The Great Fallacy: If Builders Would Just Build It Right There Would Be No Construction Defect Litigation

As the 2015 Colorado legislative session gets into full swing, there is a lot of anticipation and discussion regarding this year’s construction defect reform bill.  It seems like every time a reporter broaches this issue in an article, there is a quote from a plaintiffs’ attorney stating that if builders would just build homes right, there would be no need for construction defect litigation. This is the sentiment expressed in the site www.BuildOurHomesRight.com. 

The problem with this argument is that it assumes that the “construction defects” for which associations sue are those only that affect the performance of the homes, or are likely to affect the performance of the homes during the useful life of the component at issue. Unfortunately, this is simply not the case. Over the years, the plaintiffs’ bar has stacked the deck, so to speak, making actionable every technical building code violation, regardless of whether it has any impact, or will ever likely have any impact, on the performance of the homes involved.

In Colorado, when a builder builds and sells a home, it impliedly warrants that the home is built in a good and workmanlike manner, that it is fit for its intended purpose, and that it complies with the applicable building codes. See, e.g., Carpenter v. Donohoe, 388 P.2d 399 (Colo. 1964). Other Colorado courts have likened the breach of implied warranty claim to strict liability for construction defects. See, e.g., Hildebrand v. New Vista Homes II, LLC, 252 P.3d 1159, 1169 (Colo. App. 2010). In short, it does not matter whether the builder acted in a non-negligent manner or whether the alleged defect impacts the performance of the home, or ever will, if it violates the applicable code, the association will call it defective and include it in its construction defect claims.

The problem with this standard is that it is impractically high.  New homes built in Colorado are the only things constructed using hundreds of thousands of parts, most of which are made of natural and imperfect materials, designed and built by human hands, in the elements, over a period of months, where the standard applied is that of perfection. Even the plaintiffs’ attorneys’ favorite experts have testified that this is an impossibly high standard, and one that cannot be achieved. It is for this reason that most builders in Colorado provide their homeowners with express written warranties, assuring the homeowners that when a problem is discovered after construction, it will be repaired.

Until recently, Colorado’s builders could, and often did, disclaim these implied warranties in favor of their own express written warranties. To thwart these efforts, the plaintiffs’ attorneys supported the passage of the Homeowner Protection Act of 2007 (“HPA”). Once enacted, and codified at C.R.S. § 13-20-806(7), this piece of legislation made void as against public policy any restriction on a homeowner’s construction defect claim beyond those found in the Colorado Construction Defect Action Reform Act, C.R.S. § 13-20-801, et seq., or the Colorado Consumer Protection Act, C.R.S. 6-1-101, et seq. This codified, at least as of April 20, 2007, when the HPA went into effect, the strict liability standard for new home construction in Colorado.

During the 2001 and 2003 legislative sessions, during the passage of Construction Defect Action Reform Act I and II (“CDARA I and II”), the Colorado legislature restricted negligence claims to only those which actually effect homeowners or would be likely to do so in the future. In this regard, C.R.S. § 13-20-804 states:

(1) No negligence claim seeking damages for a construction defect may be asserted in an action if such claim arises from the failure to construct an improvement to real property in substantial compliance with an applicable building code or industry standard; except that such claim may be asserted if such failure results in one or more of the following:

(a) Actual damage to real or personal property;

(b) Actual loss of the use of real or personal property;

(c) Bodily injury or wrongful death; or

(d) A risk of bodily injury or death to, or a threat to the life, health, or safety of, the occupants of the residential real property.

While this section is good as far as it goes, the problem is that it doesn’t go far enough. When it was included within CDARA, the legislature had not yet passed the HPA and, when it did, it did not go back and broaden the section to apply to all claims brought in a construction defect action, to include claims for breach of implied warranty.

