail to the property manager stating that he had noticed a sheet of ice accumulating on his sidewalk near the entrance to his home, which he felt was the result of a construction defect. The property manager then forwarded the e-mail to ECH asking ECH to look into the problem. ECH later responded by e-mail to the property manager that it had inspected the Smiths' home and agreed that some repairs to the gutters were needed; however, ECH indicated that repairs could not be completed until the snow melted. ECH then arranged for the contractors who originally installed the gutters to make the necessary repairs, which took place between February and June of 2004. Neither the property manager nor ECH ever contacted the Smiths regarding the repairs, and the Smiths had no personal knowledge that the repairs took place. 
On February 2, 2005, Judith Smith sustained injuries after she slipped on ice that accumulated on the front walkway of the Smiths' home. The Smiths then contacted ECH directly by letter to notify it of the accident. In response, ECH informed the Smiths of the repairs to the gutters and denied liability for Judith Smith's injuries. On January 17, 2007, nearly two years after the accident, the Smiths filed a complaint against ECH alleging damages for personal injuries caused by a construction defect. ECH responded by filing a motion for summary judgment, asserting that the undisputed facts established that the Smiths' claims, which were filed almost three years after the Smiths first noticed the ice accumulation, were time-barred by the CDARA's two-year statute of limitations located in section [13-80-]104. The trial court agreed, granted ECH's motion for summary judgment, and dismissed the case.

The Smiths appealed to the court of appeals, which held that, although it agreed with the trial court that the Smiths' claims for personal injury began to accrue on the date James Smith notified the property manger of the ice accumulation, genuine disputes as to material facts existed regarding whether the statute of limitations was equitably tolled by operation of the “repair doctrine” while ECH performed its repairs. See Smith, 209 P.3d at 1181. As a result, the court of appeals reversed the trial court order granting ECH's motion for summary judgment. The Smiths and ECH both petitioned for certiorari.
In ruling that a personal injury claim, resulting from a construction defect, accrues when the claimant knew or should have known of the defect that ultimately causes the injury, the Supreme Court stated:
We agree with the trial court and court of appeals that the plain meaning of section 104 is clear. The statute contains both a list of specific claims to which the statute applies and the corresponding accrual standard for such claims. The list of claims explicitly includes “actions for the recovery of damages for ... injury to or wrongful death of a person caused by any such deficiency.” § 13-80-104(c)(I)-(III). Regarding the accrual of such claims, the statute clearly states that “a claim for relief arises under this section at the time the claimant or the claimant's predecessor in interest discovers or in the exercise of reasonable diligence should have discovered the physical manifestations of a defect in the improvement which ultimately causes the injury.” § 13-80-104(b)(I). Thus, it is plain from the language of the statute that claims under the CDARA, personal injury claims included, begin to accrue when the homeowner first discovers or should have discovered the defect.
*          *          * 
A plain reading of section 104 clearly indicates that a homeowner's claims under the CDARA may accrue and be forever barred by the statute of limitations before a personal injury occurs. And although this outcome may be equitable when viewed in terms of property damage, it certainly is quite harsh when viewed in the context of a serious and perhaps unforeseeable personal injury. Nevertheless, a harsh or unfair result will not render a literal interpretation absurd.
In ruling that the repair doctrine did not serve to toll the Smiths' claims, the Supreme Court stated:

The repair doctrine tolls a limitations period while a construction professional undertakes repair efforts intended to remedy the defect. . .  Tolling continues until the date that the construction professional abandons its repair efforts, provided that the homeowner reasonably relied on the promises to repair and, as a result, did not institute a legal action against the construction professional.

The repair doctrine has not been formally adopted by this court, but it has been considered and applied in several Colorado cases. . . However, the repair doctrine is a form of equitable tolling, and “equitable tolling is not permissible where it is inconsistent with the text of the relevant statute.” . . .  We conclude that equitable tolling pursuant to the repair doctrine is inconsistent with the CDARA because the CDARA already provides an adequate legal remedy in the form of statutory tolling of the limitations periods under specific and defined circumstances, including during the time in which repairs are being conducted.  (referring to the tolling of the statute of limitations during the duration of the notice of claim process found in C.R.S. Sec. 13-20-803.5).

