Robert G. Wheeler

In 2003, Colorado’s legislature amended and expanded the Construction Defect Action Reform Act (“CDARA”) in an attempt to decrease construction defect litigation. These amendments will substantially change construction defect litigation in Colorado. The CDARA now contains a mandatory notice of claim procedure. Plaintiffs are required to send or deliver a notice of claim to the last known address of any construction professional that they claim is responsible for a defect before filing suit. The notice of claim must describe the nature of the defect, identify its location and itemize plaintiff’s claimed damages. A lawsuit cannot be filed without serving a notice of claim and, once a notice of claim is delivered, no lawsuit can be filed for 75 days (90 days in cases involving commercial property).

Following delivery of a notice of claim, property owners and construction professionals have a duty to confer, exchange information and attempt to resolve the dispute before suit is filed. Following the mailing or delivery of the notice of claim, the construction professional may request, and the claimant must provide, reasonable access to the property to inspect the alleged defect. Within 30 days after completion of the inspection process for residential property (45 days for commercial property), a construction professional may submit an offer to resolve the claim. This offer can either be an offer to pay a specific sum of money or an agreement to remediate the alleged defect. Claimants have 15 days to accept the offer in writing, after which the offer is deemed rejected. If, on the other hand, a construction professional makes no offer, or the claimant rejects the offer, the claimant may file suit. Any applicable statute of limitations is tolled upon service of a notice of claim until 60 days following the completion of the notice of claim process. This new process will result in substantial delays while the parties attempt to resolve claims without litigation.

The CDARA also attempts to limit the ability to recover damages for code violations. Plaintiff-oriented engineers often provide long lists of code violations which, while not resulting in damage or detracting from the property’s value, are alleged to be defects in construction. To limit these types of claims, the CDARA provides that negligence claims may not be asserted if the claim arises from a failure to construct the structure in substantial compliance with building codes or industry standards, unless it results in loss of use, actual damage, bodily injury, wrongful death or potential bodily injury or death.

In addition, the CDARA limits the amount of attorney fees and other damages recoverable in construction defect litigation. Specifically, the CDARA attempts to limit the availability of treble damages for violations of the Colorado Consumer Protection Act. Plaintiffs can only recover more than their actual damages under three limited circumstances. Also, the amount of treble damages and attorney fees awarded under the Consumer Protection Act cannot exceed $250,000.

At what point should an insurer be involved in this new process? Traditionally, insurers have not gotten involved until and unless litigation is commenced. The new notice of claim provision will substantially delay actual litigation. However, the actions taken by the insured during the notice of claim, investigation and settlement process may have a significant impact on subsequent litigation. It is also not clear at what point an insured must place its insurer on notice. Finally, the insurer’s duties during the notice of claim investigation and offer stage is unclear. Therefore, we advise insureds to provide notice as soon as they receive a notice of claim and suggest that insurers assign defense counsel as soon as a notice of claim is received. If this is not done, substantial investigation and negotiations will take place without the benefit of legal counsel. This could substantially, and negatively, impact the defense of subsequent litigation.

It is possible that courts will hold that the notice of claim triggers an insurer’s duty to defend and indemnify. Obviously, if such a decision is made, insurers would have no option but to defend as soon as the notice of claim is received. Please give us a call if you have any questions or need further information about the amended CDARA.

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