So what’s the problem with a strict liability, perfection standard in the construction of new homes? In addition to being an impossibly high standard, as discussed above, it also creates an incentive for plaintiffs’ litigation experts to go on fishing expeditions. Rarely do owners in construction defect cases claim only as defective those things that impact the performance of their homes, or those things that are likely to do so in the future. I have seen time and time again letters from plaintiffs’ attorneys to homeowners in multi-family communities indicating that they intend to spend between $3,000 and $5,000 per unit to perform destructive testing to go looking for defects that, until they are found, were unknown to the owners and would likely have remained unknown to the homeowners for the entire time they owned their homes. This is the fishing expedition.  I can all but guarantee that if you were to spend $5,000 to have a plaintiffs’ litigation “forensic engineer” go hunting through any home built in Colorado, he or she could come up with pages and pages of technical building code violations that would never impact the performance of the home, but are none the less actionable under today’s construction defect laws in Colorado. This is the investment made by the plaintiffs’ attorneys, purportedly for the good of the owners, but which in reality just drives up the costs of litigation, the alleged damages in the actions, and, at the end of the day, the plaintiffs’ attorneys’ contingent fees. I have never had a plaintiffs’ attorney tell me what type of return they get on this investment, but I assume that it must be pretty good if they are willing to invest up to $5,000 per unit in a multi-family community.

No one knows what the 2015 Colorado legislative session has in store for the construction community. Whatever happens, I hope that the argument made that if builders would just "build it right" there would be no construction defect litigation falls on deaf ears under the dome at the State Capitol. Unless and until the test for "building it right" becomes something other than absolute perfection, this remains simply a fallacy.   

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

Senator Ray Scott Introduced a Bill to Reduce Colorado’s Statute of Repose for Construction Defect Actions to Four Years

For those of you reading this blog who are familiar with Colorado’s law as it pertains to construction defect actions, which I assume to be anyone reading this blog as it does not seem to get much random traffic, you are probably aware that the statute of repose applicable to construction defect actions in Colorado is generally thought of as being six plus two years. Specifically, C.R.S. § 13-80-104 states, in pertinent part:

(1)(a)  Notwithstanding any statutory provision to the contrary, all actions against any architect, contractor, builder or builder vendor, engineer, or inspector performing or furnishing the design, planning, supervision, inspection, construction, or observation of construction of any improvement to real property shall be brought within the time provided in section 13-80-102 after the claim for relief arises, and not thereafter, but in no case shall such an action be brought more than six years after the substantial completion of the improvement to the real property, except as provided in subsection (2) of this section.

*          *          *

(2) In case any such cause of action arises during the fifth or sixth year after substantial completion of the improvement to real property, said action shall be brought within two years after the date upon which said cause of action arises.

Senate Bill 15-091, introduced on January 14^th and assigned to the State, Veterans, and Military Affairs Committee, would change these provisions to read:

(1)(a) Notwithstanding any statutory provision to the contrary, all actions against any architect, contractor, builder or builder vendor, engineer, or inspector performing or furnishing the design, planning, supervision, inspection, construction, or observation of construction of any improvement to real property shall be brought within the time provided in section 13-80-102 after the claim for relief arises, and not thereafter, but in no case shall such an action be brought more than six THREE years after the substantial completion of the improvement to the real property, except as provided in subsection (2) of this section.

*          *          *

(2) In case any such IF A cause of action SUBJECT TO THIS SECTION arises during the fifth SECOND or sixth THIRD year after substantial completion of the improvement to real property, said THE action shall MUST be brought within two years ONE YEAR after the date upon which said THE cause of action arises.

While I have not seen yet the reaction to this bill from the construction defect plaintiffs’ attorneys, other than Heidi Storz’s quotes in the recent Denver Business Journal article by Ed Sealover, I imagine that it will receive a strong and determined opposition. I assume that one of the arguments we will hear will refer to a paper published years ago by the Colorado Association of Geotechnical Engineers, according to which, damage to homes suffering from the effects of expansive soils typically manifests somewhere between the fourth and seventh years after substantial completion. The argument I assume to be coming will be that builders are trying to insulate themselves from these types of cases by cutting off owners’ rights to seek redress before they even know they have problems.