*          *          *

Thus, because the General Assembly has already taken into account the need for extra time to complete repairs by allowing for statutory tolling while such repairs are made pursuant to the notice of claim procedure, we hold that equitable tolling under the repair doctrine would be inconsistent with the CDARA and consequently cannot be applied in this case.
The question remains, in my mind, whether the repair doctrine should have any place in construction defect disputes in situations where the claimant and construction professional have not engaged in a statutory notice of claim process.  The Construction Defect Action Reform Act specifically states that it is not intended to abrogate or interfere with express construction warranties or the warranty process. To be sure, C.R.S. Sec. 13-20-807 states specifically: "The provisions of this part 8 shall not be deemed to require a claimant who is the beneficiary of an express warranty to comply with the notice provisions of section 13-20-803.5 to request ordinary warranty service in accordance with the terms of such warranty. A claimant who requires warranty service shall comply with the provisions of such warranty."

I can foresee a situation in which a construction professional may encourage a claimant to submit a normal warranty claim pursuant to an express warranty, instead of serving a formal notice of claim, then conduct minimal repairs or string the claimant along sufficiently to make the claim stale, then discontinue repair efforts and argue that any claim the owner later brings for construction defects is barred by the statute of limitations.  An accrual date would be easy to identify in this situation, you would have a warranty claim clearly identifying the issue.  If the construction professional's repair efforts do nothing to toll the statute of limitations, an unwary claimant can find itself in an untenable situation, i.e., one in which the repair efforts of the construction professional were sufficient to keep the claimant from timely filing suit but insufficient to actually correct the problem.  This is specifically the situation that the "repair doctrine" had ameliorated.  Now that the doctrine is arguably no longer recognized in Colorado construction defect cases, claimants who do not know any better may pay the price.

Perhaps I am overly pessimistic; Only time will tell. . .

If you have any questions regarding the repair doctrine, or Colorado construction defect law, generally, please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.  Alternatively, you can check out the firm's website at www.hhmrlaw.com where you can learn more about Higgins, Hopkins, McLain & Roswell, and you can request a copy of our Overview of Construction Defect Litigation in Colorado.   

Tuesday, May 25, 2010

Governor Ritter Signs HB 10-1394 Into Law

As previously discussed over the last few months in this blog, HB 10-1394 has been creating a lot of waves in the Colorado insurance industry and among those that it insures in the construction industry.  A compendium of previous entries related to HB 10-1394 can be found here

The latest news is that Governor Ritter signed HB 10-1394 into law last Friday afternoon.  As reported in the Insurance Journal:
Colorado Governor Bill Ritter has signed into law a bill changing retroactively the duty of insurers to defend contractor professionals in construction liability cases.


The bill (HB 1394) was opposed by insurers and agents, who have warned it could make liability insurance for contractors hard to find or very expensive. For that same reason, it was also opposed by the American Subcontractors Association of Colorado.

It was passed in response to a 2009 court decision in General Security Indemnity v. Mountain States Mutual, which excluded claims for certain construction defects and imposed no obligation to defend in a contractor's professional liability insurance policy. The decision held that there was no duty to defend faulty construction work claims for faulty work performed by a general contractor's subcontractors.

Lawmakers were concerned that the Colorado Court of Appeal decision did not adequately consider a construction professional's reasonable expectation that an insurer would defend against a defect claim.

The bill was meant to restore some duty of the insurer to defend contractors in such claims. The new law now considers damage caused by the work of a construction professional -- even damage to the work itself -- as accidental, and eligible for coverage.

But critics say it goes too far, requiring the liability policy to almost guarantee the quality of a contractor's work much like a bond. They say the general liability policy is meant to cover the consequential damage resulting from faulty work, but not the faulty work itself.

Also, the law makes the new rules retroactive, placing insurers in a position of having to defend claims that they never envisioned when current policies were written and priced.

"It is likely that the bill will have adverse effects on the availability and affordability of insurance for construction professionals in Colorado," said Kelly Campbell, vice president for Property Casualty Insurers of America (PCI). PCI had urged the governor to veto the measure.

Campbell said the retroactive rewriting of policies is likely unconstitutional. "One thing is certain, this bill will spawn litigation on these issues, which is not in the best interests of Coloradoans or the judicial system of this state," Campbell said.

PCI said the law overturns existing Colorado law, "creating a set of insurance unique rules that would be applicable only to construction professionals, and is underscored by poor public policy that will only serve to incentivize poor workmanship in the construction industry."

According to Campbell, the bill creates incentives for general contractors to use the least expensive subcontractors, regardless of the quality of their work, and serves to insulate construction professionals from the consequences of poor workmanship.

