May 18, 2015

From Law 360

by Natalie Rodriquez

A wave of construction defect law reform efforts has swept several states this year, driven by builder lobbying and court systems struggling under the stream of litigation from these laws. And the reform momentum may spread further as residential development kicks into high gear across the country, experts say.

In the past six months, at least five states — Colorado, Nevada, Arizona, Florida and Washington — have seen various bills that attempt to make it harder for homeowners to sue under existing construction defect laws. While the bills have met with mixed results, more efforts could sprout as developers and lawmakers push to get housing projects off the ground and time-draining, resource-consuming disputes out of the courts, experts say.

One of the most closely watched reform efforts this year, however, took place in Colorado, where the third legislative proposal in three years failed to cross to the finish line. The buzz is that partisan politics in the Legislature's leadership killed the bill.

The lawmakers backing these bills — which tend to skew Republican — and the developers lobbying for them contend that legislation to curb construction defect litigation is needed so that developers and insurers won't be wary of taking a chance on new projects.

“The magnitude of the awards has really made insurance companies think twice about insuring,” said Amy Hansen, a Denver-based Polsinelli PC shareholder who works with developers setting up projects.

While legislation in Colorado has so far fizzled, the push has been gaining steam among state lawmakers, since condo development has all but vanished and the state is facing affordable housing issues, according to a Polsinelli team that has been working on the efforts.

The firm says anecdotal evidence suggests that about 85 percent of condominium projects with 100 units or more eventually face lawsuits under the construction defect law. And construction defect cases tend to be sprawling matters involving several parties and a variety of issues, which can severely tax the courts, experts note.

“It takes so much time; it is a strain on the courts and, quite frankly, a strain on the parties,” Hansen said.

However, some experts say that many of the current proposals are wrongfully attempting to impinge on consumer rights.

State legislatures are not the only avenue the builders are using to seek change. While Colorado has so far failed to pass legislative reforms, the builder industry did score a key win the day after the most recent bill died. A Colorado appeals court ruled that a homeowner association could not amend an agreement with a developer to remove an existing arbitration provision that said the builder had to agree to any changes to the contract.

Polsinelli associate Richard Murray took the lead on writing an amicus brief in the case, Vallagio at Inverness Residential Condominium Association Inc. v. Metropolitan Homes Inc. et al., representing business interests.

“This [ruling] should alleviate some of the concerns with regard to whether arbitration will stand,” Warren said, noting that it could impact other courts and states that look at the decision.

It could also entice insurers to take another look at Colorado, Hansen said.

 Legislative changes haven't been written off entirely, however, in Colorado. The issue could continue to be “dealt with potentially at the local level and maybe even the state legislative level [again], as we try to get condos built in this new and growing economy,” Hansen said.

The states that have had bills chugging their way through legislatures tend to be those that see the most construction defect litigation, according to experts. Some contend the litigation has become a legal cottage industry akin to serial patent troll litigation, with several plaintiffs attorneys moving from state to state and filing waves of similar litigation to squeeze money out of developers, builders and the insurance industry.

“There is a sense that construction defect litigation has spread from hot spots to other hot spots,” Polsinelli's Ryan Warren said.

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