Construction Advisory: Passage, Defeat, and Uncertainty: The Colorado General Assembly Tackles Construction Defect Reform in the 2017 Session

by Sherman & Howard L.L.C.
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The Colorado General Assembly is heading towards the conclusion of this year’s legislative session. Although one construction defect bill, House Bill 1279, passed the House and is expected to pass the Senate, most bills have stalled or were defeated, and the fate of one remaining bill remains uncertain. This advisory summarizes one bill we expect to pass, one that remains alive and one that has been postponed indefinitely, and briefly mentions other bills that have been defeated.

House Bill 1279: Construction Defect Claim Notice and Vote

House Bill 1279 (“HB 1279”) was unanimously passed by the House (with one abstention) on April 24, 2017. It now is in the Senate, where it is expected to pass.

HB 1279 addresses informed consent and voting by members of a homeowners’ association (“HOA”) by requiring (1) notice to unit owners, developers, and contractors about a proposed construction defect action; (2) calling of a meeting at which the HOA, developers, and contractors may address alleged construction defects; and (3) majority vote by unit owners to approve a construction defect action. As to the required notice, it must include a description of the nature of the proposed construction defect action, including a description identifying alleged defects with reasonable specificity, the relief sought, and a good-faith estimate of the benefits and risks involved. The notice also requires the disclosure by the HOA of ten specific categories of information, such as the plaintiffs’ attorney’s contingency fee percentage, estimate of other legal costs, warning to unit owners about the potential responsibility of the HOA for its attorneys’ fees and the opposing parties’ attorneys’ fees and costs if the construction defect action is unsuccessful, and warning about how a proposed construction defect action may impact the value of units and ability to refinance.

The notice must call a meeting of the unit owners no less than ten days and no more than fifteen days after the mailing of the notice. At the meeting, the HOA, developer, and contractor may address alleged construction defects. The developers and contractors may offer remedies for alleged construction defects, but such an offer is not required.

After the notice and meeting, the HOA still cannot commence a construction defect action until it obtains approval from a majority of unit owners. Excluded from the vote count are votes allocated to units owned by the developer, other construction professionals and banking institutions. Non-responsive voters also are excluded from the vote count.

Despite its anticipated passage, the construction industry has several concerns with HB 1279. First and foremost is whether HB 1279 will do anything to encourage condominium construction, such as by reducing the number of construction defect claims or by reducing insurance rates for developers and contractors. Second, unlike Senate Bill 156 (“SB 156”) discussed in detail below, HB 1279 does not address arbitration, and its informed consent and vote provisions are weaker than those proposed in SB 156. Third, construction industry representatives objected to the exclusion of non-responsive voters because that could result in a construction defect claim being approved by less than a majority of unit owners, but the House did not revise the bill to address this problem. HB 1279’s voting requirements are actually weaker than those currently in some HOA declarations (which can require up to a 67% vote to approve a defect claim), and we believe the bill will do little to encourage condominium construction.

Senate Bill 17-045: Allocation of Insurance Defense Costs

Senate Bill 17-045 (“SB 45”) addresses the allocation of defense costs when two or more insurance companies have a duty to defend an insured construction professional. This situation arises most commonly when a general contractor or homebuilder is named as an additional insured on subcontractors’ commercial general liability insurance policies. The bill would allow insurance companies to file a separate lawsuit to have a judge determine the percentage of defense costs of an insured that each insurer must pay. This approach would dramatically change existing Colorado law in ways that benefit insurers but hurt construction professionals. Sherman & Howard issued a prior client advisory on March 10, 2017 regarding concerns with the introduced version of SB 45.

The Senate Business, Labor and Technology Committee held a hearing on SB 45 on February 8, 2017, where insurance industry representatives testified for the bill and a number of construction industry organizations testified against the bill. Although the Committee adopted minor amendments, they did not address construction professionals’ concerns.

