Anti-Concurrent Causation Endorsements in CGL Insurance Policies: A Word of Caution

While I have not performed exhaustive research into the origin of anti-concurrent causation (“ACC”) endorsements on insurance policies, or how or when they migrated from first-party property policies to commercial general liability (“CGL”) policies, they have done so.  The result for Colorado’s construction professionals may rear its ugly head as an unwelcome and surprise outright declination of coverage for construction defect claims.

ACC endorsements state that if there are two causes of damage: one of which is covered by a policy and one of which is not, the carrier can invoke the ACC endorsement to disclaim coverage for all of the damage.  An exemplar ACC endorsement is ISO Form CG 21 67, entitled “Fungi or Bacteria Exclusion.”  The pertinent language of the endorsement reads:

 This insurance does not apply to:

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“Bodily injury” or “property damage” which would not have occurred, in whole or in part, but for the actual, alleged or threatened inhalation of, ingestion of, contact with, exposure to, existence of, or presence of, any “fungi” or bacteria on or within a building or structure, including its contents, regardless of whether any other cause, event, material or product contributed concurrently or in any sequence to such injury or damage.  (Emphasis added) 

You can read the remainder of the article on the Colorado Builder Magazine website.

You can reach Dave McLain by telephone at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com should you wish to discuss the potential impact of anti-concurrent causation endorsements in commercial general liability insurance policies or construction law in Colorado.

Municipal Ordinances Create Additional Opportunities for the Defense of Construction Defect Claims in Colorado

Municipal ordinances may provide additional defenses for construction professionals where state law does not provide sufficient protection for Colorado’s builders.  Colorado state law can be a minefield of potential liability for construction professionals.  Even though the state legislature has stated that it must “recognize that Construction defect laws are an existing policy issue that many developers indicate adds to for-sale costs,” the legislature has remained hesitant to provide any meaningful protection from construction defect claims, resulting in almost unlimited exposure for Colorado’s construction professionals. 

Given this background of state laws that do not go far enough in protecting Colorado’s construction professionals, it may be fruitful to review municipal ordinances for new defenses and to temper state law developments applicable to construction defect claims.  This is an area of law that is only just developing in Colorado.  In fact, the ordinances discussed in this article were only passed in the last two years with many cities only adopting the present versions of the ordinances in 2021.  The two model ordinances discussed below are potentially helpful in three ways.  The first model ordinance gives construction professionals a right to repair defects in the multi-family construction and in the common interest community context.  The second model ordinance is helpful in two ways.  First, it establishes that homeowners associations may not unilaterally circumvent ADR protections included in the original declarations for such communities.[1]  Second, the ordinance reduces the risk that strict liability will be imposed on a construction professional where a building code is violated.

1.                  Model Ordinance One: Durango, Colorado Code of Ordinances Sec. 6-151, et seq. – Builders have a right to repair alleged construction defects in common interest communities and multi-family construction claims. 

Unlike the Colorado Construction Defect Action Reform Act, C.R.S. § 13-20-801, et seq. (“CDARA”), which only gives contractors the right to offer a repair but does not give the contractor the right to make repairs, the Durango Code of Ordinances Sec. 6-151, et seq., gives construction professionals the actual right to repair alleged construction defects in a “unit in a condominium or in a multi-family building in a common interest community.”  The ordinance contains notice requirements akin to the CDARA notice of claim procedures with which a builder must comply.  If the construction professional adheres to the notice provisions, the ordinance states: “If the builder elects to repair the construction defect, it has the right to do so and the claimant may not, directly or indirectly, impair, impede or prohibit the builder from making repairs.”  A claimant may still bring a claim after repairs are completed but only if it “believe[s] in good faith that the repairs made do not resolve the construction defects.”  A construction professional should consult with an attorney before electing to invoke this right to repair since the performance of repairs could renew the statute of limitations and repose periods if the repairs are later found to be defective as claimants will argue that the statute of limitations and repose periods start anew, at least as to the repairs, and that they run from the date of the repairs rather than from the original construction of the condition and because the ordinance imposes of two-year warranty on repairs.  A construction professional wishing to avail itself of the right to repair afforded by the ordinance should also consult with an attorney to discuss the potential negative implications to its insurance coverage caused by the performance of repairs.

Durango is not the only municipality that adopted a right to repair in the multi-family context.  Wheat Ridge, Aurora, Broomfield, Centennial, Lone Tree, and Commerce City all have similar ordinances and others may follow suit.  This right to repair in multi-family construction and common interest communities is a trend of which to be aware on a statewide basis given that this model ordinance only began showing up in municipal codes over the past two years.

