Certificates of Review in Colorado Construction Defect Litigation

Daniel E. Evans and Kaitlin Marsh-Blake | Gordon Rees Scully Mansukhani | February 28, 2019

The requirement to file a certificate of review early in a lawsuit is often imposed for the purpose of preventing frivolous professional malpractice actions and avoiding unnecessary time and cost in defending such claims. These statutory obligations vary between states and are often dependent on the type of professional named as a defendant. The certificate of review requirement, sometimes called an affidavit of merit, is often seen in the healthcare context, and does not always extend to other areas of professional negligence. For example, in Missouri, a certificate of review is required in any medical malpractice action, but not in actions against other licensed professionals. In Kansas, instead of an affidavit of merit, any party to the action may request a professional malpractice screening panel review the matter and determine if there was a departure from the standard of care. Construction defect cases often involve licensed engineers, architects, and surveyors. In Colorado, these individuals are state-licensed professionals and are subject to a certificate of review.

Plaintiffs in Colorado must file a certificate of review in every professional negligence action against a licensed professional. C.R.S. § 13-20-602. The certificate of review must be filed within sixty days after service of the complaint. The certificate of review must indicate that the claimant’s attorney consulted with an expert in the area of the alleged negligent conduct, and that the consulting expert determined that the claim does not lack substantial justification. C.R.S. § 13-20-602(3). In the construction context, the certificate of review requirement applies to Colorado-licensed engineers, architects, and surveyors. Arguably, this requirement also applies to certain trades such as electricians and plumbers, as these contractors are also regulated by the Colorado Department of Regulatory Agencies and licensed through the State of Colorado.

Case law authority exists that Colorado’s certificate of review requirement is not limited to negligence claims, but instead may be required for any claim against a licensed professional that requires expert testimony. Ehrlich Feedlot, Inc. v. Oldenburg, 140 P.3d 265, 271 (Colo. App. 2006). When a plaintiff’s claim requires a showing that the licensed professional breached a duty of care, and the duty of care is not within the understanding of a layperson without the assistance of expert testimony, then a certificate of review is required. Williams v. Boyle, 72 P.3d 392, 397 (Colo. App. 2003). Depending on the allegations, the certificate of review requirement may extend to claims of fraud, breach of contract, or violations of the Colorado Consumer Protection Act. See, e.g., Williams v. Boyle, 72 P.3d 392, 399 (Colo. App. 2003) (certificate of review was required for claims involving fraud); Martinez v. Badis, 842 P.2d 245, 251 (Colo. 1992) (breach of contract claims); Teiken v. Reynolds, 904 P.2d 1387, 1398 (Colo. App. 1995) (CCPA claims).

Section 13-20-602, C.R.S., mandates that the failure to file a certificate of review shall result in dismissal of the complaint. However, the court has the discretion to determine that a longer period of time is necessary to file a certificate of review and may extend the deadline. Id. When involved in a construction defect matter in Colorado, it is important to determine whether the named defendant is a licensed professional and note the deadline for a claimant to file a certificate of review. In some instances, a well-timed dispositive motion may result in dismissal of a licensed professional based on the failure to file a certificate of review.

Condominium Conversions Defect Actions Under California Law: Not Your Run-of-the-Mill Defect Case

Brendan P. Bradley | Gordon Rees Scully Mansukhani | February 28, 2019

Condominium conversions may present developers and contractors with both additional defenses and potential liability pitfalls when a defect action is subsequently alleged by an HOA. On the plus side for the converter, unlike new residential construction projects, California Civil Code Section 896, which is commonly referred to as “SB 800,” or the “Right to Repair Act,” does not apply. This means that violation of the performance standards for construction components contained in SB 800 is not an independent basis for recovery in a suit brought by the HOA.

Further, statute of limitations defenses are commonly available to developers and contractors in conversion cases where the original construction is more than ten years old. California Code of Civil Procedure Section 337.15 sets forth a ten-year statute of repose limiting claims for latent defects. In many, if not most cases, the converted project will have been used as rental property for several years before its conversion to condominiums. This means that often, while any construction associated with the conversion may only be a couple years old when the HOA sues, the original construction may have been completed more than ten years prior. If the HOA’s claims relate to the ten-plus year old original construction, as opposed to conversion work, they are likely barred.

HOA counsel often try to skirt this statute of limitations defense by alleging that the converting developer should have identified and remedied or disclosed defects in original construction during pre-conversion investigation. Likewise, they argue that contractors who see defects in original construction while performing conversion work have an obligation to point out the defects, not cover them up. However, this requires the HOA to show that the condition actually existed such that it could have been identified at the time of conversion, which is often difficult for the HOA to prove.

