Colorado Lawmakers Hope New Law Will Break 15-Year Condo Logjam

Colorado lawmakers have spent years trying to fix the state's broken condo construction market. They hope their latest effort, signed into law this week by Gov. Jared Polis, will be the first to make a real dent.

Developers, insurers and policymakers agree on the core problem: litigation risk. A steady rise in construction defect lawsuits over the last 20 years has made condos, once a go-to affordable homeownership option, largely uninsurable and financially unworkable. 

The new law has several provisions aimed at boosting construction and increasing the state’s housing stock by making building condos less risky for builders and insurers. These include increasing the legal threshold for how many homeowners must sign on before litigation proceeds, launching a voluntary incentive program for builders, and establishing rules requiring that settlements first be put toward repairing defects.

Rep. Shannon Bird, an author and prime sponsor of the bill, said the legislation intentionally avoids picking sides in the long-running fight between trial attorneys and developers.

"Too often, the debate has been shaped by people who either represent homeowners or people who build homes," Bird said. "This time, we asked: What would a future homeowner want?"

Industry experts aren’t as sunny on the new law.

"Condos are five times as expensive to insure as apartments," Ted Leighty, CEO of the Colorado Association of Home Builders, told Bisnow. "Until you reduce the frequency and severity of claims, you’re not going to get any more underwriting."

Between 1998 and 2000, the standard insurance markets largely abandoned Colorado condos, leaving coverage to excess and surplus lines — insurers that specialize in risks not typically covered by traditional providers, said Clayton Sharkey, senior vice president and director of construction practice at IMA Financial Group.

As a result, condo construction across Colorado has cratered by more than 75% since the mid-2000s, according to a Common Sense Institute study released in late 2023.

The state has been trying ever since to find a solution to what the developer and insurance industries consider largely frivolous lawsuits, including four pieces of legislation between 2001 and 2010 that required notice to be given to developers prior to lawsuits being filed, introduced homeowner voting requirements, and defined "occurrences" in construction defect claims.

Due to attorney and other professional fees associated with lawsuits, condo plaintiffs suffering legitimate defects "can never be made whole," even in successful litigation, Sharkey told Bisnow. 

In his interactions with insurance defense attorneys over the years, Sharkey said he has found that the focus of litigation is rarely on repair but rather on big settlements.

"In 20-plus years, how many repair-based solutions consistent with the law we passed in 2003 have been pursued?" Sharkey said. "The cost and the litigation has not slowed down over those 20 years."

There is no statewide clearinghouse or monitor that tracks these lawsuits, so numbers are difficult to verify.

The state made a key change in 2017, requiring a majority of unit owners to approve litigation before a homeowners association could sue a builder. That same year, the Colorado Supreme Court ruled in the Vallagio v. Metropolitan Homes case that developers could enforce binding arbitration clauses in condo declarations. It was another win for builders. 

Still, condo starts barely budged.

The new law raises the litigation bar higher in an effort to move the needle. Starting next year, 65% of unit owners will need to approve legal action. It also creates an incentive program that encourages developers to use third-party inspections and offer warranties — one year on workmanship, two years on systems and six years on structural components — in exchange for clearer legal protections.

Builders that opt in to the program must meet higher standards in a trade-off that Bird said will help restore confidence among both buyers and insurers.

Leighty, however, is less certain. While he called the new litigation threshold a "modest but good step," he warned that the pilot program’s compliance burden — including multiple inspectors on-site — could raise construction costs. He also pointed to lingering ambiguities in the law around what constitutes a defect and how long insurers need to evaluate claims.

"We’re not convinced this reduces the severity or frequency of claims," Leighty said. "And because it’s a pilot program, it’ll only work if enough builders participate."

Bird said the benefits of the bill include the increased unit-owner threshold as well as a provision that aims to slash frivolous lawsuits by ensuring that damage rewards or settlements must first be applied to fix the alleged defect.

“Even for builders who decide not to participate in the incentive program, they still get the benefit of the increased threshold vote, [and] we’re taking away every other incentive to file litigation,” Bird said.

The stakes are high. Condos have become increasingly rare in the state even as demand for more affordable housing skyrockets. Before 2009, Colorado added one new condo for every 1.25 apartments. Today, the ratio is 1 to 14, according to the Common Sense Institute study.

Bird and IMA’s Sharkey will be watching the data. More insurers entering the market, more affordable premiums and more construction starts would all signal success. While Bird acknowledged that the law may need tweaks, she said this marks a reset, adding that most stakeholders she has worked with have expressed cautious optimism.

"This market hasn’t worked for a long time," Bird said.