Real Estate & Construction  June 8, 2007

Homeowner protection, homebuilder nightmare?

When the Colorado legislature passed the Construction Defect Action Reform Act in 2003, both lawmakers and homebuilders thought they’d reached a workable compromise.

The measure provided a process for home owners to work with their builders to secure needed repairs resulting from faulty construction, avoiding costly and time-consuming litigation.

So, what’s the point of House Bill 1338, the Homeowners Protection Act of 2007, which became effective on April 20?

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HB-1338 makes it illegal for homebuilders to require buyers to sign waivers of certain basic provisions of CDARA as a condition of buying a home. It does not change or alter any provisions of CDARA – it keeps intact the requirement that owners give the builder the chance to fix problems before going to court and all limits and caps on damages and attorneys fees. It does not apply to commercial properties, and waivers and releases signed as part of a settlement between the homeowner and builder are not affected, either.

Rep. Jack Pommer, D-Boulder, who sponsored the bill with Sen. Jennifer Viega, D-Denver, said non-negotiable provisions that substitute express warranties – limiting buyers to specific items the builder will fix – for more general implied warranties are usually buried in the mountain of paperwork presented at closing.

“The owner of Oakwood Homes told the committee (when testifying against the bill) that he had no idea how that clause got into his standard contract, and that he’d have the legal department remove it,” Pommer said. “If he really didn’t know, how would homeowners realize they were signing away their rights under existing Colorado law?”

Bruce Likoff, a partner with the law firm Holmes Roberts and Owen in Denver, who helped draft HB-1338, has a different view.

“You hear that CDARA contains a right-to-remedy,” he said. “All it does is require the builder to make a proposal to the home owner about how he would like to fix the problem. There’s nothing that says the homeowner has to accept the proposal. They can still sue, even after the offer is made.”

Too soon to tell

Both sides agree that the offending clauses appeared primarily in contracts by big production homebuilders with operations in several states. As demand for housing in the region took off in the mid-1980s, the number of out-of-state contractors putting up houses en masse rose, too. The quality of construction overall fell as a result, prompting more claims against builders, which in turn raised rates for liability insurance.

CDARA was intended to address the issue of rising insurance rates by capping punitive damages, which can be tripled, to $250,000. Anything over that amount awarded by a jury is considered actual damages, and is also capped at $250,000.

Both sides also agree that it’s too soon to tell exactly what the effects of HB-1338 will be, and that more study is needed. In fact, both the Homebuilders Association of Northern Colorado and the statewide Colorado Association of Home Builders declined comment on the situation, referring the Business Report to Likoff.

“We’re in a holding pattern of sorts right now,´ said Amie Mayhew, spokeswoman for CHA. “We’re waiting to see what happens, and we’re getting a legal analysis of our options.”

Likoff said his clients are all “reading and re-reading their contracts” to make sure language is in compliance with the new law. He is also presenting educational workshops for CHA members on the issue, and he said registration has topped 150 for each of the next two. “People are hungry for knowledge on how this will affect their business,” he said.

One of those is George Hart, president of PLS Homes Inc. in Loveland, which builds exclusively in Northern Colorado. He plans to attend one of the briefings, but said “at this point it’s too early to see an impact.”

Liability insurance issues

Another group that wants to know the potential effects of HB-1338 is the small number of specialized insurance carriers that write contractor liability policies.

While it’s too soon to know all the specifics, “it doesn’t look good,´ said Mike Pierce, principal with LBN Insurance in Johnstown. “New companies are taking a more conservative approach to insuring contractors.”

Only one of his liability carriers – Dallas National Insurance – has pulled out of the local market because of HB-1338, according to Pierce, but he added that it will take a few months before the market reacts. Only one or two companies offer the policies now, he said, and they are in the process of evaluating the impact of HB-1338.

“There are three things that can happen,” he explained. “Insurers can impose restrictions on coverage, increase premiums, or pull out of the market.”

Litigation over defective homes hasn’t taken place to the same degree in Northern Colorado as in the Denver metro area, Pierce said, and the recent slowdown in local homebuilding has kept the liability insurance market stable.

The new concern with HB-1338 is with multi-family units, where each unit could be considered a separate dwelling entitled to treble damages if a jury rules against the contractor.

While premiums for individual homebuilders vary based on the number of homes built and experience with claims, Pierce said high-end builders who build to reasonable standards can still get coverage for reasonable rates.

Hart said PLS Homes has seen some increases in its insurance rates over the years, “but nothing dramatic.”

“We haven’t had a major claim against us. Doing good work is the key, absolutely,” he added.

“Tract home liability premiums are extremely high,” he said. “For condos and townhomes, the premiums are about three times residential, so they’re almost impossible to afford now. Who knows where it might go?”

Mixed-use projects

Another area of concern, according to attorney Likoff, is with mixed-used projects, which included residential units as well as commercial.

“These are incredibly complex deals, with investors coming from all over the globe,” Likoff said. “If Colorado gets a reputation as a costly place to do business, they’ll take their money elsewhere.”

How the courts would treat such projects is just one of the uncertainties surrounding HB-1338, but Rep. Pommer is skeptical. “If they’re worried about scaring off investors, why don’t they just build things right the first time?”

Whether anyone is planning to challenge the current law in court, or wait for the next political change in the General Assembly to bring forward new legislation, is also too early to say. But the other thing everyone agrees on is that the issue is far from dead.

When the Colorado legislature passed the Construction Defect Action Reform Act in 2003, both lawmakers and homebuilders thought they’d reached a workable compromise.

The measure provided a process for home owners to work with their builders to secure needed repairs resulting from faulty construction, avoiding costly and time-consuming litigation.

So, what’s the point of House Bill 1338, the Homeowners Protection Act of 2007, which became effective on April 20?

HB-1338 makes it illegal for homebuilders to require buyers to sign waivers of certain basic provisions of CDARA as a condition of buying a home. It does not change or alter any provisions…

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