Actual Cash Value and the Delay/Denial of Contractor’s Overhead and Profit

If you own property you likely have a property owners insurance policy. The policy likely contains a replacement cost clause. The policy will also likely define what is a covered loss and how replacement costs are calculated. Examples of typical covered losses are hail damage, fire, and other perils.

Pursuant to the Colorado Division of Insurance Bulletin No. B-5.1, the actual cost value of replacing a dwelling or portion of a dwelling (i.e. roof), when a contractor is used to perform the work, is the full cost of replacement including overhead and profit less appropriate deductions for depreciation. It is important to realize, bulletins are the Division’s interpretation of existing insurance law or general statements of Division policy but these bulletins are neither binding nor final determinations of issues or rights. However, these bulletins are persuasive and can be indicative of rights under an insurance policy.

Typically, these insurance policies will contain language similar to “Insurer will pay the actual cash value of the damage to the dwelling, up to the policy limit, until actual repair or replacement is completed.” Based on a simple reading of this policy clause an owner may assume, for example, a hail damaged roof should be covered under the policy and entitling the owner to have the roof replaced. (Additionally, a property owner would need to hire a contractor to perform the work.) A contractor would provide a bid to replace the roof and the bid would include overhead and profit (generally a 20% markup is customary). The work performed by the contractor will be paid for by the Insurer under the property owner’s insurance policy.

However, some Insurers interpret the very same policy clause very differently and use a different calculation to determine the actual cash value to replace the roof. This interpretation has led to many property owners being denied coverage for the actual cash value of their claims. Insurers have interpreted such language to exclude contractor’s overhead and profit, as well as depreciation from replacement cost when calculating the actual cash value. Essentially, Insurers would pay for the construction repairs excluding any amounts for overhead and profit of the contractor who will be performing the work. If the Insurer’s interpretation of the clause was accurate a property owner would be hard pressed to find a contractor willing to complete a construction project without entitlement to overhead and profit.

Insurers may not deduct overhead and profit when calculating the actual cash value to replace or portion of a dwelling.

If your insurance claim has been delayed and/or denied or you would like more information about this insurance issue contact Milo D. Miller Law Group, P.C. at 720-306-7733.

Colorado’s Construction Trust Fund Statute – What is it and Who does it Protect?

Construction lawyers often receive calls from property owners, subcontractors, sub-subcontractors, vendors, and suppliers about difficulties related to obtaining payment on construction projects. Prudent owners, contractors, subcontractors, and material vendors are constantly attempting to allocate risk, obtain payment and maximize profit margins. Colorado’s Construction Trust Fund Statute can be a useful tool for Owners, Subcontractors and Suppliers to obtain relief for non-payment on construction projects. 

The statute requires funds distributed under a construction contract be held in trust for the subcontractors, sub-subcontractors and vendors.  If a contractor does not distribute funds received from the owner due to a subcontractor or supplier, the owner, subcontractor or supplier may use Colorado’s Construction Trust Fund Statute to obtain payment.

For example, an owner distributes funds to a contractor for work on the owner’s project. The contractor, being a contractor on multiple projects, uses those funds to pay obligations unrelated to the owner’s project. The contractor in turn does not pay the roofing subcontractor for the work performed because the funds were used elsewhere. Under this scenario, the owner and the roofing subcontractor would have a claim against the contractor for a violation of the Trust Fund Statute. The roofing subcontractor may not need to resort to filing a mechanic’s lien on the owner’s property for the contractor’s failure to pay. A variation to this example would produce a similar outcome. For example, once the general contractor pays its roofing subcontractor for the work performed the subcontractor has an obligation to disburse the funds owed to any of its sub-subcontractors.  Here, the sub-subcontractor may have a claim against the subcontractor for a violation of the Trust Fund Statute.

There are exceptions to the statute’s enforceability.  A contractor may withhold funds if there is a “good faith belief” that a subcontractor or vendor claim to payment is not valid due to the conduct or lack of proper performance entitled the contractor to a set-off.  There are additional potential exceptions for consideration.

When successful, the statute allows the claimant to recover its attorney fees, costs and three times the amount of damages.  Additionally, officers, directors, owners, managers and others who control funds subject to Colorado’s Construction Trust Fund Statute, and fail to pay pursuant to the statute, are exposed to personal liability.  It is important to also note that where a judgment is obtained against an individual for violation of Colorado’s Construction Trust Fund Statute, the judgment is not the type of debt typically subject to relief in bankruptcy proceedings.

