The Hidden Dangers of Construction Defect Litigation: A Redux

I previously wrote an article entitled “The Hidden Dangers of Construction Defect Litigation” for the Common Interests magazine, the monthly periodical of the Rocky Mountain Chapter of the Community Associations Institute. In that article, I discussed the potential negative effects of homeowners associations bringing construction defect suits as anything other than a last resort. The purpose of this post is to bring to light, by way of a real life example, the problems discussed in my previous article.

 

I have recently seen a lawsuit filed by an individual homeowner within a common interest community against the homeowners association, its management company, and the attorneys retained by the association to represent it in a construction defect lawsuit against the original developer, general contractor, and one of the design professionals. In his suit, the homeowner complains that the association’s construction defect attorneys “neglected to amend [their] complaint to include only and specifically the claims for damages for those properties, those buildings or condominium units, either by owner or specific locations, which had sustained damages or had faulty construction for which damages were being sought.” As a result of claiming damages throughout the entire community, the homeowner alleged that the entire community was tarred “with the black brush of litigation.”

 

As the homeowner explained in his complaint, he purchased a condominium for his daughter-in-law when she moved to Colorado to care for him after the death of his wife. After several years, the daughter-in-law left Colorado and the homeowner used the condominium as a rental property. Earlier this year, the homeowner tried to sell his condominium and learned that, despite the fact that he does not believe there are any construction defects within his unit, Freddie Mac and Fannie Mae notified all banks in Colorado and elsewhere that there would be no mortgage funds available for his development until the pending construction defect was resolved. Because his development was blackballed, the homeowner could not reasonably sell his condominium and, as a result, the resale and rental values plummeted. Ultimately, a default in the payment of the mortgage occurred and the homeowner’s property has gone into foreclosure.

 

With respect to the homeowners association, the homeowner claimed that it did not discharge its obligation to protect the interests of all of its members by failing to properly supervise the actions of the construction defect law firm it retained to represent it. With respect to the property management company, the homeowner claimed that as the association’s management agent it owed the association’s members the same duties as does the association. The homeowner claimed that the management company breached its obligation to the homeowners because it was directly involved in the retention of the construction defect law firm.

 

While this is certainly an untenable situation for the homeowner involved, it serves as a cautionary tale for homeowners associations contemplating construction defect lawsuits. The problem will be made worse, as suggested in my previous article, if the association does not recover enough money to repair all of the defects it has alleged to exist. If that happens, the members of the association will be left with the unenviable position of having to decide whether to impose a special assessment to repair the alleged defects or to not perform repairs, leaving themselves with a disclosure issue when they sell their homes. If they go down the latter route, the stigma associated with the construction defect lawsuit is sure to impact the development for years to come.

To learn more about construction defect litigation in Colorado, you can reach David M. McLain by telephone at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.

What Construction Professionals in Colorado Must Know About Green Building

Establishing and effectively enforcing legal regulations that promote green building requires a great deal of time and effort from all involved. After years of advocating, implementing and responding to environmentally conscious building policies, we know that small changes made now can make a huge impact later on — especially when the initiative is backed by government regulations. For these changes to really be effective, all parties involved must adhere to the laws that promote green building practices. As such, construction professionals in Colorado should be aware of the following legal issues related to green building.

LEED certification expectations

Created by the United States Green Building Council, Leadership in Energy and Environmental Design — or “LEED” for short — is a set of guidelines used to identify and implement practical and measurable green building design, construction, operations and maintenance solutions. Building owners and construction professionals can use the guidelines to gain official LEED certification, which verifies that a building, home or community was designed and built using techniques aimed at achieving high performance in certain areas of human and environmental health. These techniques include:

• sustainable site development
• water savings
• energy efficiency
• materials selection
• indoor environmental quality

On July 15, 2005, then-Gov. Owens signed executive order #D005 05, which adopted LEED for existing buildings and incorporated LEED for the construction practices of all new state buildings in Colorado.

Evolving green building laws in other states

As we’ve seen time and time again, when one major government agency makes a significant change to its construction laws, a ripple effect takes place causing change in other areas. By passing the Green Building Act of 2006 (GBA), the Washington, D.C. Council decided to hold contractors to a higher standard when it comes to green building regulations. The law, which went into effect in January 2012, requires that all non-residential buildings larger than 50,000 square feet in the district be LEED certified. Contractors must prove their intention to meet LEED by filing some sort of financial collateral, such as performance surety bond insurance, which the government can collect if the contractor fails to meet LEED standards. If this law is any indication of things to come, construction professionals across the country can expect a great deal more of accountability when it comes to the environmental classification of their finished structures.

Legal resources regarding green building in Colorado

When it comes to the ever-changing construction policies surrounding green building, you need to stay on top of new developments. As a construction professional, you don’t want to accidentally break a law just because you were either uninformed or misinformed. Failing to meet green building standards in your area — whether accidentally or intentionally — could result in penalties such as fines, license revocation and/or legal action. For more information on green building in Colorado, check out the following resources.

• As the state’s official government department in charge of promoting sustainable economic development, the Colorado Energy Office aims to advance the state’s energy market and industry.
• A non-profit trade organization representing a wide range of green building leaders, the Colorado Green Building Guild works to bridge consumer interests with eco-minded contractors.
• Made up of representatives from each state agency and department, the Colorado Green Government Coordinating Council develops and implements new conservation policies and augments existing ones.

With this knowledge at your disposal, you can make informed decisions when working on new construction projects in your area. Educating yourself on evolving policies can help you develop new building strategies that reduce energy consumption or persuade you to incorporate eco-friendly products that have less harmful impacts on the environment. How you respond to existing and evolving green building policies has a great affect on the future, so take your responsibility seriously.

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Today’s post comes from Danielle Rodabaugh, our first guest blogger. Ms. Rodabaugh is the director of educational outreach at SuretyBonds.com, a nationwide surety bond producer that helps contractors fulfill their bonding requirements. Danielle writes to help leading industry professionals better understand the legal aspect of managing successful construction operations, especially those related to emerging green building practices. You can keep up with Danielle on Google+.