On the other hand, conversion cases may pose a hornet’s nest of potential risks for developers, particularly where the developer (or its proxy) maintains control over the HOA board of directors for a period of time following conversion. If a suit for defects related to original construction was actionable during the period when the developer controlled the HOA board, it could be held accountable for failing to take action against the original builder, where the claims have subsequently been barred by the statute of limitations. Likewise, the HOA will commonly allege that defects which would otherwise be barred by the ten-year statute of limitations are actually related to the developer-controlled HOA’s failure to properly maintain the project, or provide adequate reserve budget funding to replace aging components after the conversion. Such claims can create serious insurance coverage concerns for the converter.

This is just the tip of the iceberg when it comes to potential conversion defect claim pitfalls for developers and contractors. HOA claims brought as to condominium conversion projects pose much more complex legal issues than seemingly similar cases related to new construction, even where the two projects may have identical defects. Therefore, it is vital that developers and contractors act with extra vigilance when faced with a claim by the HOA on a conversion project. Failure to do so can result in the developer or contractor facing serious insurance coverage issues, and waiving defenses which might otherwise have been available.

At What Cost? Navigating the Costly, Tricky Trends in Smaller Construction-Defect Disputes

Megan Ferris and Kristin Tannler | Construction Claims | Winter 2018

There is an ongoing trend in construction-defect litigation where lawsuits or arbitration claims involving contract, payment, or punch-list disputes transform into stubborn, unpredictable, and litigated disputes for which fees and expert costs far exceed the actual issues in dispute. These are not the multi-million-dollar condominium cases with hundreds of units and just as many parties and attorneys, but rather smaller, custom projects for individual homeowners.

The underlying contracts in these matters often contain a prevailing party-fee clause, but little else with respect to key terms.

These matters, because of cost and attorney-fee exposure, rarely go to trial or arbitration, and we don’t have the opportunity to see how courts would rule in such matters if they were given the chance. Recently, the Oregon Court of Appeals issued an opinion in Cedartech, Inc. v. Strader, 293 Or App 252 (2018) that touches on all of these themes.

Defendant Strader owned a historic home with a cedar-shingle roof. Strader contracted with Cedartech to perform certain work on her roof. That work included cleaning and treating the roof. Sometime after the written contract, Strader requested that Cedartech repair two leaks in the roof. However, while attempting to perform those repairs, Strader refused to allow Cedartech to enter the home to investigate the cause and source of the leaks.

The matter proceeded to judgment by way of bench trial. The trial court found in favor of Cedartech, the contractor, for $7,045 (less $1,200 in offset in favor of Strader). The Court of Appeals affirmed the general judgment in favor of Cedartech, finding that Cedartech had substantially performed under the contract.

Even though the Court of Appeals affirmed the general judgment in favor of Cedartech, it remains to be seen if Cedartech will recover substantial prevailing party fees. The trial court denied Cedartech’s petition for $80,829.50 in attorney fees. The trial court held that no factor supported awarding attorney fees and denied Cedartech’s petition in its entirety. The Court of Appeals remanded the attorney-fee issue back to the trial court, which is still pending.

Cedartech does not establish any new significant points of law to guide our practice, but it does inform us that the courts may be willing to enforce contract terms against homeowners and in favor of contractors. Cedartech also serves as a cautionary tale on the attorney-fee issue, which is often the tail that wags the dog in these contractors-versus-homeowner disputes.

These “small” disputes between the contractor and homeowner often land on our desks after the notice of defect period has elapsed, the homeowner has already incurred attorney fees to get the claim to suit, and the contractor has a breach of contract claim for non-payment. On top of that, the dispute has morphed into allegations of over-charging or bad work against the contractor.

Cedartech is a good reminder that the contractor is sometimes right, however obstacles often block the path to a favorable ruling. In addition, there is an ever-mounting fee petition on both sides. As we continue to litigate these contract disputes disguised as construction-defect claims, we should be mindful of the following issues:

  • The potential for a myriad of coverage issues to be addressed when reporting, including how to tiptoe around issues such as an unfinished project, allegedly fraudulent accounting, and often a lack of property damage (in the conventional sense).
  • Emotional investment of the contractor in the job gone wrong, which often implicates matters of pride, workmanship, and a separate worry that there will not be sufficient coverage.
  • Emotional plaintiffs and punitive litigation tactics that are aimed more at punishing the contractor than negotiating a resolution.
  • The decision on whether to file third-party claims against subcontractors whose worst offense is that they were not permitted to finish their work. Bringing the third-party claims increases the breadth and scope of issues and adds a whole new layer of expense, but it also may help raise settlement funds to increase the chance of a mediated resolution. These subcontractors may have their own coverage concerns and claims for non-payment to add to the mix.