Trust Fund Statute, C.R.S. §38-22-127

For more information about construction law and construction claims, contact Milo D. Miller Law Group, P.C. at 720-306-7733.

IN THE NEWS: Colorado Construction Defect Bill May Die

Colorado Senate Bill 177 was passed by the Colorado Senate a few weeks ago, and moved on to the State House.  It looks now like the Bill will die in the Colorado house.  SB 177 aims to limit homeowner associations ability pursue claims for defective construction in Court and require disclosures aimed at discouraging such cases.  The Denver Post today reported that the bill “appears bound for a legislative burial in the House” as the bill was sent to a committee likely to kill the bill, and will not likely reach the governor’s desk.

Lakewood representative Max Tyler is quoted in the Post as saying “This is a big complex problem, and its only being dealt with by saying, ‘Well, if we only fix this one little thing, everything will be fine.’ But that’s not reality. The way to deal with construction defects is to stop defective construction.”

In related news, Business Den reports a multifamily residential construction boom is taking place in the Sloan’s Lake area of Denver.  According to the article, Legacy Capital Partners announced plans to build a 24-unit row house development in the area (in addition to a multifamily project in Cherry Creek).  Additionally, Treehouse Development is finishing a 22 unit development, and Alpert Cos. is planning two multifamily developments in the neighborhoods surrounding the lake.

To read the full Denver Post article click here the Business Den article is available here

 

The Role of the Budget as a Tool to Prove Damages and Promote Improvement

Many commercial, public works and industrial construction projects involve competitive bids in which the successful bidder subsequently converts the work items or categories of work in the bid to a construction budget for the project.  On a complex construction project the budget may contain dozens of categories of work with hundreds of cost codes.

Budgetary overruns in cost codes or categories of work lead some construction managers to “dump costs” into cost code(s) that are otherwise under-budget.  This is problematic for a number of reasons including: 1) minimizing/degrading the integrity of the budget as a means to track the accuracy of the bid/estimate for the project; and 2) it can lead to potential problems in proving damages where the cost increases are due to causes other than bidding/estimating errors.

Construction costs should be properly allocated to the appropriate construction category and/or cost code in the budget.  This allows construction professionals to make adjustments where the estimate/bid did not include realistic projections on production, time and costs  (i.e. improve on future projects).  Conversely, proper construction cost tracking allows construction professionals to rely on past bids and budgets where accurate estimates proved profitable for the construction company (i.e., improve on future projects).

From a legal perspective, proper construction cost tracking is also essential to assist in calculating damages.  When construction managers “dump costs” into inappropriate cost codes it can make it very difficult to accurately track and determine damages for cost increases not caused by the contractor, and for which the contractor may be entitled to compensation. Additionally, when events arise, such as changed conditions, it is critical to create a new budget line item for the changed condition. Creating a new budget line item for the changed condition segregates the costs resulting from the change and allows for accurate cost tracking, defensible documentation, and clearer claims to entitlement.  It is also important to take steps to avoid the inclusion of cost increases independent of the changed condition due to the contractor’s own inefficiencies.   A budgetary overage may not mean the estimate/bid is unreliable or inaccurate.  Rather, it could mean that something arose that could not have been reasonably anticipated at the time of bid.

For more information on how proper construction budgets affect damages and project improvement, contact Milo D. Miller Law Group, P.C. at 720-306-7733.

Non-Compete Agreements in Colorado

Many, if not most, employment contracts include “non-compete” provisions that attempt to limit an employee’s ability to work after they quit or are terminated by an employer.  Also, even employees who do not otherwise have contracts may be asked to sign a stand-alone non-compete agreement.  One commonly held belief is that non-compete agreements are not enforceable in Colorado.  This is only partially true.

Although Colorado’s non-compete statute provides that generally, non-compete agreements are void, certain exceptions exist that can impact an employee’s ability to work in the same industry following termination.  The non-compete statute, § 8-2-113, C.R.S., includes important exceptions that should be considered when signing an employment contract or when being asked to sign a stand-alone anti-competition agreement by an employer.  If the non-compete agreement is “for the protection of trade secrets” or is between the employer and “executive and management personnel and officers and employees who constitute professional staff to executive and management personnel,” the non-competition provision may be enforceable.

