Berkeley Balcony Collapse Raises Questions About Reporting Requirements for Contractors

By on June 30, 2015
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In the wake of the recent balcony collapse that killed six people in Berkeley, California, questions have been raised regarding past claims made against the general contractor of that building, Segue Construction, particularly those regarding improperly waterproofed balconies at previous projects. Several news stories have discussed past lawsuits from personal injury lawyer firms and settlements involving Segue in which allegations of improperly waterproofed balconies were made on several projects in the bay area. While it is difficult to draw any conclusions as to what occurred in Berkeley from any of these past claims, the question that is now being raised in the media is whether the California State License Board (CSLB) should be tracking claims made against contractors in an effort to keep events like these from occurring in the future.

Currently, there are no reporting requirements in California for contractors who are named as defendants in construction defect litigation matters. The only construction-related entities who have reporting requirements in California are architects (settlements, arbitration awards, or civil judgments in excess of $5,000; California Business and Professions Code section 5588, et seq.) and engineers (settlements in excess of $50,000, or judgments/arbitration awards in excess of $25,000; California Business and Professions Code sections 6770, et seq, and 8776, et seq.).

The real question is whether reporting requirements for all contractors will have the desired effect of reducing defective construction on future projects. Unlike design professionals whose design, if defective, could be used/repeated on multiple, future projects, contractors are generally faced with an entirely new set of circumstances on each new project. From location, to design drawings, to the subcontractors utilized to perform the work, to the materials used and/or specified, each project presents an entirely new set of facts to work within. For general contractors in particular, who more often than not do not self-perform any of the work on a given project, the question is whether a reporting requirement will have the desired effect of deterring defective workmanship when they are not the party actually performing the work.

For the subcontractors who actually perform the work, it’s possible that a reporting requirement may be justified, particularly if a given subcontractor is shown to have a history of defective workmanship. From a practical standpoint, however, one issue will be exactly what each subcontractor is required to report. Unlike design professionals, most contractors do not have a consent clause in their insurance policies, and therefore the insurance carrier defending the claim can resolve the case anyway it sees fit, which may mean paying more money to resolve a case to avoid the uncertainties of trial. As well, there may be numerous non-defect related components to a given settlement such as contractual defense and indemnity obligations as well as the potential threat of joint and several liability with other joint tortfeasors who may have no assets and no insurance. As such, the amount a subcontractor pays to resolve a case may have little correlation to the overall quality of their work. Given the complexity of any potential contractor reporting requirement, for such a requirement to be effective and not negatively impact the building industry, significant resources would need to be added to CLSB to allow the degree of investigation that would be necessary to assure that contractors are treated fairly.

The question has also been posed regarding how confidentiality provisions that appear in many settlement agreements in construction defect cases may affect potential reporting requirements for contractors where the terms of the settlement are to remain confidential. In light of the tragedy that occurred in Berkeley, the media has questioned whether the legislature should ban such confidentiality provisions under to the guise of a greater public safety concern. However, unlike in the narrow situations where the legislature has taken such a drastic step (i.e. medical device claims), it is the rarest of circumstances where construction defects result in significant personal injury, and therefore the public safety argument may not be as strong. In the event the legislature or CSLB does take action to require reporting requirements for contractors, however, a simple carve out in the confidentiality provision allowing the contractor to report only the information required may still allow for the use of such provisions.

Given the international attention the Berkeley balcony collapse has received, the debate is just beginning on this subject and it is likely that the state legislature will have the final say on whether reporting requirements will be extended to contractors.

Filed under Architects, Construction Defect, Contractors State License Board, Defective Work or Material, Engineers

Colorado Court Rules Developers in Common Interest Communities Can Require Arbitration of Defect Claims Even After They Sell Last Interest

By on May 28, 2015
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Condo developers in Colorado scored a victory this month in a decision from the Colorado Court of Appeals. In Vallagio at Inverness Residential Condominium Association, Inc. v. Metropolitan Homes, Inc., et al, the court held that a clause contained in a homeowner association’s declaration requiring arbitration of construction defects claims cannot be amended without consent of the developer/declarant if the declaration requires its consent. This is the case even if the declarant no longer owns any units, provided the declaration reserves the right to declarant after it sells its last interest in the community.

