News & Events
The Economic Loss Rule and the Shifting Landscape of Construction Defect Law in Colorado
On April 21, 2025, the Colorado Supreme Court handed down its decision in Mid-Century Ins. Co. v. HIVE Construction. This case provided a further articulation of the Court’s interpretation of the economic loss rule, a legal doctrine that broadly prevents certain plaintiffs from recovering for torts, such as negligence, if their claims could also be rooted in contract law. The economic loss rule plays a particularly relevant role in the area of construction defect litigation, where the possibility of bringing a negligence claim—versus solely a claim for breach of contract—can significantly affect the availability of insurance proceeds to contribute to a defendant’s defense. The HIVE decision fits within a larger trend seen recently in construction defect law in Colorado where the courts have been narrowing the available paths for plaintiffs’ recovery. Given the recent changes to the law surrounding the economic loss rule, this alert traces the evolution of the rule’s scope with regard to construction defect actions in Colorado.
The Economic Loss Rule in Colorado
What are the legal foundations of the rule?
The Colorado Supreme Court decided two critical cases in the early 2000s which provided the basis for the economic loss rule in the State. In Town of Alma v. AZCO Const., Inc. (2000) the Town of Alma, Colorado filed suit against a contractor for damages caused by leaking water service lines that the contractor had installed. The contractor repaired a number of those leaks under their contract’s year-long warranty but refused to repair any additional leaks after the warranty had expired.
The Town asserted claims for breach of contract, breach of the implied warranty of sound workmanship, negligence per se, and negligence. In its ruling, the Court held that the Town’s tort claims for negligence must be dismissed, since the Town had an adequate remedy available under the contract. Alma has served as the foundational economic loss rule case for the State since the Court handed down its decision.
Five years later, in A.C. Excavating v. Yacht Club II Homeowners Association, Inc. (2005), the Court addressed a similar set of facts, with one critical distinction: the allegedly negligent construction occurred not on a commercial or industrial project but on residential homes. Unlike the commercial construction defects seen in Alma, here the Court clarified that in residential construction defect cases, plaintiffs can bring tort claims on top of contract claims because “homebuilders have an independent duty of care to act without negligence in the construction of homes.”
Importantly, both of these cases were decided around the same time as the General Assembly’s passage of the Construction Defect Action Reform Act, or “CDARA.” That law was passed in 2001 and significantly amended in 2003, forming the statutory basis of Colorado’s construction defect landscape. CDARA imposed a number of limitations on construction defect suits and instituted protections for construction professionals including notice requirements, inspection rights, statutes of limitations and repose, and limitations on damages. CDARA was further amended in 2006, 2010, 2017, and, most recently, 2025.
What changes have occurred recently?
Jurisprudence surrounding the economic loss rule remained consistent for nearly 20 years until the adjudication of two recent cases. In 2024, the Colorado Supreme Court decided City of Aspen v. Burlingame Ranch II Condominium Owners Association, Inc. There, the City of Aspen oversaw the development of an affordable housing project and transferred control to the Condominium Owners Association, who then sued the City for allegedly defective construction. The City claimed that the suit was barred due to the Colorado Governmental Immunity Act (CGIA). The Court agreed in part, holding that “the economic loss rule has no bearing on whether an action brought against a public entity is barred by the CGIA,” and remanding the case to district court to analyze the actual merits of the City’s immunity arguments.
Most recent was the HIVE decision, rendered earlier this year. There, HIVE Construction was the general contractor for a restaurant in Denver, where they installed improper material in a kitchen wall contrary to the construction contract. The improper installation eventually caused a fire which forced the restaurant to close its doors. After covering the damages, the restaurant’s insurer stepped into the construction defect suit as a subrogee, suing HIVE for, among other things, negligence based on willful and wanton conduct.
The case eventually turned on the application of the economic loss rule, with the insurer arguing that the rule excepts from its scope claims for willful and wanton conduct. The Court disagreed, holding that that willful and wanton conduct is not excepted from the economic loss rule, even though intentional torts are. Thus, despite the alleged occurrence of willful and wanton conduct, the Court upheld the dismissal of the insurer’s negligence claim, explicitly holding that a negligence claim cannot stand under the economic loss rule where the alleged tort duty is the same as the duty memorialized by the parties’ contract.
Conclusion
The application of the economic loss rule continues to change in subtle but significant ways as new jurisprudence tweaks the manner in which courts enforce and interpret the rule. This changing landscape plays a particularly important role in the context of construction defect litigation, where the economic loss rule decidedly applies in some circumstances but not others. Indeed, a plaintiff’s ability to bring a negligence claim in the context of construction defect litigation depends on many factors including the conduct alleged, the alleged defect that occurred, and whether the construction was commercial or residential in nature. Given that many insurance policies will exclude coverage for claims based in contract, the availability of a negligence claim can drastically change the availability of insurance funds for both plaintiffs and defendants alike.
Additionally, the economic loss rule is not the sole source of new changes to construction law in Colorado. Recently, Governor Jared Polis signed HB25-1272, which provided significant updates to CDARA, offering builders a more predictable litigation environment in exchange for heightened construction oversight and consumer protections. For a more complete analysis of HB25-1272, see our earlier alert.
All parties involved in construction and real estate development in Colorado should be aware of the evolving nature of the State’s construction defect laws in general and the economic loss rule in particular. If you have questions beyond the scope of this alert, please contact an Otten Johnson attorney directly.
