Bret Gunnell, Chris Mosley, Scott Shea and Jennifer Kirk Morris | Sherman & Howard | September 20, 2016<\/p>\n
Colorado law generally prohibits construction defect lawsuits against a construction professional brought \u201cmore than six years after the substantial completion of the improvement to the real property.\u201d \u00a7 13-80-104, C.R.S. This \u201c statute of repose \u201d reflects Colorado\u2019s policy that construction professionals should not be liable indefinitely for defects in their work. This liability cut off applies not only to homeowner suits against those responsible for building projects, but also to indemnification suits brought by general contractors against their subcontractors.<\/p>\n
Calculating the date from which the six-year statute of repose runs is the subject of significant litigation in construction defect suits, because the terms \u201csubstantial completion\u201d and \u201cimprovement\u201d are not defined in the statute. In 2012, the Court of Appeals made clear \u201cimprovement\u201d is not synonymous with project, and may be a discrete component of an entire construction project. Shaw<\/em> Const., LLC v. United Builder Servs., Inc., 296 P.3d 145, 154 (Colo. App. 2012). Shaw<\/em> determined a single building (or phase) of a multi-phase project is substantially complete, for purposes of the statute of repose, when a Certificate of Occupancy is issued, id.<\/em> at 155, thus starting the six-year clock for construction defect liability\u00a0even if work continued past that date. The Shaw<\/em> court left open the possibility, however, the statute of repose could start to run on a subcontractor\u2019s work before a Certificate of Occupancy was issued. On September 8, 2016, the Court of Appeals walked through that door.<\/p>\n In Sierra Pacific Industries, Inc. v Bradbury<\/em>, the Court of Appeals ruled the statute of repose for a general contractor\u2019s claims against a subcontractor begins to run when that subcontractor\u2019s scope of work is substantially complete, not when the project is substantially complete. \u2014 P.3d \u2014- (Colo. App. 2016). The likely practical effect of this ruling is construction professionals whose work is completed earlier in the project will face shorter exposure to liability for defective work because it is relatively rare for defects to manifest, and suits to be brought, prior to the project\u2019s completion. The ruling effectively creates a construction \u201cgrace period\u201d for designers and contractors involved earlier in the construction process.<\/p>\n For example, an excavation contractor who improperly compacts a foundation trench may have completed its work a full year before completion of the drywall, painting, and finish work that will likely show the first signs of the defect. If these defects manifest in the fifth year after drywall installation, the six-year statute of repose already may have run on the excavation contractor, while the drywall contractor remains potentially subject to suit. Further, if the geotechnical engineer was responsible for improperly calculating the compaction of the soil, its liability may have been cut off even before the defect manifests.<\/p>\n While the \u201cgrace period\u201d is good news for architects, engineers, and subcontractors who complete their scope of work early in a project, the effect on developers, general contractors and late sequence subcontractors is quite the opposite. The developer\u2019s and general contractor\u2019s work likely is only complete when the project is complete. They face the prospect of being liable for a subcontractor\u2019s defective work without the ability to seek indemnification from that subcontractor, because the statute of repose has run on the subcontractor\u2019s work. Subcontractors who complete their work late in the sequence of a construction project may face increased pressure going forward from suits attempting to attribute defects to their work, rather than a defective substrate completed much earlier.<\/p>\n Management of construction defect risk may require a different, or at least expanded, strategy in this new legal environment. Careful attention should be paid, and definitive records kept, as to when each subcontractor finishes its work on the project. Developers may wish to engage peer review of architects\u2019 and engineers\u2019 work. General contractors may wish to devote more resources to quality control to catch potential defects before they occur. Developers and general contractors may also wish to contract around the risk of losing indemnification rights against early completing contractors and subcontractors. Experienced construction lawyers can draft and recommend contract language preserving such rights to include in future agreements.<\/p>\n Sierra Pacific<\/em> could have significant impact on general contractors and developers who depend on being named as an additional insured on subcontractor insurance policies as an essential component of an overall risk management strategy for construction defects. Under this strategy, developers and general contractors rely on a subcontractor\u2019s \u201ccompleted operations\u201d coverage, extended to them under an additional insured endorsement, to protect against construction defect claims. The standard ISO completed operations additional insured endorsement (CG 20 37 04 13) extends coverage to a developer or general contractor for liability arising from the subcontractor\u2019s defective work. Importantly, the endorsement does not condition coverage on the subcontractor\u2019s liability. Thus, in theory, the developer or general contractor should retain additional insured coverage for claims asserted against them even if the subcontractor\u2019s liability has been extinguished by the statute of repose under Sierra Pacific<\/em>.<\/p>\n Insurers, however, may attempt to argue against coverage for a developer or general contractor on the ground the subcontractor\u2019s liability has been extinguished by the statute of repose. While this position may be incorrect, insurers could force developers and general contractors into expensive litigation to address the issue. Moreover, many insurers issue manuscript additional insured endorsements with language that differs from the standard ISO endorsement, and such endorsements may condition additional insured coverage on a subcontractor\u2019s liability.<\/p>\n Sierra Pacific<\/em> could pose difficulties for developers and general contractors who insure projects under a wrap \u2013 whether an owner\u2019s controlled insurance program (commonly known as an \u201cOCIP\u201d) or a contractor\u2019s controlled insurance program (commonly known as an \u201cCCIP\u201d). The typical wrap commences completed operations coverage (i.e., coverage for construction defects) from the date work on the project is substantially complete. Under Sierra Pacific<\/em>, an insurer may argue the completed operations period commences as soon as the first subcontractor\u2019s work is completed. For projects which may take a long time to complete, the completed operations period could terminate before the statute of repose expires on claims against developers and general contractors \u2013 thus leaving developers and general contractors without the construction defect coverage they thought they had purchased.<\/p>\n