2.       Model Statute Type Two: Denver, Colorado Code of Ordinances Sec. 10.204 –   Unilateral amendments to declarations in common interest communities seeking to modify or eliminate an HOA’s ADR obligations are unenforceable. 

Denver Ordinance Sec. 10.204 is a straightforward ordinance that renders any unilateral attempt by a homeowners’ association to alter a declaration to modify or eliminate its ADR obligations unenforceable if the original declaration prohibited such alterations.[2]  Thus, if a declaration includes a binding and unalterable requirement that construction defect claims must be submitted to ADR, the Denver ordinance gives effect to the provision in the declaration and prohibits HOAs from shirking their ADR obligation.  To ensure enforceability, the ordinance even includes pre-approved language to be included in a declaration:

 

The terms and provisions of the Declaration requiring alternative dispute resolution for construction defect claims inure to the benefit of Declarant, are enforceable by Declarant and 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 such amendment.  BY TAKING TITLE TO A UNIT, DECLARATION REQUIRING ALTERNATIVE DISPUTE RESOLUTION OF CONSTRUCTION DEFECT CLAIMS ARE A SIGNIFICANT INDUCEMENT TO THE DECLARANT'S WILLINGNESS TO DEVELOP AND SELL THE UNITS AND THAT IN THE ABSENCE OF THE ALTERNATIVE DISPUTE RESOLUTION PROVISIONS CONTAINED IN THE DECLARATION, DECLARANT WOULD HAVE BEEN UNABLE AND UNWILLING TO DEVELOP AND SELL THE UNITS FOR THE PRICES PAID BY THE ORIGINAL PURCHASERS.

Denver, Colorado Code of Ordinances Sec. 10.204(1) (emphasis in original).

Developers wishing to enforce an ADR provision in a declaration should begin including language like the proposed language above if they have not already.

3.                  Model Statute Type Two (Part Two): Denver, Colorado Code of Ordinances Sec. 10.202 – Code violations not an independent basis for construction defect claims or negligence per se claims, nor may courts impose strict liability for a code violation.

The same ordinance discussed in Section 2, above, also expressly states that a violation of certain specified city building codes “or a failure to substantially comply with any such code may not be used to support or prove any construction defect claim, regardless of the statutory or common law theory under which the claim is asserted.”  There is an exception when a homeowner can show that the non-conformance with the code resulted in: (1) actual damage to real or personal property; (2) actual loss of the use of real or personal property; (3) bodily injury or wrongful death; or (4) a risk of bodily injury or death to, or a threat to the life, health, or safety of, the occupants of residential real property.

The ordinance states definitively that: “Under no circumstances shall a violation of any city building code [as set out elsewhere in the city ordinances], or a failure to substantially comply with any such code, support or prove a construction defect claim based upon a theory of strict liability, or under the common law doctrine of negligence per se.”  Where members of the plaintiffs’ bar regularly use certain Colorado case law, interpreting state law, to assert that builders are essentially subject to strict liability for violations of the building code, ordinances such as this one could be a valuable tool to rebut claims alleging strict liability and may force plaintiffs to fully prove their claim as they would have to with any claim for allegedly negligent construction.  Parker, Fort Collins, and Westminster have already passed similar ordinances.  As with the right to repair ordinances, these ordinances were only enacted over the past two years and lend support to the notion that municipal ordinances are a rapidly changing source of construction defect law.

Conclusion

While there is not yet a large body of municipal construction defect law on which defense attorneys can rely, and while we have yet to see cases challenging the application of local ordinances based on preemption by state law, recent developments in municipal law are encouraging and warrant continued review as local jurisdictions take part in the regulation of construction defect claims.  Where so many of the local jurisdictions discussed in this article have only adopted their construction defect ordinances in the past two years, it is reasonable
to conclude that more local jurisdictions may adopt useful regulations moving forward and construction defect attorneys should continue to monitor legal developments at the local level.

For additional information regarding local construction defect ordinances and their potential benefit to Colorado’s construction professionals, you can reach Ricky Nolen by e-mail at nolen@hhmrlaw.com or by telephone at (303) 653-0042.

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[1] This is a codification of the Colorado Supreme Court decision in Vallagio at Inverness Residential Condo. Ass’n v. Metro.  Homes, Inc., 395 P.3d 788 (Colo. 2017), which may remain in effect even if Vallagio were to be overturned.

[2] This also is a local codification of the Vallagio decision, which may remain in force should the Colorado Supreme Court later overrule Vallagio.

