Will the construction-defects reform legislation that passed through the Colorado legislature this year usher in a flood of condominium projects?
It could certainly help. But the notion that it will make insurance for such projects suddenly much more available or bring down the cost of coverage is, to be frank, very hard to imagine.
Builders say the ease of frivolous class actions is one reason they stopped building condos and townhomes. In 2005, condos were 20 percent of the new housing market in Colorado. They’re currently 2 percent.
The new legislation requires a majority of homeowners in a condo complex to agree to take legal action against a developer when problems arise in the construction. Previously, lawsuits could proceed with just the approval of the board of a homeowners’ association.
However, a number of additional things need to happen before insurance carriers begin to more readily cover multi-family, owner-occupied projects in Colorado in the same way they do in other states.
As they are wont to do, insurers will set their rates based on loss history. In others words, they’ll want to see whether the new law does its job of shielding contractors from multimillion-dollar construction-defect lawsuits. More specifically, insurers will want to see that the courts uphold the new law through repeated challenges.
The new majority vote requirement will help, as will a provision that mandates that an HOA board call a meeting to hear from the developer or builder on potential remedies before moving forward with a suit.
Still, we’re talking about a minimum of several years before any relaxation of the market.
Until then, insurers will continue to issue policies for these projects in the way they have in Colorado for years – through what are known as Owner-Controlled or Contractor-Controlled Insurance Programs, or wrap-ups.
What else would help? Well, insurers (and contractors) would benefit from statewide legislation that would require aggrieved parties to turn to arbitration instead of litigation. Pushing that through the legislature is a bigger hurdle, however, one that has faced much opposition in past reform attempts.
The good news is that, according to the Colorado Municipal League, 17 counties and municipalities — including Denver, Aurora, Colorado Springs and Fort Collins — have passed measures requiring arbitration over litigation in defects disputes.
The state Supreme Court is expected to rule this summer on a related case, Vallagio vs. Metropolitan Homes, which might also help. In that dispute, a lower court ruled that an HOA board cannot unilaterally strip a provision out of its contract saying that any legal disputes must go to mandatory arbitration. Upholding that ruling would be a victory for contractors – and help further encourage insurers to consider covering more condo projects.
Andrew Mahoney is a CCIG Insurance Advisor. Reach him at AndrewM@thinkccig.com or 720-330-7925.Back to Resources