One Colorado Court Allows Negligence Claim by General Contractor Against Subcontractor

Judge Paul King of the Douglas County District Court recently confirmed that subcontractors in residential construction owe an independent duty, separate and apart from any contractual duties, to act without negligence in the construction of a home in Colorado.  See Order, dated September 7, 2010, Sunoo v. Hickory Homes, Inc. et al., Case No. 2007CV1866; see also Cosmopolitan Homes, Inc. v. Weller, 663 P.2d 1041 (Colo. 1983); A.C. Excavating v. Yacht Club II Homeowners Ass’n, Inc., 114 P.3d 862 (Colo. 2005).  He also verified that the holding in the B.R.W. Inc. v. Dufficy & Sons, Inc., 99 P.3d 66 (Colo. 2004)[1] case does not prohibit general contractors, such as Hickory Homes, from enforcing a subcontractor’s independent duty to act without negligence in the construction of a home.  In his Order, Judge King stated:

The independent duty to construct in a non-negligent manner is not dependent on the nature of the party presenting the claim in residential contract.  It is independent of any agreement and there is nothing that precludes the homeowner or the general contractor from seeking to enforce it in a residential homeowner setting.     

See Order, Sunoo v. Hickory Homes, Inc. et al., p. 7.

In the Hickory Homes case, an excavation subcontractor filed a motion for partial summary judgment on Hickory’s third-party claims for negligence, contribution, and breach of implied warranty.  The excavation subcontractor argued that Hickory’s claims for negligence and contribution were barred by the Economic Loss Rule as a contract existed between it and Hickory.  Hickory asserted that the excavation subcontractor is subject to an independent duty that can form the basis of any tort claim, which bars summary judgment.  Judge King agreed, and denied the excavation subcontractor’s motion for partial summary judgment. 

Another subcontractor joined the excavation subcontractor’s motion for partial summary judgment concerning Hickory’s breach of implied warranty claim, arguing that the implied warranty of habitability did not apply to it.  Hickory clarified that the breach of implied warranty claims were not predicated upon said warranty of habitability.  Rather, Hickory’s claims of breach of implied warranty arise out of implied warranties of merchantability and fitness for a particular purpose.  The court found it undisputed that this subcontractor provided goods in connection with its work on the plaintiffs’ home.  Accordingly, Judge King found that an implied warranty of merchantability and fitness applied to those goods and denied the subcontractor’s joinder in the motion for partial summary judgment.  Judge King’s Order serves as further confirmation that subcontractors engaged in residential construction in Colorado are subject to the same independent duty applicable to builders. 

Additionally, in his Order, Judge King verified that the trial court should follow the criteria set forth in the Redden v. SCI Colorado Funeral Services, Inc., 38 P.3d 75 (Colo. 2001) case in determining whether to permit designations of nonparties beyond statutory time frame allowed, or within 90 days after commencement of the action.  C.R.S. § 13-21-111.5(3)(b) provides that the negligence or fault of a nonparty may be considered if the claimant entered into a settlement agreement with the nonparty or if the defending party gives notice that the nonparty was wholly or partially at fault within 90 days following the commencement of the action unless the court determines a longer period is necessary.  In the Hickory Homes Order, Judge King indicated that the trial court should, in accordance with Redden, “strive to promote justice and should be guided by the following three criteria: 1) was the neglect excusable; 2) was there a meritorious claim; and 3) whether the designation would be consistent with equitable considerations.”  See Order, Sunoo v. Hickory Homes, Inc. et al., p. 2.  

 

Hickory sought to designate several potential nonparties at fault outside of the 90-day time frame allowed by statute following its receipt of expert reports from the plaintiffs.  As such, the court found Hickory’s delay in seeking to designate the nonparties excusable.  Id. at p. 3.  Hickory argued that provisions in the contract dictate that the owners were responsible for certain construction elements, including the structural floor system.  As a result, the court found that Hickory had established a meritorious claim.  As the plaintiffs did not raise structural or geotechnical issues until its experts’ second reports, the court found that equitable considerations favored granting Hickory permission to make its nonparty designations and thereby granted its motion for leave.  For those of us defending construction defect cases, the opportunity to designate nonparties following the receipt of a plaintiff’s expert report(s) is, in many instances, extremely vital to our client’s defense and almost always outside the statutory time frame of 90 days.  Accordingly, it is reassuring to see the Douglas County District Court give consideration to the timing predicaments facing construction defect defendants.

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

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[1] In the B.R.W. Inc. case, the Colorado Supreme Court held that the Economic Loss Rule barred the steel subcontractor’s negligence claims against the engineering firm and inspector for a public works project, even though the subcontractor had not directly contracted with the engineering firm or inspector.             

In Colorado, Repair Vendors Can Bring First-Party Bad Faith Actions For Amounts Owed From an Insurer

With the aftermath of Sandy still being felt up and down the Eastern seaboard, the question of many victims turns to how they can rebuild their lives and homes.  One of the first things many people do is call on their insurance carriers to help rebuild whatever damaged property they have.  In a recent case here in Colorado, those rebuilding efforts got reaffirmed by a Court of Appeals case, Kyle W. Larson Enterprises, Inc., Roofing Experts, d/b/a The Roofing Experts v. Allstate Insurance Company, --- P.3d ----, 2012 WL 4459112 (Colo. App. September 27, 2012).

The facts of the case are pretty straightforward and could describe many repair vendors in numerous situations.  Roofing Experts contracted with four homeowners insured by Allstate to repair their damaged roofs.  The contracts provided that repair costs would be paid from insurance proceeds.  The contracts also allowed Roofing Experts full authority to communicate with Allstate regarding all aspects of the insurance claims.  Before work began, Roofing Experts met with adjusters from Allstate to discuss the four homes and the amount of each claim.  After receiving approval for the claims, Roofing Experts began the repairs.  During construction, Roofing Experts discovered additional repairs were necessary to maintain certain manufacturer’s warranties and to conform to applicable building codes.  Roofing Experts made the additional repairs and invoiced Allstate for them.  Allstate agreed to pay the originally claimed amounts, but refused to pay for the additional repairs.  Roofing Experts brought a first-party bad faith action under C.R.S. § 10-3-1115 and 1116 as a first-party claimant.