U.S. District Court of Colorado Interprets Insurance Policy’s Faulty Workmanship Exclusion and Exception for Ensuing Damage

Recently, the United States District Court for the District of Colorado interpreted a faulty workmanship exclusion in a property insurance policy in The Lodge at Mountain Village Owner Association v. Eighteen Certain Underwriters of Lloyd’s of London, 22 U.S Dist. Ct LEXIS 48883*, decided on March 18, 2022.  The Court held that the faulty workmanship exclusion at issue extended to preclude coverage for later ensuing damage that arose from the faulty workmanship, even though the damage was weather related, because faulty workmanship was the primary cause of the ensuing damage.

The claims in The Lodge at Mountain Village arose from maintenance work performed on log siding at three multi-unit condominium buildings in Telluride.  The maintenance work to the log siding included staining, finishing, and chinking repairs to joints between the logs.  About a year after completion of the work, The Lodge at Mountain Village Owners Association (“The Lodge”) notified the maintenance contractor that logs were extremely weathered and that its work was defective.  The Lodge retained an expert who prepared a report stating that the log finish and underlying wood was deteriorating because of the contractor’s work and that some areas were not properly protected from exposure to snow, rain, and brine from ice-melting salt.  The Lodge pursued and settled its claims against the contractor.

A year after filing suit against the contractor, but before settling those claims, The Lodge filed an insurance claim with its first-party property insurance carrier.  The insurance policy provided coverage for “All Risks of Direct Physical Loss or Damage except as hereinafter excluded.”  With respect to applicable exclusions, the policy stated that it did not insure against “the cost of making good defective design or specifications, faulty material, or faulty workmanship, unless physical loss or damage by a peril not excluded ensues and then this policy shall only cover for such ensuing loss or damage . . .”  The policy also excluded “ordinary wear and tear” and “gradual deterioration,” with the same language that “unless physical loss or damage by a peril not excluded ensues and then this policy shall only cover for such ensuing loss or damage.”  The insurance carrier denied the loss pursuant to the exclusions for faulty material, faulty workmanship, gradual deterioration, and ordinary wear and tear.  The Lodge then had its expert provide an additional report, which described damage that was due to the failed chinking sealant and that areas with failed chinking had increased moisture due to rain and melting snow events.  The Lodge provided this letter report to its insurance carrier and asked that it reopen the claim, describing the loss as damage that resulted from faulty workmanship, but noting that the damage ensued after the faulty workmanship.  The insurance carrier denied the claim a second time.

The Lodge then filed suit against its insurance carrier and the independent insurance adjuster that investigated the claim, asserting claims of breach of contract, statutory bad faith, and common law bad faith.  The parties agreed that the damage arose from faulty workmanship.  The question addressed by the Court was whether the ensuing damage was covered by the insurance policy.  The Lodge’s argument was essentially that the contractor did not cause the damage itself, but that it was caused by later moisture intrusion from rain and snow.  The Court noted that, though courts around the country have reached mixed results regarding ensuing damage caused by excluded perils, they all agree with the principle that “the exception cannot be allowed to swallow the exclusion.”  Therefore, the Court found that the cause of the damage claimed by The Lodge was the construction defect, not a later covered peril.  There was no dispute that the damage to the logs was caused by the contractor’s failure to properly seal the logs, which led to water penetrating behind them, which the Court found to have unambiguously fallen within the exclusion for faulty workmanship.  The court noted that, to read the policy as The Lodge requested, would have resulted in coverage for the very damage caused by the construction defect, which was excluded under the policy.  In other words, it would allow the exception to swallow the exclusion.

The Court went on to analyze whether the damage would similarly be excluded by the ordinary wear and tear and gradual deterioration exclusions.  The Lodge argued that the damage was due to moisture from rain and snow.  The Lodge had described such damage in its complaint and discovery responses as resulting from “slow, hidden, and repeated intrusion of water,” which was “slow and discrete,” and “gradual and progressive.”  Based on this description, the Court found that The Lodge’s argument that the damage was due to later rain and snow intrusion would similarly result in a lack of coverage for the damage because it would fall under the policy’s exclusion for gradual deterioration.

The Court also held that another basis to dismiss The Lodge’s breach of contract claim against the insurer was that The Lodge had failed to notify the insurer of the claim until at least 24 months after it discovered the damage.  The Court held that it was undisputable, as a matter of law, that The Lodge did not notify its insurance carrier of the claim within a reasonable time as required by the insurance policy.  Therefore, the Court dismissed The Lodge’s breach of contract claim for this additional reason.