In undertaking triage and mapping out the initial strategy, the contractor’s counsel may consider these tactics:

  • A frank discussion with the contractor client about how to approach a non-payment claim and the likelihood of recovery. This is often where personal counsel may be of aid in either aggressively pursuing a counterclaim or assisting the contractor client in making the decision to forego recovery in exchange resolution of the claim.
  • Attempt to outline items that require remediation versus a part of the job that simply has to be finished and arguably is not the basis of a defect claim against the original contractor.
  • Develop contractual arguments in the contractor’s favor. Did the homeowner wrongfully terminate? Did the homeowner improperly withhold payment? What was the homeowner’s role in contributing to project delays?
  • Engage an expert on behalf of the contractor to immediately document the job-site condition, preferably before remediation or repairs have commenced. Even if repairs have begun or have been completed, a consultant will be able to assist in evaluating reasonableness of cost of repairs and assist in sorting out repair costs from costs to finish.
  • Early evaluation if the case requires deposition discovery before attempting ADR. In some cases, even though we all appreciate the need to keep attorney-fee exposure at a minimum, the plaintiff homeowner has to go through a deposition and be forced to appreciate some of its inherent weakness and to educate her own counsel. Further, early discovery assists in identifying facts that can be developed in favor of the contractor client.

Once the initial discovery issues are mapped out and the pressure points are identified, the case can be set on a course for resolution. If resolution is not possible, perhaps certain contract terms can be construed in favor of the contractor, especially where the contractor was improperly terminated before completion of the project or prevented from completing work. If the analysis in Cedartech can be extended to these other instances, then homeowners should be more hesitant to prosecute contract claims where they themselves were in material breach and should be advised that attorney-fee recovery is not always a given.

Ohio Supreme Court Narrows Coverage for Construction Defect Claims

Arnanda M. Leffler and Anastasia J. Wade | Brouse McDowell | February 10, 2019

On October 9, 2018, the Ohio Supreme Court issued its long-awaited decision in Ohio Northern Univ. v. Charles Constr. Servs., 2018-Ohio-4057, holding that a general contractor was not entitled to insurance coverage for its subcontractor’s faulty work. Since then, some commentators have described the Court’s holding as eliminating all insurance coverage for claims involving defective construction. Such a broad reading is not warranted. Still, Ohio’s insureds would be wise to consider purchasing an endorsement that is readily available in today’s insurance market.

Coverage for Construction Defect Claims Nationally

For years, courts around the country have grappled with coverage for claims involving defective or faulty construction. These cases generally turn on whether the court determines that defective construction is an “occurrence.” An “occurrence” is defined as an accident, including continued or repeated exposure to harmful conditions. In practice, faulty work is almost always an accident as that word is commonly understood—contractor-insureds rarely, if ever, intend or expect to cause injury to persons or property, including their own work. Thus, the industry has long understood that insurance policies will generally provide at least some coverage for damage arising from defective work, subject to policy exclusions that bar coverage for the actual repair or replacement of an insured’s faulty work. Insurers, however, argue that defective work is a non-accidental “business risk” that is not an “occurrence” covered by the policy. Since 2012, almost all courts that have considered the issue have held that defective construction is an “occurrence” and, thus, it is covered by the policy, at least to the extent that work other than the insured’s work is damaged. See Black & Veatch Corp. v. Aspen Ins. (Uk) Ltd, 882 F.3d 952, 966 (10th Cir.2018) (citation omitted).

Ohio’s Position: Westfield Ins. Co. v. Custom Agri Sys., Inc.

In 2012, the Ohio Supreme Court decided Westfield Ins. Co. v. Custom Agri Sys., Inc., 2012-Ohio-4712, holding that claims for the cost to repair an insured’s defective work are not covered because they “are not claims for ‘property damage’ caused by an ‘occurrence’ under a commercial general liability [CGL] policy.” In its decision, however, the Court cited and approved of prior Ohio case law which held that consequential damages arising from a policyholder’s defective work generally are covered by CGL policies. Since Custom Agri, insurance practitioners and courts in Ohio have generally agreed that:

  • Repair and replacement of a policyholder’s defective work is not “property damage caused by an occurrence” and is not covered by standard CGL policies; and
  • Consequential damages to property other than the policyholder’s work is “property damage caused by an occurrence” and may be covered by a standard CGL policy depending upon the applicability of the policy’s exclusions and conditions.

