On June 6, 2012, Colorado fundamentally altered the rules that apply to roofers and restoration contractors handling losses on residential property. Governor Hickenlooper signed into law a bill1 that, at first blush, appears aimed at unscrupulous “storm chasers.” The impact of the new statute, however, reaches far beyond its presumptive target. And the law is rife with unintended consequences for everyone within its reach.
The new rules arguably affect virtually every restoration contractor doing business in Colorado, regardless of whether that contractor’s primary business involves roof repairs. According to the statute, the term “Roofing Contractor” includes any “firm, partnership, corporation, association, business trust, limited liability company, or other legal entity that performs or offers to perform roofing work in [Colorado] on residential property for compensation.”2 Contractors in the restoration industry invariably assume the role of general contractor, and in doing so, they take on responsibility for all of their subcontracted trades. As a result, every residential restoration project that involves roofing work – no matter how minor – likely requires compliance with the statute. That includes fire losses in which the roof is damaged. And it includes water losses that are caused by high wind and roof damage (i.e., tornado, microburst, etc.). Indeed, the list of property losses that necessitate some degree of roofing work is virtually endless.
Moreover, the law introduces a number of new requirements that contractors will likely find difficult to follow. And non-compliance carries draconian consequences.
In an effort to help contractors navigate this new legislation, this article highlights four things that contractors must know: First, “industry standard” work authorizations are useless for purposes of residential roof work in Colorado and they need to be revised to comport with the new law. Second, contractors who fail to track every item of job costs (i.e., as if each project was a rate and material job) run significant collection risks. Third, no contractor can offer to waive or pay homeowner deductibles. Fourth, contractors cannot serve as public adjusters, and they need to be careful about negotiating a scope of work with the carrier because doing so may amount to a prohibited act of claim adjusting.
1. Re-Write Colorado Work Authorizations.
The statute spells out the following requirements that every agreement between contractor and homeowner must satisfy.3 Again, these requirements come into play on every residential project involving roof work.
a.) Get it in writing and specify the scope of the project.
Both the homeowner and a representative of the contractor must sign a written agreement before any work may be performed.4 On its face, this requirement sounds simple enough. But it will often be impossible to meet. Restoration contractors are frequently asked to board-up roof damage under circumstances that do not allow for cool-headed negotiation. When the fire department calls a contractor to secure the burned-out roof at 2:30 a.m., it may simply be impossible to secure a written agreement before performing the work.
Even if the homeowner is available, however, the statute further mandates the contract contain a statement regarding the “scope of roofing services and materials to be provided.”5 This requirement is both a hazard and a help. To the extent the statute applies to emergency roof repairs, the law presents a hazard because the work cannot wait while the contractor prepares a detailed estimate. Further complicating matters, the statute does not seem to allow for roofing work performed on a rate and material basis. The contract must specify the scope of service and the materials to be used. Thus, the only viable option available to the contractor is to make an educated guess about the scope of work and put it in writing. Guesswork is always dangerous, but an experienced contractor should be able to ballpark the scope and materials and put it in the contract.
b.) Specify the dates during which work will be performed.
The new law requires that every residential roofing contract set forth the “approximate dates of service.”6 Construction contracts often call for completion within a specified period of time from the commencement of work. This statute, however, requires that the agreement identify the “dates of service.” Thus, the requirement under the new law is to specify when the work will commence and when it is expected to be finished. To safeguard against unforeseen delays, the contract should make clear that some delays are unavoidable and that failure to meet the stated “deadline” does not constitute a breach.
c.) Incorporate the estimate by reference.
In addition to requiring the parties to specify the scope of services and materials to be provided, the agreement must also include the “approximate costs of the services based on damages known” at the time the contract is signed.7 This presents the same problems as does including the scope of services and materials.
But once the property is secure, the scope and pricing requirements of the statute are probably beneficial. Restoration contractors tend to leave price terms open until they can come to an agreed-upon scope of work with the insurance adjuster. By leaving the price term open and subject to negotiation with the carrier, however, contractors run a significant risk that the homeowner will dispute the enforceability of their agreement with the contractor because there was not meeting of the minds on a critical term (i.e., the price). That argument has teeth because the carrier is not the customer – the homeowner is.
A clearly established price strengthens the contractor’s potential remedies. And this added support is important because, as detailed below, the new statute arguably limits the remedies that contractors could otherwise pursue with respect to roofing claims.8 That said, a well-written contract should permit the contractor to record a mechanic’s lien for all non-roofing work, sue the customer and pursue collection. Indeed, if the contractor provides a copy of the agreement to the carrier – as soon as it is signed – doing so will greatly improve the odds of getting paid. Even if the insurance adjuster, an “independent consultant” or a competitor later disputes the contractor’s price, it will be difficult to get around a binding written agreement between the contractor and the insured. Particularly where the carrier knows, from the outset, what the project will cost, denying the homeowner’s claim raises a significant risk of bad faith liability. And the cost of defending a bad faith suit is typically higher than the contractor’s final invoice.
