Association Insurance Company v. Carbondale Glen Lot E-8, LLC: Federal Court reaffirms that there is no duty to defend or indemnify a builder for defective construction work

In a case that squarely confronts the juxtaposition of an insurer’s duty to defend or indemnify its insured for construction related defects, the United States District Court for the District of Colorado recently granted an insurer’s motion for summary judgment on both matters against a construction subrogee, in Ass’n Ins. Co. v. Carbondale Glen Lot E-8, LLC, No. 15-cv-02025-RPM, 2016 WL 9735743, at *1 (D. Colo. Oct. 10. 2017).

Mountainview Construction Services, LLC (“MCS”) served as the general contractor for the construction of a residence on a lot owned by Glen Lot E-8, LLC (“E-8”).  MCS took out a Commercial General Liability Policy (“Policy”) with Association Insurance Company (“AIC”) that provided coverage to MCS for the relevant time period for the construction of the residence.  E-8 then asserted a series of claims against MCS, based on the allegation that MCS and its subcontractors defectively constructed the home by, among other things, building the residence two feet too high in violation of applicable codes.  E-8 also argued that MCS and its subcontractors made significant alterations and/or deviations from the original project specifications without obtaining E-8’s consent or approval from relevant authorities.   MCS tendered the claim to AIC for defense and indemnity.  In turn, AIC declined coverage on the argument that the Policy precluded any coverage for defective work MCS may have performed on the project, absent damage to person or other property.

MCS and E-8 subsequently settled all of E-8’s claims against MCS.  As part of the settlement terms, however, MCS assigned all of its rights against AIC to E-8 related to AIC’s refusal to defend and indemnify MCS.  In the ensuing action by E-8 against AIC, AIC moved for summary judgment on its declaratory judgment claim.  In doing so, AIC argued that the relevant Policy language prevented it from defending or indemnifying MCS for the allegations contained in E-8’s operative complaint against MCS in the underlying action.

In holding that AIC did not owe MCS any duty to defend it for E-8’s claims, Judge Richard Matsch first delved into the relevant language of the Policy.  Indeed, the Policy provided in pertinent part that AIC would cover and pay sums to MCS for “bodily injury” or “property damage” to property which the Policy covered.  The Policy, however, defined property damage as follows:

a. Physical injury to tangible property, including all resulting loss of use of that property.  All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or

b. Loss of use of tangible property that is not physically injured.  All such loss of use shall be deemed to occur at the time of the ‘occurrence’ that caused it.

Construing the foregoing language, the Judge Matsch held that AIC did not have a duty to defend MCS against E-8’s claims because E-8 did not allege “physical injury to tangible property,” or “loss of use of tangible property that is not physically injured.”  Rather, E-8’s allegations against MCS made clear that its grievance stemmed from a defectively built house.  What is more, E-8 never implied in its complaint that the flawed workmanship “caused the loss of use of some other tangible property that was not physically injured.”  The court also stressed that the Policy’s exclusionary language that prohibited coverage for faulty workmanship, effectively put an end to any duty on AIC’s part to defend or indemnify MCS for any defect, deficiency, or inadequacy germane to MSC’s work on the project.

Having been precluded from coverage based on the Policy language, E-8 then argued that C.R.S. § 13-20-808 effectively mandated a duty to defend on AIC’s part since the duty is triggered where there is a “potentially covered liability” against a “construction professional concerning a construction defect.”  Even so, the court noted that the duty to defend under the statute is still subject to the express terms of the Policy language between an insurer and its insured, and the duty is not triggered where the claims at issue are not covered by the insurance policy.  For the foregoing reasons, the court held that AIC had no duty to defend or indemnify MCS pursuant to the Policy.  Accordingly, the court entered summary judgment in AIC’s favor and dismissed all of E-8’s counterclaims against AIC.

In application, the ruling reaffirms the well-established principle that the express terms of a policy will continue to be the benchmark with which courts determine an insurer’s duty to provide coverage, in the absence of any contravention of public policy.  Further, policy language that expressly discounts coverage for a contractor’s substandard work on a project, absent injury to person or other property, remain enforceable provisions.  The public policy underlying this appears to be the need to discourage shoddy workmanship and to provide contractors the incentive to avoid preventable defective work during the construction of a project.   

For more information about the Association Insurance Company v. Carbondale Glen Lot E-8, LLC case or about construction law in Colorado, you can reach David McLain by e-mail at mclain@hhmrlaw.com or by telephone at (303) 987-9813.

Recent Changes in the Law Affecting Construction Defect Litigation

At Long Last, the Colorado Legislature Passed Construction Defect Reform

By David M. McLain

On May 23, 2017, Governor Hickenlooper signed HB17-1279 into law.  The bill states that before an HOA’s executive board can institute a construction defect action, it must provide notice of the anticipated commencement of the action to each of the HOA’s unit owners, along with certain disclosures about the anticipated action.  The bill also requires that the HOA executive committee convene a meeting of the unit owners to consider the action, and that the construction professionals against which the claim is being brought have the opportunity to address the members of the HOA.  The bill also states that the HOA executive committee may only initiate a construction defect action if it is approved by “owners of units to which a majority of votes in the association are allocated.” 

While this sounds good, the bill goes on to state that for purposes of calculating the required majority vote, the following votes are excluded:

1. Any votes allocated to units owned by a contractor, subcontractor, developer, or builder responsible for any part of the design, construction, or repair of any portion of the common interest community, or any affiliate of such a party, including any entity controlled or owned, in whole or in part, by any person that controls or owns the company, or by the spouse of such a person.
2. Any votes allocated to units owned by banking institutions, unless a vote from such an institution is actually received by the association.
3. Any votes allocated to units of a product type in which no defects are alleged, in a common interest community whose declaration provides that common expense liabilities are not shared between the product types.
4. Any votes allocated to units owned by owners who are deemed “nonresponsive”.