Notably, however, the Custom Agri Court did not address whether a typical CGL policy would provide coverage for the repair or replacement of defective work performed by the policyholder’s subcontractors. The Court addressed this issue in Ohio Northern.

Coverage for Subcontractor Work: Ohio Northern

In 2008, Ohio Northern contracted with Charles Construction Services (CCS) to construct a hotel and conference center. After CCS and its subcontractors completed the work, Ohio Northern discovered significant issues with the work and brought suit against CCS. CCS tendered the claim to its insurer, Cincinnati Insurance Company, which argued that it had no coverage obligations under Custom Agri. In response, CCS argued that Custom Agri was inapplicable because subcontractors performed almost all of the work at issue, not CCS.

The trial court granted summary judgment to Cincinnati, but the Third District Court of Appeals reversed. In finding in favor of CCS, the appellate court analyzed certain policy exclusions that expressly preserved coverage for damaged work or damages arising from faulty work if: (1) a subcontractor performed the work; and, (2) the damage occurred after project completion. Cincinnati then appealed to the Ohio Supreme Court, which accepted the following proposition of law for review:

[Custom Agri] remains applicable to claims of defective construction or workmanship by a subcontractor included within the “products-completed operations hazard” of [a] commercial general liability policy.

Thus, the question before the Court was whether Custom Agri applies to claims involving a subcontractor’s faulty work. In its decision, the Court concluded that Custom Agri does apply to such claims.

The Court acknowledged that its decision went against the weight of authority from its sister-courts nationally, but nonetheless applied Custom Agri to hold that “property damage caused by a subcontractor’s faulty work is not fortuitous and does not meet the definition of ‘occurrence’ under a CGL policy.” The Court failed to address several arguments, including: (1) that this interpretation rendered meaningless the carve-back for subcontractor work in the Your Work exclusion; (2) that the drafting history of the exclusions confirmed that the insurers themselves intended to provide coverage for subcontractor defective work; and, (3) that the meaning of “occurrence” used in Custom Agri contradicted the long-standing meaning given to the word in every other context. Instead, the Court suggested that the Ohio General Assembly could address the issue by requiring that all policies issued in Ohio define “occurrence” to include defective workmanship. Of course, this suggestion brings little comfort to the contractor-insureds that paid substantial sums for “completed operations” endorsements that were intended to provide coverage for these claims in the first place.

What’s Next for Ohio’s Construction Insureds?

Many commentators have written that the decision in Ohio Northern eliminates all coverage for construction defect claims. Taken to its logical conclusion, the absurdity of this argument is evident. Suppose an insured incorrectly affixes materials to the façade of a building, resulting in falling masonry that strikes and kills an innocent bystander. Or, suppose an insured incorrectly installs wiring during construction, resulting in a fire that destroys both the project and surrounding homes. Would any insurer even argue that there is no coverage for such claims?

The Court’s opinion in Ohio Northern cannot be read so broadly. The Court answered a narrow question: does Custom Agri apply to subcontractor work? The answer, according to the Court, is yes. But, Custom Agri held that, while there is no coverage for the repair or replacement of a policyholder’s defective work, there is coverage for consequential damages arising from that defective work. While at times the Court’s language in Ohio Northern is imprecise, the Court makes clear over and again that it is simply applying its precedent, Custom Agri. Notably, the Custom Agri Court relied upon multiple cases previously decided by Ohio courts holding that consequential damages arising from defective construction are covered occurrences. Had the Ohio Northern Court intended to overrule this prior precedent, cited in Custom Agri, it easily could have stated its intention to do so. The Court’s silence on these cases means they are still applicable to Ohio policyholders. Thus, consequential damages arising from defective construction should still be covered under CGL policies.

In fact, even Cincinnati recently confirmed that the Court’s opinion cannot be read so broadly as to eliminate coverage for consequential damages. In its response to a motion to reconsider filed by Ohio Northern, Cincinnati stated that the opinion “correctly recognizes that consequential damages, when they exist, may be covered.” For example, Cincinnati acknowledged that a subcontractor’s CGL coverage would apply at least “where a subcontractor damages part of a construction project that is not within its subcontract.” According to Cincinnati, the Court found no coverage for the consequential damages at issue in Ohio Northern because CCS was a general contractor and all of the damage to the project was CCS’s “work.”

