Colorado Court of Appeals’ decision regarding the statute of limitations applicable to construction defect claims.

In United Fire Group ex rel. Metamorphosis Salon v. Powers Elec., Inc., — P.3d —, 2010 WL 2521752 (Colo. App., June 24, 2010), the Colorado Court of Appeals addressed the proper application of C.R.S. § 13-80-104 in Colorado construction defect cases.  The essential facts of the case were that Gary Powers d/b/a Powers Electric, Inc. installed an exit sign in the Metamorphosis Salon.  On March 6, 2006 a fire damaged property owned by the salon, which was insured by United Fire Group.  On March 27, 2006, a fire investigator provided a report to United Fire concluding that faulty wiring in the electrical exit sign installed by Powers Electric caused the fire.  United Fire issued a series of checks to Metamorphosis Salon for losses incurred in the fire, and the salon cashed these payments between April 24 and August 7, 2006.  On March 11, 2008, United Fire filed a subrogation action against Powers Electric, claiming that the negligent installation of the exit sign caused the fire.

At the trial court level, Powers Electric moved for summary judgment, arguing that United Fire’s claims accrued on the date of the fire and, consequently, its case was barred by the applicable statute of limitations.  United Fire argued that the statute of limitations began to run either on (1) the date it received the fire investigator’s report; or (2) the dates on which the salon cashed the insurance checks.  The trial court granted Powers Electric’s motion for summary judgment determining that United Fire’s claim accrued on the date of the fire and having waited more than two years after this date to sue Powers Electric, its case was barred by the statute of limitations.

On appeal, the parties agreed that the case was a construction defect case governed by the Construction Defect Action Reform Act (“CDARA“), C.R.S. § 13-20-801, et seq., and the two-year statute of limitations found in C.R.S. § 13-80-102(1)(a) and 104(1).  They also agreed that under C.R.S. § 13-80-104(1)(b)(I), the two years begins to run when a claimant “discovers or in the exercise of reasonable diligence should have discovered the physical manifestations of a defect in the improvement which ultimately causes the injury.”  The parties disagreed, obviously, regarding the meaning of the phrase “physical manifestation of a defect in the improvement.”

In referring to Smith v. Executive Custom Homes, Inc., 230 P.3d 1186 (Colo., 2010), the Court of Appeals stated:

There, a homeowner argued that the statute of limitations begins to run when the injury occurs. The supreme court rejected this approach, concluding that the statute of limitations starts to run “when the homeowner first discovers or should have discovered the defect.” In reaching this conclusion, the court observed that, “[i]t is possible that an injury itself could serve as initial discovery of a construction defect.” (citations omitted)

In referring to Highline Village Associates v. Hersh Cos., 996 P.2d 250 (Colo. App. 1999), the Court of Appeals stated:

There, the division stated that, to apply the statute of limitations in a CDARA case, “a claim accrues when a physical manifestation of a defect appears, even though its cause is not known at that time.” (citations omitted)

Based on this background, the Court of Appeals concluded: “Relying on the plain language of section 13-80-104(1)(b)(I), we conclude that the fire in this case was a ‘physical manifestation of a defect.'”  The court went on to say:

Applying Smith, we further conclude that the damage caused by the fire-the injury here-served as the initial discovery of the defect. Applying Highline Village Associates, we also conclude that it was not necessary to know that the defect caused the fire for the fire to be the defect’s physical manifestation. 

Although United Fire Group v. Powers Electric, Inc. case does nothing to upset seemingly settled Colorado law, it serves as a good reminder that construction defects in Colorado truly do accrue when a claimant “discovers or in the exercise of reasonable diligence should have discovered the physical manifestations of a defect in the improvement which ultimately causes the injury.”  Courts will not, and should not, go out of their way to adopt a tortured reading of the statute to produce result-oriented decisions.  If you need another reminder of this truth, you need look no further than the Smith v. Executive Custom Homes decision, in which the Colorado Supreme Court stated:

A plain reading of section [13-80-]104 clearly indicates that a homeowner’s claims under the CDARA may accrue and be forever barred by the statute of limitations before a personal injury occurs. And although this outcome may be equitable when viewed in terms of property damage, it certainly is quite harsh when viewed in the context of a serious and perhaps unforeseeable personal injury. Nevertheless, a harsh or unfair result will not render a literal interpretation absurd.

For more information regarding the recent Smith v. Executive Custom Homes decision, you can read our previous discussion of the case here.  To learn more about construction law or construction defect litigation in Colorado, please visit our website or contact me at mclain@hhmrlaw.com to request a copy of our Overview of Construction Defect Litigation in Colorado.