The problem with this is that the exclusions render the informed consent meaningless.  Prior to HB17-1279, a declaration could provide that in order for an association to have standing to sue for construction defects, it had to obtain the informed consent of up to 67% of the owners within the community, with no exclusions.  For example, in a common interest community of 100 units, the association would need to obtain the affirmative vote of 67 of the units owners within the community, regardless of ownership, in order to proceed with a construction defect action.  That is no longer the case under HB17-1279.

Under HB17-1279, the HOA’s executive committee needs only the approval of a simple majority of responsive owners in order to proceed with an action.  Two years ago, a plaintiffs’ construction defect attorney that also sits on the executive committee for his HOA testified at the Colorado legislature that even on uncontested issues, it is rare for his HOA to receive a response rate above 20% of the total membership.  Assuming that response rate is reflective of most associations, under the same example above and under HB17-1279, if an HOA were to send out 100 ballots seeking approval of a construction defect action and get back only 20 ballots, it could proceed with an action so long as 11 votes were in favor of an action.

That said, there remains some question among the legal community as to the effectiveness of a 67% supermajority clause in a declaration.  There are those among defense attorneys who questioned whether such clauses were ever enforceable, and there are no appellate cases upholding such clauses, so it is not as though the decision was made to trade 67% for a simple majority of responsive owners.  In fact, if the 67% supermajority clauses were not enforceable, a simple majority of responsive owners is still a higher threshold than the executive committee making the decision itself.  

Colorado Supreme Court Upholds “Consent-to-Amend” Provision in an HOA’s Declaration. A Step in the Right Direction.   

On June 5, the Colorado Supreme Court announced the Vallagio at Inverness Residential Con. Ass’n v. Metro. Homes, Inc., No. 15SC508, 2017 CO 69 (Colo. June 5, 2017) decision.  By way of background, Metro Inverness, LLC developed the Vallagio at Inverness Residential Condominiums and served as the declarant for its homeowners association.  When it set up the Association, the Declarant included within the Association’s declaration a mandatory arbitration provision specific to construction defect claims. This provision stated that it “shall not ever be amended without the written consent of Declarant and without regard to whether Declarant owns any portion of the Real Estate at the time of the amendment.”

The HOA purportedly amended the declaration to remove the arbitration provision, without the Declarant’s consent, and filed a construction defect lawsuit in district court.  The defendants moved to compel arbitration, relying on the arbitration provision for construction defect claims and arguing that the purported amendment to remove it was invalid because the unit owners did not obtain the Declarant’s consent for the amendment. The Association, in response, argued that the unit owners validly amended the declaration to remove the arbitration provision and that the declarant consent requirement violated the Colorado Common Interest Act (“CCIOA”).

Briefing and arguments on this issue made their way from the district court, through the Colorado Court of Appeals, and ultimately to the Colorado Supreme Court, which agreed to decide two issues:

1. Did CCIOA permit a developer-declarant to retain a right of consent to amendments to a provision of a common interest community’s declaration mandating arbitration of construction defect claims.
2. Were claims brought under the Colorado Consumer Protection Act, §§ 6-1-101 to -1121, C.R.S. (2016) (“CCPA”) arbitrable.  In response to these questions, the Supreme Court made short work of the arguments advanced by the Association and concluded that CCIOA did not void the declarant “consent-to-amend” provisions and that CCPA claims are arbitrable.

In sum, the Supreme Court’s decision is certainly a positive development for the Colorado construction community as it preserves the builder’s ability to enforce arbitration provisions in construction defect cases.  To protect your ability to arbitrate any construction defect claims brought against you by an association, be sure to include a declarant “consent-to-amend” provision in the association’s declaration. 

- Reprinted from Colorado Builder Forum (Summer 2017)

Vallagio v. Metropolitan Homes: Colorado Supreme Court Upholds Declarant Consent Provision to Amend Arbitration Out of Declarations

On June 5, 2017, the Colorado Supreme Court announced the Vallagio at Inverness Residential Con. Ass’n v. Metro. Homes, Inc., No. 15SC508, 2017 CO 69 (Colo. June 5, 2017) decision. In short, the Colorado Supreme Court upheld the validity of declarant “consent-to-amend” provisions and expressly held that claims under the Colorado Consumer Protection Act are arbitrable.

By way of background, the Vallagio at Inverness Residential Condominiums were developed by Metro Inverness, LLC, (“Declarant”) which also served as the declarant for its homeowners association. Metropolitan Homes was Metro Inverness’ manager and the general contractor on the project. Greg Krause and Peter Kudla served as declarant-appointed members of the Association’s board during the period of declarant control.

When it set up the Association, the Declarant included within the Association’s declaration a mandatory arbitration provision specifically for construction defect claims. This provision stated that it “shall not ever be amended without the written consent of Declarant and without regard to whether Declarant owns any portion of the Real Estate at the time of the amendment.”

The HOA purportedly amended the declaration to remove the arbitration provision, without the Declarant’s consent and filed a construction defect lawsuit in district court.  The defendants moved to compel arbitration, relying on the arbitration provision for construction defect claims and arguing that the purported amendment to remove it was invalid because the unit owners did not obtain the Declarant’s consent for the amendment. The Association, in response, argued that the unit owners validly amended the declaration to remove the arbitration provision and that the declarant consent requirement violated the Colorado Common Interest Act (“CCIOA”).

The district court denied the defendants’ motion to compel arbitration, concluding that the Declarant’s consent was not required to remove the arbitration provision because, inter alia, the declarant consent requirement violated CCIOA and was, therefore, void and unenforceable. Specifically, the district court held that the declarant consent provision violated C.R.S. § 38-33.3-302(2), which provides: “The declaration may not impose limitations on the power of the association to deal with the declarant that are more restrictive than the limitations imposed on the power of the association to deal with other persons.” The court also found that the declarant consent provision violated C.R.S. § 38-33.3-217(1)(a)(I), which states:

[T]he declaration . . . may be amended only by affirmative vote or agreement of unit owners to which more than fifty percent of the votes in the association are allocated or any larger percentage, not to exceed sixty-seven percent, that the declaration specifies. Any provision in the declaration that purports to specify a percentage larger than sixty-seven percent is hereby declared void as contrary to public policy, and until amended, such provision shall be deemed to specify a percentage of sixty-seven percent.

