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Colorado finally corrects thirty-year old flaw in construction defect statute of repose

Wednesday, March 22, 2017 @ 03:03 PM
Author: Jesse Witt

The Colorado Supreme Court has finally settled a decades-old conundrum surrounding the state’s construction defect statute of repose.

A statute of repose is similar to a statute of limitations insofar as both restrict the time a party can bring a claim. A statute of repose period begins on a fixed date (such as the day someone finishes work on a project), while a statute of limitations period begins when someone discovers an injury (such as a defectively installed window).

In 1986, at the height of the so-called “tort reform” movement, the Colorado General Assembly voted to shorten both the statute of repose and the statute of limitations for construction defect claims. Historically, Colorado’s statute of repose had given a homeowner ten years following construction to file an action, and its statute of limitations had required that any such action be filed within three years of the date that the claimant discovered a defect. After 1986, however, these time periods changed; the new statute of repose required suits to be filed within six years of the end of construction, and the new statute of limitations gave claimants only two years following discovery of the physical manifestation of a defect to seek legal relief.[1]

Although these amendments were intended to benefit builders by shortening their exposure to construction defect claims by homeowners, they had an unexpected consequence. Based on the broad wording of the 1986 statute, courts concluded that the new statute applied to all construction defect claims against all construction professionals, including indemnity claims filed by developers against their subcontractors.[2] This was a change from prior law, which had recognized: “The virtually universal rule is that a claim for indemnity does not accrue, and therefore the limitations period does not begin to run, until the indemnitee’s liability is fixed i. e., when he pays the underlying claim, or a judgment on it.”[3]

For example, consider the following timeline. In 1987, a developer hires a carpenter to install a window on a new home under a subcontract that requires the carpenter to provide indemnity for any defects in his workmanship. In 1988, a homeowner buys the house. In 1992, the homeowner discovers that the window is leaking but does not know why. In 1994, the homeowner sues the developer for water damage. In 1995, the developer pays to repair the water damage after determining that the leak occurred because the carpenter failed to flash the window correctly. According to the subcontract, the developer should be able to demand indemnity from the carpenter for those repair costs. But under the 1986 statute, the developer’s third-party claim for indemnity would be barred because more than two years have passed since the homeowner discovered the manifestation of the defect in 1992, and more than six years have passed since the end of construction in 1988.

This result—that a claim for indemnity could accrue and expire before a developer had paid anything on the loss, or perhaps even identified what trades were responsible—came as a shock to many in the industry, and it led to “shotgun style” pleadings, in which a developer named in a lawsuit would immediately sue every subcontractor on the job for indemnity, even if many of those subcontractors had no involvement with any alleged defects.

This caused insurance premiums to rise and prompted Colorado’s first Construction Defect Action Reform Act (CDARA) in 2001. CDARA amended the 1986 statute of limitations and repose to add a new section stating that, notwithstanding the limitations and repose periods, an indemnity claim against a third party would not arise until the underlying claim was resolved, and that the indemnitee would then have ninety days to pursue an indemnity claim. In the example above, the developer would have had ninety days after settling with the homeowner in which to sue the carpenter for indemnity.

That was the intent, at least. In 2008, the Colorado Court of Appeals ruled that CDARA had only succeeded in changing the two-year statute of limitations, not the six-year statute of repose.[4] This interpretation gave developers extra time in cases where a defect had manifested early in the repose period, but it provided little relief in situations where a homeowner filed suit closer to the six-year mark. Indeed, even if developer did not have a statute of repose problem at the outset of a case, the slow pace of litigation could cause the six-year period to expire during the pendency of the lawsuit. Thus, these decisions encouraged a return to the era of shotgun pleadings that CDARA had sought to curta il. In two subsequent decisions in 2012 and 2016, the court of appeals adhered to this interpretation and ruled that the statute of repose could be even shorter for subcontractors who only worked on a discrete portion of a job.[5]

In 2013, the General Assembly voted down a bill that would have corrected this problem, citing concerns over other portions of the bill that would have weakened consumer protections for homebuyers.[6] Later attempts to amend CDARA focused on limiting homeowner rights and did not address the courts’ incorrect interpretation of the statute of repose.

Finally, however, the supreme court took up the issue in 2016. In Goodman v. Heritage Builders, Inc.,[7] the court overruled the three court of appeals decisions. The court correctly recognized that CDARA was intended to provide developers a ninety-day window following settlement or judgment with a homeowner to pursue indemnity claims against subcontractors or others responsible for the underlying damage, even if that occurred more than six years after construction.

In Goodman, a couple purchased a home from Heritage Builders in 2006. In late 2011, the couple sold to a new owner. Several months later, the new owner discovered construction defects. Unable to reach an informal resolution, he sued Heritage Builders in 2013. Heritage Builders then filed a third-party complaint for indemnity against the responsible subcontractors, but the district court entered summary judgment in the subcontractors’ favor, finding that the indemnity claims had not been filed within six years of the 2006 completion date.