Since the Court dismissed The Lodge’s breach of contract claim against its insurance carrier, there was no basis for its bad faith claims against the carrier as a matter of law.  This opinion upholds the U.S. District Court’s inclination to interpret insurance policy language strictly, and to not permit an insured to use an exception to an exclusion to serve as a means for the insured to get around an exclusion.  Also, it provides guidance to policyholders that damage arising from defective workmanship will not be covered where there is a faulty workmanship exclusion unless there is a subsequent loss legitimately caused by a covered peril.

For additional information regarding The Lodge at Mountain Village Owner Association v. Eighteen Certain Underwriters of Lloyd’s of London case, or Colorado construction law, generally, you can reach Carin Ramirez by e-mail at ramirez@hhmrlaw.com or by telephone at (303) 987-7140.

Colorado’s Workers’ Compensation Act and the Construction Industry

In general, issues relating to employment law occur in all industries. However, some issues are more likely to be raised in certain employment contexts. For example, office work environments tend to give rise to harassment and discrimination claims while wage and hour disputes and workplace safety claims are common in the oil and gas industry. In the construction industry, employers must be especially cognizant of discrimination and harassment claims, employee misclassification claims, workplace safety issues, and wage and hour claims. In the context of workers’ compensation claims, construction projects often create unusual situations due to the contractual relationships between the parties.

Even relatively simple construction of a single-family residence involves several levels of contracting, including between the owner and general contractor, between the owner or general contractor and design team, between the general contractor and subcontractors, and between the prime subcontractors and lower tiered sub-subcontractors. In most circumstances, this would not be an issue. However, when an injured worker makes a workers’ compensation claim, the contractual relationships among the various entities involved in a project can have a significant impact on which party or parties could be liable for the injury.

Under Colorado’s workers’ compensation scheme, an employee injured while performing services within the purpose and scope of his or her employment is entitled to receive compensation for any medical expenses and lost wages. See C.R.S. § 8-40-101, et seq. The purpose of this law is to ensure that the employee receives timely compensation without having to invest time and money into filing a lawsuit. To protect the employer, workers’ compensation is the exclusive remedy for the employee, provided the employer has workers’ compensation insurance and the injury is not intentionally self-inflicted. To further ensure the employee is compensated for an injury, Colorado provides any person or entity conducting business by contracting out work is considered a statutory employer and is liable for workers’ compensation. If the statutory requirements are met, workers’ compensation is the exclusive remedy for each statutory employer.

In a construction context, this workers’ compensation scheme can create issues for the various parties involved. If, for example, an employee of a plumbing subcontractor is injured by falling debris from the roof, the plumbing subcontractor, the general contractor, and the property owner would be statutory employers for the purposes of a workers’ compensation claim. Further, once the compensation claim is paid, the plumbing subcontractor, general contractor, and property owner would be protected from claims resulting from the injury, regardless of which entity paid the claim. This includes subrogation claims brought by a workers’ compensation carrier. However, subcontractors who are not in the same chain of contracting as the plumbing subcontractor could be sued for negligence and/or premises liability. In the example above, both the workers’ compensation carrier and the injured employee could sue the roofing subcontractor and any other subcontractor who may have been involved. The responsible subcontractors would not be able to seek contribution or indemnity from the plumbing subcontractor, general contractor, or property owner because of the protections afforded by Colorado’s Workers’ Compensation Act.

To protect themselves against workers’ compensation related claims, subcontractors must ensure that they have adequate insurance coverage for personal injury matters. If a subcontractor subcontracts out a portion of its scope of work, it must ensure that every entity in the chain of contracting has adequate insurance coverage. This requires more than simply requesting a certificate of insurance. The subcontractor may want to consider having an attorney or its insurance broker review the policy to ensure coverage is adequate or get an affirmative acknowledgement from the carrier that coverage exists. Otherwise, a subcontractor could discover that the entity which caused the injury does not have adequate coverage only after an incident occurs, thereby exposing the subcontractor to a potential claim.

For additional information regarding the effect of Colorado’s Workers’ Compensation Act on the construction industry, feel free to reach out to Jordan Kaplan by e-mail at kaplan@hhmrlaw.com or by telephone at (303) 987-9811.