The Declarant then brought an interlocutory appeal to the Colorado Court of Appeals and a division of that court reversed the district court’s denial of the motion to compel arbitration. Vallagio at Inverness Residential Condo. Ass’n v. Metro. Homes, Inc., 2015 COA 65, ¶¶ 1, 72, __P.3d__.

Thereafter, the petitioner, Vallagio at Inverness Residential Condominium Association, Inc. (the “Association”), petitioned the Colorado Supreme Court, which granted certiorari in order to answer two chief questions: 1) did CCIOA permit a developer-declarant to retain a right of consent to amendments to a provision of a common interest community’s declaration mandating arbitration of construction defect claims, and; 2) were claims brought under the Colorado Consumer Protection Act, §§ 6-1-101 to -1121, C.R.S. (2016) (“CCPA”) arbitrable. In response to these questions, the Supreme Court concluded that CCIOA did not void the declarant “consent-to-amend” provisions and that CCPA claims are arbitrable.

Underlying its decision, the Supreme Court was unpersuaded by the Association’s three principle arguments that the “consent-to-amend” provision was violative of CCIOA. Specifically, the Association argued that the “consent-to-amend” provision was void for the following reasons: 1) the provision exceeded the 67% voting threshold established by C.R.S. § 38-33.3-217(1)(a)(I), for amending a declaration; 2) it was a device intended to evade the foregoing 67% limitation and thus is proscribed by C.R.S. § 38-33.3-104, and; 3) in violation of C.R.S. § 38-33.3-302(2), it imposed limitations on the power of the Association to deal with the Declarant that were more restrictive than the limitations imposed on the power of the Association to deal with other persons.

The Supreme Court ultimately made short work of the arguments advanced by the Association. First, the Supreme Court agreed with the Court of Appeals’ conclusion that nothing in CCIOA precluded a declaration from imposing additional requirements (i.e., non-percentage based requirements) for amendments. The Supreme Court illustrated this conclusion by evaluating other provisions of CCIOA that expressly contemplated such additional requirements.

Second, the Supreme Court was similarly unpersuaded with the Association’s second argument because it appeared to be premised on the Association’s first argument, that CCIOA establishes an absolute 67% voting limitation, and the Supreme Court concluded that the “consent-to-amend” provision did not contravene any of CCIOA’s policies or purposes. The Supreme Court supported the later conclusion by noting that CCIOA patently permits a declaration to “specify situations in which disputes shall be resolved by binding arbitration. . .” In this context, the Supreme Court concluded that it was unable to find that the “consent-to-amend” provision evaded the limitations of CCIOA.

In response to the Association’s third argument, with respect to C.R.S. § 38-33.3-302(2), the Supreme Court recognized that the Association had no power to amend the declaration. Rather, the Supreme Court concluded that CCIOA provides that unit-owners, not the Association, have the power to amend the declaration by a 67% vote. Therefore, the “consent-to-amend” provision did not impose any limitation on “the power of the association” under C.R.S. § 38-33.3-302(2).

Lastly, turning to the Association’s argument that CCPA claims were not arbitrable, the Supreme Court was not persuaded by the Association’s proposition that the statutory right to file a civil action may not be waived pre-dispute. In coming to this conclusion, the Supreme Court noted that the CCPA contains no language expressly precluding a waiver of a “court action” found in the statutes that Association sought to analogize. Nor was the Supreme Court persuaded by the Association’s assertion that the Colorado Construction Defect Action Reform Act (“CDARA”) precluded a waiver of a plaintiff’s CCPA claims, given that CDARA expressly envisions the possibility of an arbitration proceeding involving CCPA claims. See C.R.S. § 13-20-806(7)(a).

For these reasons and others, the Supreme Court concluded that the “consent-to-amend” provision was enforceable and consistent with CCIOA and that claims for violations of the CCPA may be properly arbitrated. In sum, the Supreme Court’s decision is certainly a positive development for the Colorado construction community as it preserves the builder’s ability to enforce arbitration provisions in construction defect cases.

For additional information regarding Vallagio v. Metropolitan Homes or about construction defect litigation in Colorado, generally, you can reach Jean Meyer by telephone at (303) 987-9815 or by e-mail at meyer@hhmrlaw.com.

Taylor Morrison v. Terracon: Adjustment of Verdicts to Account for Others’ Liability and Contractual Limitation of Liability Clauses

In a case of first impression, a division of the Colorado Court of Appeals weighed in on how a trial court should adjust a jury verdict against a contractor when two critical components are still at play: (1) a setoff from other liable parties and (2) a clause in the contract limiting liability.   In short, the court concluded the correct approach is to first apply the setoff against the jury verdict and then apply the contractual limitation against the recoverable amount. 

The facts in Taylor Morrison of Colorado, Inc. v. Terracon Consultants, Inc., 2017 COA 64, highlight the massive difference in what order the court factors in the setoff from the contractual liability.  In this case, Taylor Morrison of Colorado, Inc. (“Taylor Morrison”), was the developer of a residential subdivision.  Terracon Consultants, Inc. (“Terracon”) was the geotechnical engineering firm which performed services at the project. In a written contract, Terracon was responsible for testing the soil for compliance with project specifications and building codes. Taylor Morrison and Terracon further agreed to place a cap on Terracon’s total liability to Taylor Morrison at $550,000 for any and all damages or expenses arising out of its services or the contract.