This requirement is easily satisfied by incorporating the estimate by reference. For instance, the agreement could include a statement that the price is based on “the costs set forth in the estimate attached hereto.” Just be sure to attach the estimate to every contract.
d.) Include extensive contact information.
The contract must list the contractor’s contact information, including at a minimum, its physical address, email address and telephone number.9 The statute also says that “any other contact information available for the roofing contractor” should be listed as well.10 It is unclear what the legislature intended here, but contractors should err on the side of providing multiple means of communication (e.g., cell phone, Facebook, Twitter).
e.) Identify your bonding company and your insurance carrier.
The agreement must identify the contractor’s surety and liability coverage insurer, along with the contact information for each.11 This statutory requirement is, of course, easy to satisfy. But it likely leads to at least two significant outcomes. First, small contractors (i.e., two guys and a pickup) cannot afford insurance premiums and will be forced out of the mainstream market. Second, legitimate contractors may see more Colorado complaints filed with their surety and liability carriers.
f.) Explain homeowners’ new statutory rights, including the right to terminate.
The contract must set forth the roofing contractor’s policies regarding cancellation of contracts and its duties vis-à-vis its customers.12 These policies and duties are detailed in the statute and are not negotiable.
First, the new statute requires that the contract contain a clause stating the contractor’s cancellation policy, which includes a new cancellation policy imposed on roofing contractors.13 This policy is that the property owner may rescind the contract and obtain a full refund of any deposit paid to the contractor within 72 hours after entering the contract.14
Many roofers and restoration contractors already give their customers a period of time during which they can rescind. But by mandating a three-day rescission period, Colorado has officially opened the door to unbridled “poaching.” Natural disasters in Colorado already trigger a flurry of contractors trying to undercut each other on price. And now that homeowners have three days to back out, the flurry of activity is likely to intensify.
It is, of course, illegal for contractors to knowingly interfere with existing agreements. But by giving homeowners a statutory right to rescind, they are more likely to hunt for a “better deal,” thereby incentivizing contractors who are willing to engage in unscrupulous tactics. Contractors who lose projects as a result of unfair interference can sue, but the costs of litigation usually outweigh potential benefits. Thus, the mandatory rescission requirement is simply going to heighten competition in a business that is already cutthroat.
Second, the statute requires that contracts include language similar to the following in boldfaced type: the contractor shall hold in trust any payment from the property owner until the roofing contractor has delivered roofing materials at the residential property site or has performed a majority of the roofing work on the residential property.15
This new duty presents a significant risk of liability for contractors. Holding money in trust for another imposes fiduciary obligations, which if breached, can expose a contractor to legal damages. Care should be taken to account internally for payments from homeowners received prior to delivering roofing materials on site or performing a majority of the roofing work. To be safe, funds received in connection with residential projects should be segregated into a separate account and should not be moved into the contractor’s operating account until the project is substantially complete.
Third, in circumstances in which payment for roofing work will be made from the proceeds of a property and casualty insurance policy, the contract must contain: (a) a statement that the roofing contractor cannot pay, waive, rebate, or promise to pay, waive, or rebate all or part of any insurance deductible,16 and (b) a statement that the property owner may rescind the contract within 72 hours after written notice from the insurer that the claim for payment for roofing work is denied in whole or in part.17
Putting these provisions into a contract is, obviously, straightforward. But the homeowners’ statutory right to terminate the contractor within 72 hours of a denial of coverage gives rise to a host of potential problems. As detailed below, the new law arguably eliminates all of the contractor’s available remedies against the homeowner (other than unjust enrichment), so the homeowner’s liability exposure – in the event of such a termination – is minimal. That, in turn, reduces the odds that insurance carriers will be sued for bad faith for denying coverage for roofing – even if the carrier approved the estimate and told the contractor to commence work. Bottom line: A termination under this provision will almost certainly leave the contractor holding the bag on the roofing claim.
The only notable exception to the statutory termination right applies to supplemental work.18 If the contractor is required to add an unforeseen supplement, the homeowner cannot terminate the agreement if the carrier refuses to cover the additional work.19 This shield against termination is, of course, welcome. But it also presents a risk of chaos in the middle of the project. If the carrier denies supplemental coverage, the contractor will have to decide whether to proceed and risk non-payment from the homeowner or walk away from the job. And since many supplemental claims do not become apparent until the roof is torn off, this may not be an easy call to make. Thus, it is important to prepare a comprehensive estimate at the outset.
2. Track costs on every residential project as if it were a rate and material job.
As discussed above, if the carrier denies any part of the claim, the owner has 72 hours from receiving notice to terminate the contract.20 And if the contract is terminated, within ten days of the termination the contractor must refund all of the money paid by the owner.21 There is one exception to this mandatory refund policy but it may create more problems than it purports to solve. According to the statute, the contractor can retain compensation for “roofing work actually performed . . . in a workmanlike manner consistent with standard roofing industry practices.”22 Contractors are – for better or worse – likely to believe that their work was consistent with industry standards and to liberally measure the amount of work completed before termination. Yet they owe a duty to the homeowner to hold prepayments in trust – something that arguably gives rise to heightened fiduciary liabilities. Thus, the stakes are high for contractors who encounter the statutory obligation to refund money under the statute.