The Colorado Healthy Families and Workplaces Act: It may be time to review your paid sick leave policy

Gov. Jared Polis signed the Colorado Healthy Families and Workplaces Act (HFWA) on July 14, 2020, and it became effective at the start of this year. It requires that all employers provide each employee paid sick leave as and to provide statutory notice of such rights. Among other changes to Colorado’s requirements pertaining to paid sick leave, each employee now earns at least one hour of paid sick leave for every 30 hours worked, though employees are not entitled to earn or use more than 48 hours of paid sick leave each year, unless the employer allows a higher limit. Employers are prohibited from engaging in retaliatory personnel actions when employees use paid sick leave, which now must begin to accrue when an employee begins working and can be used as it is accrued. HFWA does not allow for any vesting of paid sick leave.

Up to 48 hours of accrued, but unused, paid sick leave are required to be carried forward into, and can be used in, a subsequent year. That said, employers are not required to allow employees to use more than 48 hours of paid sick leave in a year.

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You can read the remainder of the article on the Colorado Builder Magazine website.

You can reach Dave McLain by telephone at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com should you wish to discuss the Colorado Healthy Family and Workplaces Act or construction law in Colorado.

HHMR is Hiring a Director of Operations/EOS Integrator

Founded in 2001, Higgins, Hopkins, McLain & Roswell, LLC (“HHMR”) exists to embody and exemplify the principles of service and stewardship.  In everything we do, we focus on serving our clients selflessly and to the best of our ability.  In doing so, we always have in the forefront of our minds our obligation to act as the stewards of our clients’ trust, confidences, and resources.

HHMR is highly regarded for its expertise in construction law and the litigation of construction related claims, including the defense of large and complex construction defect matters.  In addition to their construction law background, HHMR’s attorneys are well versed and experienced in tort, contract, property, and general casualty litigation ranging from products liability to personal injury and premises liability claims.

We value team-players who are organized and meticulous, who are flexible and willing to assist with whatever firm needs arise, and who will contribute to and help foster our positive and collaborative firm culture.

HHMR is seeking a full-time Director of Operations/Integrator to help solidify business operations and create future growth.  This position could also be described functionally as the Legal Administrator, or Law Firm Administrator, or Firm Office Administrator.  The successful candidate will have at least two years of operational management experience.  An ideal candidate will have experience in a law firm setting and with implementation and execution of the Entrepreneurial Operating System (“EOS”).  The Director of Operations will work collaboratively with the leadership team, execute the business plan, drive results, and make decisions in furtherance of the firm’s vision.  The Director of Operations must have strong project management skills and handle day-to-day operations overseen by the firm’s owners.

Responsibilities of this position include:

·                     Assisting the ownership to fulfill the firm’s vision.

·                     Meeting with the owners to map our quarterly business plan and assigning KPIs.
·                     Integrating all major operating functions of the firm using EOS, ensuring that everyone is rowing together in the same direction, and modeling the way, always working toward the greater good of our clients, employees, and the firm.
·                     Overseeing day-to-day operations.
·                     Recruiting, hiring, onboarding/training of new employees, and offboarding (i.e., helping     to assure that we have the right people in the right seats).
·                     Ensuring that firm is well structured and systematized to run smoothly and efficiently (i.e., helping to assure that we are all doing the right things, the right way).
·                     Ensuring that everyone is truly following, and adhering to, the firm’s core processes and operating system with consistency.  Demonstrating effective project management skills.
·                     Human resources including payroll and benefits administration.
·                     Resolving issues effectively - seeing real problems, being comfortable with conflict and radical candor, calling out the problems, and solving the problems in a practical and positive manner.  Ensuring the team is healthy, functional, and cohesive.  
·                     Leading, managing, and holding accountable all non-attorney employees.
·                     Financial reporting and analysis, including facilitating taxes and budgeting.
·                     COLTAF (client trust fund) account administration.
·                     Accounts payable and accounts receivable, including collections.
·                     Bank deposits.
·                     Bank account reconciliation.
·                     Management of all business insurance.
·                     Management of office supply and equipment vendors.  

·                     Working with IT vendor to manage IT issues and needs.

Candidates must be proficient in Microsoft Office Suite and an ideal candidate would have experience with Tabs3 and PracticeMaster firm management software.  Familiarity with and experience operating within EOS is a benefit.

We offer a competitive salary which is commensurate with experience, ranging from $75,000 to $115,000, plus the potential for bonuses based on meeting or exceeding KPIs for the position.  We also offer excellent benefits including health, dental, vision, long-term disability, and life insurance, 401(k) matching, other voluntary benefits, and paid time off (“PTO”) of 120 hours per year.  Interested candidates should submit their resume and references.

Interested candidates should send a cover letter, resume, and references to David McLain at mclain@hhmrlaw.com. 

