Under Colorado House Bill 17-1279, HOA Boards Now Must Get Members’ Informed Consent Before Bringing A Construction Defect Action

Posted on by
Reply

Luke Mecklenburg | Snell & Wilmer | April 8, 2018

Last year, I wrote a post calling attention to stalled efforts in the Colorado legislature to pass  meaningful construction defect reform.  Shortly thereafter, the legislature got it done in the form of House Bill 17-1279.  This bill creates an important pre-litigation notice-and-approval process whenever an HOA initiates a construction defect action in its own name or on behalf of two or more of its members.

Before May 2017, the pre-litigation requirements that an HOA had to fulfill before bringing a construction defect claim under the Colorado Construction Defect Action Reform Act (“CDARA”) were generally minor. For example, while many declarations required majority approval from the community prior to initiation of claims, in practice, what the industry was seeing is that some HOAs were making it so that only a majority of the HOA Board had to approve bringing the claim, rather than the majority of interested unit owners.  It was also common that, even where the majority of owners were involved, they were often voting in favor of filing a lawsuit or arbitration without fully understanding the risks and costs.  This practice presented a risk to developers—it is easier to get approval from a small group than from a larger group, and it is easier to get approval when the voting owners do not fully appreciate the risks and costs inherent in filing a claim.

Colorado House Bill 17-1279, which was signed into law by Governor Hickenlooper in May 2017 and is codified at C.R.S. § 38-33.3-303.5, lessens these risks by amending the Colorado Common Interest Ownership Act (“CCIOA”) to add certain pre-litigation requirements.  Section 38-33.3-303.5 applies any time an HOA institutes a construction defect action  its own name on behalf of itself or two or more unit owners on matters affecting the common interest community.  C.R.S. §§ 38-33.3-302(1)(d), -303.5(1)(a).

These amendments directly address the “majority vote” issue. As amended, section 38-33.3-303.5 states that the HOA’s “executive board may initiate the construction defect action only if authorized within the voting period by owners of units to which a majority of votes in the association are allocated,” unless the action pertains to (1) nonresidential facilities with defects of less than $50,000 or (2) “the association is the contracting party for the performance of labor or purchase of services or materials.”  C.R.S. § 38-33.3-303.5(1)(d)(I)(A).  The section excludes several types of votes from this “majority,” including votes allocated to units owned by a development party and by banking institutions “unless a vote from such an institution is actually received,” votes “allocated to units of a product type in which no defects are alleged, in a common interest community whose declaration provides that common expense liabilities are not shared between the product types,” and votes allocated to “nonresponsive” unit owners.  C.R.S. § 38-33.3-303.5(1)(d)(III).  Nevertheless, this majority vote requirement applies “notwithstanding any provision of law or any requirement in the governing documents” of the community, so for most construction defect actions, it effectively curtails the practice of initiating construction defect actions based only on a majority vote of the HOA board.  C.R.S. § 38-33.3-303.5(1)(d)(I)(A).

The revised statute also requires significant disclosures. Before bringing a lawsuit or arbitration for construction defect claims, the HOA board must mail or deliver written notice of the anticipated construction defect action (the “Proposed Action”) to each owner and to the construction professional against whom the Proposed Action would be asserted (the “Disclosure Notice”).  The Disclosure Notice must: (1) set the date for the newly required meeting with owners (the “Meeting”) within ten to fifteen days after the Disclosure Notice, to consider the Proposed Action; and (2) make the following disclosures:[1]

  • As to the meeting itself, the Disclosure Notice must explain that:
    • The voting period begins after the Meeting, at which time the HOA will accept votes for or against proceeding with the Proposed Action;
    • The voting period ends at the earlier of 90 days after the meeting or when the HOA has received enough votes to either approve or disapprove of the Proposed Action; and
    • All impacted construction professionals are invited to the Meeting and will have the opportunity to address the owners and, if the professional so chooses (not required), they may offer a remedy in accordance with CDARA’s notice of claim process
  • As to the substance of the claims and proposed action, the Disclosure Notice must provide a description of the alleged defects with reasonable specificity, the relief sought, and a good faith estimate of the benefits and risks involved. It must disclose that:
    • The alleged defects may result in increased maintenance and repair costs or special assessments;
    • The applicable deadlines and statutes of limitations for bringing the Proposed Action;
    • That the defects may have to be disclosed to potential buyers;
    • The compensation arrangement between the attorneys and the HOA;
    • The HOA may incur legal costs up to a specified amount, in addition to attorneys’ fees and that, if the HOA does not prevail on its claims, it may have to pay these amounts;
    • A court or arbitrator could award costs and fees to the opposing party, if the HOA does not prevail, and the HOA would be responsible for those amounts;
    • There is no guarantee that any damages awarded will cover the cost of repairs;
    • Market value of the units may be adversely affected by the defects; and
    • Owners and prospective buyers could have difficulty obtaining financing because of the defects and the suit.

