Construction-defects reform efforts will return in 2024

Six years after construction-defects reform advocates passed a bill and won a key legal ruling that they believed would restart the state’s dormant condominium-building market, it’s become clear that the changes were not enough.

And, so, the reform debate will be returning to the Colorado Legislature in 2024.

The reformed Homeownership Opportunity Alliance — a coalition that includes homebuilders, construction groups and economic-development organizations — is pushing a two-tiered proposal that it believes would reduce the number of lawsuits filed against new condos. That, in turn, would bring more insurers back to the market, cut insurance costs and make it more feasible for builders to put up the lower-cost housing if their construction costs fell substantially, backers say.

A pair of moderate but influential members of the majority party at the Capitol are signed on to run the bill, and Sen. Rachel Zenzinger, D-Arvada, said this will be her pre-file bill, meaning it’s likely to begin its legislative journey early in the session. Its biggest opposition likely will come again from plaintiff attorneys who long have argued that people who invest their life savings in a poorly built home must have the right to seek redress in court — though supporters insist they are crafting the legislation in a way that will reduce lawsuits without granting blanket immunity.

A lack of condos

“We endeavor a stitching together of what’s politically feasible and what’s needed,” said Dave Davia, CEO of the Rocky Mountain Mechanical Contractors Association, whose members are the trade companies that are targets now of construction-defects lawsuits. “I think that the governor is reasonable and open to figuring out how we fix the shortage of affordable housing … Defects clearly has to be one of the quivers that has to be used to tackle this.”

In 2017, the bipartisan backers of a reform law sought largely to address the fact that condos had fallen from a roughly 20% share of all new housing starts in 2008 to slightly more than 2% in 2016 — a drop they attributed to the high number of lawsuits filed against builders. The law required a majority of unit owners in a condominium complex to agree to any suit before it was filed, and a subsequent court decision determined that condo owners’ associations could not unilaterally remove requirements from deeds that disputes must go to arbitration.

New condo starts rose slightly in the next few years but never even reached a double-digit percentage, and they fell again in 2022 to just 3% of new housing stock. Meanwhile, average single-family home prices in Colorado reached $625,000 in June, according to a Common Sense Institute study, greatly reducing the pathways into home ownership for younger professionals without lower-priced condos on the market.

A primary reason for the dearth of condos, argued Colorado Association of Home Builders CEO Ted Leighty, is the ongoing prevalence of lawsuits against them — a prevalence that he couldn’t quantify by percentage but that he said bolsters the adage “If you build it, you will be sued.” While the 2017 law requires greater buy-in from condo owners before going to court, the 2007 Construction Defect Action Reform Act allowed technical violations to be added onto claims that previously had to prove harm to life, and those violations — think three nails being used where there should have been four — allow suits to proceed much more easily.

Reasons behind the condo dearth

Organizations such as the Colorado Trial Lawyers Association long have pushed back on claims of an excessively litigious atmosphere by arguing that property owners would not go to the expense and trouble of filing lawsuits if they didn’t feel they’d suffered significant harm. Still, several cities that compete with Denver for jobs and workers, notably Austin and Salt Lake City, are seeing condos built at faster rates than they were 20 years ago, unlike in Colorado, noted the CSI study authored by Maiker Housing Partners CEO Peter LiFari.

Meanwhile, insurance costs make up an average of 5.5% of the hard costs of condominium projects in this state — 233% more than apartment projects in which insurance costs tend to constitute 1.1% to 1.5% of the overall budget, the CSI study found. That’s left fewer insurers wanting to cover such projects and has reduced the number of active condo builders in Colorado from 146 at the time CDARA passed in 2007 to 23 in 2022, the study found.

To Rep. Shannon Bird, the Westminster Democrat who will sponsor the defects-reform bill in the House, the problem goes beyond being one of housing affordability to being a moral issue. Younger Coloradans are not able to invest in homes and grow financially like older generations did, and it’s creating an undue burden for a whole demographic at a time when the state needs to attract and retain talent as an antidote to the labor shortage troubling employers, she said.