Several years after Terracon performed its work, the homeowners sued Taylor Morrison alleging cracks in the drywall of their houses, and Taylor Morrison in turn sued Terracon and various subcontractors for damages relating to those defects.  Among other reasons, Taylor Morrison attempted to void the limitation of liability clause on the ground that Terracon’s conduct was willful and wanton.  The court dismissed Terracon after it depositing $550,000 in the court registry.  Taylor Morrison proceeded to trial against other subcontractors and settled for $592,000 with remaining subcontractors. 

Taylor Morrison appealed the court’s dismissal of its willful and wanton claim Terracon on the ground that it should have been allowed to introduce evidence of Terracon’s willful and wanton conduct so as to void the limitation of liability clause.  The appellate court remanded the case to determine whether Taylor Morrison should have been allowed to introduce such evidence.  The trial court concluded that Taylor Morrison should have been able to, so it ordered a new trial against Terracon alone.  At the trial, the jury awarded Taylor Morrison $9,586,056 in damages.  Despite the large verdict, after reviewing post-trial briefings, the court entered a final judgment of zero dollars due from Terracon to Taylor Morrison. 

The trial court arrived at this result by applying the contractual limitation of liability to reduce the jury verdict of $9,586,056 down to the limitation of $550,000.  Finally, it then deducted the $592,500 setoff from the prior settlement from the other parties against the $550,000 to arrive at zero dollars owed. 

Taylor Morrison appealed again and contended that the trial court erroneously deducted the $592,500 setoff from Terracon’s contractual limitation of liability of $550,000 rather than deducting the setoff from the $9,586,056 jury damages verdict.  The appellate court agreed.

Consequently, the court concluded that the trial court must first apply the setoff against the jury verdict to ascertain the allowable amount of recovery, and then apply any contractual limitation against this reduced amount.  “This approach prevents double recovery by the plaintiff, preserves the parties’ right to have the terms of a contract enforced, and best gives effect to the jury verdict.” Taylor, 2017 COA 64, ¶ 25.

In application, this would mean the court should have applied the $592,500 setoff to the $9,586,057 jury verdict.  This would have resulted in a new total of $8,993,556.  The trial court then should have applied limitation of liability and reached a final judgment of $550,000 due from Terracon to Taylor Morrison.  The Court of Appeals remanded the case back to the trial court to enter this new judgment.

For more information regarding the Taylor Morrison v. Terracon lawsuit or about construction defect litigation in Colorado, you can reach David McLain by telephone at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.

Colorado Homebuyers Must be in Privity of Contract with Developer to Assert Breach of Implied Warranty of Suitability.

On April 17, 2017, the Colorado Supreme Court announced its decision in Forest City v. Rogers, No. 15SC1089, 2017 CO 23 (Colo. Apr. 17, 2017). The Court held that privity of contract is necessary for a homebuyer to assert a claim for breach of implied warranty of suitability against a developer. In other words, one must be a party to a contract to pursue a claim for breach of any implied warranty of suitability therein.

Defendant Forest City was the developer of a mixed use property in Stapleton. Forest City subdivided the land and sold the vacant lot at issue to a professional builder, Infinity. Infinity then built a residence and sold it to the plaintiff, Tad Rogers. After moving into the home, Rogers came to believe that the water table beneath the house along with calcite leaching from the road material led to a buildup of calcite in the foundation drain, making the basement uninhabitable and causing the sump pump to work overtime. Rogers sued Forest City on various theories, including breach of the warranty of suitability. In particular, Rogers alleged that Forest City impliedly warranted to him that his lot was suitable for a home with a finished basement, when in fact it was not. He prevailed on this claim at the trial court level.

On appeal, a divided Colorado Court of Appeals held that the implied warranty of suitability can exist between a developer who sells a vacant lot and a homeowner who is not the first purchaser of the lot if (1) the developer improves the lot for a particular purpose and (2) all subsequent purchasers rely on the developer's skill or expertise in improving the lot for that particular purpose. Rogers v. Forest City Stapleton, Inc., 2015 COA167M, ¶ 19 (Dec. 17, 2015). In reaching that determination, the Court of Appeals cited the comparative expertise of the developer to the homebuyer and, in extending protection to subsequent purchasers, adopted the reasoning of an Indiana Court of Appeals case from 1989. Id. at ¶ 16 (citing Jordan v. Talaga, 532 N.E.2d 1174 (Ind. Ct. App. 1989) (theorizing that absent an implied warranty of proper drainage extending from the developer to the homeowner “unscrupulous developers would be vested with impunity to develop marginal and unsuitable land” and “[h]omeowners would be left without a remedy for latent undisclosed defects in real estate not chargeable to the builder.”)) The appellate court did not ultimately reach the issue of whether the implied warranty of suitability existed in the case at hand, however, because the trial court did not properly instruct the jury and the jury did not make the relevant factual findings. Forest City and Rogers both filed petitions for certiorari.

The Colorado Supreme Court reasoned that, by their very nature, implied warranties are contractual obligations – promises implied in contracts – and thus breaches of these implied warranties give rise to contract claims that must be analyzed according to contract principles. Privity of contract is an established contractual principle that requires that one must be a party to a contract to enforce a term in the contract or an implied warranty arising out of the contract. Therefore, for a homebuyer to bring a breach of the implied warranty claim against a developer, the parties must be in privity of contract.

Although privity of contract is not required to bring a claim for implied warranty in product liability matters related to the sale of personal property, such cases are distinguishable from those involving the sale of real property. In the construction context, Colorado courts continue to require privity of contract to bring a claim for breach of the implied warranty of habitability. And, at least one Colorado court previously suggested that the implied warranty of suitability is a subset of the implied warranty of habitability.

In addressing policy arguments, the Court explained, “The policy rationale for imposing an implied warranty between a developer and home buyer does not exist when, as here, the developer sells a lot to a professional builder who in turn improves the lot and sells it to a third-party home buyer.” Rogers contracted with Infinity, a professional builder, and thus, it was Infinity, not Forest City, that had superior knowledge and expertise as to the defect at issue. “In circumstances such as these, there is no reason to presume that a disparity exists in sophistication between the developer and the professional builder, that the builder was in a worse position than the developer to know of and assess potential defects in a lot, or that the professional builder would rely upon the developer - rather than its own investigative resources – to provide lots suitable for the builder’s intended purposes.”