PLEASE NO CALLS OR AGENCIES.

Denver’s Proposed Solution to the Affordable Housing Crisis

Over the past ten years, Colorado has seen a population growth of almost 15 percent, with many residing in Denver.  In fact, in 2020, Denver ranked among the top five cities for inbound growth in the United States.  At the same time, from 2010 through 2020, the state’s production of new housing decreased by 40 percent.  The decrease in supply, coupled with the increase in demand has exasperated the already rising cost of housing in the state.  This, along with other external factors such as job loss due to the COVID pandemic, has resulted in a statewide housing crisis.

The City of Denver is proposing a revision to the municipal code that would expand affordable housing through three main tools: (1) increasing “linkage fees,” (2) requiring new multi-family development to designate a percentage of units to be affordable, and (3) offering zoning and financial incentives.  The proposal addresses both rental housing and ownership opportunities.  Although it is essential to combat the housing crisis and increased homelessness in the region, it is equally important to understand the impacts the proposed affordable housing ordinance would have on developers, if and when enacted.  

Increased Linkage Fees

In addition to funds received through donations and tax-based contributions, affordable housing permanent funds are raised from the affordable housing linkage fee revenue fund.  These funds are set to be used for the production and preservation of rental housing as well as rental assistance.  The amendment proposes increasing the linkage fee paid before the issuance of a building permit for any new construction or improvements that increase the gross square footage of an existing structure.  The fee, which applies to residential, commercial, and industrial construction, is calculated per square foot, at a rate depending on structure type.  For example, the proposal increases the linkage fee for low-density residential from $0.66 to $1.77 per square foot, whereas the fee for buildings with industrial or agricultural uses increases from $0.40 to $0.96 per square foot.  Fees for mixed-use development are to be proportioned based on the square footage for each use.  The proposal estimates that the linkage fee will go into effect on July 1, 2022, and increase each year based on the rate of inflation.

Linkage fees do not apply to the construction of contractual commitments dated and properly recorded prior to July 1, 2022.  This exception only applies while original development continues; any redevelopment contracted after such time will be subject to the proposed rates.  Additionally excluded from the linkage fee requirement are construction projects including (1) those that provide required affordable housing on the property, (2) affordable housing projects built with federal, state, or local funding, (3) charitable projects aimed at providing housing assistance, (4) buildings used solely for government or education purposes, (5) projects due to involuntary demolition, (6) additions of 400 square feet or less to single-unit or two-unit dwellings, and (7) accessory dwelling units. Additionally, linkage fees may be waived upon an applicant showing that the required amount of fees exceeds the amount that would be needed to mitigate the actual demand for affordable housing created by the development.

Mandatory Affordable Housing

The proposed amendment affects multi-family residential development.  New residential developments consisting of 11 or more units at one location must develop a minimum percentage of income-restricted units (IRU) within the structure.  The minimum percentage of IRUs depends on location.  High market areas are neighborhoods in the top quarter of highest rent or sales prices and land values, and typical market areas are all other regions not recognized as high market.  To comply with mandatory affordable housing, a high market area development must designate a minimum of 10 – 15 percent of the units as income-restricted.  Development in a typical market area must designate a minimum of 8 – 12 percent of its units as income-restricted.  These development requirements apply to both rental units and for-sale properties.  If developers choose to forgo the minimum IRU requirements they will be subject to the alternative fee-in-lieu requirements.  Fee-in-lieu costs range between $250,000 and $478,000, depending on the location of the new development and the type of dwelling structure.  The fee is then multiplied by the required number of IRUs excluded from the development.  For example, if an apartment complex proposed for a typical market area only designates 10 units out of 200 to be income-restricted, the applicant would be required to pay a $2.5 million fee-in-lieu before receiving a building permit.  However, if an applicant can show its proposed development meets the city’s five-year housing plan and comprehensive plan goals, the developer may negotiate an alternative to the mandatory affordable housing requirements.

Incentives

The proposal allows for permit fee reductions, reduced minimum vehicle parking requirements, and linkage fee exemptions for street-level commercial structures to incentivize developers to comply with minimum IRU requirements.  The proposal provides added incentives for developers which choose to include a higher percentage of IRUs than required by the ordinance.  Such developments will be entitled to an increase in building height and floor area ratios than is regularly provided for in zoning laws, in addition to increased vehicle parking exemptions.  Developed IRUs must be maintained for a minimum of 99 years to qualify.