The purpose of the disclosures is to ensure that owners are informed and knowledgeable about the risks and basis for the Proposed Action prior to voting. Further, at least five business days before sending the Disclosure Notice, the HOA Board must send a separate notice to the construction professional, advising it of the upcoming Meeting.  The construction professional may then elect to offer a presentation at the meeting, which may include “an offer to remedy any defect in accordance with” CDARA.   C.R.S. § 38-33.3-303.5(1)(c)(II).  This provision is intended to give the construction professional enough time to prepare for the Meeting and to offer voluntary remediation.

In sum, HB 17-1279 should have two primary effects: making sure HOA members understand the potential risks and benefits of construction defect litigation, and making sure that most of the affected parties give informed consent to proceed.

[1] The specific language of the required disclosures is codified at C.R.S. § 38-33.3-303.5(1)(c)(II)-(III).

Don’t Sleep on This: New York High Court Addresses Scope of “Blanket” Additional Insured Endorsements

Posted on by
Reply

Tyrone R. Childress, Edward M. Joyce and Jason B. Lissy | Jones Day | April 2018

The Situation: The issue of whether “blanket” additional insured endorsements require direct contractual privity with an insurance policy’s “named insured” has received inconsistent treatment by U.S. courts.

The Development: The New York high court’s recent Gilbane decision confirms that the requirements for “additional insured” status continue to be determined by the specific language of additional insured endorsements themselves and not by the insurance requirements of parties’ underlying contracts.

Looking Ahead: Prior to a project’s commencement, the actual language of additional insured endorsements should be carefully reviewed to confirm its alignment with parties’ contractual intent.

Is a contractual privity requirement lurking within the fine print of your “additional insured” coverage? As illustrated by the New York high court’s recent decision in Gilbane Building Co./TDX Constr. Corp. v. St. Paul Fire and Marine Ins. Co., No. 22, 2018 WL 1473553 (N.Y. Mar. 27, 2018) (“Gilbane“), the answer, if overlooked, can mean the difference between being fully insured and not covered at all. 

Additional Insured Endorsements and the Contractual Privity Issue 

In addition to contractual indemnification provisions, many companies require that they be added as “additional insureds” to the liability insurance policies of those with whom they do business. By conferring direct rights to coverage for third-party liabilities that arise out of the performance of others’ work, additional insured status provides a number of important risk management benefits. It allows the additional insured to keep these losses off of its own insurance program, thereby protecting its loss history and avoiding related premium increases. It also protects the additional insured in the event that its counterparty is unable to perform its contractual indemnification obligations.

While additional insureds can be added to a policy via a “specific” endorsement (i.e., expressly identifying the particular individual or entity to be added), parties instead frequently rely upon “blanket” (also referred to as “automatic”) endorsements to do so. Designed to avoid having to create a new endorsement and obtain insurer authorization each time an additional insured is added to a policy, “blanket” additional insured endorsements generally provide additional insured status to any person or entity that the named insured is contractually required to add to the policy.

As is the case in many large-scale construction and development projects (e.g., where a “downstream” subcontractor agrees in its subcontract with the project’s general contractor to add the “upstream” project owner as an additional insured under the subcontractor’s liability policies), the party to be added as an additional insured often is not in direct contractual privity with the named insured. The issue of whether such arrangements are sufficient to confer additional insured status under these “blanket” endorsements has received inconsistent treatment by United States courts.

As the New York high court’s recent Gilbane decision demonstrates, the question of whether direct contractual privity with a policy’s named insured is a prerequisite to additional insured status continues to depend on the precise language of the “blanket” additional insured endorsement used. 

Factual Background

Gilbane involved the construction of a 15-story building at the Bellevue Hospital Campus in Manhattan for use by New York City’s Chief Medical Examiner. The Dormitory Authority of the State of New York (“DASNY”), which was financing and overseeing the project, retained a joint venture formed between Gilbane Building Company and TDX Construction Corporation (the “JV”) to serve as the project’s construction manager. 

The construction management agreement between DASNY and the JV provided that any prime contractor, whether retained by DASNY or otherwise, was required to name the JV as an additional insured under its liability insurance policies. 