At the trial court level, Allstate moved for summary judgment, arguing that Roofing Experts was not a first-party claimant entitled to bring a bad faith action. The trial court agreed and granted the motion.  Roofing Experts moved for reconsideration, which request was denied.  Roofing Experts then appealed those rulings to the Court of Appeals, which reversed the trial court’s rulings.

Allstate moved for summary judgment, claiming under those same statutes that Roofing Experts did not qualify as a first-party claimant.  The trial court agreed and granted Allstate’s motion for summary judgment.

In making its decision, the Court of Appeals reviewed the statutes at issue.  Specifically, the Court of Appeals reviewed C.R.S. § 10-3-1115(1), which states:

(1)(a) 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.

(b) For the purposes of this section and section 10-3-1116:

(I) “First-party claimant” means an individual, corporation, association, partnership, or other legal entity asserting an entitlement to benefits owed directly to or on behalf of an insured under an insurance policy. “First-party claimant” includes a public entity that has paid a claim for benefits due to an insurer’s unreasonable delay or denial of the claim.

(II) “First-party claimant” does not include:

(A) A nonparticipating provider performing services; or

(B) A person asserting a claim against an insured under a liability policy.

The Court of Appeals focused on the fact that the legislature, in drafting the statute, included parties who might make claims on behalf of insureds as demonstrated in the language in section (1)(a) and (1)(a)(I).  In explaining the decision, the Court of Appeals first stated that the intent of passing C.R.S. § 10-3-1115 and 1116 was to create a statutory duty for insurers to refrain from unreasonable delay or denial of payment of any claim for benefits owed.  The Court of Appeals also found that the legislature made it clear that persons or entities other than the insured are included as potential “first-party claimants.”  Additionally, the Court found that the statute enumerated what the definition of first-party claimant does not include.  The Court of Appeals found it persuasive that repair vendors like Roofing Experts were not listed in that section.

The Court of Appeals rejected Allstate’s argument that the statue was ambiguous and did not include Roofing Experts or other repair vendors.  In response, the Court of Appeals stated that Allstate’s interpretation of the statutes was strained and unreasonable.  The only reasonable reading of the statute’s language, according to the Court of Appeals, is a reading of the plain meaning of the words used.  In this case, the only reasonable interpretation of the “on behalf of” language is that the definition of a first-party claimant includes those who assert, “on behalf of an insured,” “an entitlement to benefits owed . . . under an insurance policy.”

The Court of Appeals reversed the trial court’s ruling of summary judgment dismissing Roofing Experts’ action under C.R.S. § 10-3-1115 and 1116.  For now, repair vendors can continue working knowing they will have the full support of the law on their side, should they need it in pursuing an insurance claim made for a homeowner.

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

Colorado Court of Appeals Finds Damages to Non-Defective Property Arising From Defective Construction Covered Under Commercial General Liability Policy

The recently decided case of Colorado Pool Systems, Inc. v. Scottsdale Insurance Company (Colo. Ct. App. 10CA2638, October 25, 2012), confirms that absent specific exclusions in the policy, a commercial general liability (“CGL”) policy covers damages to non-defective property arising from a builder’s own defective workmanship.

Colorado Pool Systems, Inc. (“Colorado Pool”) was hired as a subcontractor to install a swimming pool at Founders Village Pool and Community Center (“Founders Village”) in Castle Rock, Colorado.  After the concrete shell of the pool was placed, some of the rebar frame was found to be too close to the surface.  Founders Village demanded that Colorado Pool remove and replace the pool, and Colorado Pool contacted its insurance carrier, Scottsdale Insurance Company (“Scottsdale”), with which Colorado Pool held a CGL policy.  After inspecting the pool, Scottsdale’s claims adjuster stated that the insurance policy would cover losses associated with removing and replacing the pool.

Relying on the claim adjuster’s statement, Colorado Pool paid for the demolition of the pool’s concrete shell.  After demolition was complete, however, Scottsdale refused to pay for the demolition or for the cost of replacing the pool, and denied all coverage under the CGL policy.  Colorado Pool, after paying damages to the general contractor for the pool project, filed suit against Scottsdale asserting that Scottsdale had a duty to defend and indemnify Colorado Pool pursuant to the applicable CGL policy.  The trial court found that the CGL policy did not cover Colorado Pool’s claimed damages, and Colorado Pool appealed.

The Court of Appeals first addressed whether the Builders Insurance Act, C.R.S. § 13-20-808, applied to Colorado Pool’s claims.  The Court found that while the Act was intended to apply retroactively, such an application to Colorado Pool’s CGL policy would be impermissibly retrospective because it would change the coverage under the policy that the parties had originally bargained for. 

The Court, therefore, interpreted the CGL policy and the term “accident” in the policy under the common law, and adopted the test from Greystone Construction, 661 F.3d 1272 (10^th Cir. 2011).  Applying the Greystone test, the Court held that coverage exists under a CGL policy for damages arising from improper or faulty workmanship if those damages are not specifically excluded in the policy, if non-defective property is damaged, and if the damage was unforeseen and unexpected.   For Colorado Pool, that meant that Scottsdale did not have to pay for removing and replacing the pool, since Colorado Pool was obligated to replace its own defective work product.  Related damage to a non-defective deck, sidewalk, retaining wall, and electrical conduits, however, were covered under the CGL policy, because such damages were not specifically excluded, the property was not defective, and Colorado Pool did not expect or foresee the damage.

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

When Does a Claim Against an Insurance Carrier for Failing to Defend Accrue?

The following is an update on our December 20, 2010 article regarding United States Fire Insurance Company v. Pinkard Construction Company, Civil Action No. 09-CV-01854-MSK-MJW, and its underlying dispute, Legacy Apartments v. Pinkard Construction Company, Case No. 2003 CV 703, Boulder County Dist. Ct.  That article can be found here. 

