The U.S. Census Bureau estimates Colorado’s population increased 13.2 percent between April 1, 2010 and July 1, 2018.[i]  In the last full calendar year alone, Colorado added almost 80,000 people, making it the seventh fastest-growing state in the country.  Naturally, these new residents, in addition to the natives, need places to live, learn, shop, play, and get health care.  So it should be no surprise Colorado has experienced a building boom paralleling its population increase.

With developers ceasing the opportunity to capitalize on population boom by constructing condominium complexes, townhouses, apartment buildings, and subdivisions full of track houses, litigation stemming from construction defects was becoming a serious issue in Colorado.  In 2001, in response to lobbying by Colorado’s insurance and construction industries, lawmakers passed the Construction Defect Action Reform Act or “CDARA,” codified at C.R.S. § 13-20-801, et. seq., in the hopes of regulating claims and lawsuits related to construction defects.  The CDARA was amended and expanded in 2003, 2007, and 2010.  Despite the best intentions of CDARA, construction defect litigation was still having a chilling effect on new condominium development, with new construction falling from 20 percent to just 3 percent.  In response, lawmakers recently enacted HB 17-1279, which creates additional hurdles for condominium boards and homeowner associations eager to commence actions against construction professionals.[ii]

The purpose of this article is to highlight some of the key aspects of the CDARA and other considerations involved in defending construction defect cases.

CDARA’s Application

Since construction is largely governed by contracts and they often include arbitration clauses limiting access to the courts, the provisions of the CDARA specifically apply to any “…civil action or an arbitration proceeding for damages, indemnity, or contribution brought against a construction professional to assert a claim, counterclaim, cross-claim, or third party claim for damages or loss to, or the loss of use of, real or personal property or personal injury caused by a defect in the design or construction of an improvement to real property.”[iii]

Important Definitions

The CDARA defines a “claimant” as “…a person other than the attorney general or the district attorneys of the several judicial districts of the state who asserts a claim against a construction professional that alleges a defect in the construction of an improvement to real property.”[iv]  This rather all-encompassing definition allows for individuals or homeowner associations to assert claims against construction professionals for construction defects.

The CDARA was also drafted to include almost everyone involved in any facet of the construction process.  Indeed, “construction professional” is defined as “…an architect, contractor, subcontractor, developer, builder, builder vendor, engineer, or inspector performing or furnishing the design, supervision, inspection, construction, or observation of the construction of any improvement to real property. If the improvement to real property is to a commercial property, the term “construction professional” shall also include any prior owner of the commercial property, other than claimant, at the time the work was performed…”[v]

Notice of Claim Process

One of the hallmarks of the CDARA is its Notice of Claim requirement.  Claimants looking to assert a claim or eventually commence litigation against a construction professional must first satisfy the CDARA’s Notice of Claim threshold requirement.

Claimant must send a written notice “…to the last known address of a construction professional against whom claimant asserts a construction defect claim that describes the claim in reasonable detail sufficient to determine the general nature of the defect, including a general description of the type and location of the construction that claimant alleges to be defective and any damages claimed to have been caused by the defect.”[vi]

The CDARA requires claimant to provide the construction professional with the Notice of Claim no later than 75 days before filing an action, or no later than 90 days before filing the action in the case of a commercial property.[vii]

After receipt of the Notice of Claim, the construction professional may provide a written request for it, and its contractors or other agents, to gain access to claimant’s property for the purpose of inspecting the property and any alleged defect.  The CDARA requires the inspection be completed within 30 days of service of the Notice of Claim.[viii]

Within 30 days of completion of the inspection process, or within 45 days following the inspection of a commercial property, a construction professional may send claimant “…an offer to settle the claim by payment of a sum certain or by agreeing to remedy the claimed defect” as alleged in the Notice of Claim.”[ix]  The construction professional’s written offer to settle must include “…a report of the scope of the inspection, the findings and results of the inspection, a description of the additional construction work necessary to remedy the defect described in the notice of claim and all damage to the improvement to real property caused by the defect, and a timetable for the completion of the remedial construction work.”[x]