DASNY contracted separately with Samson Construction Company (“Samson”) to serve as the prime contractor for the project’s excavation and foundation work. In its prime contract with DASNY, Samson agreed to obtain a commercial general liability (“CGL”) insurance policy that included several entities, including the JV, as additional insureds. 

To satisfy this requirement, Samson obtained a CGL policy from Liberty Insurance Underwriters (“Liberty”), containing a blanket additional insured endorsement (titled “Additional Insured—By Written Contract”) stating:

“WHO IS AN INSURED (Section II) is amended to include as an insured any person or organization with whom you have agreed to add as an additional insured by written contract but only with respect to liability arising out of your operations or premises owned by or rented to you.” (emphasis added). 

During construction, Samson’s excavation work allegedly caused significant structural damage to adjacent buildings. DASNY sued Samson and the project architect for negligence, and the project architect, in turn, commenced a third-party action against the JV.

When the JV looked to Liberty to defend and indemnify the JV against the project architect’s third-party claim, Liberty denied coverage on the ground that the JV was not an additional insured under Samson’s CGL policy.

Disagreement Between the Trial and Intermediate Appellate Courts

In the ensuing coverage dispute commenced by the JV, Liberty moved for summary judgment, maintaining that its “blanket” additional insured endorsement added as additional insureds only parties with whom Samson had a direct contractual relationship. Given that Samson and the JV were not in contractual privity, Liberty argued that its “blanket” additional insured endorsement therefore did not extend coverage to the JV. 

In response, the JV maintained that Liberty’s “blanket” additional insured endorsement did not require direct contractual privity between the named insured and the additional insured, but instead required only that the additional insured be identified in a written contract to which the named insured is a party. Given that Samson was required to add the JV as an additional insured in its prime contract with DASNY, the JV maintained that it was therefore afforded additional insured status under Samson’s CGL policy. 

Denying Liberty’s motion for summary judgment, the trial court determined that the CGL policy’s “blanket” additional insured endorsement “requires only a written contract to which Samson is a party” and that this requirement was met by Samson’s written contract with DASNY, which obligated Samson to obtain insurance including the JV as an additional insured. 

Over a vigorous dissent, the intermediate appellate court reversed, holding that the CGL policy’s “blanket” additional insured endorsement “clearly and unambiguously requires [that] the named insured execute a contract with the party seeking coverage as an additional insured.” Differentiating between the phrases “with whom” and what it viewed as the more-expansive phrase “for whom,” the intermediate appellate court reasoned that the “plain meaning” of the words “any person or organization with whom you have agreed to add as an additional insured by written contract,” as used in the “blanket” additional insured endorsement, required a direct contractual relationship between the named insured and additional insured. 

New York Court of Appeals Finds a Contractual Privity Requirement

 In a 5-2 opinion affirming the intermediate appellate court’s decision, the New York Court of Appeals determined that the CGL policy’s “blanket” additional insured endorsement was “facially clear” and the phrase “with whom,” when afforded its ordinary meaning, “can only mean that the [named insured’s] written contract must be ‘with’ the additional insured.”

Finding the “blanket” additional insured endorsement unambiguous, the New York high court determined that extrinsic materials such as the insurance procurement requirements of the Samson–DASNY prime contract could not be used to “rewrite” the CGL policy, and instead merely conferred the JV with potential third-party beneficiary standing under the prime contract to sue Samson for its breach.

Tips to Avoid Unintended Consequences

The New York high court’s recent Gilbane decision underscores the need for parties to carefully review the scope of their additional insured coverage prior to a project’s commencement. To that end, the following tips will help to avoid unintended consequences like those in Gilbane and ensure that additional insured coverage aligns with parties’ contractual intent:

  • Avoid “Contractual Privity” Requirements. Where parties to be added as additional insureds lack a direct contractual relationship with the policy’s named insured, “specific” endorsements, or “blanket” additional insured endorsements that do not require direct contractual privity with the named insured, should be used. In particular, parties should avoid “blanket” additional insured endorsements like the one at issue in Gilbane (e.g., ISO Form CG 20 33 04 13) and instead consider broader forms, such as ISO Form CG 20 38 04 13 (“Additional Insured—Owners, Lessees or Contractors—Automatic Status for Other Parties When Required in Written Construction Agreement”), which provide additional insured status to both the party with whom the named insured directly contracts in writing to perform operations, as well as “any other person or organization [the named insured is] required to add as an additional insured under the contract or agreement.”
  • Require Additional Insured Coverage to be “Primary And Noncontributory.” Parties should consider whether to require that additional insured coverage be provided on a “primary and noncontributory” basis and have named insureds obtain endorsements to their liability policies providing the same (e.g., ISO Form CG 20 01 04 13, “Primary and Noncontributory—Other Insurance Condition”). Doing so ensures that contribution will not be sought from the additional insured’s own insurance policies (i.e., that the additional insured’s own insurance policies will apply in excess of, and not subject to pro-rata allocation with, the named insured’s liability policy).
  • Specify “Completed Operations” Coverage Requirements. Many standard form additional insured endorsements provide coverage only for “ongoing operations.” In addition, while “completed operations” coverage for additional insureds is available via separate endorsements (e.g., ISO Form CG 20 37 04 13, “Additional Insured—Owners, Lessees or Contractors—Completed Operations), these endorsements may provide only completed operations coverage for occurrences during the policy period, which may be of insufficient duration. Additional insureds seeking completed operations coverage should accordingly consider requiring downstream parties to purchase project-specific completed operations coverage for a specified period following the project’s substantial completion (e.g., through the applicable state’s statute of repose).
  •  Evaluate the Scope of Coverage for Additional Insureds’ Sole Negligence. Parties should consider whether the particular language of their additional insured endorsements will provide coverage for the additional insured’s sole negligence (i.e., for liabilities that are not at least partially caused by the named insured’s own acts or omissions). Given courts’ inconsistent treatment of this issue, parties should be familiar with how their insurance policy language has been construed under applicable state law, as well as with any state anti-indemnity statutes that may further restrict the availability of coverage for an additional insured’s sole negligence.
  • Do Not Rely on “Certificates of Insurance” as Proof of Coverage.Parties should keep in mind that additional insured status is created only by an actual endorsement issued and approved by the insurer, and cannot be obtained via a “certificate of insurance.” To confirm their additional insured status, parties therefore should not rely upon “certificates of insurance” (which do not constitute adequate proof of coverage) and should instead require that they, at a minimum, be provided with copies of the policy’s declarations pages, schedule of forms, and the additional insured endorsement itself.

Three Key Takeaways

  1. In many large-scale construction projects, parties frequently rely upon “blanket” endorsements, which generally provide additional insured status to any person or entity that the named insured is contractually required to add to the policy.
  2. In these situations, however, the party to be added as an additional insured often is not in direct contractual privity with the policy’s named insured. As illustrated by the Gilbane decision, whether such arrangements are adequate to confer additional insured status under “blanket” endorsements depends on the precise language of the endorsement used.
  3. Prior to a project’s commencement, the actual language of additional insured endorsements should therefore be carefully reviewed to confirm its alignment with parties’ contractual intent.

Explaining Depreciation of Personal Property Contents in Colorado

Posted on by
Reply

Jonathan Bukowski | Property Insurance Coverage Law Blog | April 14, 2018

Whether your insurance company forced you to sift through soot and ash, trying to recollect what has just been stolen, or trying to identify items damaged by water, going through damaged contents and creating an inventory is an emotionally draining experience that typically comes with little to no guidance by the insurance company. After spending countless hours substantiating lost personal property contents, the insurance company responds with random, and sometimes substantial reductions in the value of the personal property for depreciation, often with little to no explanation as to how it arrived at that conclusion.

But what is depreciation, and why is it important?

Depreciation is the loss in value to a particular item due to wear and tear, age, obsolescence, or any other factor. Depreciation is subtracted from the cost to replace the damaged items to arrive at an actual cash value. While most insurance policies provide for recovery based on a replacement cost basis, some policies limit recovery of personal property contents to the actual cash value. It is also common for replacement cost value policies to limit recovery to actual cash value until the damaged property is repaired or replaced. While it may not be difficult to replace an inexpensive item that has been substantially depreciated, it can become very difficult, or nearly impossible, to replace an expensive item improperly depreciated to a point where the policyholder is financially unable to purchase a replacement item.

To determine depreciation, Colorado follows the broad evidence rule which requires that allrelevant factors must be considered to determine appropriate depreciation. This requires looking beyond just wear and tear or market value, and includes looking at all facts and circumstances which would lead to a correct estimate of the value of the particular item.1 These facts may include the original cost, the cost of replacement, collectability, location, use, and even the opinion of witnesses. More important, depreciation should not be taken generally, and items should be depreciated on an individual basis.