Although a summary judgment order would typically be appealed to the Colorado Court of Appeals, the Colorado Supreme Court granted an original proceeding based on the novel issues presented and ordered the subcontractor to show cause why summary judgment should not be set aside. The court announced its final decision in March 2017. The court first reviewed the statutory language of CDARA and its statement that indemnity claims could be brought within ninety days of resolution “notwithstanding” the other provisions of the statute. The court then concluded that this language clearly indicated the drafters’ intent to allow developers more time beyond the six-year statute of repose to bring third-party indemnity claims. The court therefore made its rule absolute and vacated entry of summary judgment.

How this opinion will affect future litigation remains to be seen. Some have argued that a shorter statute of repose is crucial “to relieve those involved in the construction business of the prospect of potentially indefinite liability for their acts or omissions.”[8] Such a concern may be exaggerated, however, given the fact that most subcontractors’ liability insurance arises from “occurrence” policies triggered by the date of loss, not the date that a claim is made.[9] In that context, the Goodman case should not expose subcontractors to significant liability beyond the existing statute of repose period. Even if an indemnity claim was made decades after work was performed, the claimant would still need to prove that the property damage occurred during the first six to eight years following construction, or else the claim would be untimely. So long as subcontractors have paid their premiums during the statute of repose period, those policies should cover their liability, regardless of when the claim was actually made; they need not fear perpetual exposure to indemnity claims.

In sum, Goodman appears to be the solution to a thirty-year puzzle over Colorado’s construction defect statute of repose. For the time being, the issue appears to be settled. Should the legislature start tinkering with the statute again, however, then the next fix may be decades away.

[1] See Colo. Rev. Stat. § 13-80-104.  The 1986 amendments incorporated an element of accrual into the statute of repose, such that the actual period could vary between six and eight years. Discussion of these scenarios is beyond the scope of this article.

[2] Nelson, Haley, Patterson & Quirk, Inc. v. Garney Cos., Inc., 781 P.2d 153, 155 (Colo. App. 1989).

[3] Duncan v. Schuster-Graham Homes, Inc., 194 Colo. 441, 447, 578 P.2d 637, 641 (1978)

[4] Thermo Dev., Inc. v. Cent. Masonry Corp., 195 P.3d 1166, 1167 (Colo. App. 2008).

[5] Sierra Pac. Indus., Inc. v. Bradbury, ___ P.3d ___, 2016 COA 132, (Colo. App. Sept. 8, 2016); Shaw Constr., LLC v. United Builder Servs., Inc., 296 P.3d 145 (Colo. App. 2012).

[6] Colo. 69th Gen Ass. S.B. 52 (2013) “Transit-oriented Development Claims Act of 2013.”

[7] 2017 CO 13, ___ P.3d ___ (Colo. Mar. 20, 2017).

[8] Sierra Pacific, supra n.5, ¶ 26.

[9] See Jesse Howard Witt & Marci M. Achenbach, “Insuring the Risk of Construction Defects in Colorado: The Tenth Circuit’s Greystone Decison,” 90 Den. U. L. Rev. 622 (2013).

CBS story highlights client’s dispute with repair contractor

Tuesday, March 7, 2017 @ 07:03 PM
Author: Jesse Witt

In a recent news story, Denver’s CBS4 covered a dispute between homeowner Maria Gordon and restoration contractor Belfor. Gordon had hired Belfor to rebuild her home after a drunk driver destroyed the house while she lay sleeping, but disagreements led to a lawsuit. Jesse Witt represented Gordon in the action, and he cautioned homeowners to read construction contracts carefully before signing. The parties eventually reached a confidential settlement.

Click here to watch the video.

Witt named to 2017 Super Lawyers

Wednesday, March 1, 2017 @ 09:03 AM
Author: Jesse Witt

The Witt Law Firm is proud to announce that Super Lawyers has recognized lawyer Jesse Howard Witt as Top Rated Construction Litigation Attorney in Boulder Colorado.

Super Lawyers is a rating service of outstanding lawyers who have attained a high-degree of peer recognition and professional achievement. Super Lawyers selects attorneys using a patented multiphase selection process. Peer nominations and evaluations are combined with independent research. Each candidate is evaluated on 12 indicators of peer recognition and professional achievement. Selections are made on an annual, state-by-state basis. The objective is to create a credible, comprehensive and diverse listing of outstanding attorneys that can be used as a resource for attorneys and consumers searching for legal counsel. Since Super Lawyers is intended to be used as an aid in selecting a lawyer, it limits the lawyer ratings to those who can be hired and retained by the public. This is the fifth time that Super Lawyers has recognized Mr. Witt.