The Construction Defect Action Reform Act of 2003

• Publication year: 2003
• Pages: 89

32 Colo.Law. 89 Colorado Lawyer 2003.

2003, July, Pg. 89. The Construction Defect Action Reform Act of 2003

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89

Vol. 32, No. 7, Pg. 89

The Colorado Lawyer
July 2003
Vol. 32, No. 7 [Page 89]

Specialty Law Columns
Construction Law Forum
The Construction Defect Action Reform Act of 2003
by Ronald M. Sandgrund, Scott F. Sullan

This column is sponsored by the CBA Construction Law Forum Committee. The column addresses various construction-related issues in both public and private areas. The column editor and Committee encourage the submission of substantive law articles addressing issues of interest to practitioners in the field of construction law

Column Editor

James W. Bain of Brega & Winters, P.C., Denver - (303) 866-9408

Ronald M. Sandgrund Scott F. Sullan

About The Authors

This month's article was written by Ronald M. Sandgrund, a principal with Vanatta, Sullan, Sandgrund & Sullan, P.C., Greenwood Village; and Scott F. Sullan, a principal with the same firm - (303) 779-0077. The authors thank attorneys Joseph F. Smith and Dean R. Vanatta for their help on this article, as well as column editor James W. Bain for his extensive review of the article and expert editing assistance.

In 2003, the Colorado legislature amended and expanded the Construction Defect Action Reform Act to accelerate its effect, decrease construction defect litigation, and reduce the costs of insuring construction professionals. The amendments restrict damages available to property owners against construction professionals arising from construction defects and false, misleading, and deceptive business practices under Colorado's Consumer Protection Act.

In 2001, the General Assembly passed the Construction Defect Action Reform Act ("CDARA I"), which was intended to limit wasteful and frivolous lawsuits.1 CDARA I was the result of a historic compromise involving homeowners, developers, and insurance companies. The development and insurance industries subsequently worked to amend and expand substantial portions of CDARA I.

As part of a wave of "construction defect" legislation in the United States,2 amendments to CDARA I went into effect with the passage of House Bill 03-1161 ("CDARA II" or the "Act").3 CDARA II applies to residential, commercial, and government property owners, and is effective as to all actions filed on or after April 25, 2003.4 The primary goals of CDARA II are to: (1) limit litigation, while preserving property owners' rights; and (2) stabilize the cost of insurance products for construction professionals.5

This article reviews the significant changes wrought by CDARA II, including pre-suit "notice of claim" procedures, limitations on remedies that may negate negotiated contractual provisions, and restrictions on recoverable damages. The article also examines potential problems that may arise as a result of the new legislation.

CDARA II Definitions

CDARA II contains many definitions critical to applying its provisions, including some unique concepts not adopted or explored by other states. Because many CDARA II provisions contravene the common law, they may be narrowly construed and restricted to their specific terms.6 Such a cautious construction of CDARA II makes sense because an expansive reading of its limitations on the rights of property owners and others injured by construction defects could have unexpected and unintended consequences.7 In construing CDARA II, courts likely will be mindful of its overriding intent to "preserv[e] adequate rights and remedies for property owners who bring and maintain [construction defect] actions."8

The newly defined terms are set out in CRS § 13-20-802.5. Following is a discussion of those terms, as well as an analysis of several important issues arising from the definitions.

Construction Professional

CRS § 13-20-802.5(4) defines a "construction professional" 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.9

In the case of commercial property, a construction professional also includes any prior owner of the commercial property at the time the work was performed, excluding the claimant. "Commercial property" is any property zoned to permit commercial, industrial, or office uses.10

Action

"Action" means a civil action or arbitration for damages, indemnity, or contribution brought against a construction professional that asserts any claim for damages, loss to or loss of use of real or personal property, or personal injury caused by a design or construction defect in an improvement to real property.11 Historically, undeveloped land, including subdivided lots, has not been considered an "improvement to real property."12 It is not clear whether CDARA II applies to a failure to repair or maintain real property if it results in the creation or maintenance of a defective condition.13

Actual Damages

As defined in CRS § 13-20-802.5(2), "actual damages" means 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." For residential property only, actual damages also include

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.14

CDARA II does not address how to assess damage to property that has no reasonably ascertainable fair market value. For example, this might include claims brought by governmental entities for repairs to historical or similarly unique properties damaged by construction defects or by homeowner associations ("HOAs") as to repairs to common elements.15 Where the fair market value is not readily determinable, courts likely will be asked to set the "actual damages" cap at the lower of the replacement cost of the real property or the reasonable cost to repair the alleged construction defect, plus any "relocation costs" and other statutorily-recoverable damages. This result would be consistent with the stated purpose of CDARA II: to preserve "adequate rights and remedies for property owners who bring and maintain" construction defect actions.16

CRS § 13-20-802.5(2) also defines "actual damages" as to "personal injury," which are damages recoverable by law, except as limited by CRS § 13-20-806(4). This latter statute limits damages for noneconomic loss or injury or derivative noneconomic loss in an action asserting personal injury (and, presumably, bodily injury)17 to $250,000, if the action arose as a result of a construction defect.18 This cap is to be adjusted for inflation as of July 1, 2003, and as of July 1 of each year thereafter, until 2008, when the adjustment inexplicably ends.19 Claims for personal or bodily injury as a result of a construction defect may not be trebled under the deceptive and misleading trade practices prohibition contained in the Colorado Consumer Protection Act ("CCPA").20

The definition of "actual damages" raises a number of issues. The following discussion addresses some of those matters.

Punitive Damages: Construction professionals may argue that punitive damages no longer are available against them because such damages are not expressly included within the definition of "actual damages." Such an interpretation of CDARA II raises equal protection concerns and tends to subvert the public policies underlying CRS § 13-21-102, Colorado's exemplary damages statute.21 Punitive damages are not insurable in Colorado. Thus, construction professionals likely will face an uphill battle arguing that one of the primary purposes of CDARA II, which was to open insurance markets to construction professionals, is served by exempting them from the application of the punitive damage statute.22

Additional Damages: Because the Act makes a clear distinction in the definition of "actual damages" as to the specific, additional damages recoverable "with respect to residential property [only],"23 construction professionals may argue that their liability for both tort and contract damages for commercial property is limited to the least of the amounts set out in CRS § 13-20-802.5(2), plus "relocation costs." As such, construction professionals may assert that other losses (including loss of profits, delay damages, pre-judgment interest, and attorney fees) no longer are recoverable - even if such damages are provided for by contract or applicable statute.24

Damage to Improvements Under Construction: CDARA II does not address whether its provisions apply to claims involving real property improvements damaged during the course of construction work, if such damage is discovered before the work is substantially completed.25 Disputes may arise as to whether CDARA II applies to structures under construction. The purchase of builder's risk coverage may help limit such disputes where the parties to a construction project have mutually agreed to insure the risk of such damage and waive all claims among them relating to the loss.26 Builder's risk insurance will not eliminate these types of disputes because the policies typically contain exclusions for poor workmanship and contractual noncompliance.

Claimant

"Claimant" is defined 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...