June 16, 2025

HB 25-1272: What Colorado Developers Need to Know About the State’s New Construction Defect Law

On May 12, 2025, Governor Jared Polis signed House Bill 25-1272 (“HB 25-1272“) into law. This act, known as the Colorado American Dream Act, seeks to address a key barrier to the construction of entry level condominiums and townhomes: construction defect litigation risk.

The Multifamily Construction Incentive Program (the “Incentive Program”) is the centerpiece of HB 25-1272; it aims to offer builders a predictable litigation environment in exchange for heightened construction oversight and consumer protections. This alert outlines the Incentive Program and other general changes to the construction defect liability landscape.

The Incentive Program

Who is Eligible to Participate?

The Incentive Program is open to builders of attached multifamily residential housing with two or more units, such as duplexes, townhomes, and condominiums. Builders of detached single-family homes are not eligible. Participation is voluntary but must be affirmatively recorded and documented early in the development process.

What are the Requirements?

Starting January 1, 2026, qualified builders may participate in the Incentive Program by complying with three core obligations:

1. Mandatory Warranty Coverage. Participants must provide the following warranties covering any construction defects at no cost to homeowners:
   1. One year for workmanship and materials;
   2. Two years for electrical, plumbing and mechanical systems; and
   3. Six years for major structural components (e.g., foundation, load-bearing elements, framing).
2. Certified Third-Party Inspections. The Incentive Program requires a series of third party inspections for each component, system, and improvement during construction, distinct from standard building inspections. These inspections are designed to proactively identify and address deviations from code or plans during the construction process. The inspections must be conducted by a qualified, independent inspector with no affiliation to the builder or its contractors. Insurers may also provide inspectors.
   1. For each inspection, the inspector must certify that the inspected component, system, or improvement:
      1. Was included in the approved construction documents;
      2. Was accessible and compliant with applicable building codes and manufacturer specifications at the time of inspection; and
      3. Any identified issues were corrected before occupancy.

   Participants must certify and file all inspections with the building department before a certificate of occupancy is issued. This documentation creates a record and a presumption that the construction was free of defects at the time of completion.

3. Record Notice of Participation. Lastly, participants must record a notice of election to participate in the Incentive Program in the real property records of the county in which the property is located prior to offering any unit for sale. This notice must apply to the entire project and can only be revoked before the issuance of the last certificate of occupancy for the project.

What are the Benefits for Participants?

Participants in the Incentive Program are afforded a few procedural safeguards. These benefits are designed to encourage early resolution and provide a more structured and predictable claims process. Participation in the Incentive Program provides the following legal advantages:

1. Exhaustion of Warranty Remedies Before Filing a Claim. Homeowners and associations (“Claimants”) must pursue all remedies available under the applicable warranty before bringing a defect claim. The statute of limitations will be tolled while warranty remedies are pursued for a maximum of one year or until the completion of the warranty process, whichever is longer.
2. Pre-Litigation Response Process. Participants and their insurers are required to follow a structured response protocol when a Claimant submits a construction defect notice. This process is intended to provide clarity on whether and how defects will be addressed.
   1. Mandatory Delivery of Response. Participants and their insurers must jointly respond to a defect notice with a formal offer to repair or settle for money, or with a written explanation of why the alleged defect does not warrant repair.
   2. Timelines for Response. An offer to repair or settle for money must be made within 90 days after the participant’s inspection deadline under the notice of claim process pursuant to C.R.S. § 13-20-803.5, and a written explanation must be delivered within 30 days of the inspection deadline. Participants may request an extension to provide an offer to repair or settle for money, but the act sets an absolute deadline of 210 days from the defect notice date.
   3. Penalties. If a Claimant unreasonably rejects a reasonable offer, the court may award attorneys’ fees and costs to the participant. If the participant fails to make a reasonable offer, the court may award attorneys’ fees and costs to the Claimant.
      1. A Claimant’s rejection is presumed unreasonable if the Claimant recovers a final judgment in an amount that is less than the amount offered or the reasonable value of the offered repair.
      2. If a Claimant rejects a participant’s offer, the Claimant must submit a written counterproposal within 30 days of rejection. The counterproposal must propose a repair plan at the participant’s expense or provide a settlement amount. The participant has 15 days to accept this counterproposal. However, if the participant accepts the Claimant’s counterproposal, the participant must also pay the Claimant’s reasonable attorneys’ fees and investigation costs.
3. Concurrent Certificate of Review for Architects and Engineers. When filing a lawsuit against architects or engineers, Claimants must also include a certificate of review by a qualified third party, confirming the alleged negligence. The act changes current law, which requires such certificates of review to be filed within 60 days after serving a complaint or demand for arbitration against a licensed professional.