Downfall

One downfall of the City’s housing affordability proposal is that it fails to alleviate the pressures and added costs that construction defect litigation places on developers and contractors.  Developers have expressed a need for relief from these added costs to successfully and affordably complete affordable housing projects.  The Colorado General Assembly briefly touched on the constraints of construction defect laws in its 2022 affordable housing tasks force report.  The task force expressed concerns that exemptions from construction defect laws would displace the balance between consumer and developer rights.  However, as developers continue to raise concerns regarding the effects the state’s strict construction defect litigation has on the affordability of development, it increasingly becomes important for the City to address such matters.  Developers who wish to see such exemptions included in the proposed affordable housing ordinance may submit comments during the public review process.

Public Review

The proposed affordable housing ordinance is currently available for public review.  Interested parties may submit comments and concerns to the City of Denver from now through March 14, 2022.  Comments are accepted through the City’s open forms, which can be found here.  The City will review the comments and release an updated proposal by the end of March 2022, after which interested parties will be allowed to speak at a public hearing held in front of the Denver Planning Board and the Denver City Council.  The proposal will not go into effect until a final version is adopted by the Denver City Council.  Additional information on the proposed expansion of affordable housing requirements can be found here.

For additional information regarding Denver’s affordable housing initiative, or Construction law in Colorado, you can reach Taylor Ostrowski by telephone at (303) 653-0047 or by e-mail at Ostrowski@hhmrlaw.com.

Revisiting Denver's construction defect ordinance

I recently had the opportunity to write an article for the Winter 2022 edition of the Colorado Builder Magazine.  Since we are now seeing construction defect claims on projects built after enactment of Denver's construction defect ordinance, it seemed an opportune time to revisit the topic.  

To find the original version of this article, follow this link.  Should you wish to reach out to me to discuss Denver's ordinance, or construction law or litigation generally, please feel free to contact me by e-mail at mclain@hhmrlaw.com or by telephone at (303) 987-9813.

The Economic Loss Rule: From Where Does the Duty Arise?

When entering a contract under Colorado law or attempting to enforce your rights when the other party breaches a contract, it is important to know and understand what rights you have and what claims you can bring or defenses you may have.  One important consideration is Colorado’s version of the economic loss rule.  The Colorado Supreme Court has issued several opinions clarifying the scope of the economic loss rule since it adopted the rule in 2000.  The purpose of the economic loss rule is to maintain the boundary between contract law and tort law.

In Colorado, the economic loss rule provides that a party suffering only economic loss from the breach of an express or implied contractual duty may not assert a tort claim for the breach without an independent duty of care under tort law.  In most instances the economic loss rule will not bar intentional tort claims.  The question becomes: from where does the duty arise?  Is there an independent duty in tort law?  Did the duty arise solely from the contract?

On January 14, 2021, a division of the Colorado Court of Appeals released its opinions in McWhinney Centerra v. Paog & McEwen, 486 P.3d 439 (Colo. App. 2021), answering the question as to when the economic loss rule applies and altering Colorado’s economic loss rule. The Court of Appeals noted in its decision, that while the decision is contrary to several other decisions, it was based on the recent decision of the Colorado Supreme Court in Bermel v. BlueRadios, Inc., 440 P.3d 1150 (Colo. 2019).  The Court specifically determined that where an independent duty exists, outside the agreement, the economic loss rule does not bar a tort claim.

The McWhinney case arose from a land development deal gone bad during the real estate collapse of 2008.  McWhinney Centerra Lifestyle Center LLC (“MCLC”), a subsidiary of McWhinney Holding Company, LLP (“McWhinney”), and Poag & McEwen Lifestyle Centers-Centerra LLC (“P&M”), a subsidiary of Poag & McEwen Lifestyle Centers, LLC (“PMLC”), formed Centerra LLC.  The purpose of Centerra LLC was to acquire, develop, own, and operate an upscale shopping center in Loveland, Colorado, The Promenade Shops at Centerra.  MCLC provided the capital, land, and an established public-private partnership with the city and county entities for infrastructure financing.  P&M served as the managing member of the joint venture.  MCLC & P&M signed an operating agreement (the “Agreement”), and McWhinney and PMLC signed as guarantors.

The Agreement required P&M to obtain a construction loan for Centerra LLC and later a permanent loan.  In 2005, P&M obtained the construction loan for $116 million in accordance with the Agreement, and the shopping center opened in October 2005.  In 2006, P&M purchased a $155 million forward swap loan on behalf of Centerra LLC without first obtaining the permanent loan.  P&M’s intent for obtaining the forward swap loan was to gain the trust of other investors to obtain a loan for personal reasons not for the benefit of Centerra LLC.