The present action, St. Paul Fire and Marine Insurance Co., et al. v. The North River Insurance Co., et al., Civil Action No. 10-CV-02936-MSK-CBS, encompasses the coverage battle that ensued between Pinkard’s insurers, Travelers Indemnity Company of America (“Travelers”) and United States Fire Insurance Company (“USFI”), following the settlement of Legacy’s construction defect claims against Pinkard.  A short history of the underlying facts is as follows:

In 1995, Pinkard constructed the Legacy Apartments housing complex in Longmont, Colorado. Following construction, Legacy notified Pinkard of water leaks associated with various elements of construction.  Legacy ultimately filed suit against Pinkard in 2003, and would go on to clarify and amend its defect claims in 2004, 2006, and again in 2008. Following Pinkard’s notification of Legacy’s claims, USFI provided a defense to Pinkard, but Travelers refused to do so, on the purported basis that Legacy’s allegations did not implicate property damage under the terms of Travelers’ policy.  The case proceeded to trial in 2010 and settled during the jury’s deliberations.  Thereafter, both Travelers and USFI each contended that their settlement contributions exceeded their liability under the respective policies. They asserted claims against one another for contribution, indemnity, and subrogation. 

Among the claims, USFI asserted specifically that Travelers owed contribution towards Pinkard’s defense. In response, Travelers moved for summary judgment on the basis that its refusal to defend Pinkard was known to USFI as early as 2003, and thus, under the three-year statute of limitations provided by C.R.S. § 13-80-101, USFI’s claims became barred in 2006.  In reply, USFI argued that its claims were not stale, and in fact were continuing to accrue, under the “continuing wrong” doctrine, under which the cause of action and ensuing limitations run from the date of the last injury.

District Judge Marcia Krieger was not persuaded and determined that, under Colorado law, “the insurer’s [Travelers’] continued refusal to defend the insured constituted a series of breaches….for which the limitations period runs with each breach.”  Accordingly, Judge Krieger concluded, “a plaintiff can only sue on those breaches that occurred within the relevant limitation period.” Thus, whereas Travelers disclaimed its intention to defend Pinkard on multiple occasions, each disclaimer gave rise to a separate breach subject to a separate limitation period. This effectively limited USFI’s right to recover defense costs against Travelers, if any, for the three-year time period between January 2008 and 2011. 

Travelers separately contended that its policy coverage — and thus its defense obligation — was not triggered by Legacy’s allegations within the aforesaid time period because Legacy only alleged claims of faulty workmanship. In response, USFI argued that, in accordance with the Tenth Circuit Court of Appeals’ Greystone Const. Inc. v. National Fire & Marine Ins. Co., 661 F.3d 1272 (10^th Cir. 2011) decision, Legacy’s claims should be enough to trigger Travelers’ defense obligation, insofar as it was alleged that the apartments were damaged as a result of Pinkard’s failure to construct them in a workmanlike manner. 

Presently, because the Greystone decision was issued just a few weeks before the parties’ briefing on this topic, Judge Krieger appears inclined to allow the parties to submit additional briefing on Greystone’s impact on the sufficiency of Legacy’s defect allegations for the purpose of invoking coverage under Travelers’ policies.

Perhaps most importantly, Judge Krieger has posed questions with regard to other issues of law, including the retroactive application of Greystone, the timeframe from which a court should assess the legal aspects of a duty to defend, and even the mens rea of an insurance carrier that denies its defense obligation.  Whereas Travelers and USFI have an obvious interest in resolving the matter at hand, it is no stretch to say that Judge Krieger’s eventual resolution of these broader topics of law will have an enormous impact on defense coverage for contractors in the years to come.

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

Important Information Regarding Colorado Mechanic’s Lien Rights.

With payment problems in the construction economy having accelerated over the past few years, there has been a substantial increase in mechanic’s lien activity and associated litigation. The typical mechanic’s lien claimant is a material supplier, a trade subcontractor, or even a general contractor that has not been paid by the developer/owner of the construction project. The reason for filing a mechanic’s lien claim is that it offers the prospect in many cases to make the unpaid construction professional a priority creditor, with a lien on the real estate that is superior to the construction lender. 

One of the primary rules governing a mechanic’s lien claim is that the creditor’s formal written “Notice of Intent to File a Mechanic’s Lien” (hereafter “Lien Notice”) must be (1) served on the owner of the property for which the work was done or the materials used, and (2) served at the same time on the general contractor who has handled the construction project.  After the creditor has made service of the lien claim by USPS certified mail (using the green return receipt card for proof of service) or separate personal delivery of the notice to the property owner and general contractor, ten full days must pass (not including the date of mailing of the notices) before the lien notice is filed in the public records.

After ten days have expired following the date of mailing using certified mail, or personal delivery of the notice to the property owner and the general contractor, the lien notice can be filed to make the lien valid.  The lien notice must be filed in the county land records where the property is located.  This mailing and recording process must be completed within four months of the last substantial work done on the construction by the party claiming the lien. The required minimum ten-day waiting period between serving the lien on the owner and general contractor, and recording the lien means that a lien claimant actually should accomplish service of the Lien Notice not less than three and a half months after the creditor’s last substantial work on the project. 

As a practical matter, it is advisable to work well within these deadlines rather than waiting until the four month window is about to close. The reason for this timing recommendation is that a creditor needs to (1) prepare a completely accurate Lien Notice; (2) locate and separately serve the notice(s) on both the property owner and general contractor; (3) wait at least full ten days after service of the notices, not including the date(s) of service; and (4) record a copy of the complete and served Lien Notice in the land records of the county where the work was done -- all within the four-month period. 

