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March 27, 2009

Construction Defect Pre-judgment Interest Bill Will Overturn 2008 Colorado Supreme Court Holding on Pre-judgment Interest, Delay Settlement of Claims, Drive Up Defense Costs, Insurance Rates

SB 246, Concerning the Award of Moratory Interest to Claimants in Residential Construction Defect Actions, and, in Connection therewith, Enacting the “Homeowner Protection Act of 2009,” was introduced March 13 and assigned to the Senate State, Veterans and Military Affairs Committee.

The bill would allow a plaintiff-homeowner to recover moratory interest (interest paid as damages for delay in performing an obligation) in residential construction defect cases from the time of the creation of the construction defect through the end of the statutory notice of claim process. The bill also establishes the statutory rate of the moratory interest (6 percent per year, compounded annually, from the later of either the date the construction defect was installed or the date the buyer closed on the property through the date of the mailing of the claimant’s first notice of the claim; and thereafter at a rate of 8 percent per year, compounded annually).

NAMIC has joined members of the business community, construction industry, real estate development community, Colorado Civil Justice League, and the Denver Metro Chamber of Commerce in opposing this bill as being legislation fraught with serious adverse unintended consequences for homebuyers, insurance consumers, the real estate market, and the small-business community.

Although NAMIC appreciates the importance of providing homeowners with meaningful protections against shoddy construction work and providing them with legal remedies that will adequately compensate them for their legitimate damages, NAMIC believes that SB 246 is rife with public policy problems that make the bill unsound and harmful to the state of Colorado.

Specifically, NAMIC has the following concerns with the bill:

  • SB 246 would legislatively overturn a recent unanimous decision of the Colorado Supreme Court on the issue pre-judgment interest (Goodyear Tire & Rubber v. Holmes, 193 P.3d 821 (Colo. 2008), which held that “in construction defect cases involving replacement cost damages, pre-judgment interest begins accruing when [the homeowner] incurred the replacement costs.” Id. At 828-829.
  • The bill does not distinguish between a reasonable and an unreasonable “delay in performing an obligation.” Since the issue of what caused the construction defect (legal causation) is a very complex issue that often requires extensive investigation and expert analysis, some delays are reasonable and legally necessary.
  • SB 246 does not define “delay in performing an obligation” and what is meant by a “claim.” Since the legal implications of these terms are significant, the bill should specifically define these terms.
  • The Moratory Interest Rate set in the bill, which is considerably higher than an amount any investor could secure in the financial market, will create a disincentive to homeowners to settle cases quickly. In fact, the bill would award the claimant damages from the date of the installation of the defect, so in effect, the plaintiff would recover damages calculated from a date prior to the time the homeowner actually expended or invested his/her financial resources to remedy the purported construction defect.
  • SB 246 will make it harder for parties to the construction defect case to come together through the notice of claim process to resolve the dispute.
  • The proposed legislation will drive up legal defense costs, construction defect damage claims, commercial insurance rates, and, ultimately, the cost of housing for homeowners.

NAMIC requests that its member companies writing commercial liability coverage policies in Colorado, contact members of the Senate State, Veterans and Military Affairs Committee to express their concerns with this bill and to ask them to VOTE "NO" on SB 246.

Senate State, Veterans and Military Affairs Committee Members:

Posted: Friday, March 27, 2009 12:00:00 AM. Modified: Friday, March 27, 2009 1:58:26 PM.

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