Proponents of SB 45 later proposed an amended version of the bill that addresses some of the concerns with the introduced bill, but it still would hurt construction professionals by (1) causing additional insureds to completely lose insurance coverage if they did not strictly comply with a proposed requirement that within 21 days of receiving a notice of construction defect claim they notify all insurers with a duty to defend; (2) eliminating the “notice-prejudice” rule, which provides that if an insured delays giving an insurer notice of a claim or suit, the insured is entitled to coverage unless the insurer shows it was prejudiced by late notice; (3) likely delaying an additional insured’s defense for months; and (4) allowing insurers to sue any insured or additional insured construction professional who did not have liability insurance for any period of time implicated by the claim.

The bill has a fiscal note cost of over $250,000 a year for the state due to additional staff in the Colorado Judicial Department. Thus, the bill needs to be heard by the Senate Appropriations Committee. That hearing, however, has been postponed several times. Construction industry organizations are working against SB 45 and its outlook is uncertain. Currently, the bill remains under consideration.

Senate Bill 17-156: Construction Defects Arbitration, Notice and Vote

Senate Bill 17-156 (“SB 156”) was the construction defect bill supported by a coalition of construction industry organizations, business interests, metro-area mayors, affordable housing advocates, and others. Since 2014, this coalition has supported legislation to reduce the frequency and magnitude of construction defect claims and encourage the construction of condominiums. SB 156 would favor arbitration of construction defect claims, instead of litigation in court, by providing that if the governing documents of a condominium project require arbitration of construction defect claims, those provisions cannot later be removed or amended. The bill also would require unit owners to receive certain disclosures about the risks and costs of a construction defect claim and a majority of unit owners to vote to approve pursuing a construction defect claim.

The Senate passed SB 156 on March 6, 2017 by a vote of 23 12, with five Democrats joining all eighteen Republicans in supporting the bill. In the House, the bill was assigned to the State, Veterans, and Military Affairs Committee, also known as the “Kill Committee.” While supporters were optimistic this might be the year for meaningful construction defect reform, SB 156 was postponed indefinitely on April 20, 2017.

Other Defeated Construction Defect Bills

The 2017 legislation session also saw the introduction of other proposed construction defect bills that died in the legislative process.

Senate Bill 17-157 is another notice and consent bill that would have required an HOA to notify all unit owners and receive majority approval before bringing a construction defect claim against a developer or builder. This bill was postponed indefinitely.

House Bill 17-1169 would have given construction professionals a right to repair any alleged construction defects before the claimant could file a construction defect action. This bill also was postponed indefinitely.

Conclusion

The 2017 legislative session of the Colorado General Assembly adjourns on May 10, 2017. We expect HB 1279 will pass. We believe SB 45 would be harmful to the construction industry, and while somewhat uncertain we expect that SB 45 will not be approved.

We believe HB 1279 does not go far enough to meaningfully reduce the risk of construction defect actions and spur new condominium construction. An even bigger problem is that with the passage of HB 1279, the Colorado General Assembly may feel they have “solved” the construction defect issue and not consider additional legislation for the foreseeable future.

We believe that the one thing that would do the most to spur condominium construction is to ensure that if an HOA declaration says construction defect claims will be resolved in arbitration, that provision is enforceable and cannot be deleted. That would ensure that such claims are resolved in arbitration instead of in a jury trial. Many plaintiffs’ construction defect attorneys and HOA organizations oppose legislation that would require arbitration. This issue, however, is currently being reviewed by the Colorado Supreme Court in Vallagio at Inverness Residential Condominium Association, Inc. v. Metropolitan Homes, Inc. The Court heard oral argument in the case in March, and we expect a ruling by the end of this year. A favorable ruling by the Supreme Court would be very positive for the construction industry and we believe would encourage developers and contractors to build condominiums. Once the Colorado Supreme Court rules in Vallagio, Sherman & Howard’s construction industry practice group will issue a client advisory to notify our clients and the industry of the impact of that decision.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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