We will continue to watch the legislature for bills impacting construction law in Colorado and will monitor the progress of such bills, including Senate Bill 91. I am not sure how far this bill will make it, but I hope that it does not cause too much distraction or confusion of issues if and when Senator Ulibarri introduces his attainable housing bill, thought to be coming soon and to be similar to last year’s effort, Senate Bill 14-220.

If you have any questions regarding construction law or the litigation of construction defect claims in Colorado, you can reach David M. McLain by e-mail at McLain@hhmrlaw.com or by telephone at (303) 987-9813.

Coloradoans Deserve More Than Hyperbole and Rhetoric From Plaintiffs’ Attorneys; We Deserve Attainable Housing

As the 2015 Colorado legislative session gets underway, the media attention and discussion regarding the lack of attainable housing, skyrocketing rental rates, and the ongoing state and local efforts to reverse these trends have risen to a dull roar. The hyperbole and rhetoric from those who would oppose any reforms has risen to cacophonous levels.

Among the most often quoted talking points from the opposition are that any changes to Colorado’s existing laws would strip homeowners of their right to seek redress for construction defects and that they would virtually insulate construction professionals from such claims.  The long and the short of it is that if this year’s legislation looks anything like SB 220 from last year, nothing could be further from the truth. The two main provisions from SB 220 were: 1) protection of a construction professional’s ability to resolve construction defect claims through arbitration; and 2) requirement of informed consent of more than 50% of the owners within a common interest community before a construction defect action could begin. Neither of these changes would strip homeowners of any rights and they certainly would not insulate construction professionals from construction defect actions.

There is No Right to a Jury Trial in Civil Actions

One of the opposition’s favorite arguments is that requiring arbitration of construction defect claims unfairly infringes upon homeowners’ “rights” to have their cases tried to a jury of their peers. The problem with this argument is that it is simply not true. There is no constitutional right in Colorado to have your civil action tried to a jury. See Colorado Constitution, Article II, § 23 (“The right of trial by jury shall remain inviolate in criminal cases…”); see also Garhart ex rel. Tinsman v. Columbia/Healthone, LLC, 95 P.3d 571, 580 (Colo. 2010) (“[T]he Colorado constitutional right to a jury applies to criminal cases, not civil cases…”).

Despite the opposition’s view of arbitration, the simple fact is that in Colorado, arbitration is a favored method of dispute resolution.  Peterman v. State Farm Mut. Auto. Ins. Co., 961 P.2d 487, 493 (Colo. 1998).  The Colorado Constitution, statutes, and case law all support agreements to arbitrate disputes.  See Lane v. Urgitus, 145 P.3d 672 (Colo. 2006).  Colorado public policy strongly favors the resolution of disputes through arbitration. See Huizar v. Allstate Ins. Co., 952 P.2d 342 (Colo. 1998); Byerly v. Kirkpatrick Pettis Smith Polian, Inc., 996 P.2d 771 (Colo. App. 2000).

In fact, the Colorado Common Interest Act, the law giving rise to common interest communities and empowering the very homeowners associations which bring construction defect actions, states:

The General Assembly hereby specifically endorses and encourages associations, unit owners, managers, declarants, and all other parties to disputes arising under this article to agree to make use of all available public or private resources for alternative dispute resolution, including, without limitation, the resources offered by the office of dispute resolution within the Colorado judicial branch through its website.

C.R.S. § 38-33.3-124(1)(a)(II).

This same section concludes with the following subsection:

The declaration, bylaws, or rules of the association may specify situations in which disputes shall be resolved by binding arbitration under the uniform arbitration act, part 2 of article 22 of title 13, C.R.S., or by other means of alternative dispute resolution under the “Dispute Resolution Act,” part 3 of article 22 of title 13, C.R.S.