For practical reasons of timing and complying with the time limits of the mechanic’s lien statute, it is advisable to prepare and serve the written Lien Notice approximately 75 days after the last substantial work is done on the project. Most importantly, if there is any difficulty in serving the owner and general contractor parties by certified mail within the time allowed, it will be advisable to have them served personally by a professional process server. Under Colorado law, it is possible that a mechanic’s lien can be defeated in the end if the certified mail is sent to an incorrect address, for the property owner or the general contractor.  It is best to send redundant lien notices to these parties if they have multiple addresses, or if you believe that they may be using multiple addresses without knowing which address is their primary address.  

The two morals to this story are that if you have mechanic’s lien claims (1) try not to wait more than 75 days to begin the process of asserting the claim with formality by means of a written Lien Notice; and (2) send the notice to multiple addresses for the property owner and the general contractor if you are in doubt about which address is correct. If you send the notice(s) by certified mail, return receipt requested to any correct address, you are considered to have served the party. 

Also, if you use certified mail, return receipt requested, and the addressee refuses to accept or sign for the certified letter, it will be returned to you by the USPS.  Keep the letter in its returned condition for later proof that you served the notice, because mailing the certified letter (with the return receipt) is sufficient under Colorado law, as long as the notice was sent to the right address for the owner or general contractor.  It does not matter for purposes of serving the required notice(s) that the certified mail was refused or never picked up by the addressee.

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

The Colorado Court of Appeals rules that a statutory notice of claim triggers an insurer’s duty to defend.

Gene and Diane Melssen d/b/a Melssen Construction (“Melssen”) built a custom home for the Holleys, during which period of time Melssen retained a CGL insurance coverage from Auto Owners Insurance Company. Soon after completion of the house, the Holleys noticed cracks in the drywall and, eventually, large cracks developed in the exterior stucco and basement slab. Thereafter, the Holleys contacted Melssen, the structural engineer, an attorney, and Auto-Owners, which assigned a claims adjuster to investigate the claim.

In April 2008, the Holleys sent Melssen a statutory notice of claim pursuant to C.R.S. § 13-20-803.5 (“NOC”). In this NOC, the Holleys claimed approximately $300,000 in damages related to design and construction defects. The Holleys also provided a list of claimed damages and estimated repairs, accompanied by two reports from the Holleys’ consultant regarding the claimed design and construction defects. In June 2008, Melssen tendered the defense and indemnity of the claim to Auto-Owners. While Auto-Owners did not deny the claim at that time, it did not inspect the property or otherwise adjust the claim. Thereafter, in October 2008, Auto-Owners sent Melssen a letter denying coverage on the basis that the damage occurred outside of the applicable policy period.

Ultimately, Melssen settled the claims against it for $140,000. This settlement occurred prior to the Holleys’ serving a complaint on Melssen and Melssen never provided the draft settlement agreement to Auto-Owners prior to execution. After the settlement, Melssen brought suit against Auto-Owners for breach of contract, bad faith breach of contract, and violations of C.R.S. §§ 10-3-1115 and 1116. After a three-day trial on the merits, the jury returned a verdict in favor of Melssen on all claims and awarded it damages. The trial court then ordered Auto-Owners to pay Melssen’s costs and attorneys’ fees.

In its appeal to the Colorado Court of Appeals, Auto-Owners argued that the trial court erred by submitting to the jury the question regarding whether the Holleys’ NOC constituted a “suit” under the policy, which thereby triggered Auto-Owners’ duty to defect Melssen. Auto-Owners’ argument contended that the NOC process was neither a complaint (i.e., suit) nor was it an alternative dispute resolution proceeding.

The Court of Appeals ruled, in its June 21, 2012 decision,[1] that the trial court indeed committed error in submitting this issue to the jury but that the error was harmless because the Holleys’ NOC was, as a matter of law, a “suit” which triggered Auto-Owners’ duty to defend. In so holding, the Court of Appeals ruled that the NOC also constituted an alternative dispute resolution proceeding under the policy.

Auto-Owners also argued in the appeal that the NOC served as nothing more than a condition precedent to the Holleys filing suit against Melssen. Not persuaded, the Court of Appeals held that the NOC process constitutes an alternative dispute resolution proceeding, as well as serving as a condition precedent to the institution of a suit against a construction professional.

Interestingly, during the appeal, Melssen also argued that C.R.S. § 13-20-808(7), enacted in 2010, applied retroactively to trigger Auto-Owners’ duty to defend. That section states:

An insurer’s duty to defend a construction professional or other insured under liability insurance policy issued to a construction professional shall be triggered by a potentially covered liability described in:

(1)               A notice of claim made pursuant to section 13-20-803.5….

Because it had already determined that a NOC constitutes a “suit” under the insurance policy at issue, the Court of Appeals determined that it need not address the retroactive application of the 2010 amendments to the Construction Defect Action Reform Act. At least one panel of the Court of Appeals has previously held that C.R.S. § 13-20-808 should not be applied retroactively,[2] so the issue may be resolved, at least until the Colorado Supreme Court weighs in on the issue.

For more information regarding the Melssen case or construction litigation in Colorado, you can reach David M. McLain by telephone at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.

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[1] Melssen v. Auto-Owners Insurance Company, 285 P.3d 328 (Colo. App. 2012).

[2] TCD, Inc. v. American Family Mutual Insurance Company, 2012 WL 1231964 (Colo. App. April 12, 2012).

Limitations of liability in subcontractors’ contracts may not be enforceable in Colorado to limit claims by construction professionals.

The Colorado Homeowner Protection Act of 2007 (“HPA”), codified at C.R.S. § 13-20-806(7), specifically voids express waivers of, or limitations on, a residential property owner’s ability to enforce any rights, remedies, and damages provided by law in a construction defect case.  Practically speaking, this means that limitation of liability provisions in contracts between construction professionals and residential homeowners are void and will not be enforced in Colorado.  The HPA can extend even further, however, to subcontractors on residential projects, as seen in a recent District Court ruling.

The HPA was tested in Thacker v. Gallery Homes, et al., v. Terracon Consultants, Inc., et al., Larimer County District Court Case No. 2007CV1195.  Gallery Homes hired Terracon to provide geotechnical and structural engineering services at the Colony Ridge subdivision in Loveland, Colorado.  Terracon performed work for Gallery Homes under three separate contracts, each of which included a provision limiting Terracon’s total liability to Gallery Homes. 

