Can You Sue a Contractor that has Gone Out of Business?

Homeowners have six years to bring a claim in Colorado

When building a new home, hiring a contractor is one of the most important decisions a homeowner will make. As such, most homeowners invest a lot of time finding the right fit and, of course, ensuring that the contractor has insurance.

But what if something starts to go wrong with the work and the homeowners learn the contractor has gone out of business? Can those homeowners sue the contractor even if they’ve gone out of business?

In Colorado, the short answer to that question is “Yes.”

“You can sue an out-of-business builder and there’s an art to it,” says Duncan L. Griffiths, a construction litigation attorney in Lone Tree. “Under Colorado law, homeowners have direct recourse against anyone who was negligent during the construction of their home.”

Griffiths worked with a number of homeowners who faced this exact issue after the economic downturn.

“These cases were very common between 2010 and 2015,” he says. “There were a lot of builders that really oversold themselves during the building boom from 2006 to 2007. When the bubble burst, a lot of small-time builders went out of business.

“I had more than a handful of communities that I was involved in. I would call them ghost towns. Not only did the developer go out of business, but they just stopped building. A lot of homeowners thought they didn’t have recourse because their builder had gone belly-up.”

Finding the Insurers

The hard work in suits like these is to determine who the contractor was insured by. Without that, getting a settlement will be a big challenge.

Finding the insurer can take countless hours of hard work.

“It’s not like the insurer is published on the internet,” Griffiths says. “You have to dig to find out who the insurance company was. If it’s a contractor that I happen to know, I might know if they were sued and I can go through the case file to find out who the insurance company was. It does involve some detective work.

“I wish it was better regulated, to be honest. It’d be great if we could require contractors to publish their insurance in a public database. That’d be a huge help to consumers, but you can imagine why the insurance company wouldn’t want that.”

Key factors

While it is possible to sue contractors that have gone out of business, there are some important factors to consider:

  • Timely reporting of the issue is vital. Homeowners in Colorado have a six-year outer limitation on bringing claims. There is an exception if the homeowners discover the problem in the fifth year. In that case, the homeowners have up to eight years to bring a claim.
  • It’s also possible to sue subcontractors. “A lot of homeowners don’t realize that the builder isn’t the only person who is liable,” Griffiths says. That said, it’s much more difficult to go up against a subcontractor as they can blame others for the issues. It’s usually much easier to blame the developer or general contractor who is responsible for the overall product. 

What Will it Cost?

Griffiths says that, in some cases, homeowners might be able to recover some damages without a lawyer if their contractor is in business. Once a contractor has gone out of business, though, hiring an experienced lawyer is advised. That’s due, in large part, to the work attorneys can do to find out who contractors were insured by when the work was done.

“If it’s big dollars, it’s worth getting an attorney involved who knows what they’re doing on the insurance side,” Griffiths says. 

The fee for representation can vary dramatically.

For big settlements, such as those worth $100,000 or more, many lawyers will take cases on a contingent basis. In those cases, a lawyer will receive between 30% to 40% of the settlement once the case is concluded.

For smaller settlements, lawyers will charge on an hourly basis. 

For more information about construction litigation, read this overview article on construction litigation.

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