Construction Claims: Understanding Colorado’s Statutory Notice of Claim Process
In the construction industry, it is almost inevitable that at some time contractors and design professionals will receive a notice of claim (NOC) letter. This is the first step in the claims process that may lead to an informal settlement or a lawsuit filed by the property owner. Consequently, if a construction professional – any developer, general contractor, subcontractor or design professional – receives a NOC letter, it is imperative for them to understand their statutory rights and to take prompt action that may enable an informal resolution of the claim, or if necessary, to begin preparation of their defense to any litigation.
Construction Professionals’ Rights
In April 2003, Colorado enacted the Construction Defect Action Reform Act (CDARA). C.R.S. § 13-20-802. Although CDARA is primarily favorable to property owners, the NOC provisions under CDARA provide that before any litigation, the construction professional is entitled to inspect the property and alleged defects, and to make an offer to informally settle the claim by making repairs or offering a monetary payment. C.R.S. §§ 13-20-803.5 (2) – (5).
To comply with the NOC requirements, the claimant must first send by personal delivery or certified/registered mail a notice of the claim to the construction professional. C.R.S. § 13-20-803.5 (1). The NOC letter must describe the claim in sufficient detail to determine the nature of the alleged defect, including a description of its type and location and the resulting damages. C.R.S. § 13-20-802.5.
The NOC letter must be delivered or mailed to the construction professional at least 75 or 90 days before filing a lawsuit for residential construction claims or commercial property claims, respectively. C.R.S. § 13-20-803.5 (1). If the claimant fails to comply with the NOC process requirements, the court must grant a motion to stay the lawsuit until the claimant complies with the NOC requirements. C.R.S. § 13-20-803.5 (9).
Take Prompt Action
After receiving a NOC letter, construction professionals should take prompt action to inspect the property. Unless there is a written agreement with the claimant to extend the deadline, the inspection must be completed within 30 days after service of the NOC letter. C.R.S. § 13-20-803.5. (2) and (3).
First, the construction professional needs to promptly send notice to all insurers that issued general liability policies to them from the date of first construction of the project through the present. If the construction professional was issued an additional insured endorsement on a policy by a subcontractor or design professional for the project, notice of the claim also needs to be immediately sent to these additional insurers.
Although not all insurers will accept a NOC letter as a trigger for a defense during the NOC process, immediate notice should be provided to all insurers to determine whether the claim will be accepted for defense. If the claim is accepted, an insurer may assign defense counsel and authorize retention of an expert for the inspection. If the insurer declines to assign counsel or retain an expert, it may be prudent for the construction professional to retain them to assist with the inspection and to respond to the NOC letter.
Second, the construction professional will need to collect the project job file – all contracts, plans, change orders, requests for information, field notes, inspection reports, billing records and correspondence.
Third, the construction professional will need to determine who should participate in the inspection, including the most knowledgeable company representatives, construction and/or design professional experts, attorneys, and insurer representatives. This team should develop a methodical approach for the inspection, and determine what equipment may be needed.
Depending upon the nature or location of the claimed defects, intrusive testing may also need to be considered.
Fourth, the construction professional must send a request to the claimant by certified/registered mail to propose an inspection date. If the inspection is not completed within 30 days after service of the NOC letter, absent an agreement with the claimant to extend the deadline, the construction professional will forfeit the statutory right to inspect the property. C.R.S. § 13-20-803.5 (2).
In response to the request, the claimant must allow access during normal working hours, and must allow construction professional representatives access for the inspection, including experts, attorneys and insurer representatives. C.R.S. § 13-20-803.5 (2).
Property Inspection and Destructive Testing
Although not defined by the statute, the claimant must permit “reasonable access” for the inspection, which renders it essential to have an understanding with the claimant about the inspection duration, and if necessary, whether additional time may be necessary. C.R.S. § 13-20-803.5 (2). Because destructive testing is not specifically permitted by the statute, it will be necessary to reach an agreement with the claimant in advance if any destructive testing may be necessary. The parties also will need to agree upon any repairs that may be needed for components or finishes that may be damaged during destructive testing.
Advance coordination of the inspection and destructive testing with the claimant can avoid or minimize complications at the inspection. More importantly, given the possibility of an informal claim resolution, the construction professional will need to avoid any unnecessarily adversarial confrontation with the claimant and maintain a professional attitude throughout the process.
The NOC Response
Following the inspection, the inspection team should objectively discuss their findings regarding the existence, cause and extent of the claimed defects, and the scope and cost of any repairs. This discussion should include the attorney and insurer because a prompt decision will need to be made whether to propose repairs or a monetary payment to settle the claim, or to reject the claim and not make any settlement proposal.
The construction professional may also need to consider whether other contractors or design professionals who may have caused or contributed to the alleged defects should also be requested to participate in any settlement proposal. Given the limited time to make a settlement proposal – 30 days after inspection completion at a residential property and 45 days for a commercial property – a prompt and informed decision for any proposal will be imperative.
If repairs will be offered, the proposal must include a report on the scope, findings, and results of the inspection, and a description of the scope and timetable for the proposed repairs. C.R.S. § 13-20-803.5 (3). Depending upon the nature or scope of repairs, or the relationship with the claimant, the construction professional will also need to decide whether to perform the repairs themselves, or whether to retain another contractor.
If a monetary proposal will be offered, although not required by the statute, it may be prudent to also submit a scope and cost of repairs to enable the claimant to evaluate whether the payment will be sufficient to satisfactorily complete all repairs.
Following receipt of any settlement proposal, the claimant has 15 days to serve the construction professional with an acceptance or the offer will be considered rejected. C.R.S. § 13-20-803.5 (4). The construction professional must pay the monetary settlement or complete repairs by the deadline stated in the proposal, unless any delay is caused by events beyond the reasonable control of the construction professional. C.R.S. § 13-20-803.5 (5). The terms of any settlement proposal may also be negotiated by the parties.
Any settlement proposal should also cite Colorado Rule of Evidence 408 to confirm that the proposal remains confidential. Subject to certain limited exceptions, a settlement proposal should remain confidential and should not be used by the claimant to prove liability in any subsequent litigation. Finally, if the parties agree to settle the claim, the attorney for the construction professional should prepare a settlement agreement that confirms a broad and final settlement of all claims and damages.