Within the past several years, trial lawyers have been highly successful in filing lawsuits and obtaining large settlements from builders and contractors, as well as their insurers.  This has been pervasive through the Western United States, emanating in California and moving eastward, resulting in limited availability of general liability insurance, tremendous increase in premiums, and higher housing prices.  In Colorado, there has been the additional threat of treble damages being assessed in cases where the fraud standard has been met under the Colorado Consumer Protection Act.

 In an effort to provide some relief to Colorado builders and contractors, the Colorado Home Builders Association sought passage of meaningful construction defect legislation beginning in 2001.  Subsequently, the Colorado Fair Remedy Act was passed by the legislature, and signed by the governor.  This was a good first step, but this act did not contain nearly the impact to effect necessary change in the Colorado building industry. It was not sufficient to properly protect builders, contractors, and their carriers from having to defend frivolous suits, and paying high monetary settlements to avoid the possibility of lengthy trials and possible significant jury verdicts. 

1. Since then, the Colorado Home Builders Association has been working with various coalition partners to seek passage of more meaningful legislation, which has just come to fruition in the form of HB-1161.  The following are some of the key features of the bill, which was signed into law on April 25, 2003.  Builders are given the right to remedy or correct alleged construction defects or settle claims before litigation ensues.  Specifically, a claimant shall deliver a written notice of the claim to a construction professional (architects, contractors, subcontractors, builders, developers, and engineers) no later than 75 days before filing an action against such a professional, or no later than 90 days before filing the action in case of a commercial property.  Then, the claimant must provide the construction professional reasonable access to the property and the claimed defect, with the inspection to be completed within 30 days of service of notice of the claim.  Although the text of the bill reads that the builder has a “right” to remedy, it is in actuality more of an “opportunity,” since the claimant can reject the builder’s offer to remedy.   
   
   Within 30 days following completion of the inspection, or within 45 days in the case of a commercial property, a construction professional may offer to settle a claim by paying a certain sum, or by agreeing to remedy the claimed defect.  The written offer must include a report of the scope of the inspection, the findings, description of work needed to remedy the defect, and a timetable for repair.  If no offer is made by the construction professional, or if claimant rejects an offer, the claimant can then bring an action, unless the parties have agreed to mediation.  If so, the mediation would take place prior to an action being brought. 
   
   The prior law had no notice, or notice-process provisions prior to a claimant being able to file a lawsuit.  
2. A clear definition of “actual damages” arising from an alleged construction defect is provided, eliminating the applicability of “probable damages” from current Colorado law as it pertains to construction defect claims.  This is critical because prior to enactment of HB-1161, a claimant could properly present a construction defect suit, based partly upon probable future damages, which, of course, can be indefinite in some cases.  More importantly, “probable” is a term that’s open to much interpretation and speculation among experts.  By restricting a claim to “actual damages,” a limit is placed on such claims.  The term “actual damages” according to HB-1161 means the fair market value of the real property without the alleged construction defect, the replacement cost of the real property, or the reasonable cost to repair the alleged construction defect, whichever is less, together with relocation costs, possible loss of use, and other related costs associated with the suit. 

3. Perhaps the most significant component of HB-1161 is the limitation on treble damages now available under Colorado law.   These are essentially punitive damages.  Under the Colorado Consumer Protection Act, treble damages are available to a plaintiff if he or she can establish fraud or bad faith by clear and convincing evidence.  HB-1161 limits treble damages in a construction defect action to $250,000, instead of the prior standard where a jury awarded actual damages, and non-economic damages were trebled.  Further, attorney fees awarded under the Colorado Consumer Protection Act are within the $250,000 cap.   

   Another extremely significant aspect to this treble damages limitation is the fact that there is an additional requirement that a claimant must meet to be entitled to an award of treble damages in a Colorado Consumer Protection Act action.  Specifically, according to the bill, if a builder’s offer of settlement is at least 85 percent of the damages that a claimant recovers through a court action (excluding legal fees and costs), then there is no availability of treble damages under the Colorado Consumer Protection Act, even if a claim under this act is otherwise established.  However, if the builder fails to respond to a notice of defect, or does not perform pursuant to an agreement with the claimant, then the 85 percent rule does not apply.   

   This “85 percent” rule should serve to encourage claimants to accept reasonable offers to repair, and will, in turn, reduce the filing of lawsuits. 

4. For those cases in which a personal injury is alleged to have been caused by a construction defect, such as mold, a claimant can still recover for economic and non-economic damages.  However, non-economic damages are limited to $250,000.  Non-economic damages include pain, suffering, and emotional distress.  Under prior Colorado law, courts had more latitude in awarding non-economic damages. 
   
   
   
   
    Differences Between HB-1161 and SB 800

 The following are some of the features of SB 800 (the “Right-to-Repair” legislation that became effective in California on January 1, 2003), which are not part of HB-1161.

1. SB 800 defines construction defects according to how a home should function. These “functionality standards” are the basis for a construction defect cause of action.  SB 800 reduces the statute of limitations on several of these “functionality standards.”
2. SB 800 sets forth specific maintenance obligations for homeowners to meet.
3. SB 800 sets up an automatic mediation step if disputes arise over a repair. 

SB 800 has damages limitations as well. For instance, the homeowner is only entitled to damages for the reasonable value of repairing any violation of the standards set forth, the reasonable cost of repairing any damages caused by the repair efforts, and loss of use, as well as reasonable attorneys fees. 

These are just some of the differences between the two bills.  Both bills, however, are a move in the right direction.  The damages limitations and the “85 percent” rule as stipulated in HB-1161 will limit the potential monetary exposure to a builder and its subcontractors, and should encourage more early resolution of claims for the amount of damages the claimant actually sustained.  The expectation is that this will result in many carriers providing general liability coverage to builders and other contractors, with lower premiums to reflect the lower degree of overall risk of loss.  

Although HB-1161 does not provide a builder with an absolute right to repair, it will result in far more claims being settled. It is important to note that disputes will only be subject to mandatory mediation if there is a mediation requirement in the purchase/sales contract between the builder and the homebuyer.  Thus, an appropriate provision needs to be added to such contracts, if it does not already exist.  

 To reap the full benefits of HB-1161’s components, builders, their subcontractors, and insurance carriers must be well versed in all of the features of the bill so that they can take full advantage of what it bill provides.  DBH Resources, Inc. (DBHR) has developed services to guide those in the construction and insurance industries through the process. These include contract reviews, educational seminars, and training to ensure that all employees understand the context of the new legislation.

 (For more information about DBHR’s services, call Don Aberbook at 303-346-5569 or e-mail him at daberbook@dbhresources.com.)