After the project was completed, two homeowners filed suit against Gallery Homes for alleged construction defects involving movement of their basement floor systems and foundations and damage to porches, patios, garages, and driveways.  Gallery Homes sued Terracon as a third-party defendant, and Terracon sought to enforce its limitation of liability provisions via a partial summary judgment motion. 

Judge Gregory M. Lammons denied Terracon’s motion in an order dated April 7, 2010, stating that the HPA “expressly states that any attempt of a construction professional to limit the amount of damages for which they are liable for work done on a residential project is void as against public policy.”  The order also affirmed the definition of a construction professional under C.R.S. § 13-20-802.5(4) as “an architect, contractor, subcontractor, developer, builder, builder vendor, engineer, or inspector performing or furnishing the design, supervision, inspection, construction, or observation of the construction or any improvement to the real property.

Importantly, Judge Lammons noted that the HPA does not state that only homeowners may enforce its provisions, and that the HPA is applicable to Terracon as a third-party defendant subcontractor on a residential project.

After the parties proceeded to trial, the jury found that Terracon was not negligent in providing its services to Gallery Homes.  Gallery Homes appealed the verdict and Terracon cross-appealed the denial of its motion to enforce its limitation of liability clauses.  In an unpublished opinion dated May 31, 2012, Gallery Homes v. Terracon Consultants, Inc., d/b/a Terracon Consulting Engineers & Scientists, the Court of Appeals declined to rule on the enforceability of Terracon’s limitation of liability provisions, finding instead that Terracon’s cross-appeal was moot and should not be addressed.

The clear impact of this interpretation of the HPA is that even if a subcontractor on a residential project does not contract directly with a residential homeowner, if that subcontractor is performing work on a residential project the HPA may apply to make any limitation of liability provisions in the subcontractor’s contract unenforceable.


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

Derek Lindenschmidt named Law Week Colorado's 2012 Barrister's Best Construction-Defects Lawyer for the Defense

I am happy to announce that Law Week Colorado has named Derek Lindenschmidt as the Best Construction-Defects Lawyer for the Defense: Barrister’s Best for 2012. Law Week Colorado’s recognition of Derek states:

When a small firm names a new partner, that’s big news, and it means there’s a reason for that promotion. So is the case of Derek Lindenschmidt, the newest partner of 11-person firm Higgins Hopkins McLain & Roswell. He’s a younger member of this crowd, but he’s quickly earning a reputation as a top lawyer with expertise in the construction-defects defense realm.

Congratulations, Derek! I have recently spent the summer joined at the hip with Derek, arbitrating two separate multi-week, multi-party construction defect claims. After watching Derek’s closing argument yesterday in the second of these arbitrations, I can only say that his reputation is well deserved.

For anyone who has not met or worked with Derek, I offer this brief biography: Derek started as an associate of the firm in 2006 when he relocated to Colorado from Charleston, South Carolina where he was an associate with the Qualey & Beck Law Firm. During his time in South Carolina, Derek represented general contractors, developers, subcontractors and homeowners in various types of construction-related matters, including residential construction defect disputes, contract review and drafting, and defense of mechanics liens. During his time with HHMR, Derek’s practice has focused on representation of construction professionals in a wide variety of both litigated and non-litigated matters, including the defense of developers and general contractors in complex construction defect lawsuits. He has defended against claims in all phases of development, from initial design through post-construction, and has successfully recovered from subcontractors in subrogation. He has also successfully resolved many claims through alternative dispute resolution. Sheri Roswell and I were happy to announce, in January 2012, that Derek had been promoted to partner.

If you would like to get in touch with For more information regarding Higgins, Hopkins, McLain & Roswell, please visit our website at www.hhmrlaw.com.  If you are interested in learning more about construction litigation in Colorado, including the impact of recent changes in the law, please visit our blog at www.ColoradoConstructionLitigation.com.

-          David M. McLain

Allowing the use of a general verdict form in a construction defect case could subject your client to prejudgment interest.

A recent opinion from the Colorado Court of Appeals is a cautionary tale concerning the calculation of pre-judgment interest.  See Hendricks v. Allied Waste Transportation, Inc., 2012 WL 1881004 (Colo. App. 2012).  The Hendricks sued Allied after one of its drivers backed into the corner of their home with an Allied garbage truck.  At trial, a jury awarded the Hendricks $160,100 in damages.  Although the jury was instructed on the cost of repairs, diminution in value, and non-economic damages, the parties agreed to a general verdict form that did not ask the jury to specify the types of damages awarded.  Id. at *1.  The Hendricks sought to amend the judgment to include prejudgment interest and costs, which the trial court granted.

Allied appealed, arguing that the trial court erred by awarding the Hendricks prejudgment interest from the date their property was damaged.  Id. at *7.  The Colorado Court of Appeals found no error, and affirmed.  In its opinion, the Court of Appeals acknowledged that the trial court’s award of prejudgment interest was pursuant to C.R.S. § 5-12-102.  The pertinent portion of this statute provides:

(1)   Except as provided in section 13-21-101, C.R.S., when there is no agreement as to the rate thereof, creditors shall receive interest as follows:

* * *

(b) Interest shall be at the rate of eight percent per annum compounded annually for all moneys or the value of all property after they are wrongfully withheld or after they become due to the date of payment or the date judgment is entered, whichever first occurs.              

C.R.S. § 5-12-102(1)(b). 

Allied argued that the trial court should have awarded interest from the date of the verdict pursuant to Goodyear Tire & Rubber Co. v. Holmes, 193 P.3d 821 (Colo. 2008), and Hildebrand v. New Vista Homes II, LLC, 252 P.3d 1159 (Colo. App. 2010).  The Court of Appeals found Allied’s reliance on these cases misplaced as these cases concern damages for the cost of repairs whereby interest accrues from the date repairs are made.  Importantly, the Court of Appeals pointed out that in Goodyear and Hildebrand, the juries returned special verdict forms, which allowed the courts to calculate interest based specifically on the cost of repairs.  Id. 