Colorado policyholders should always carefully review and scrutinize personal property contents estimates provided by the insurance company to determine whether excessive or unsupported deductions have been made for depreciation. If you suspect the insurance company has not considered all relevant factors to determine appropriate depreciation, consider requesting the insurance company provide a reasonable explanation of the depreciation methodology used in determining the depreciation applied to the individual items.
__________________
1 Nebraska Drillers, Inc. v. Westchester Fire Ins. Co., 123 F.Supp. 678 (D.Colo.1954).

The Proper Standard for Evaluating “Actual Cash Value” Under New Jersey Law

Posted on by
Reply

Jennifer Van Voorhis | Property Insurance Coverage Law Blog | April 12, 2018

One of the most common questions we hear from our clients has to do with the differences between “actual cash value” and “replacement cost value.” Replacement cost value on its face seems relatively straight forward, but what is “Actual Cash Value” determined under New Jersey law?

This topic was visited by Shane Smith following Super Storm Sandy in Calculating Actual Cash Value, Part 5: New Jersey and New York, and I was curious if the criteria had changed following such an influx of first party property damage claims.

There are typically three general ways to determine Actual Cash Value:

  1. market value;
  2. replacement cost less depreciation; and
  3. the broad evidence rule.1

The Broad Evidence Rule, in layman’s terms, is a combination of Market Value (what it’s selling for now) and Replacement Cost less Depreciation (how much it costs to replace minus age/wear & tear/condition, etc.).2 In Messing v. Reliance Insurance Company, the court found “that the broad evidence rule was most consistent with the principle of indemnity.”3

The Supreme Court of New Jersey agreed. In Elberon Bathing Company v Ambassador Insurance Company,4 a fire case that went to appraisal, the Court held:

“[T]hat (1) appraisal based on replacement cost without consideration of depreciation does not measure actual cash value; (2) the proper standard for evaluating ‘actual cash value’ under New Jersey standard form policy is broad evidence rule. . . .”

The Elberon the New Jersey Supreme Court found broad evidence to be the standard because it requires the fact-finder to consider the same evidence an expert would consider relevant to an evaluation; fair market value and replacement cost minus depreciation. The Court does allow the fact-finder to use the criteria as guidelines if the facts of the case are appropriate.
____________________
1 See Note, “Valuation and Measure of Recovery Under Fire Insurance Policies,” 49 Colum. L. Rev. 818, 820-823 (1949); Cozen, Op. cit., supra, 12 Forum at 648-658; Hinkle, “The Meaning of ‘Actual Cash Value,’” 1967 Ins.L.J. 711. See generally Annot., 61 A.L.R.2d 711 (1958).
2 Messing v. Reliance Ins. Co., 77 N.J.Super. 531, 187 A.2d 49 (1962).
3 Id. at 534.
4 Elberon Bathing Co. Inc. v Ambassador Ins. Co., 77 N.J. 1, 389 A.2d 439 (1978).

Call for Presenters for Four Construction Defect & Dispute Conferences

Posted on by
Reply

We have four Construction Defect & Dispute Conferences coming up and we would like to see you there!

New Orleans, LA – Friday, October 12, 2018

Seattle, WA – Friday, November 16, 2018

Salt Lake City, UT – Friday, February 8, 2019

Chicago, IL – TBD – May/June of 2019

If you have a great topic that you would like to submit to us we want to hear from you!  Submit your proposal to jeff@adviseandconsult.net.  Please provide us with your topic ideas along with which conference you are most interested in attending.

We are looking for interesting, informative and beneficial topics and presenters from attorneys, judges, and insurance professionals.  Some topic ideas to get the brain juices flowing are:

Unisex bathrooms & building codes

3D Printing & construction defects

Building Information Modeling & Impact on construction defects

Solar Panels & Insurance Coverage for roof damage

Replacement Cost Estimates vs. Reality

Virtual Reality: The Future of Expert Testimony?

These are just a few topics that might appeal to our attendees – think of topics that you would like to attend.

All topics covered must be in 1 hour increments, can be solo or panel discussions.  This is a fantastic way to get more of those pesky CLE/CE credits out of the way – depending on your local state requirements, you may earn 2 or 3 times the credits for being a presenter!

On top of that you will get good exposure as a public speaker that you may use on your CV, people will look at you as an expert in your field, plus you will receive a complimentary pass (including lunch) for you and four others that you can give to colleagues.

So get your topic ideas together, talk with colleagues on getting a panel together and submit your topic ideas to jeff@adviseandconsult.net.

We do not provide any travel, other expenses or compensation.