The court concluded by dismissing Rogers’ claim for breach of implied warranty of suitability against Forest City, but left some wiggle room for future plaintiffs by indicating that it might entertain a third-party beneficiary theory. Overall, the decision represents a modest victory for developers of residential construction as it serves to curtail the potential claims against them. In addition, this opinion is likely to reverberate through analysis of other implied warranties and encourage a more practical, examined assessment of relative bargaining power in years to come.

For more information regarding the Forest City v. Rogers case or construction law in Colorado, you can reach Maggie Stewart by telephone at (303) 987-9814 or by e-mail at stewart@hhmrlaw.com.  

David M. McLain to Speak at the CLM Claims College - School of Construction - Scholarships Available

Dave McLain will again be serving as an instructor at the CLM's Claims College – School of Construction, to be held this year at the Marriott Baltimore Waterfront in Baltimore, Maryland on Wednesday, September 6, 2017 through Saturday, September 9, 2017.

Overview of the 2017 School of Construction

Construction claims present  myriad complexities in claim handling. Construction defect lawsuits are often multi-party cases with cross claims and third-party claims between and among the numerous defendants. Insurance coverage is intertwined and complex due to the interplay of primary, excess, wrap, and additional insurers for the numerous defendants. All this is further complicated by statutes and regulations, inconsistent case law and procedural peculiarities throughout the United States. The economic stakes are high as the  damages claims can be in the multi-millions.

Competent construction claims handling requires an understanding of the distinct legal and practical  issues between commercial and residential claims. This is no place for the average adjuster and certainly no place for the adjuster who has not been properly trained.

The School of Construction will provide adjusters with the knowledge, tools, and understanding required to navigate these complex claims. Professionals seeking to expand their knowledge of construction risk concepts and seasoned professionals looking to move into construction claims are encouraged to attend.

Upon satisfactory completion of all three levels, graduates will receive the Certified Claims Professional (CCP) in Construction designation.

About the Claims and Litigation Management Alliance

The Claims and Litigation Management (CLM) Alliance is the only national organization created to meet the needs of professionals in the claims and litigation management industries. Founded in 2007, the CLM currently has more than 30,000 Members and Fellows — a number that grows by hundreds each month.

Scholarships Available

As an instructor, I have the ability to offer three scholarships (registration fee only) to industry professionals (insurance - risk, adjusters, claims, etc. and corporate) to attend Claims College.  In order to attend, you need not to be a current CLM Fellow – however you will need to register (at no cost) to receive the scholarship. If you are interested in attending, please let me know by May 9th so that I can put you in touch with the proper person at the CLM to register.  I look forward to the event and hope that there are folks out there interested in taking advantage of the scholarships.

Colorado House Bill 17-1279 – A Misguided Attempt at Construction Defect Reform

On March 17th, House Bill 17-1279,  concerning the requirement that a unit owners’ association obtain approval through a vote of unit owners before filing a construction defect action, was introduced and assigned to the House State, Veterans, and Military Affairs Committee.  The bill is currently scheduled for its first committee hearing on March 29^th, at 1:30 in the afternoon.  While, on its face, this appears to be a step in the right direction towards instituting “informed consent” before an HOA can file a construction defect action, the bill actually restricts the ability of developer to include more stringent requirements in the declaration of covenants, conditions, and restrictions for an association, thereby lowing the threshold of “consent” required to institute an action.

House Bill 17-1279 would amend C.R.S. § 38-33.3-303.5 to require an association’s executive board to mail or deliver written notice of the anticipated commencement of a construction defect action to each unit owner and to call a meeting of the unit owners to consider whether to bring such an action.  Any construction professional against which a claim may attend the unit owners’ meeting and have an opportunity to address the unit owners and may include an offer to remedy any defect in accordance with C.R.S. § 13-20-803.5(3).  The conclusion of the meeting would initiate a 120-day voting period, during which period the running of any applicable statutes of limitation or repose would be tolled.  Pursuant to this bill, an executive board may only institute a construction defect action only if authorized by a simple majority of the unit owners, not including: 1) any unit owned by any construction professional, or affiliate of a construction professional, involved in the design, construction, or repair of any portion of the project; 2) any unit owned by a banking institution; 3) any unit owned in which no defects are alleged to exist, and/or 4) any unit owned by an individual deemed “nonresponsive.”    

While this may seem helpful in curbing construction defect litigation, it is actually a step in the wrong direction.  Currently, under Colorado’s Common Interest Ownership Act, a developer may include a language in an HOA’s declaration requiring that the association provide owners with certain information about a proposed construction defect action, and requiring the approval of 67% of the unit owners, with no restrictions on which unit owners’ votes actually count towards the total.

Additionally, the bill extends the voting period from 60 days, as set forth in C.R.S. § 7–127–107, to 120 days.  Currently, any time spent by an association to gather votes necessary to proceed with a construction defect action does not toll the running of any applicable statutes of limitation or repose, where HB 1279 would provide for such tolling. 

I fail to see how those in the Colorado Legislature actually believe that reducing the owner consent level from the 67% a declaration can currently require to a simple majority, excluding the votes of numerous categories of owners, and extending the statutes of limitation and repose will do anything to cool the litigious environment when it comes to condominiums and townhomes.  Making it easier for an association to bring a claim is certainly not the answer, and will do nothing to spur future construction of for sale multi-family housing.

To learn more about House Bill 17-1279, you can reach David McLain by telephone at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com

Homeowner Protection Act of 2007 Not Just for Individual Homeowners Anymore?

On March 9, 2017, the Colorado Court of Appeals announced its decision in Broomfield Senior Living Owner, LLC v. R.G. Brinkmann Company, No. 16CA0101, 2017 COA 31 (Colo. App. Mar. 9, 2017).  As a matter of first impression, the Court evaluated whether a senior living facility constitutes “residential property” protected by the Homeowner Protection Act of 2007 ("HPA") provision of the Construction Defect Reform Act (CDARA).

