Busting Myths About Colorado Construction Defect Claims
April 27, 2015
Myth 1: It takes only two owners of a big condo building to file a class action lawsuit for construction defects, even if the other owners don't want to.
Truth: Under Colorado law, only the homeowner-elected board of directors can authorize the filing of a lawsuit on behalf of the community. In addition, the board of directors is legally bound to comply with the governing documents for the association. If a developer includes a voting requirement in the governing documents, the board must submit the decision to the members for a vote. Because governing documents frequently contain additional restrictions on filing lawsuits, the board often must go through the process of amending the governing documents before they can file a lawsuit. This process typically requires a two-thirds vote of all homeowners.
Myth 2: Current Colorado law does not give a builder the opportunity to repair defects before getting sued.
Truth: Colorado law requires all homeowners with construction defects to give builders 75 days notice of defects before filing a lawsuit. During this 75 days, the builder has the right to inspect the property and make an offer to repair. Good builders can make permanent and proper repairs. Bad builders, on the other hand, either ignore the notice, or offer only cheap "caulk and walk" solutions that will not fix the real problems. Colorado homeowners have the right to reject shoddy repairs.
Myth 3: Colorado trial attorneys buy units so then can take them apart and find defects to file lawsuits.
Truth: There is no evidence of this ever happening in Colorado. This story is made up by those who are trying to distract people from the real problems of shoddy construction.
Myth 4: Colorado’s 2005 construction defects law made it much easier for homeowners to sue developers over property defects (this myth is being spread by Denver Mayor Hancock)
Truth: There is no 2005 Colorado construction defects law. The laws allowing a homeowners association to file a lawsuit on behalf of the community as a whole have been around since Colorado adopted its version of the Uniform Common Interest Ownership Act in the early 90’s. CCIOAs provisions are consistent with a large majority of other states that also passed laws based on the same uniform model act. The other law that affects construction defects is Colorado’s Construction Defect Action Reform Act “CDARA” which was passed in 2001. CDARA actually granted rights to builders by requiring notice prior to filing a lawsuit and placing limitations on a homeowner’s right to recover damages for construction defects, and requiring homeowner associations to disclose construction defect claims to their members. CDARA was amended in 2003 to limit homeowners ability to recover treble damages for builder's consumer protection violations. In 2007, the Colorado legislature passed a law preventing builders from enforcing waivers of claims of negligence, breach of contract, or implied warranties. In 2010, the builders lobbied for and had passed a law strengthening their insurance coverage in construction defect cases.
Myth 5: Construction defect litigation has stopped condo construction because insurance companies will not provide liability coverage.
Truth: In 2010, builders lobbied to pass HB 1394 which proposed to amend insurance law to increase coverage for construction defects. Insurance premiums for policies that provide coverage for construction defects have risen in Colorado because of a this law . HB 1394 states that commercial general liability policies are presumed to cover construction defects. The passage of this bill resulted in several cut-rate insurance companies pulling out of the Colorado market place which was a consequence that was anticipated and expected by construction professionals when the bill was proposed. Because most of these insurance companies were offering substandard policies that provided no coverage for construction defects anyway, most construction professionals were not upset when the insurance companies departed. Colorado homebuilders got exactly what they asked for from the legislature in 2010, but now they are seeking to use the consequences of the bill they promoted to be passed as an excuse to strip homeowners rights.
Myth 6: Construction defect litigation on condos has caused apartment rents to rise.
Truth: Escalating rents in Colorado are the result of a confluence of factors that have been heavily analyzed by economists on both sides. The results of the reports are public information and should be consulted instead of relying on anecdotal commentary. That said, builders and developers in Colorado will continue to build apartments as long as it is extremely profitable. At the legislative hearings on SB 177, not one builder or developer has actually stated that passage of SB 177 would result in an appreciable increase in the construction of affordable condominiums. Further, not one representative from the insurance industry has testified that passage of SB 177 would result in lower insurance premiums or an increase in the availability of liability insurance coverage for construction professionals who build affordable condominiums. The bill sponsors in the Colorado State Senate were very careful to say this bill was not a panacea and simply a step towards building more affordable housing. This suggests that other bills, perhaps even more onerous bills should be expected in the future. See Housing Market Analysis by Pacey Economics.
Myth 7: Arbitration is a less expensive, faster, and fairer way to resolve construction defect cases.
Truth: Arbitration fees in a typical construction defect case are $60,000 to $100,000. This compares to a typical District Court filing fee of $224. Regardless of whether a case is in court or arbitration, a typical construction defect case last 18 to 24 months. Arbitration does not typically allow a right to appeal, and the fact that an arbitrator incorrectly applied the law is not grounds for appeal.
Myth 8: Current Colorado law does not require community associations to notify its members about a decision to file a construction defect lawsuit.
Truth: The Colorado statutes governing community associations already mandate that community associations provide their members with disclosures concerning construction defect actions. The notification to homeowners must include the “nature of the action and the relief sought” as well as the “expenses and fees that the executive board anticipates will be incurred in prosecuting the action.” See C.R.S. § 38-33.3-303.5(2)(b)(I)-(II). In contrast, SB 177 would require significantly more detail regarding the nature of the case before a notice of claim is sent and before the board has a reasonable opportunity to gather the required information. In addition, SB 177 provides no protection to stop the statute of limitations from running during the sixty-day notice period.
Duncan Griffiths is an associate attorney with the law firm of Benson, Kerrane, Storz & Nelson where he represents homeowners and community associations with claims for construction defects.