In the Hendricks case, the parties agreed to a general verdict form whereby the jury was instructed on the cost of repairs, as well as diminution of property value, and noneconomic damages.  As a result, the Court of Appeals could not determine which portion of the verdict, if any, was for the cost of repairs.  In its opinion, the Court of Appeals referred to a recent Colorado Supreme Court case, Ferrellgas, Inc. v. Yeiser, 247 P.3d 1022 (Colo. 2011), wherein the Supreme Court affirmed the trial court’s calculation of prejudgment interest from the date the plaintiff’s home was initially damaged since the jury’s general verdict form lacked any basis to distinguish between the amount of damages awarded for the reasonable cost of repair and diminution in value concerning the calculation of prejudgment interest.  In accordance with these recent Colorado opinions, those defending property damage claims should insist on the use of a special verdict from to limit the exposure to their clients stemming from prejudgment interest.  

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

There is No Non-Delegable Duty on the Part of Residential Builders in Colorado

Recently, in the Arapahoe District Court, the Honorable Michael Spear, issued an order holding that builders do not owe a non-delegable duty to homeowners.  In Marx and Corken v. Alpert Custom Homes, Inc., et al., Judge Spear’s order came in response to plaintiffs’ motion for determination of question of law seeking a finding that the defendants owed a non-delegable duty to the plaintiffs and thus, to strike defendants’ designation of nonparties at fault.  After being fully briefed, Judge Spear, found that such a non-delegable duty does not exist.

The case arises from the construction of a single-family residence in Aurora, Colorado.  Through the construction and interaction with Alpert Custom Homes, Inc. and Scott and Sally Alpert, the defendants, Paul Marx and Kay Corken, the plaintiffs claimed they suffered various damages and losses, and brought claims for breach of contract-warranty, breach of contract, violation of the Colorado Consumer Protection Act, breaches of the implied covenant of good faith, promissory estoppel, willful breach of contract, and quantum meruit.  During litigation, the defendants filed a designation of nonparties at fault, which named several parties which were at fault for the alleged construction defects at issue in the case.  The pertinent nonparties named were subcontractors of defendant Alpert Custom Homes, Inc. during the construction of the residence.

Plaintiffs filed the motion for determination of law discussed earlier seeking to strike defendants’ designation of nonparties on the basis that the defendants owed them a non-delegable duty to construct the home in a good and workmanlike manner.  Plaintiffs’ main argument stemmed from Cosmopolitan Homes v. Weller, 663 P.2d 1041, (Colo. 1983), in which the court found that a builder owes the homeowner an independent tort duty of reasonable care in constructing the residence.  Plaintiffs supported their claim by citing two district court cases which allegedly agree with the legal principle that the duty is non-delegable.

Defendants’ response argued that a non-delegable duty, such as plaintiffs claim, is a tort-based concept limited to inherently dangerous activities, which building a home is not.  Defendants also argued that a general contractor is not liable for the negligence of subcontractors, which follows a long line of cases.  Defendants’ final argument rests on Loughridge v. Goodyear Tire & Rubber Co., 207 F.Supp.2d 1187 (D.Colo. 2002), which relates to the discussion of proportionate liability and how it applies to claims for breach of warranty as well as tort claims.  Thus, defendants asked the court to issue an order (1) that the construction of a residence does not give rise to a non-delegable duty; (2) that defendants are not vicariously liable for the acts of the independent subcontractors; and, (3) that designation of nonparties is proper.

As mentioned above, Judge Spear found in favor of the defendants and held that the designation of nonparties was valid and should be allowed to stand.  In his order, Judge Spear found that while Cosmopolitan Homes stands for the idea that a builder owes an independent tort duty of reasonable care in construction of a residence, there is no Colorado Case law to support the proposition that a builder’s duty is “non-delegable.” [Emphasis added].  Judge Spear stated that such a term relates to a common law doctrine developed from Garden of the Gods Village v. Hellman, 294 P.2d 597 (Colo. 1956), to the present day, “does not support a conclusion that it should be created by the courts in the context of this case.”  Judge Spear further found that the law is clear that a person hiring an independent contractor is ordinarily not liable for negligence of the independent contract and that Cosmopolitan Homes does not stand for the proposition that a builder is vicariously liable for the torts of its subcontractors.

Judge Spear also addressed A.C. Excavating v. Yacht Club II Homeowners Ass’n, 114 P.3d 862 (Colo. 2005), which holds that a subcontractor owes a duty of care directly to the homeowner.  Discussing Yacht Club II, and supporting his finding that a non-delegable duty does not exist, Judge Spear stated that if a builder were to have a non-delegable duty, there would be no need for the holding of Yacht Club II.

When Judge Spear discussed defendants’ argument regarding proportionate liability, he walked through many different cases.  However, Judge Spear found the Loughridge Court’s reasoning persuasive.  Judge Spear found that the statute’s “language contains no limitation to tortious acts and when, as in this case, a plaintiff in reality plead alleged contract and warranty claims as tort claims based on a duty implied by law § 13-21-111.5, C.R.S., applies and the Designation of Non-Parties is proper.”

Thus, the court in Marx and Corken v. Alpert Homes, Inc., et al., found that a builder’s duty of reasonable care in construction of a residence owed to a homeowner is just that.  It does not rise to the level of non-delegable duty and does not interfere with a builder’s ability to apportion blame to its independent subcontractors who may be liable.

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

Higgins, Hopkins, McLain & Roswell, LLC is Looking for a New Associate Attorney.

Higgins, Hopkins, McLain & Roswell, LLC, a boutique firm located in Cherry Creek, has an immediate opening for a litigation associate with 2 – 5 years of experience in construction litigation and/or insurance defense.  To be successful a candidate, you must be an optimist, well spoken, have exceptional research and writing skills, and be able to think on your feet. Given that our files are very document-intensive, you must be very organized and detail-oriented.  Experience with deposing witnesses and some trial experience a plus.

