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Construction Law Update: The “Residential Construction Exception” to the Economic Loss Rule Is Limited to the Home

Construction Law Update: The “Residential Construction Exception” to the Economic Loss Rule is limited to the Home

In the recent Court of Appeals decision argued by RWO’s Hal Bruno in Muirfield at Lonetree Homeowners Association, Inc. v. Summit Investments, et al., the appellate court reversed the trial court’s denial of a directed verdict in favor of the defendant who was a developer of the plaintiff – a homeowners association (“HOA”).  The developer sought to dismiss the HOA’s negligence claim because the HOA also asserted an identical breach of contract claim arising from a written development agreement that described the developer’s construction-related duties to the HOA and that had been negotiated by counsel on both sides. Pursuant to a doctrine established in Colorado known as the “economic loss rule,” if a party suffers only economic loss or damages from the breach of a contractual duty, that party may not also assert a tort claim (here, a negligence claim) if the tort duty that was alleged to have been breached was provided for in the contract. An exception to the economic loss rule has been carved out in Colorado law with respect to residential construction where negligence or other tort claims are allowed against parties responsible for the construction of residences. Colorado courts have determined that the duty to construct a residence without negligence (or free from defects) is separate and independent from any contractual duties the parties may have reduced to writing. Until the January 2014 decision in Muirfield at Lonetree, Colorado courts had not defined the extent of the residential construction exception, particularly in cases involving common-interest or homeowners association communities that contain both privately owned residences, but also commonly owned improvements. In the present appeal, involving alleged construction defects to a commonly shared road that was constructed by subcontractors retained by the general contractor, the court of appeals held that “a road is not a residence,” and refused to extend the residential construction exception to the economic loss rule to non-residential improvements.