Wednesday, May 12, 2010

Colorado HB 10-1394 passes out of the legislature and moves on to the Governor, again

After passing third reading in the Senate on May 4th, HB 10-1394 went to the Governor's office for the first time.  Because of pressure from insurance companies, the Governor's office urged the parties interested in HB 10-1394 to continue working on compromise language and threatened that the bill would be vetoed if the parties could not reach an amendment.  Shortly thereafter, Senator Scheffel recalled the bill to the Senate.  The bill received a strike-below amendment on its second third reading in the Senate, the text of which can be found here.  To address the carriers' concern that the bill would turn a CGL policy into some form of warranty or surety bond, the language in the first part of the bill was changed to read:
IN INTERPRETING A LIABILITY INSURANCE POLICY ISSUED TO A CONSTRUCTION PROFESSIONAL, A COURT SHALL PRESUME THAT THE WORK OF A CONSTRUCTION PROFESSIONAL THAT RESULTS IN PROPERTY DAMAGE, INCLUDING DAMAGE TO THE WORK ITSELF OR OTHER WORK, IS AN ACCIDENT UNLESS THE PROPERTY DAMAGE IS INTENDED AND EXPECTED BY THE INSURED. NOTHING IN THIS SUBSECTION (3): 
     (a) REQUIRES COVERAGE FOR DAMAGE TO AN INSURED'S OWN WORK UNLESS OTHERWISE PROVIDED IN THE INSURANCE POLICY; OR

     (b) CREATES INSURANCE COVERAGE THAT IS NOT INCLUDED IN THE INSURANCE POLICY.
The prohibition on Super-Montrose endorsements found within Section 2 of the bill now reads:
A PROVISION IN A LIABILITY INSURANCE POLICY ISSUED TO A CONSTRUCTION PROFESSIONAL EXCLUDING OR LIMITING COVERAGE FOR ONE OR MORE CLAIMS ARISING FROM BODILY INJURY, PROPERTY DAMAGE, ADVERTISING INJURY, OR PERSONAL INJURY THAT OCCURS BEFORE THE POLICY'S INCEPTION DATE AND THAT CONTINUES, WORSENS, OR PROGRESSES WHEN THE POLICY IS IN EFFECT IS VOID AND UNENFORCEABLE IF THE EXCLUSION OR LIMITATION APPLIES TO AN INJURY OR DAMAGE THAT WAS UNKNOWN TO THE INSURED AT THE POLICY'S INCEPTION DATE.
Finally, the applicability language in the bill, Section 3, reads "This act applies to all insurance policies in existence or issued on or after the effective date of this act."

Colorado HB 10-1394 passed on its second third reading in the Senate on May 10th.  Yesterday, the House voted to concur with the Senate amendments and to repass the bill.  The bill will now go back to Governor Ritter for his signature.  The conventional wisdom is that because the parties were able to agree on compromise language, the Governor will now sign the bill into law.

Monday, May 10, 2010

The 2010 legislative session in Colorado will end with no construction defect measures having been introduced

In today's online edition of the Denver Business Journal, Ed Sealover reported that the "Bill that bothered Colorado builders dies without a hearing."  In a hearing today of the Senate State, Veterans and Military Affairs Committee, Senate Majority Leader John Morse asked the committee to postpone Senate Bill 45 indefinitely after stating that the issues surrounding foreclosure delays were more complicated than he had originally thought.

Fueled by comments made by the sponsoring Representative, Andy Kerr, that "all options are on the table," builders "feared the bill would be gutted and the foreclosure language replaced by last year's Senate Bill 246, a failed effort to make builders pay interest on construction defects from the time a home was built rather than the time the defect was reported."  According to Chris Elliott, government affairs chairman for the Colorado Association of Home Builders, that change would have doubled the amount builders must pay in construction defects lawsuits, thereby taking away any incentive for homeowners to settle lawsuits quickly.

According to Ed Sealover, "short of an unlikely last-second introduction of a new bill on construction defects later Monday," there will be no construction defects bill this year. Colorado's legislative session ends this Wednesday.  According to both Senator Morse and Representative Kerr, they hope to bring back some sort of construction defects legislation in 2011. 

Wednesday, May 5, 2010

What commercial property owners must know about protecting themselves from liens for work performed for tenants

One of the problems for commercial property owners involves work done at the request of a tenant (i.e., tenant finish, tenant remodel, tenant repairs, or other similar work) that can become the obligation of the property owner. Specifically, a mechanic’s lien claim can be brought by the unpaid general contractor, trade subcontractor, and/or material supplier against the property owner.

The Colorado mechanic’s lien statute does provide potential protections for a property owner, and they are relatively simple actions to take. However, they must be implemented as a practical matter before the “first lienable” construction work is done. Note: the first lienable work is typically done in the form of construction drawings. For that reason, the preventative measures discussed here must be implemented by the property owner or the contract property manager before the date on which construction drawings are begun.