Claimant has 15 days from the date of delivery of the offer to settle to provide written acceptance, otherwise the offer is deemed rejected.[xi]   If early settlement is unsuccessful, claimant may commence litigation against the construction professional.  Should a claimant fail to comply with CDARA’s Notice of Claim process, the civil action or arbitration must be stayed until the process is completed.[xii]

The aim of the CDARA’s Notice of Claim process is to provide a prompt and cost-effective way for the parties to avoid litigation.  It provides the parties with a pre-litigation investigative tool allowing the construction professional to receive notice of and then inspect all alleged defects.  Should the Notice of Claim process prove unsuccessful, it does allow the construction professional and its representation to enter litigation with an understanding of the case not necessarily afforded in other types of civil actions.  Additionally, assuming the construction professional provides prompt notice of the claim to its insurer, the process allows for the construction professional to gain immediate legal representation and the opportunity to retain experts to fully protect its interests.

The CDARA mandates an insurer defend a construction professional who has received a Notice of Claim by reasonably investigating the claim and reasonably cooperating with the insured during the Notice of Claims process.[xiii]  Thus, failure to do so may give rise to a bad-faith claim.

CDARA’s Restriction on Construction Defect Negligence Claims

The CDARA precludes any separate negligence claim seeking damages for a construction defect if it arises from a failure to construct in substantial compliance with an applicable building code or industry standard, unless the failure results in actual damage to real or personal property; actual loss of the use of real or personal property; bodily injury or wrongful death; or, a risk of bodily injury or death to, or a threat to the life, health, or safety of, the occupants of the residential real property.[xiv]

This limitation, however, does not prohibit the assertion of tort claims other than claims for negligence; the assertion of contract or warranty claims; or, the assertion of claims that arise from the violation of any statute or ordinance other than claims for violation of a building code.[xv]

Available Damages Under the CDARA

Pursuant to the CDARA, a claimant may not recover more than “actual damages,” unless claimant prevails on the claim the construction professional violated the Colorado Consumer Protection Act and:

(a) The construction professional’s monetary offer, made [during the Notice of Claim process], to settle for a sum certain…is less than 85 percent of the amount awarded to claimant as actual damages sustained exclusive of costs, interest, and attorney fees; or

(b) The reasonable cost, as determined by the trier of fact, to complete the construction professional’s offer, made [during the Notice of Claim process], to remedy the construction defect…is less than 85 percent of the amount awarded to claimant as actual damages sustained exclusive of costs, interest, and attorney fees.[xvi]

The CDARA defines “actual damages” as “the lesser of the [1] fair market value of the real property without the alleged construction defect; [2] replacement cost of the real property; or [3] reasonable cost to repair the alleged construction defect, together with relocation costs…”[xvii]  When residential property is involved, actual damages also includes “…other direct economic costs related to loss of use, if any, interest as provided by law, and such costs of suit and reasonable attorney fees as may be awardable pursuant to contract or applicable law.”[xviii]

Importantly, if a construction professional does not “substantially comply” with the terms of an accepted offer to remedy or settle a claim made during the Notice of Claim process or if a construction professional fails to respond to the Notice of Claim at all, the construction professional “shall be subject to treble damages,” but only if claimant otherwise prevails on the claim that a violation of the Colorado Consumer Protection Act occurred.[xix]  However, the aggregate amount of treble damages and attorneys’ fees awarded in an action under the Colorado Consumer Protection Act, is capped at $250,000.[xx]

Statute of Limitations

 The CDARA sets forth the statute of limitations for an action to be brought against a construction professional for an improvement to real property.[xxi]  It includes a two-year statute of limitations from the time a defect is discovered or in the exercise of reasonable diligence should have been discovered.[xxii]  In no case may an action be brought after a six-year statute of repose, however, it may be extended up to two years if the defect is discovered during the fifth or sixth year after substantial completion.[xxiii]

Not all alleged construction defects are latent, so defense counsel should be vigilant for a statute of limitations defense.  Should evaluation warrant, it is imperative the proper affirmative defense is asserted in a construction professional’s Answer to a Complaint or Notice of Arbitration to preserve a statute of limitations defense.

The Colorado Supreme Court ruled in Goodman v. Heritage Builders, Inc.,[xxiv] the provision of C.R.S. § 13-80-104 which allows a construction professional to bring claims against third-parties within 90 days of final judgment or settlement applies not only to the two-year statute of limitations, but also to the six-year statute of repose.  This is important for general contractors looking for indemnification and contribution from its subcontractors.