Whether a particular position constitutes “executive and management personnel” “professional staff to executive and management personnel” is a fact-intensive question that cannot be analyzed in a vacuum.  For example, a non-compete may be enforceable against some commission-sales personnel but not others.  That an individual holds an executive title or works in a “profession” may not be determinative as to the enforceability of a covenant-not-to-compete.

Outside the standard “non-compete,” Colorado law allows other forms of such agreements such as agreements requiring employees to re-pay education and training expenses if the employee has worked for the employer for less than two years.  Additionally, provisions in physician employment contracts or shareholder agreements that require payment of damages for competition may also be enforceable under Colorado law.  Virtually every contract signed by a doctor contains one of these provisions.  When a physician is leaving a practice, it is vitally important that these provisions be examined carefully to determine whether the provision is effective and enforceable.

Covenants not to compete, or non-compete agreements, are often misunderstood by both employers and employees.  When considering whether to sign one of these agreements and the enforceability of the agreements, both employers and employees should consult with attorneys experienced in the drafting and enforcement of these non-compete provisions.

For more information, contact Milo D. Miller Law Group, P.C. at 720-306-7733.

Preserving Miller Act Rights to Obtain Payment on Federal Construction Projects

Unlike private construction projects, construction professionals may not file or enforce mechanic’s lien rights on public construction projects. The Miller Act is a federal law designed to afford certain subcontractors and suppliers rights to obtain payment on a federal construction project when the prime contractor fails to pay them. The mechanism to recover payment is the prime contractor’s payment bond which is required on federal construction projects that exceed $100,000. The VA hospital in Aurora is an example of a federal construction project in the Denver area where subcontractors availed themselves of their Miller Act rights.

The Miller Act only provides remedies to certain subcontractors or suppliers depending on their position in the interrelated network of construction contracts. First-tier subcontractors and second-tier subcontractors and material suppliers may make a Miller Act claim. First-tier subcontractors and material suppliers are parties who have contracts directly with the prime contractor. Second-tier subcontractors and material suppliers are parties who have contracts directly with first-tier subcontractors. Lower tiered subcontractors and suppliers cannot assert a Miller Act Claim.

Miller Act Claims may be waived only in a writing signed by the party waiving its rights and only after the party waiving the right has provided labor or furnished material in the performance of the construction contract.

A Miller Act claim is governed by specific notice, timing and perfection requirements and if not followed strictly, can work to prevent a recovery and payment. However, when the requirements are met, the Miller Act can serve as an excellent method to obtain payment on a federal construction project. An experienced construction lawyer can assist in evaluating the validity and viability of a Miller Act Claim.

For more information, contact Milo D. Miller Law Group, P.C. at 720-306-7733.

Construction Scheduling

Enhance margin through proper planning.   

The majority of successful commercial, industrial and public works construction projects contain scheduling clauses in contracts that require adherence to a Baseline Schedule that properly connects the scope of work and duration to predecessor and successor activities.  A Baseline Schedule that does not contain appropriate logic ties can expose the prime contractor and other subcontractors to increased costs in the form of delays, acceleration, trade stacking and other inefficiencies.

Construct the Project Schedule as Part of the Procurement Process

Surprisingly, those involved in the procurement for some construction companies have little to no practical experience in managing a construction project or putting together a construction schedule.  It is important that those responsible for bidding a project, building a project and scheduling the project, to coordinate their expertise to make sure that the underlying assumptions involved in the bid are validated through a realistic lens.  This is especially the case when examining construction work that is seasonally dependent.

The person responsible for building the schedule for a project should be involved with the estimator and the project personnel to understand the competing perspectives and the various assumptions both make when bidding and building a construction project.  Reliance on invalid assumptions concerning activity duration during the bidding process can result in disastrous cost increases for responsible party(s).  The negative consequences include, but are not limited to, liquidated damages, actual damages and consequential damages.

Conversely, integration between the procurement and the project team prior to bid can allow for more realistic assumptions about the work and accuracy in terms of costs and potential profit margins.  This translates to reliability and confidence from those involved including owners, prime contractors and subcontractors.

For more information, contact the attorneys at Milo D. Miller Law Group, P.C. at 720-306-7733.