“We know that over time, so many people have not been able to find affordable places to live,” Bird said in an interview. “You’ve got a lot of people in their young adulthoods not being able to purchase a place to live, and we’ve got an entire generation not being able to build wealth.”

What the construction-defects reform bill seeks to do

The Zenzinger/Bird bill that is backed by the Homeownership Opportunity Alliance will try to tackle the issue in two ways.

First, it will include a provision reversing existing law, which establishes non-delegable duties in which construction-defects lawsuits must target general contractors and all subcontractors, even if the purported defect was not done by certain subcontractors. This existing law has led to the creation of “wrap” insurance policies that can be 500% to 800% higher than general liability policies and make it so expensive to build condominiums that builders eschew them in favor of multifamily rental housing like apartments or stand-alone single-family homes, Davia said.

By changing the law to assign delegable duties, the bill would require claims to be more specific against the companies that created the alleged defects and would allow individual contractors to buy cheaper policies that cover their work rather than all work in a project, Leighty said. And if attorneys are targeting, say, a $200,000 general-liability policy with their suits rather than a $10 million wrap policy, it may make filing such a suit less attractive, he added.

Second, the bill would create a right to remedy in which condo owners and the contractors responsible for alleged defects would agree to a third party that could come in and repair the work before any grievance could proceed to court. Different than right to repair — an idea that plaintiffs’ attorneys have fought because it would allow the contractor who created the faulty work to be the one that seeks to fix it — this provision too could reduce the number of lawsuits filed against such projects, which in turn could lower insurance premiums, Leighty said.

Questions on the coming bill

Alyssa Davenport, CTLA political and public relations director, said in an email that her organization can’t respond to such a proposal until they see proposed legislation. It will have further conversations about the idea when and if there is draft language, she added.

Kelly Campbell, a longtime insurance-industry executive, said that the bill’s ability to generate an infusion of new condo construction in the coming years depends in large part on the language of the provision creating delegable duties. While the right-to-remedy provision should help to lower insurance premiums by reducing the number of lawsuits, the other provision needs to be written so that it narrows the pool of potential defendants rather than expands it.

“If the point of the delegable duties is to more clearly identify who is responsible in a construction-defects case, that could decrease litigation,” Campbell said. “But if the point of the delegable duties is to point the finger at more people, that won’t decrease lawsuits. That is going to be the real challenge.”

The proposal comes in the wake of the failure last session of Senate Bill 213 — Gov. Jared Polis’ effort to accelerate construction of more affordable housing by reducing local governments’ ability to limit such construction along transit and high-traffic corridors. That bill revived discussions of construction-defects reform, especially as SB 213 critics like Zenzinger said that it could not accomplish its aims of boosting lower-cost housing stock without removing the legal hurdles that plague condo construction.

Construction-defects reform and the housing debate

Polis is expected to bring back SB 213 in some form this year, but Bird emphasized that she and Zenzinger are not looking to strike a compromise by saying they will back his overhaul of local control if he gets behind the idea of legal reform. Both are former city council members, and Bird said emphatically that she would not support any proposal that takes zoning and permitting rights away from local governments, as she believes people deserve to have a voice on what their local community will look like.

The construction-defects reform proposal will be just one of many bills seeking to spur affordable housing, and it will go up against some ideas that are far more centered in government power, such as the likely revival of a measure killed this past session to permit local governments to enact rent-control policies.

But Zenzinger said that she believes even an idea like defects reform that has generated criticism from more liberal groups has a chance to pass next year because the language of the bill will not strip condo owners’ ability to go to court when they can’t get relief in other ways. She said that she believes this narrowly focused bill could find compromise with previous ideological opponents, and she thinks it could draw supporters who believe there must be many approaches to try to tackle the state’s housing crisis.

“Right now, the state’s best response is to build more taxpayer-subsidized, lower-income rental product, and I don’t think that’s anybody’s goal,” Bird added. “We keep going after different things that don’t hit the mark, and they don’t offer solutions grounded in basic economics.”