Potential Pitfalls

1. Fee Shifting Provision. While the act’s fee-shifting provision aims to resolve disputes early by encouraging responsive negotiations, it also creates a problematic dynamic. The mere act of accepting a counteroffer could saddle a participant with thousands of dollars in legal and expert costs, even if the participant’s original offer was nearly sufficient. This places serious pressure on the participant’s first offer to be “perfect” in scope and valuation, lest they later be punished for compromising. Although the legislature’s intent was to incentivize early resolution, this provision, as written, may have the opposite effect. It creates a disincentive for participants to accept anything but a mirror image of their original offer—effectively penalizing reasonable negotiations and good-faith compromises. A future legislative fix might involve a materiality threshold (e.g., fee-shifting applies only if the participant’s original offer was off by more than 10% of the counteroffer).
2. Statute of Limitations: A Repackaging of Existing Law—with a Concerning Ambiguity. At first glance, the new C.R.S. § 13-20-803.3(7)(a) appears to simply restate Colorado’s existing, six-year statute of repose for construction defect claims, and C.R.S. § 13-20-803.3(7)(c) incorporates the existing provision from C.R.S. § 13-80-804(2) that construction defect claims arising in years five and six may be brought within two years after they arise. However, this new section also creates ambiguity and unintended risk. The statute arguably eliminates the two-year statute of limitations for construction defect claims against participants in the Incentive Program in cases where the homeowner discovered or should have discovered the defect during the longest applicable warranty period. The new statute is silent as to what time limitations govern claims that could not reasonably have been discovered within the longest applicable warranty period but are discovered prior to the expiration of the six-year statute of repose. Further, by expressly preserving the repose extension provisions of C.R.S. § 13-80-804(2) – but not the two year statute of limitations for construction claims stated in C.R.S. § 13-80-804(1), the new statute appears to establish the six-year anniversary of substantial completion as the bar date for all construction defect claims against Incentive Program participants discovered during the first four years after substantial completion. Still more fodder for debate is found in C.R.S. 13-20-803.3(7)(a)(II), which could be interpreted to imply that if an architect or engineer was not negligent, the six-year statute of limitations applies—but if they were negligent, no statute of limitations applies. The literal wording of the statute supports this interpretation, but it is nonsensical, contradicts existing law, and undermines the act’s goal of promoting predictability and liability containment. To correct this, the statute should be revised to clarify that all claims against architects and engineers—regardless of negligence—remain subject to the six-year statute of limitations with the potential two-year extension.

Other Updates

Associations Defect Litigation Process. The act also amends the Colorado Common Interest Ownership Act (CCIOA) by requiring approval from 65% (up from a simple majority) of unit owners before an association can initiate a construction defect action. Furthermore, any net recovery from litigation or settlement must first be used to repair the defect before being used for other purposes.

Disclosure and Transparency Requirements. Builders and licensed professionals must now provide key information early in the claim process, including, construction plans, soil reports, maintenance manuals, contact details of subcontractors and inspectors, and relevant insurance policies.

Insurance Protections for Participants. The act prohibits an insurer from cancelling, denying or reducing coverage under an existing liability insurance policy if a participant offers to settle or repair a defect under the Incentive Program, provided that any agreement that affects coverage is subject to the insurer’s approval.

Local Governments Must “Fast-Track” Affordable Condominium Approvals. To be eligible for certain state housing funds, cities and counties must implement 90-day approval timelines for for-sale multifamily projects where at least 50% of the units are affordable.

What Developers, Builders, and Legal Teams Should Do Now

The act marks a shift in Colorado’s approach to balancing development risk and consumer protection. For developers, the new law aims to offer a more predictable litigation environment—but only for those who opt into the Incentive Program and comply with strict inspection and warranty requirements. Now is the time to:

1. Evaluate whether participation makes sense for upcoming projects and review project schedules to ensure timelines align with the January 1, 2026 start date;
2. Review and update warranty programs, sales agreements, marketing materials, and disclosures accordingly;
3. Review and update inspection protocols to align with statutory requirements;
4. Engage with your insurance carrier early to confirm coverage and ability to use third-party inspectors appointed by the carrier; and
5. Counsel associations and buyers on the new dispute resolution processes.