Jared Berg
Attorney, Sherman & Howard, Denver
Almost all legal claims must be brought within a certain time period established by statute. If the claimant fails to assert a claim in the time allowed, whether in court or arbitration, the claim is “time-barred” and may be dismissed.
Construction defect claims in Colorado are subject to two such limitations, the statute of limitations and the statute of repose. The SOL limits the time within which the claim must be asserted once the claimant knows or should have known the claim exists. The SOR, on the other hand, bars all claims after a certain time even if the claimant does not yet know the claim exists. In Colorado, the SOL for construction defect claims provides that a defect claim must be brought within two years from the time the claimant first discovered, or should have discovered, a “physical manifestation” of the defect. Colorado’s SOR for defect claims is six years from substantial completion unless the defect manifests in the fifth or sixth year after substantial completion. In that case, the claimant still has two years to assert a claim from the date of manifestation. But if the claimant first discovers the defect in the seventh year after substantial completion, the SOR bars the claim.
The Colorado Court of Appeals decision in Sierra Pacific Industries Inc. v. Bradbury interprets Colorado’s SOR for defect related claims in a way important for developers, designers and contractors to understand. Sierra Pacific deals specifically with the SOR as it applies to claims against subcontractors. The Sierra court found that SOR on claims against subs begins to run when that sub’s work is substantially complete, not when the entire project is substantially complete. This interpretation of the term “substantial completion,” if it remains law, could have significant implications for claims against designers and contractors that complete their work early in the project sequence. Their liability is effectively reduced because it is rare for defects to manifest before the project’s completion.
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.
This is good news for architects, engineers and subcontractors who complete their work early in a project, but potentially disastrous for developers, general contractors and late- sequence subs. Because the developer’s and general contractor’s work is typically complete only when the entire project is complete, they now face the prospect of being liable for a sub’s defective work without the ability to seek indemnification from that sub. Subs whose work falls later in the project may face increased pressure from suits attempting to attribute defects to their work, rather than, for instance, a defective foundation completed much earlier.
Sierra Pacific may also have important implications for general liability coverage for construction projects. For instance, if a claim against an insured sub arises after the SOR for that sub’s work has run, the carrier may attempt to avoid coverage because the sub itself faces no legal liability, even if the general contractor is an additional insured on the policy. For projects covered under a wrap policy, carriers may take the position that completed operations coverage begins to run when the first designer or sub’s work is complete. The completed operations coverage could then expire before the SOR bars claims against the developer, general contractor and late-sequence subs.
At this point, it is unclear if this decision will stand. The Colorado Supreme Court may review the decision, and the General Assembly may amend the statute to clarify its definition of substantial completion. Either of these steps, if they happen at all, could take several months or longer. In the meantime, developers and general contractors should take steps to ensure they preserve claims against early sequence subs and preserve coverage for such claims. This may include:
•Peer review of the architect’s and engineers’ designs and recommendations;
•Careful recordkeeping regarding the date of substantial completion for the work of individual subs and designers;
•Tracking SOR deadlines for individual subs and designers;
•Improved quality assurance programs;
•Using contract language to strengthen subs’ indemnification obligations; and
•Working with brokers and coverage counsel to ensure proper insurance coverage is in place.
An ounce of prevention at the outset of your project could be the difference between recovering damages from a subcontractor for its defective work and looking to your own carrier, or worse, paying out of pocket to correct that work.