The most hypocritical part of this argument, from the opposition’s perspective, is that some of the very plaintiffs’ attorneys now championing the “right” to jury trials have arbitration clauses in their own engagement letters, signed by homeowners associations when the associations hire the attorneys to represent them in construction defect actions. Perhaps the “right” to a jury trial only applies when the associations sue construction professionals for construction defects, not when they sue plaintiffs’ attorneys for malpractice.

Requiring Informed Consent Does Not Insulate Construction Professionals From Construction Defect Claims

One of the most often repeated arguments against requiring informed consent from a majority of owners in a development before a construction defect action can be initiated is that developers/declarants typically own a number of homes within a community while they remain unsold and that the declarant could frustrate the consent requirement by voting against the construction defect action.  To the extent that the legislature views this to be a legitimate concern, one way to deal with it would be to make clear that a declarant cannot vote in the election regarding whether to proceed with a construction defect action. I have seen this written into several declarations for homeowners associations, and it would seem to eliminate the problem highlighted by the opposition. Once that concern is ameliorated, would the opposition continue to argue against a homeowner’s right to have a say as to whether his or her community should engage in a construction defect action?

At the end of the day, homes are one of the largest investments people may make in their lives and it seems only right that they should have a say as to whether their association will proceed with a construction defect action on their behalf, after being fully informed as to the consequences of taking that action.

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

Colorado Legislators Need to Fix Barriers to Attainable and Affordable Homeownership

Rents Soar and Condo Construction Stalls, creating “Housing Squeeze”

Colorado’s economy is dependent on a strong housing market that includes diverse and attainable options.  Despite strong demand, communities across Colorado face a growing shortage of one of the most critical options—owner-occupied, multi-family housing. Condo and townhome construction has effectively ground to a halt due in part to concerns among builders about the growing number of lawsuits over construction issues.

Today, condos represent just 3.1 percent of new housing starts, compared to nearly 23 percent in 2007.  Because of this, would-be first-time homebuyers have significantly fewer options and are increasingly being forced into the skyrocketing rental market. The lack of owner-occupied, multi-family options also leaves behind seniors who are looking to downsize from single-family homes.

Colorado Heading Into a “Housing Squeeze”

A recent Sunday Denver Post front-page article focused on the “Housing Squeeze” and raised concerns over how “rising costs could move from a personal crisis to an economic drag” for families—and the state’s economy. Another Post story noted that renters “need to make $35 per hour, or almost 4½ times Colorado’s minimum wage” to afford the median metro Denver rental rate.

Legislature Can No Longer Wait to Address this Problem

The General Assembly needs to enact bipartisan common-sense reforms that reduce the threat of

expensive, time-consuming litigation; increase the supply of attainable housing; and protect the rights of all homeowners in a community. The Homeownership Opportunity Alliance is working with the General Assembly to enact legislation that will:

• Create a quick resolution process that is fair to homeowners who need repairs while protecting the rights of all owners in a community;
• Allow construction of more diverse and affordable housing options, closer to downtown and work, so that young workers can own rather than rent and seniors can make housing choices;
• Encourage new developments near light rail and transit stations that provide easy access to commuting, shopping and urban-living options, and promote density and sustainable housing options that consumers want but cannot access currently; and
• Foster conditions that will encourage builders to construct more affordable housing and thereby provide increased home ownership opportunities.

It’s time to fix Colorado law with common-sense steps that open the door to attainable home ownership while protecting the legal rights of all homeowners in a community. For more information and to take action, please visit:

homeownersopportunity.org 

facebook.com/Housing4CO 

@Housing4CO

Homeownership Opportunity Alliance Coalition 

• American Council of Engineering   Companies of Colorado
• American Subcontractors Association
• Apartment Association of Metro Denver
• Associated Builders and Contractors
• Associated General Contractors
• Building Jobs 4 Colorado
• Colorado Association of Commerce & Industry
• Colorado Association of Home Builders
• CO Association of Mechanical & Plumbing Contractors
• CO Association of Plumbing-Heating-Cooling Contractors
• Colorado Association of REALTORS®
• Colorado BUILDS
• Colorado Business Roundtable
• Colorado Civil Justice League
• Colorado Competitive Council
• Colorado Concern
• Colorado Contractors Association
• Colorado Hotel & Lodging Association
• Denver Metro Chamber of Commerce
• Denver South Economic Development Partnership
• Douglas County Commissioners
• Downtown Denver Partnership
• Heating, Air-Conditioning, Refrigeration Professionals
• Hispanic Contractors of Colorado
• Hope Communities
• Housing Colorado
• Independent Electrical Contractors
• Metro Denver Economic Development Corp.
• Metro Mayors Caucus
• NAIOP Colorado
• National Electrical Contractors
• Sheet Metal & Air Conditioning Contractor
• Transit Alliance

Mayors

• Marc Williams, Arvada
• Steve Hogan, Aurora
• Sue Horn, Bennet
• Dick McLean, Brighton
• Rick Pilgrim, Bow Mar
• Randy Ahrens, Broomfield
• Jeffrey Huff, Castle Pines
• Cathy Noon, Centennial
• Doug Tisdale, Cherry Hills Village
• Gale Christy, Columbine Valley
• Sean Ford, Commerce City
• Michael Hancock, Denver
• Randy Penn, Englewood
• Tony Carey, Frederick
• Marjorie Sloan, Golden
• Ron Rakowsky, Greenwood Village
• Bob Murphy, Lakewood
• Phil Cernanec, Littleton
• Jim Gunning, Lone Tree
• Joe Gerlach, Nederland
• Joyce Thomas, Northglenn
• Mike Waid, Parker
• Dallas Hall, Sheridan
• Herb Atchison, Westminster
• Joyce Jay, Wheat Ridge

Another Case Highlighting the Difference Between CGL Policies and Performance Bonds

During the summer of 2011, Ellis Construction hired Cool Sunshine Heating & Air Conditioning to install the HVAC systems in a single-family home it was building for Gary Doberman and Ellen Robertson in Boulder, Colorado. The homeowners took issue with much of the work performed on their home and tried to negotiate directly with Ellis Construction. When those negotiations broke down, the homeowners sent a notice of claim pursuant to the Construction Defect Action Reform Act, C.R.S. § 13-20-801, et seq. One of the defects alleged in the notice of claim was that the SEERS 13 compressor installed by Cool Sunshine was inappropriate for the system and that because it was installed to run on only one stage, it did not meet the City of Boulder’s code requirements for noise levels. The homeowners therefore requested that the compressor be replaced with a SEERS 20 compressor, which would comply with the Boulder City Code.

When negotiations fell apart, the homeowners filed a lawsuit against Ellis Construction and many of its subcontractors, including Cool Sunshine. The claims against Cool Sunshine included breach of implied warranty and negligence. Cool Sunshine tendered a copy of the complaint to American Family, which had issued Cool Sunshine the CGL insurance policy in effect at the time. American Family denied coverage and declined to provide a defense to Cool Sunshine. Thereafter, Ellis Construction filed cross-claims against its subcontractors, including Cool Sunshine, for breach of contract, breach of warranty, indemnification, and contribution. There was no evidence that Cool Sunshine ever tendered these cross-claims to American Family.

After Cool Sunshine settled the claims against it, and was dismissed from the lawsuit with prejudice, Cool Sunshine filed a declaratory judgment action against American Family in the U.S. District Court for the District of Colorado seeking a ruling that American Family had an obligation to provide a defense against the homeowners’ lawsuit, and for breach of contract based on American Family’s failure to conduct a reasonable investigation into the homeowners’ claims, to provide a defense against the claims, or indemnify Cool Sunshine for the settlement. Cool Sunshine also brought claims for statutory bad faith breach of contract and for violation of the Colorado Consumer Protection Act. During the pendency of this suit Cool Sunshine and American Family filed cross-motions for summary judgment regarding whether American Family had a duty to provide Cool Sunshine a defense against the homeowners’ claims.