In 2007, Plaintiff Broomfield entered into a contract with Defendant Brinkmann for construction of a senior assisted and independent living facility. The contract contained warranty provisions related to the quality of construction and cautioned that Plaintiff’s failure to provide Defendant with prompt notice of any defects would result in waiver of any claim for breach. The contract also limited Defendant Brinkmann’s liability by identifying three separate accrual provisions that would determine the time period in which Plaintiff could bring a claim. The project was completed in 2009.

In the fall of 2012, Plaintiff Broomfield observed the presence of sewer flies in the building and decided to conduct further investigation into potential causes. In November 2013, Plaintiff presented Defendant Brinkmann with a notice of claim identifying numerous construction defects at the facility. A lawsuit ensued.

Brinkmann successfully defeated Plaintiff’s claims at the trial court level by relying on the accrual period and the notice requirement delineated in the parties’ contract. Under the terms of the contract, Plaintiff’s claims began to accrue in 2009 and would have expired in 2011 (even though Plaintiff did not observe the sewer flies until the following year). In addition, application of the contract meant that, by failing to provide Brinkmann with prompt notice or an adequate opportunity to conduct repairs, Plaintiff had waived its right to assert claims for latent defects.

On appeal, Plaintiff argued that the contractual provisions relied upon by Brinkmann and were void as against public policy under the HPA. The HPA renders a contract’s limitation or waiver of CDARA’s rights and remedies void as against public policy in claims arising from “residential property.” It provides in relevant part:

In order to preserve Colorado residential property owners’ legal rights and remedies, in any civil action or arbitration proceeding described in section 13-20-802.5(1), any express waiver of, or limitation on, the legal rights, remedies, or damages provided by the “Construction Defect Action Reform Act” ... or on the ability to enforce such legal rights, remedies, or damages within the time provided by applicable statutes of limitation or repose are void as against public policy.

C.R.S. § 13-20-806(7)(a).

The HPA was traditionally understood to safeguard individual homeowners making the most expensive purchase of their lives from more sophisticated, knowledgeable commercial builders and sellers. See The American Heritage Dictionary of the English Language 840 (2000) (a homeowner is a person who owns the house in which he or she lives); see also Webster's Third New International Dictionary 1082 (2002) (a home is a house occupied by a family). Plaintiff Broomfield was not an individual homeowner, however. Instead, it was a sophisticated business entity that profited by collecting rental income from its senior residents. There was no apparent disparity of bargaining power in the sale of the subject property. Would the HPA nevertheless apply to protect plaintiff from effect of its contract with Defendant Broomfield? The appellate court determined that it would.

Without delving into the legislative history of the HPA, the Colorado Court of Appeals held that a senior living facility constitutes a “residential property” within the meaning of the enactment.  The Court looked at the dictionary definition of “residence” (a place where people live) and the fact that the property was zoned for residential use. The court also examined the treatment of “residential real property” in the context of property tax law, insinuating that its application to the HPA might stop short of hotels and motels. Broomfield Senior Living Owner, LLC v. R.G. Brinkmann Co., 2017 COA 31, ¶ 21 (“[I]n the context of property tax law, the legislature and the Colorado Constitution define “residential real property” as all residential dwelling units and the land they are situated upon, excluding hotels and motels.”)

The court rejected Defendant Brinkmann’s argument that the term “residential property” was ambiguous because it was not defined in the statute itself.  Likewise, the fact that Plaintiff was a sophisticated legal entity that collected rental income - not an individual homeowner - did not render the property commercial.  The Court clarified that the term “residential” in the HPA is used to describe the property owned, not to limit its applicability to any specific type of owner, whether an entity or a natural person.

As a result of the appellate court’s analysis, the HPA’s protection extended to Plaintiff Broomfield, the limitation of the accrual of claims contained in the parties’ contract was void as a matter of public policy, and the longer statutory accrual of claims periods applied.[1]  The suit was no longer time barred and Plaintiff had not waived any claims.

By focusing on the nature of the property owned, as opposed to who owns the property, the Court’s decision appears to stray from the HPA’s original purpose - the need to protect individual homeowners from more sophisticated, knowledgeable commercial builders and sellers.  In a special concurrence, Judge Davidson analyzed the HPA’s legislative history and acknowledged that “the overwhelming impetus for the bill was the plight of the individual homeowner—the problem was that homeowners were being forced to waive important rights in order to enter into a contract to buy a house.”  Even so, Judge Davidson went on to opine that the lack of any discussion or voiced concerns in the legislature indicated that it was “assumed as a given that a purchaser of ‘residential property’ included not just an individual homeowner, but also the (more sophisticated and far less vulnerable) purchaser of mixed-use and multi-family properties.”

Unless and until the Colorado Supreme Court addresses this issue, the appellate court has opened the door for big businesses to use a special protection meant for individual homeowners as a loophole in contracts for the purchase of any property that may be considered “residential.” And this, of course, invites further questions as to what other types of properties could potentially fall under that definition.

For more information regarding the Broomfield Senior Living case or construction law in Colorado, you can reach Maggie Stewart by telephone at (303) 987-9814 or by e-mail at stewart@hhmrlaw.com.  

---

[1] CDARA links the accrual of construction defect claims to the date of discovery. See C.R.S. § 13-80-104(2)(b)(I) (…“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.”)  It was uncontested that the “physical manifestations of the defect” or flies in the plumbing were discovered in the fall of 2012.  Thus, in contrast to the shortened accrual provisions described in the parties’ contract, under CDARA, Plaintiff’s claims would be considered timely because it would have had until 2014 to bring suit. See C.R.S. § 13-80-104(1)(a) (incorporating the two-year statute of limitations for tort actions).