The first step toward property owner protection from lien claims resulting from tenant-originated construction work is the drafting of a specific provision in the lease document that requires owner permission in writing for the construction of tenant improvements. The lease also needs to say, in conspicuous bold type, that the tenant has no right to allow any mechanic’s lien to attach to the property, that neither the landlord nor the property will be subject to such liens, and that the tenant will fully indemnify the owner of the property for the defense of any such claims, including all costs and attorneys’ fees incurred.

If such a provision is in place, then the owner needs to enforce it, and not make it useless by casually telling a tenant that it need not comply with it. That means that if the owner learns of the tenant’s intention to construct improvements, the owner needs to (1) see the full plans; (2) be given a complete list of suppliers, general contractors, and trade subcontractors; and (3) provide written permission to the tenant for the work in question – while still disclaiming any responsibility by the owner of the property for any lien claim.

Then the owner of the property needs to record the lease with the County Clerk and Recorder of the county in which the property is located. This gives public notice that the tenant cannot subject the property to lien claims, and that the contractor and subcontractors can only look to the tenant for payment.

At the same time the written consent is given, and the lease is recorded, the owner (or the property manager) should also post a large and conspicuous notice of non-liability of the owner of the property for mechanic’s liens. This notice should be attached to the front door in a manner that is hard to remove, and it should be confirmed by the owner (through inspection) at least weekly that the notice is in place through the entire time of delivery of materials and construction work. The owner or property manager should also keep a log of these inspections as proof, if such proof becomes necessary, that the notice was in place. If the notice is removed it should be immediately replaced. If this notice is not in place, the protections of the notice are lost entirely.

The notice needs to say the following:
NOTICE OF OWNER’S NON-LIABILITY FOR MECHANIC’S LIENS FOR CONSTRUCTION ON THIS PROPERTY
This property is presently under tenant-finish construction with the consent of the owner, but the suppliers, general contractor, trade subcontractors, providers of labor and/or equipment are given notice under C.R.S. § 38-22-105(2) that the owner of the property, and the property itself shall not be subject to any claims of mechanic’s liens, or other similar claims. This notice serves to advise any supplier, general contractor, trade subcontractors, providers of labor and/or equipment that the sole obligation for payment for all construction-related charges is the obligation of the tenant alone, and not the obligation of the owner or property manager.
This may seem like a lot of work for the property owner or property manager, but it is a simple case of an ounce of prevention being worth a pound of cure. Without taking these steps, the property and/or the owner are potentially liable for mechanic’s liens of suppliers and construction contractors. Otherwise, the full costs of a tenant-originated remodel or interior finish may become the obligation of the property owner. This is in addition to the costs of hiring a qualified attorney to defend, negotiate, and potentially go to trial on these issues.

Also, if there is a lender involved in the financing of the property, it will be necessary for the owner to defend and address their problems. This is because the terms of the deed of trust are likely to be violated by the bringing of a lien claim against the property, and the lender is probably going to be brought into the case.

If you would like more information about property owners' ability to protect themselves from lien claims in Colorado, please contact Buck Mann by e-mail at mann@hhmrlaw.com or by telephone at (303) 987-7143.

Sunday, May 2, 2010

There May Not Be Any Construction Defect Legislation in Colorado This Year After All

In three previous entries (first on January 13, 2010 - "Colorado Homeowner Protection Act of 2010. Much ado about nothing or Trojan horse?," then on March 16, 2010 "Is a Legislative Attack on Colorado Homebuilders Imminent?," and finally on April 2, 2010 "Will there be a construction defects bill in 2010? When will we know?"), I discussed the prospects for having to defend against construction defect legislation this year.

The Homeowner Protection Act of 2010 appears on the Senate Calendar as scheduled to be heard tomorrow afternoon at 1:30 in the Senate State, Veterans & Military Affairs Committee.  In an e-mail yesterday to a supporter of the bill, Senator Morse stated:

I appreciate all your work and all your comments on SB 45 this year. As I said when I sent out the strike below, I have not been able to the devote the time to this issue that I had hoped. After reviewing all the comments I received I have decided that now is not the right time to move this bill forward. As a result, I have asked Senator Heath to remove it from Monday’s calendar in State Affairs and I have told him that I don’t plan to reschedule it this year.

So, if you were planning to come and testify, please understand there will not be a hearing to testify at. Again, I appreciate all the work you have put into this matter.
It is interesting to note that Senator Morse refereces a "strike below" amendment that he circulated for SB 10-045.  I am not sure whether this amendment turned the bill into a construction defects bill, and, hopefully, we will never know.  If SB 10-045 is removed from the Senate Calendar tomorrow, and not calendared again later, there will be no construction defects bill this year, and we can all heave a sigh of relief.

Disclaimer

The information contained in this blog is provided for informational purposes only. It is not legal advice and should not be construed as providing legal advice on any subject matter.