In 2007, P&M entered a $40 million mezzanine loan.  A loan which the Court found P&M used for personal interests.  P&M used the $40 million dollar loan for Dan and Josh Poag to buy out their co-founder, Terry McEwen.  The Court found that P&M intentionally concealed this buyout and its intention to use these self-dealings to fund it.  P&M gave MCLC limited and misleading information or no information at all about the buyout.

Shortly after P&M’s buy out of McEwen, it began defaulting on its loans and lacked the funds to pay property taxes.  In 2008, the real estate market collapsed, and P&M allowed the construction loan to go into default.

In 2011, after the joint venture failed, MCLC sued P&M, asserting a breach of contract claim based on the Agreement and seven tort claims.  The district court dismissed all seven tort claims under the economic loss rule.  The Court of Appeals determined P&M owed a duty of fair dealing to MCLC, including a duty of disclosure and that P&M had purposefully concealed and misrepresented material facts about the $40 million loan.  Further, the Court of Appeals concluded that the district court erred when it applied the economic loss rule to bar MCLC’s common law intentional tort claims of fraudulent concealment, intentional interference with contractual obligations, and intentional inducement of breach of contract.

The Agreement between MCLC and P&M stated that P&M owed fiduciary duties of care and loyalty to Centerra LLC and MCLC.  The duty of loyalty requires that the best interest of the company and its members take precedence over any of the manager’s individual interests and that the manager act in good faith.  The duty of care requires that a manager act on an informed basis.  P&M breached its fiduciary duties under the Agreement when it purchased the forward swap, entered the $40 million mezzanine loan, and failed to secure permanent financing.

P&M’s purchase of the forward swap on behalf of Centerra LLC was a breach of P&M’s fiduciary duties because of the individual benefit P&M derived from it.  P&M used the forward swap as a tool to obtain the $40 million mezzanine loan to buyout McEwen.  P&M purposefully concealed the purpose and significant details of the $40 million mezzanine loan and failed to give MCLC a complete or accurate picture of how the loan would impact the operations of Centerra LLC.  P&M had a duty to disclose material facts related to the mezzanine loan to MCLC and they failed to do so, therefore, breaching their fiduciary duties.  

Finding that P&M owed fiduciary duties under the Agreement and breached those duties the Court of Appeals turned to MCLC’s intentional tort claims.  The Court determined that the district court erred in dismissing MCLC’s common law intentional tort claims, except for the civil conspiracy claim.  Under the guidance of the Colorado Supreme Court’s decision in Bermel the Court noted that while the intent of the economic loss rule is to prevent tort law from “swallowing” the law of contract, courts must also be cautious not to allow contract law to swallow tort law.  “The economic loss rule generally should not be available to shield intentional tortfeasors from liability that happens to also breach a contractual obligation.” Town of Alma v. AZCO Constr., Inc., 10 P.3d 1256, 1260 (Colo. 2000).

The Court reinstated MCLC’s fraudulent concealment, intentional interference with contractual obligations, and intentional inducement of breach of contract claims.  The Court reasoned that the three claims stem from a duty based in tort law independent of the Agreement.  The conduct underlying each of the claims may also support a breach of contract claim, however, in this case, the Court did not shield the intentional tortfeasors simply because the conduct also happens to breach a contractual obligation.

However, the economic loss rule did bar MCLC’s civil conspiracy claim.  MCLC alleged P&M and PMLC conspired to breach the Agreement.  As signatories to the Agreement, P&M and PMLC’s duty not to conspire to breach the contract stemmed solely from the Agreement itself.  P&M and PMLC had no independent duty in tort law not to conspire to breach the Agreement with another signatory of the Agreement.  Thus, the economic loss rule barred MCLC’s civil conspiracy claim.

Though the McWhinney decision was contrary to previous holdings, one must bear in mind, the Court had new direction from the Colorado Supreme Court’s decision in Bermel.  While the economic loss rule had barred tort claims which happened to breach a contractual obligation the court has moved away from this one-track mind analysis.  McWhinney makes it clear that the economic loss rule does not bar an intentional tort claim simply because a breach of contract claim exists.

McWhinney’s effect may be that plaintiffs’ attorneys ramp up efforts to bring intentional tort claims.  It is important for defense counsel to know to what claims the economic loss rule can serve as a defense.

For additional information regarding the McWhinney decision or Colorado construction law, you can reach Taylor Hite by e-mail at Hite@hhmrlaw.com or by telephone at (303) 653-0043.