Colorado Supreme Court Weighs in on Timeliness of Claims Against Subcontractors in Construction Defect Actions

On February 27, 2017, the Colorado Supreme Court announced its decision in the Goodman v. Heritage Builders, No. 16SA193, 2017 CO 13 (Colo. February 27, 2017) case.  In ten short pages, the Colorado Supreme Court completely reshuffled Colorado construction law with respect to application of the statutes of limitation and repose on third-party claims in construction defect cases.  Specifically, the Colorado Supreme Court overruled a series of earlier Court of Appeals' decisions that found C.R.S. § 13-80-104(1)(b)(II) (“104(1)(b)(II)”) had no effect on the six-year statute of repose.  For context, 104(1)(b)(II) permitted third-party actions for indemnity and contribution to toll until ninety days after the claims in the underlying action were resolved by settlement or judgment. In the construction context, 104(1)(b)(II) was intended to allow a general contractor’s claims against liable subcontractors to toll for the statutorily defined period.  This allowed the general contractor to first focus its attention on defending the claims against and thereafter to pursue its claims against the subcontractors.

However, beginning in 2008, in the Thermo Dev., Inc. v. Cent. Masonry Corp., 195 P.3d 1166 (Colo. App. 2008) case, the Colorado Court of Appeals began chipping away at the force of 104(1)(b)(II).  This trend continued in the Shaw Constr., LLC v. United Builder Servs., Inc., 2012 COA 24, 296 P.3d 145 decision, the Sierra Pac. Indus., v. Bradbury, 2016 COA 132, ­_ P.3d_ decision, and culminating in the Sopris Lodging, LLC v. Schofield Excavation, Inc., 2016 COA 158, reh'g denied (Nov. 23, 2016) decision.  Effectively, in these decisions, the Colorado Court of Appeals determined that third-party claims could not be brought beyond Colorado’s six-year statute of repose, regardless if they were brought within the ninety day tolling provision set forth in 104(1)(b)(II).

From a general contractor’s perspective, these decisions were considered particularly disconcerting in that they expressly stood for the proposition that a general contractor could be faced with the possibility of having a homeowner’s claims against the general contractor found to be timely, yet the general contractor would be left with no recourse against the implicated trades responsible for the alleged damages.  Such a situation could hypothetically arise if the homeowner brought suit on the last day before the expiration of the six-year statute of repose and the general contractor, despite acting expeditiously in its pursuit against the subcontractors by bringing suit against the subcontractors the very next day, would be left with no recourse owing to the fact its claims were time barred.  

Fortunately for general contractors, and unfortunately for subcontractors, the Colorado Supreme Court insisted that 104(1)(b)(II) not be rendered “superfluous.”  In this vein, as a result of the Goodman decision, a general contractor’s claims against subcontractors may now be tolled beyond the period of the statute of repose as long as the claims are brought during the construction defect litigation or within ninety days following the date of judgment or settlement.

For more information about the Goodman decision, or construction defect litigation in Colorado, you have reach Jean Meyer by telephone at (303) 987-9815 or by e-mail at meyer@hhmrlaw.com.

Mid-Session Overview of Colorado’s 2017 Construction Defect Legislation

As the 2017 Colorado legislative session reaches the halfway point, I thought it an opportune time to provide a quick overview of the construction defect bills introduced so far this session.

Senate Bill 17-045, “Concerning a Requirement for Equitable Allocation of the Costs of Defending a Construction Defect Claim,” sponsored by Senators Grantham and Angela Williams and Representatives Duran and Wist, was introduced on January 11^th and assigned to the Senate Business, Labor, and Technology Committee.  This bill affects construction defect actions in which more than one insurer has a duty to defend a party by providing that if the carriers cannot agree regarding how to allocate defense costs within 45 days of the filing of a contribution action, a court must conduct a hearing regarding the apportionment of the costs of defense, including reasonable attorneys’ fees, among all carriers sharing in the duty to defend within 60 days after an insurer files its claim for contribution, unless the carriers agree to resolve the issue through a mutually agreeable, alternative process.  The bill further provides that the court must make a final apportionment of costs after entry of a final judgment resolving all of the underlying claims against the insured.  The bill also makes clear that an insurer seeking contribution may also make a claim against an insured or additional insured who chose not to procure liability insurance during any period of time relevant to the underlying action.  Finally, the bill states that a claim for contribution may be assigned and that bringing such a claim does not affect any insurer’s duty to defend.  The Senate Business, Labor, and Technology Committee heard SB 17-045 on February 8^th and referred the bill, as amended, to the Senate Appropriations Committee.

Senate Bill 17-155, “Concerning the Statutory Definition of a Construction Defect for Purposes of the ‘Construction Defect Action Reform Act,” sponsored by Senator Tate and Representative Saine, was introduced on February 3^rd and assigned to the Senate Business, Labor & Technology Committee.  The bill defines construction defect to mean “a defect in the design or construction of any improvement to real property that causes: (a) any damages to, or the loss of use of, real or personal property; or (b) personal injury.”  SB 17-155 has not yet been heard in committee.

Senate Bill 17-156, “Concerning Prerequisites to the Authority of a Unit Owners’ Association to Pursue Resolution of Disputes Involving Construction Defects,” sponsored by Senator Hill and Representatives Wist and Saine, was introduced on February 1^st and assigned to the Senate Business, Labor & Technology Committee.  The bill provides that when an association’s governing documents require mediation or arbitration of a construction defect claim, which is later amended or removed, mediation or arbitration is still required, and provides certain requirements for such mediation or arbitration.  With respect to arbitration, the bill provides that the arbitrator is required to follow the substantive law of Colorado with regard to any claim or defense, and that failure to do so is grounds for a district court to vacate or refuse to confirm the arbitrator’s award.  Finally, the bill provides that before an association may file a construction defect action, the parties must mediate the dispute and the association must obtain the informed written consent of the owners of units to which at least a majority of the votes in the association are allocated.  The Senate Business, Labor, and Technology Committee heard SB 17-156 on February 27^th and referred the bill, as amended, to the Committee of the Whole.