If a Notice of Claim is sent to a construction professional within the time prescribed for the filing of an action under any applicable statute of limitations or repose, then the statute of limitations or repose is tolled until 60 days after the completion of the Notice of Claim process.[xxv]

Other Important Considerations in the Early Evaluation of Construction Defect Cases

Construction contracts often include prevailing party provisions, which allow the prevailing party in a civil action or arbitration to recover attorneys’ fees and litigation costs (e.g. arbitration and expert fees).  It is imperative any applicable insurance policy be consulted prior to the assignment of counsel to determine whether attorneys’ fees and litigation costs are covered or the insured construction professional will be out-of-pocket in the event of such an award.  The insured construction professional should be immediately advised, preferably in a reservation of rights letter.  Given the nature of construction defect litigation, an insurer should expect any attorneys’ fees and costs, particularly expert fees, awarded to a claimant to be substantial.

In Colorado, in order to collect prevailing party fees, a party must first establish it is, indeed, the prevailing party. However, such a determination is not always easy.  For example, if a claimant prevails on less than half of its numerous claims, a claimant may still argue it was the prevailing party.  Under such circumstance, it is particularly important how claimant frames the case.  In Colorado, the court, or arbitrator/arbitration panel, have wide discretion in determining who is the prevailing party.  Under a scenario where a claimant would prevail on less than half of its claims, claimant could argue the non-prevailing claims were ancillary or derivative claims. Perhaps even argue the winning claims had a higher dollar value or required more time, substantive legal work, or discovery than the other claims. Therefore, a construction professional could still be exposed to a substantial award of attorneys’ fees and costs even if it prevails on more than half the claims asserted.

Takeaway

The CDARA is likely to see future amendments to address numerous flaws in the construction defect litigation arena.  When faced with a construction defect claim, it is important the insured construction professional adhere to the Notice of Claim process, or, alternatively, force claimant to adhere to it. Legal counsel should be immediately assigned and experts retained to assist the insured construction professional navigate the CDARA’s pre-litigation requirements.  Should litigation commence, it is of great importance the policy be consulted to determine whether attorneys’ fees and litigation costs are covered or the insured construction professional will be out-of-pocket. As a best practice, a claims adjuster should determine whether there is a prevailing party clause in the construction contract and the insured construction professional should be immediately advised of the potential for out-of-pocket expenditures not covered by the policy.  Defense counsel should also be sure to consult with retained experts to determine whether an affirmative defense and a motion for dismissal for violation of the statute of limitations are proper.

[i] U.S. Census Bureau (2019). QuickFacts Colorado. Retrieved from https://www.census.gov/quickfacts/co.

[ii] C.R.S. § 38-33.3-303.5.

[iii] C.R.S. § 13-20-802.5(1).

[iv] C.R.S. § 13-20-802.5(3).

[v] C.R.S. § 13-20-802.5(4).

[vi] C.R.S. § 13-20-802.5(5).

[vii] C.R.S. § 13-20-803.5(1).

[viii] C.R.S. § 13-20-803.5(2).

[ix] C.R.S. § 13-20-803.5(3).

[x] Id.

[xi] C.R.S. § 13-20-803.5(4).

[xii] C.R.S. § 13-20-803.5(9).

[xiii] C.R.S. § 13-20-808(7)(b)(I)(A)–(B).

[xiv] C.R.S. § 13-20-804(1)(a)–(d).

[xv] C.R.S. § 13-20-804(2)(a)–(c).

[xvi] C.R.S. § 13-20-806(1)(a)–(b).

[xvii] C.R.S. § 13-20-802.5(2).

[xviii] Id.

[xix] C.R.S. § 13-20-806(2).

[xx] C.R.S. § 13-20-806(3).

[xxi] C.R.S. § 13-80-104.

[xxii] C.R.S. § 13-80-102; C.R.S. § 13-80-104(1)(b)(I).

[xxiii] C.R.S. § 13-80-104(2).

[xxiv] 390 P.3d 398 (Colo. 2017).

[xxv] C.R.S. § 13-20-805.

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