Further complicating matters is the fact that contractors do not tend to keep job cost records from which they can easily calculate the value of their work up to the point of termination. If the estimate calls for $25,000 in repairs, most contractors will simply do the job and collect the agreed-upon fee. They will not typically keep simultaneous rate and material billing records because there is no need to do so. Under the new law, however, such records may prove essential when contractors are called upon to demonstrate the value of the work they performed prior to termination.
The statute is also silent about multifaceted restoration jobs. On a fire loss, for example, does the homeowner have the right to terminate the entire restoration contract while avoiding liability for consequential damages? Or is this provision of the statute limited to roofing work? If the contractor is hired, for example, on a $300,000 residential fire loss and only 10% of the total project costs relate to roofing, how much of the insurance money should be held in trust? And how much is the contractor required to refund if the homeowner terminates due to a coverage dispute with his carrier over the roof repairs? The only way to resolve these uncertainties is to clearly address them in the contract with the homeowner. While the statute obviously governs all roofing work, the contract should spell out exactly what will happen with the other coverage amounts if the homeowner prematurely terminates the agreement.
Clarifying these questions in a well-written agreement is also important because the statute appears to eliminate a number of enforcement tools otherwise available to contractors. According to the new law, the contractor’s only right of recovery from the homeowner is to pursue “common law remedies” for materials ordered and installed prior to termination.23 Because mechanics’ liens are based on statutory law, a court may conclude that this language eliminates the contractor’s right to record a lien. Likewise, once the underlying agreement is terminated, contractors may find it difficult to recover attorneys’ fees (since no Colorado statute provides for fees and common law requires a valid contract to convey such a right). Again, on a project that involves more than just roofing work, it is critically important to address these questions clearly in a written agreement and to preserve all possible remedies for non-roofing work.
3. Do not offer to pay or waive the deductable (ever).
Under the new law, “Roofing Contractors” cannot advertise or offer to pay, waive or rebate any portion of the homeowner’s deductable.24 And violating this prohibition gives the insurance carrier the right to ignore the contractor’s claim entirely25 and gives the property owner the right to sue the contractor for any damages suffered by the owner as a result.26
The problem, again, is that many of the roof-related losses that trigger the statute will involve other forms of insured work. Thus, it is unclear whether a restoration contractor can offer to waive a deductable on non-roofing construction. Since this provision gives the insurance carrier the right to ignore the contractor’s bill, however, the better approach is to assume that the law applies to every loss involving roof repairs. And contractors should simply stop offering to waive or to pay the deductable on any project involving damage to the roof.
4. Do not offer or purport to serve as a public adjuster (ever).
The statute also prohibits “Roofing Contractors” from claiming to be or acting as public adjusters.27 And because unscrupulous contractors have been known to drum up work by playing the role of public adjuster, this statutory prohibition is aimed at a very real problem. The challenge for honest contractors, of course, is that preparing an agreed-upon estimate with the insurance adjuster may be considered “adjusting” the claim – particularly where the contractor advocates for additional coverage. The new law is careful to point out that contractors can discuss the estimate with the carrier, but it is unclear where the line is drawn between discussions and claim adjusting. The best thing for contractors to do is to keep an arm’s-length relationship with both the homeowner and the carrier. If the homeowner wants to hire a public adjuster to assist with evaluating coverage, the homeowner is free to do so. But contractors should stay out of the adjusting business entirely.
Although the new law triggers a number of complex questions that courts will eventually have to sort out, one thing is clear: Restoration contractors – regardless of whether they are primarily in the business of repairing roofs – need to take action. The “industry standard” work authorization is an endangered species in Colorado and contractors must make comprehensive changes to their contracts. In addition, they must prepare for the new limits the law places on a contractor’s rights and obligations on every job involving a roof repair.
1 Senate Bill 12-038, codified at C.R.S. § 6-22-101 et seq.
2 C.R.S. § 6-22-102(3)(b)(I).
3 C.R.S. § 6-22-103(1).
5 C.R.S. § 6-22-103(1)(a).
6 C.R.S. § 6-22-103(1)(b).
7 C.R.S. § 6-22-103(1)(c).
8 See Section 2, infra.
9 C.R.S. § 6-22-103(1)(d).
11 C.R.S. § 6-22-103(1)(e).
12 C.R.S. § 6-22-103(1)(f) and (g).
13 C.R.S. § 6-22-103(1)(f)(I).
15 C.R.S. § 6-22-103(2).
16 C.R.S. § 6-22-103(1)(g).
17 C.R.S. §§ 6-22-103(1)(f)(II), 6-22-104(1)(a).
18 C.R.S. § 6-22-104(1)(a).
21 C.R.S. § 6-22-104(2).
22 C.R.S. § 6-22-104(3).
23 C.R.S. § 6-22-104(4).
24 C.R.S. § 6-22-105(1).
25 C.R.S. § 6-22-105(2)(a).
26 C.R.S. § 6-22-105(2)(b).
27 C.R.S. § 6-22-105(3).
28. 4821-7041-7424, v. 1-7041-7424, v. 1