In his order on these motions, Judge William J. Martinez denied Cool Sunshine’s motion and granted American Family’s motion. Cool Sunshine Heating & Air Conditioning, Inc. v. American Family Mut. Ins. Co., 2014 WL 7190233, (D. Colo. December 17, 2014). In his order, Judge Martinez started his analysis by quoting the tenets of Colorado coverage law, including the following:

·         “An insurance company owes its insured a ‘duty to affirmatively defend its insured against pending claims.’”;

·         “An insurer seeking to avoid its duty to defend an insured bears a heavy burden.”;

·         “The insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot.”;

·         “An insurer has a duty to defend unless it can show that: (1) the allegations of the complaint against the insured describe only situations which are within the policy exclusions; and (2) there is no factual or legal basis on which the insurer might be held liable to indemnify the insured.”; and

·         “The obligation to defend is not determined by the insured’s actual liability to the claimant; instead, the duty to defend arises when the allegations in the complaint, if sustained, would impose a liability covered by the policy.”

Id. at 2 (internal citations omitted).

With this legal framework as a backdrop, Judge Martinez pointed out that “[f]aulty workmanship can constitute an occurrence that triggers coverage under a [commercial general liability] policy if (1) the property damage was not caused by purposeful neglect or knowingly poor workmanship, and (2) the damage was to non-defective portions of the contractor’s or subcontractor’s work or to third-party property.” Id. at 3 (quoting Greystone Constr., Inc. v. Nat’l Fire & Marine Ins. Co., 661 F.3d 1272, 1286-87 (10^th Cir. 2011). In this case, there was no allegation of property damage to any non-defective portion of Cool Sunshine’s work. For that reason, Judge Martinez found that neither the notice of claim nor the complaint contained allegations that could reasonably come within coverage of American Family’s policy. In so ruling, Judge Martinez quoted favorably a Tennessee case that held, “the cost to repair a defectively installed product does not constitute ‘property damage’ unless the defective product causes some damage to the property outside of the cost to replace the defective product.” Id. at 4 (citing Travelers Indem. Co. of Am. v. Moore & Assoc., 216 S.W.3d 302, 310 (Tenn. 2007).

Judge Martinez continued by pointing out that even if the installation of an inferior compressor constituted property damage under American Family’s policy, there would still be no coverage for the claims against Cool Sunshine because of the exclusions in the policy related to damage to the insured’s own work. According to exclusion 2.l of the policy, the policy did not cover property damage to “your work” arising out of it or any part of it. Judge Martinez quoted Farmington Cas. Co. v. Duggan, 417 F.3d 1141, 1143 (10^th Cir. 2005) stating: “Damage to an insured’s own work resulting from his faulty workmanship on it is usually covered by a performance bond, not a commercial general liability policy.” “Commercial liability policies are not intended to protect the insured from unsatisfactory performance of a contract.” United Fire & Cas. Co. v. Boulder Plaza Residential, LLC, 633 F.3d 951, 959 (10^th Cir. 2011).

Judge Martinez dispensed with Cool Sunshine’s last argument, that the homeowners alleged bodily injury (emotional distress and anxiety), which American Family acknowledged did not fall squarely within any of the policy’s exclusions, by pointing out that “Colorado law establishes that ‘bodily injury’ in the context of a commercial liability policy does not include emotional distress.” Id. at 5 (citing Nat’l Cas. Co. v. Great Southwestern Fire Ins. Co., 833 P.2d 741, 746-47 (Colo. 1992).

Based on the foregoing, Judge Martinez held as a matter of law that the claims against Cool Sunshine describe only situations which fall clearly within the policy’s exclusions. As there were no claims asserted which could form the basis for creating a duty for American Family to indemnify, American Family had no duty to defend.

For additional information about the Cool Sunshine case or about construction law in Colorado, you can reach David M. McLain by e-mail at McLain@hhmrlaw.com or by telephone at (303) 987-9813.