We offer a competitive a salary which is commensurate with experience.  We also offer excellent benefits.  Interested candidates should submit their resume, references, and writing samples to:

Ms. Nancy Bronner

E-mail:  bronner@hhmrlaw.com

NO CALLS OR AGENCIES

Joinder vs. Misjoinder in Colorado Construction Claims: Roche Constructors v. One Beacon.

Often, those practicing in the construction defect field have faced questions concerning the joinder of a party. Recently, the U.S. District Court for the District of Colorado weighed in on the requirements for joinder under the Colorado Rules of Civil Procedure.  See Roche Constructors, Inc. v. One Beacon America Ins. Co., 2012 WL 1060000 (D. Colo. 2012).  Roche secured a construction contract to build a detention facility for the Lincoln County Sheriff’s Office in Lincoln County, Nebraska.   In turn, Roche entered into a subcontract with Dobberstein Roofing Company, Inc. in October 2009 to install the roofing system and other related work at the detention facility.  The subcontract agreement required Dobberstein to maintain adequate commercial general liability insurance and to add Roche as an additional insured under the policy.  Roche maintained a builder’s risk policy issued by OneBeacon America Insurance Company and Dobberstein secured a certificate of liability insurance underwritten by Transportation Insurance Company (“TIC”).  Id. at *1.    

Roche alleged that Dobberstein constructed the roofing system in a negligent manner in violation of the subcontract.  Roche claims it incurred additional costs to repair structural damage to the roofing system as a result of Dobberstein’s negligent work.  In order to cover said damage, Roche tendered insurance claims to OneBeacon and TIC.  According to Roche, OneBeacon denied coverage and TIC failed to respond to Roche’s claims.  In June 2011, Roche brought claims against all three, Dobberstein, OneBeacon, and TIC in the Weld County District Court.  Id. at *2.  Roche brought claims for breach of an insurance contract, insurance bad faith, statutory damages for insurance bad faith, and declaratory judgment against OneBeacon and TIC.  Roche claimed breach of contract, breach of implied warranty and express warranty, and negligence against Dobberstein. 

About a month later, OneBeacon removed the case to the U.S. District Court for the District of Colorado pursuant to federal subject matter jurisdiction based on diversity.  All of the defendants consented to removal.  On August 22, 2011, Roche filed a motion to remand the case and an amended motion to remand on August 23, 2011.  In its motions to remand, Roche argued removal was improper because Dobberstein had contractually waived its right to remove the case pursuant to the forum selection clauses in the subcontract agreement.  As such, Roche argued Dobberstein is estopped from consenting to removal and that the resulting lack of unanimous consent precludes removal pursuant to 28 U.S.C. § 1446(b).  Id. at *3.  After finding that Roche’s amended motion to remand timely, the court turned to the merits of said amended motion. 

The court acknowledged that the forum selection clause in the subcontract agreement between Roche and Dobberstein expressly gave Roche the right to choose the forum to have any matters arising out of litigation to be heard.  Neither OneBeacon nor TIC disputed that Roche had the right to choose the forum in litigation or that the forum selection clause was unenforceable.  The court found Dobberstein violated the forum selection clause by consenting to remove the case to federal court, which was not the forum selected by Roche.  Id.  Because Dobberstein could not properly consent to removal, not all defendants consented to removal from the Weld County Court.  OneBeacon and TIC argued that the court should sever the two sets of claims and only remand the claims against Dobberstein.  In its motion to sever, OneBeacon argued that Roche had engaged in a fraudulent misjoinder by suing diverse defendants in state court.  TIC argued that Roche waived its ability to remand by choosing to combine its claims against defendants not subject to the forum selection clause in one action.    

While acknowledging when procedural misjoinder generally occurs[1] in its opinion, the U.S. District Court for the District of Colorado indicated that the application of procedural misjoinder was not necessary to resolve Roche’s amended motion to remand.[2]  According to the court, the joinder of claims against multiple defendants in a single action is governed by Colorado Rule of Civil Procedure 20, which provides:

All persons may be joined in one action as defendants if there is asserted against them jointly, severally, or in the alternative, any right to relief in respect of or arising out of the same transaction, occurrence, or series of transactions or occurrences and if any question of law or fact common to all defendants will arise in the action.  

Id. at *4 (quoting C.R.C.P. 20(a)).  Under Colorado law, Rule 20 is given the “broadest possible reading.”  Id.; see City of Aurora ex rel. Utility Enterprise v. Colorado State Eng’r, 105 P.3d 595, 623 (Colo. 2005).  The U.S. District Court for the District of Colorado found that Roche’s complaint met the requirements for a Rule 20 joinder.  More specifically, the court found that all claims arise from the construction of the detention facility, meaning the case will involve a significant amount of overlapping evidence.  Additionally, the court found common questions of fact and/or law exist concerning the claims, such as Dobberstein’s alleged negligent construction, the extent to which the OneBeacon policy covers negligent construction, the subcontract terms as it relates to Roche’s coverage under Dobberstein’s policy with TIC, and whether TIC waived its right to assert certain policy provisions.  Id. at *5.  Accordingly, the court granted Roche’s amended motion to remand, and remanded the case back to the Weld County District Court. 

While you may enjoy success in seeking to join additional parties to one action if you can demonstrate that your claims arise out of the same transaction or occurrence, and will involve a significant amount of overlapping evidence, your success may be limited and/or precluded if the pertinent contract documents contain enforceable forum selection clauses.               
        

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

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[1] According to the U.S. District Court for the District of Colorado, procedural misjoinder generally occurs “when a plaintiff sues a diverse defendant in state court and joins a non-diverse or in-state defendant even though the plaintiff has no reasonable procedural basis to join such defendants in one action.”  Id. at *4.                

[2] The U.S. District Court for the District of Colorado also acknowledged that the Tenth Circuit had not adopted the doctrine of procedural misjoinder, and the court declined to resolve this issue since the application of the procedural misjoinder was not necessary to resolve Roche’s amended motion.