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Would Construction Defects Reform Have Helped Colorado's Housing Crunch?

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Flickr user Butterbean
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New condos in Denver.

A measure to make it more difficult for condo owners to sue developers over defects from construction died during the state Legislature's final full week in session.

Beyond developer support, affordable housing advocates had thrown their weight behind the bill. They say that threats of litigation and high insurance premiums have led to a slowdown in condo construction and an associated crunch in more affordable condo units. The Denver Post quoted Denver Mayor Michael Hancock as saying "Construction defects are severely slowing the construction of for-sale, affordable housing."

While there is no doubt that the Front Range has a shortage of affordable housing, a change to the construction defects law may not have provided a fix.

Here's the argument that links construction defects to a lack of affordable housing. Since the passing of Colorado's construction defects law in 2001, developers say lawsuits over defects have increased. So have liability insurance premiums for developers building condos. This has had a chilling effect on condo construction, developers say. Rapid Front Range growth and slow construction coming out of the recession means fewer single family homes are available, so those prices are driven up, and there are few condos to fill in the gaps. This leads to a market with few unaffordable properties for entry-level buyers.

But not everyone buys this argument.

Ron Sandgrund, a lawyer and expert on property law in Colorado who helped craft the 2001 construction defects law, believes market forces that discourage condo development are the biggest factor in the condo shortage.

Sandgrund pointed to a study by the firm Pacey Economics showing there is no correlation between a state's construction defects law and its rate of condo construction. Plus, weakening the legislation hurts potential homebuyers, who probably do not want to trade off affordability for quality on the biggest purchase of their life.

"If you water down construction defect laws you will have worse construction," he said.

Dan Mills, a vice president and shareholder with Flood and Peterson, an insurance company that offers liability insurance to developers, also said changes to the law would probably have little effect on the condo market. Insurance companies certainly wouldn't have dropped their premiums, he said.

"Even if this law had passed as the Senate had sent it over, even if it had passed in its original form, the insurance industry would have sat for five or six years, watching it be adjudicated."

Mills acknowledged that Colorado's construction defects law, as interpreted, has chilled the market for those who insure development projects – there are only a handful operating here, because it's harder to turn a profit with relatively strict liability statutes.

But he also said the jump in premiums barely affects the price of a new condo – a developer might pay $2,000 more per unit in insurance because of the strict law. The big issue that puts developers off is the drawn-out legal process, when a claim leads to various insurance companies fighting over who is ultimately responsible for the defect.

"So everybody starts pointing fingers at everybody else," Mills said. "No, it's not the foundation, it's the grading of the land. No, it's not the concrete, it's the rebar that's in the concrete. And the famous term is you get 60 lawyers in a room for three years and suddenly a $300,000 fix costs $30 million."

The proposed changes to the construction defects law wouldn't fix this problem, he said.

Insurers, though, are crafting their own solution. A new type of insurance product now wraps all the contractors under one policy. This eliminates the problem – and the cost, and time – of 60 lawyers in a room.

"Rather than having dozens and dozens of insurance policies there's just one," Mills said. "And if anything goes wrong with the project that one policy would pay."

In this case, the free market may be coming up with a solution where legislators cannot.

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