Senate Bill 17-157, “Concerning Prerequisites for the Authority of a Unit Owners’ Association to Pursue Litigation Involving Alleged Construction Defects, and, in Connection Therewith, Imposing Notification, Disclosure, and Voting Requirements Prior to Commencement of an Action,” sponsored by Senator Angela Williams and Representative Melton, was introduced on February 17^th and Assigned to the Senate Business, Labor & Technology Committee.  The bill requires that, before the executive board of an association in a common interest community brings suit against a developer or builder on behalf of unit owners, the board must notify all unit owners and, except when the association contracted with the developer or builder for the work complained of or the amount in controversy is less than $100,000, obtain the approval of a majority of the unit owners after giving them detailed disclosures about the lawsuit and its potential costs and benefits.  The bill also limits the amount and type of contact that a developer or builder that is potentially subject to a lawsuit may have with individual unit owners while the association is seeking their approval for the lawsuit.  SB 17-157 has not yet been heard in committee.

House Bill 17-1169, “Concerning a Construction Professional’s Statutory Right to Repair Under the ‘Construction Defect Action Reform Act,” sponsored by Representative Leonard and Senator Tate, was introduced on February 6^th and assigned to the House State, Veterans, and Military Affairs Committee.  The bill altered Colorado’s notice of claim process by providing that a construction professional could either offer to settle a claim by payment of a sum certain or by actually repairing the defect.  The bill also provided certain requirements in the event that the construction professional undertakes repairs.  The House State, Veterans, and Military Affairs Committee heard, and postponed indefinitely, HB 17-1169 on March 1^st.  

To learn more about this year’s construction defect legislation, you can reach David McLain by telephone at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.  Also, you can track the progress of any legislation at the Colorado Legislature’s website.  

The Impact of Sopris Lodging v. Schofield Excavation on Timeliness of Colorado Construction Defect Claims

On October 20, 2016, the Colorado Court of Appeals announced the Sopris Lodging, LLC v. Schofield Excavation, Inc.[1] decision. The Sopris decision significantly altered the potential pitfalls awaiting a general contractor in pursuit of third-party claims as well as potential defenses available for a subcontractor defending against third-party claims.

By way of background, the Sopris construction defect case arose out of the following facts: TDC was the general contractor for the construction of a hotel owned by Sopris Lodging. On March 11, 2011, Sopris Lodging sent TDC a notice of claim regarding alleged construction defects. On May 24, 2013, Sopris Lodging filed a complaint in district court asserting construction defect claims against one of the subcontractors of the hotel, and against the general contractor’s principals, but not the general contractor. Contemporaneous with the filing of the suit, Sopris Lodging and TDC entered into an agreement to toll the statute of limitations on Sopris Lodging’s potential claims against TDC.  In August 2013, Sopris Lodging joined the general contractor to the suit. A year later, in 2014, the general contractor joined a variety of subcontractors as third-party defendants.

In response to the general contractor’s third-party claims, some of the subcontractors moved for summary judgment, asserting that the general contractor’s claims against them were barred by the two year-year statute of limitations set forth in C.R.S. § 13-80-102. The subcontractors argued that the claims against the subcontractors accrued when Sopris Lodging delivered its notice of claim to TDC in March 2011. Because the general contractor did not file its third-party claims until 2014, the subcontractors asserted that the claims against them were time barred.

In response to these arguments, the general contractor asserted that C.R.S. § 13-80-104(1)(b)(II) tolls the statute of limitations for a defendant’s third-party claims until ninety days after a settlement or final judgment on the plaintiffs’ claims against the defendant. However, the trial court ruled that C.R.S. § 13-80-104(1)(b)(II) did not apply and that the general contractor’s claims against the subcontractors were time barred. After the trial court’s ruling, Sopris Lodging settled with TDC, which assigned its claims against the subcontractors to Sopris Lodging.  Thereafter, Sopris Lodging filed this appeal asserting that C.R.S. § 13-80-104(1)(b)(II) did in fact toll TDC’s claims.

The Court of Appeals ruled that if a third-party plaintiff brings third-party claims in the underlying construction defect case, the third-party claims must be timely pursuant to C.R.S. § 13-80-102 and that that the tolling provision set forth in C.R.S. C.R.S. § 13-80-104(1)(b)(II) does not provide for a blanket tolling of third-party construction claims. Rather, C.R.S. § 13-80-104(1)(b)(II) provides for a discrete (ninety day) revival of third-party claims after resolution of the underlying construction defect claims. The Colorado Court of Appeals acknowledged that this analysis could lead to a “somewhat anomalous conclusion” that the statute of limitations applicable to general contractors could expire before the first-party plaintiff filed suit against a general contractor. Nevertheless, the Court of Appeals recommended that where such an outcome is possible, a general contractor has the following options to preserve its claims against subcontractors: 1) when a general contractor receives a notice of claim, the general contractor should send its own notices to subcontractors; 2) in the alternative, where it is possible that third-party claims may expire, the general contractor should enter into a tolling agreement with the subcontractors; or 3) the general contractor could just wait until the resolution of the underlying construction defect case and bring suit during that ninety day revival period set forth in C.R.S. § 13-80-104(1)(b)(II).  That said, if a contractor were to use this third option, its claims would still need to be brought within Colorado’s six-year statute of repose.  Colorado courts, however, will not entertain third-party claims against subcontractors that are not timely.

In conclusion, before a general contractor brings suit against a subcontractor, nuanced analysis is necessary to preserve the timeliness of claims against subcontractors. To learn more about the Sopris decision or to discuss best practices to avoid the pitfalls of the Sopris case, you can reach Jean Meyer by telephone at (303) 987-9815 or by e-mail at meyer@hhmrlaw.com.

---

[1] Sopris Lodging, LLC v. Schofield Excavation, Inc., 2016 COA 158, reh'g denied (Nov. 23, 2016).