Recovering Actual Damages Under Colorado's Construction Defect Action Reform Act-part Ii
| Publication year | 2009 |
| Pages | 25 |
2009, June, Pg. 25. Recovering Actual Damages Under Colorado's Construction Defect Action Reform Act-Part II
June 2009
Vol. 38, No. 6 [Page 25]
Construction Law articles are sponsored by the CBA Construction Law Section.
Coordinating Editor
James W. Bain of Benjamin, Bain & Howard, L.L.C., Greenwood Village--(303) 290-6600, jamesbain@bbhlegal.com
About the Authors
Ronald M. Sandgrund is Of Counsel, Mari K. Perczak is a Shareholder, and Leslie A. Tuft is an Associate with the law firm of Sullan,(fn2) Sandgrund, Smith & Perczak, P.C. in Denver. The firm represents commercial and residential property owners, homeowners associations, and unit owners in construction defect and insurance coverage disputes.
This two-part article analyzes the meaning of "actual damages" as used in Colorado's Construction Defect Action Reform Act and its provisions limiting damages in construction defect actions.
Colorado's Construction Defect Action Reform Act's (CDARA)(fn1) multi-part definition of "actual damages"(fn2) describes and limits the recoverable damages for property damage and personal injury claims arising from construction defects. Colorado's appellate courts have not yet interpreted CDARA's definition of actual damages or applied its damages limitations.
This two-part article provides an issues checklist for construction defect practitioners and examines several unanswered substantive and procedural questions related to CDARA's actual damages definition and limits. Part I of this article, which was published in the May 2008 issue of The Colorado Lawyer, discussed who bears the burden of proving which of CDARA's property damage limitations applies, whether and to what extent CDARA preempts common law construction defect damage principles, when recovery of more than actual damages is proper, and which questions a judge or jury must decide. Part II discusses the evidence admissible to prove actual damages under CDARA; recovery of prejudgment interest; attorney fees and costs; and whether CDARA prohibits exemplary (punitive) damages in construction defect actions.
Regardless of who bears the burden of proof regarding application of the "whichever is less" aspect of CDARA's actual damages definition, questions remain about what evidence is admissible to prove the amount of each of the three actual damages limits. The discussion below examines these limits and how to prove the amount of each.
Under common law, repair cost damages typically were measured as of the trial date when those repairs had not yet been made, and diminution in value damages were measured by the difference in value before and after the date of injury.(fn3) CDARA does not state when to measure the "fair market value without the alleged construction defect." The date these actual damages are measured may be crucial to determining the right to prejudgment interest.(fn4)
"Market value" alone typically is defined as "the price the property could have been sold for on the open market under the usual and ordinary circumstances. . . ."(fn5) However, courts may find that the statutory language "fair market value without the alleged construction defect" should not be equated with the traditional definition of fair market value. For example, some claimants have argued that this value is the sum of the property's salvage value plus repair costs, less any reduction in value due to stigma. Other formulas may be proffered.
Parties may dispute the date for measuring this value depending on how real estate values are changing. If repair cost is measured as of the trial date, this amount may be capped under CDARA by the property's value without the alleged construction defect, and defendants may argue that the property value as of trial controls. Alternatively, if the purpose of CDARA is to make the property owner whole, claimants may argue that the highest property value during the ownership period should control, to restore the claimant's personal interest in seeing the property repaired under Slovek.(fn6)
The original sale price of property is competent, non-conclusive evidence of its current market value.(fn7) Early Colorado decisions did not permit admission of a property's assessed value for tax purposes as evidence of its market value.(fn8) However, because the assessment laws have been amended to base assessments on actual value, such assessments have been held admissible evidence of market value, subject to attack on the weight of the evidence.(fn9) Such attack might include evidence that the assessment does not establish: (1) whether it accounted for adverse conditions; (2) whether it has been challenged; (3) the accuracy of the assessor's data collection; or (4) whether comparable sales occurred before or after public disclosure of damage to the subject property.(fn10)
An owner may testify about his or her estimate of the property's value if the owner had the means to form an intelligent opinion, derived from adequate knowledge, of the nature, kind, and value of the property.(fn11) No Colorado court has ruled on whether an owner can testify to the diminution in his or her property's value from defects and resulting property damage; however, trial courts likely have discretion under C.R.E. 701 to admit or limit such opinion testimony.(fn12)
Fair market value of land and its improvements. CDARA does not state whether improvements should be considered together with the underlying land in determining fair market value without the defect. Claimants argue that CDARA does not contemplate severing the land from the improvements for valuation purposes because, although CDARA does not define "real property," other statutes define the term to include both land and its improvements.(fn13) Dictionary definitions also support this conclusion.(fn14) Moreover, defendants may face difficulty obtaining admissible evidence of a home's valuation separate from the land on which it is built, because no market generally exists for selling homes without land.(fn15)
Fair market value not reasonably ascertainable. Fair market value may not be reasonably ascertainable for unique or historical properties or the common elements in a common interest community. Damages for injuries to hard-to-value property hypothetically could be zero if the "whichever is less" part of CDARA's actual damages limitation applies and the property's value cannot be determined. This result, however, obviously contradicts CDARA's purpose of making claimants whole and providing them with adequate remedies.(fn16)
Valuing common elements presents challenges. Colorado's Common Interest Ownership Act (CCIOA)(fn17) generally prohibits "any purported conveyance, encumbrance, judicial sale, or other voluntary or involuntary transfer" of common elements.(fn18) Because common elements cannot be severed and bought and sold, arguably no market exists to determine their value. No Colorado appellate court has addressed this issue. However, one Colorado district court found that no market value exists for common elements because they lack any separate value or functional purpose other than as a complement to each individual unit.(fn19)
In Redbud Cooperative Corp. v. Clayton,(fn20) the Tennessee Court of Appeals held that the damages measure should be the repair cost for correcting common area drainage problems, rather than the value of the residences diminished as a result of the inadequate drainage. That court explained that, because the common areas will be held in perpetuity, any damages measure predicated on market value was inapplicable.(fn21) This court's reasoning suggests that, by analogy, where no market value can be ascertained, such value need not be considered in applying CDARA's "whichever is less" provision.
Moreover, at common law, where residential property has no fair market value, repair cost generally is the appropriate measure of damages.(fn22) Where the market value is not determinable, defendants will argue the actual damages limitation means the lower of the replacement cost or the reasonable cost to repair the alleged construction defect.(fn23) CCIOA homeowner associations have a statutory duty to maintain and repair common elements.(fn24) Using CDARA's valuation or replacement cost damages limitation may conflict with this statutory duty and with CDARA's express purpose if applying such limitation will not provide enough money to effect statutorily mandated repairs.(fn25)
Some argue that one approximation of common elements' fair market value is the aggregate value of all the common interest community's individual units and their appurtenant common elements combined, because an undivided interest in the common elements is included in the legal description and accompanies the conveyance of each unit.(fn26) CCIOA provides that each unit, together with its interest in the common elements, must be separately assessed and taxed; that the value of the common elements must be assessed proportionate to each unit; and that common elements shall not be separately assessed or taxed. However, CCIOA does not explain how to value the common elements alone.(fn27) Other unanswered questions exist regarding application of CDARA's "whichever is less" limitation to common interest communities consisting of separate buildings, especially when served by common surface grading, utilities, or other common areas or elements.
"Replacement cost" generally means the cost to rebuild rather than repair defectively constructed property.(fn28) CDARA does...
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