Colorado Real Estate Journal - February 18, 2015
Construction defect litigation has been hot for the past decade.- Now a reversal of a construction trend away from multifamily has focused industry attention on the negative impact of CD litigation and produced a new push for legislative reforms. Notwithstanding the presumed fear of CD litigation, Colorado’s current building boom is led by residential and public works projects. This is after a major slowdown in construction during and after the 2007 to 2009 recession. During the last decade, residential construction was hit hard by the recession and subsequent departure of many in the construction labor force to the oil fields of Northern Colorado and North Dakota. The residential building environment was further weakened when CD litigation scared off many insurance entities that provide coverage for architects, engineers, contractors and subcontractors that design and build residential projects. Now market demand and potential profits have overcome the fear of CD litigation as 2014 saw a surge in residential construction. This has, in part, addressed the lack of new multifamily units coming to market. Developers who had turned their talents to building apartments in order to avoid the risk of multifamily construction litigation and the restricted availability of insurance for those types of projects are returning to multifamily construction. The current hot topic is the proposed legislation to take the teeth out of, or at least put some restrictions on, future CD lawsuits. This is coupled with the actions taken by local governments to do an end run around what may or may not come out of the Legislature by establishing their own restrictions to impact CD litigation. Attempts to put some definition to CD litigation started in the early 2000s with the initial passage of the Construction Defect Action Reform Act in 2001. CDARA I was an attempt to add some structure, deadlines and requirements for those asserting CD claims to those defending against them. As with any statute open to interpretation, it soon became apparent that additional legislation was necessary and CDARA II became law. CDARA II significantly expanded CDARA I and applied to all cases filed after April 25, 2003. CDARA II applied to residential and commercial construction while CDARA I was applicable to residential construction. This increased the number of projects where CDARA II applied. CDARA was amended two more times with the passage of the Colorado’s Homeowner Protection Act of 2007 and Colorado’s Construction Professional Liability Insurance Act of 2010. 2014 was the year the pent-up demand for multifamily construction squared off against the current collection of statutes controlling CD litigation. Senate Bill 220 was introduced and would have placed numerous limitations and roadblocks to the then structure for CD litigation. That bill was defeated, but set the stage for the current round of CD legislation. We can anticipate that the issues that will be addressed in the 2015 legislation will be similar to those set forth in 2014. The 2014 bill was framed to reduce the use of the court system as the place to fight out CD claims and instead shift the claims into arbitration. One view of this is that it is better to have a neutral arbitrator than a potentially hostile jury that may have heard about or experienced defects and is likely to award damages. If the 2015 bill follows the 2014 bill, we can expect to see broader disclosure requirements from a homeowner’s association to its members, perhaps including the requirements that attorney fees and costs be disclosed to members prior to the initiation of any lawsuit. The issue of the impact of a CD case on the marketability of a member’s property may also need to be disclosed, depending on the language of any successful legislation. Undoubtedly the issue of who gets to vote and what percentage it takes to approve the filing of a CD lawsuit by a homeowner’s association will be addressed. How will another version of CDARA affect CD litigation? Certainly, the up-front disclosure and vote requirements may make it more difficult to get litigation started. However, the best that the insurance and construction industry can hope for is that these restrictions will result in fewer cases. Ultimately, as the residential boom continues, defects will be found and CD litigation will proceed. Note: In construction litigation, multifamily does not include apartments, just condominiums and townhomes.