An Ounce of Prevention…

While coverage firms like Brouse McDowell can and should continue to advocate for coverage for consequential damages, Ohio’s contractors should nonetheless consider purchasing additional coverage, particularly if they are acting as a general contractor. Numerous insurers now offer endorsements that reinstate the coverage that the Ohio Northern decision arguably eliminated. For example, some insurers amend their insuring agreement to specifically cover property damage to an insured’s work if it is performed by a subcontractor and falls within the products-completed operations hazard. Other insurers “deem” that property damage to the insured’s work is caused by an occurrence if it is unexpected and unintended. Yet other insurers amend the definition of “occurrence” to include “subcontracted property work damage.”

There may be material differences in how these various forms operate and the extent of coverage they provide, which is a subject that is beyond the scope of this article. Policyholders in Ohio should contact their brokers to discuss the options available to them and, if appropriate, should contact coverage counsel to discuss how the various, differing forms would operate. For their part, owners and developers should amend their construction contracts to compel contractors to purchase such endorsements.

Insureds and sophisticated brokers will understandably question why they and their clients must pay higher premiums to purchase endorsements to protect themselves from claims that the insurers intended would be covered by the existing CGL form. Nonetheless, here, an ounce of prevention is worth a pound of cure, and construction industry participants should contact their brokers and counsel today.

Ohio Supreme Court Bucks Recent Trend and Holds No Coverage for Construction Defects Under Commercial General Liability Policy

Heather Howell Wright | Bradley | December 2018

The insurance coverage analysis under a commercial general liability (“CGL”) insurance policy begins with the “insuring agreement.” The standard CGL policy provides coverage for “those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage.’” The standard CGL policy further provides that the property damage must be caused by an “occurrence,” which is in turn defined as “an accident.” Traditionally, courts had held that a construction defect was not an “accident,” and thus losses associated with such defects or faulty workmanship were not covered under a CGL policy. However, the recent trend has been for courts to find that construction defects or faulty workmanship do satisfy the “occurrence” and “property damage” requirements for CGL coverage. Yet, a recent decision out of Ohio bucks this trend of finding that claims of faulty workmanship may be covered under a CGL policy.

In Ohio N. Univ. v. Charles Constr. Servs. Inc., the Ohio Supreme Court recently held that construction defects do not constitute an occurrence under a standard-form CGL policy, and that an insurer has no obligation to defend or indemnify claims for defective work. The underlying claim in this case involved a contract between Ohio Northern University (“Owner”) and Charles Construction Services, Inc. (“Contractor”) to build a new conference center and hotel. After the project was complete, Owner discovered extensive water damage and structural defects. Owner filed suit against Contractor, which in turn filed third-party claims against its subcontractors. Contractor tendered the defense to its insurer, Cincinnati Insurance Company (“Cincinnati”), which intervened and sought a declaration that it had no duty to defend or indemnify Contractor.

In the trial court, Cincinnati filed a motion for summary judgment on the declaratory judgment claim and asserted that claims for defective workmanship are not claims for “property damage” caused by an “occurrence.” The trial court granted Cincinnati’s motion for summary judgment, finding there was no duty to defend or indemnify for faulty workmanship.

On appeal, the Ohio Supreme Court considered the CGL policy definition of “occurrence” as an “accident including continuous or repeated exposure to substantially the same general harmful conditions.” The court opined that an accident was unexpected or unintended – involving fortuity. Because a subcontractor’s faulty work is not fortuitous, it could not satisfy the “occurrence” requirement in the CGL.

Importantly, the Ohio Supreme Court recognized that its decision conflicted with decisions in other states as well as the trend of finding coverage for construction defects – but the court explained that “[r]egardless of any trend in the law,” it was required to interpret the plain and unambiguous language of the policy. The court also noted that the Arkansas legislature had enacted a statute requiring that a CGL policy sold in Arkansas must define “occurrence” as including “property damage resulting from improper workmanship.” The Ohio N. Univ. Court noted that the Ohio General Assembly could pass similar legislation in response to the decision.

While the recent trend across the country has been for courts to find that construction defects may be covered under a CGL policy, this case may indicate a pendulum swing in the other direction. Even if it proves to be an outlier, it highlights the importance of knowing which law will apply to the interpretation of insurance policies, because the law can vary significantly from one jurisdiction to another.