Methods to Obtain Payment for Construction Services Under Colorado Insurance Law

Construction lawyers often evaluate insurance policies for a variety of reasons including covered risks, uncovered risks and possible avenues for recovery for their clients.  One need not be covered by an insurance policy in order to successfully sue an insurance provider.  Contrary to the common belief, insurance companies may vulnerable to suits filed by a wide range of individuals and entities beyond the actual policy holder.

Vendors such as construction contractors who contract with property owners (homeowners, HOAs, REITS) may qualify as “first party claimaints” allowing them to obtain recovery from the property owner’s insurance company for work the vendor provides in correcting a covered property loss claim.  At least two Colorado Courts have found that vendors who have provided construction services for an insured property loss to be first party claimants under the property owners insurance policy.

Beside the potential of a claim by an insured who purchased the insurance policy, the path for potential claims has been statutorily opened up for an expansive class of plaintiffs categorized as “first party claimants” through Colorado’s “statutory bad faith” statute.  The definition of a “first party claimant” is broad and includes “a person or entity that asserts a claim ‘on behalf of’ an insured.”  Hence, an independent third party, such as roofing contractor, who has no contract with an insurance company, may be permitted to sue that insurance company for contractual breach “on behalf of” a homeowner or condominium association with whom the insurance company did have a contractual relationship when the roof repairs were commissioned.

This means the insurance company providing the policy may be obligated to pay for the construction vendor’s services, and additional statutory damages equal to double the denied benefit, and attorney fees. These remedies may be available under Colorado’s “statutory bad faith” statute, § 10-3-1113, 1115 and 1116, which provides relief where an insurer unreasonably delays or denies the benefits owed.

In addition to pursuing statutory bad faith claims, an insured or a contractually-uninvolved third party may utilize another well-established avenue for legal action, specifically, a straight forward breach of contract action.  A breach of contract claim is viable as long as there is a valid assignment of claims from the insured to the third party.  However, there is a caveat arising out of the law of assignments: the insured cannot assign the actual policy that was contractually entered into with the insurance company; what is assignable is the right to receive money due or to become due under the existing contract.   Every case is unique and should be evaluated by an attorney experienced in insurance and construction claims.

For more information, contact the attorneys at Milo D. Miller Law Group, P.C. at 720-306-7733.

Making Insurance Carriers Pay for Property Damage

Recent hail storm events have caused significant property damage to homeowners in Colorado, and many are having difficulty getting property insurance carriers to pay for roof and siding damage or losses to their homes or common interest communities.

Colorado law provides homeowners with significant rights and remedies when insurance carriers unreasonably deny or delaying paying homeowners for losses.  In Colorado, an insurance carrier that unreasonably delays or denies a claim can be held liable for twice the amount of the covered benefit and payment of a homeowner’s attorney fees.  Additionally, Colorado recognizes claims against insurance carriers for damages due to an insurance carrier’s breach of contract, bad faith conduct and violations of the Colorado Consumer Protection Act.

Should you have any questions about your policy or the manner in which your insurance carrier is handling your claim, contact the attorneys at Milo D. Miller Law Group, P.C. at 720-306-7733

Minimizing Risk And Protecting The HOA in Capital Improvements and Construction Defect Repairs

Construction projects, whether construction defect repairs or capital improvements, pose many risks to HOAs.  Among these risks is the risk that the reconstruction project can result in construction defects.  Universally, HOAs desire to avoid having construction defects arise during any construction project.  Although these defects do occur in reconstruction work, a carefully managed contracting process can properly allocate risk among the parties. Too often, HOAs involved in major repair or capital construction projects simply execute the vendor’s contract without revision.  Executing a vendor contract without careful examination can result in an HOA unnecessarily forfeiting rights and accepting unfavorable terms.  Ultimately, the HOA is the customer and should not simply accept the contract that is offered.

 The construction contract can help prevent defects by integrating execution of the work with well-timed quality control inspections by an independent party such as an owner’s representative.  It is imperative that the HOA manage risk by requiring adequate insurance coverage and policy limits in the event a loss.  Additionally, it is critical that the construction contract contains a well drafted indemnity clauses to address claims that may arise associated with liens, regulatory compliance and a host of other issues.

 If you are dealing with construction defect repairs or capital improvement projects, the attorneys at Milo D. Miller Law Group, P.C. can assist you in risk mitigation and management before, during and after your project. Contact the attorneys at Milo D. Miller Law Group, P.C. at 720-306-7733.