In Vallagio, the declaration required the developer/declarant’s consent to any change in the declaration’s requirement that construction defects be tried in arbitration. After the homeowner’s association gained control, it amended the declaration to eliminate the arbitration requirement. It then file suit in court against the developer. The trial court held the association’s vote eliminating the arbitration requirement was valid, but the Colorado Court of Appeals reversed finding the amendment invalid because it did not first obtain the developer/declarant’s consent to the change.

The Vallagio decision is good news in the wake of the failure of state legislative efforts to encourage further condo development in Colorado. This spring, the Colorado house rejected legislation, passed by the state senate, that stated when the governing documents of a common interest community require mediation or arbitration of a construction defect claim and the requirement is later amended or removed, mediation or arbitration is still required for a construction defect claim.

Filed under Condominiums, Construction Defect, Homeowners Association (HOA)

The Court of Appeals Clarifies the Purpose of Public Contract Code § 7107 & the Ramifications for Public Entities Violating the Same

By on May 20, 2015
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On April 1, 2015, in East West Bank v. Rio School District, the Second Appellate District of the California Court of Appeals held that whereas under Public Contract Code § 7107, a public entity can withhold funds owed to a contractor when there are liens on the property or when there is a good faith dispute concerning whether the work was properly performed, the public entity cannot withhold funds due to a contractor over a dispute over the contract price. In reaching its holding, the court noted its disagreement with Martin Brothers Construction, Inc. v. Thompson Pacific which held otherwise. The Court also held that the doctrine of “unclean hands” does not apply to Public Contract Code § 7107, to limit a contractor’s potential recovery of damages and attorney’s fees. Finally, the Court held that the time limitations for a contractor to submit a claim under a public works contract do not apply where that contractor’s claims arise out of the public entity’s alleged breach of that contract.

Background Facts

In East West Bank, the Rio School District (District) entered into a contract with FTR International, Inc. (FTR) to build a school. During construction, FTR submitted approximately 150 proposed change orders (PCOs), asserting that they were necessary due to the District providing plans that were inadequate and misleading. The District, however, denied most of the PCOs on the grounds that the work was covered under the base contract, that the amounts sought by FTR were excessive, and/or on the grounds that a given PCO was untimely in accordance with the public works contract notice provisions. The project was ultimately completed in June 2001 and the District filed a notice of completion on August 7, 2001.

Thereafter, a dispute between FTR and the District arose out of a payment issue. Under the contract, the District retained 10% of each progress payment, such that at the completion of all work, the District held a reserve of $676,436.49. The reserve was subject to stop notices filed by FTR’s subcontractors until the last stop notice was released on September 28, 2004. When the District failed to pay the balance due under the contract, refused to release any of the retention, and refused to compensate FTR for delay and disruption damages, FTR filed suit. FTR asserted a claim against the District for breach of contract and violation of Public Contract Code § 7107, seeking damages, statutory penalties, attorney’s fees, interest and costs. The District countered with a separate lawsuit, which was subsequently consolidated. After the trial court found in FTR’s favor, the District appealed, raising three primary issues regarding when a public entity can withhold retention payments under Public Contract Code § 7107, whether a contractor must comply with time limitations for filing a claim under a public works contract following a breach, and whether a public entity can assert an “unclean hands” defense to dispose of a claim for damage and attorney’s fees following a statutory violation.

Explanation of the Court’s Decision

In reaching its decision, the Second Appellate District noted that Public Contract Code § 7107(c) calls for a public entity to release any retention previously withheld within 60 days after completion of a work of improvement. In the event of a dispute, the public entity can withhold from the final payment an amount not to exceed 150% of the disputed amount. Under subsection (f), however, a public entity will be subject to a penalty of 2% per month, in lieu of interest, on any contract amount improperly withheld, plus attorney fees and costs. At trial, the District argued that it was justified in withholding the retention amount – more than 10 years after completion of the project – due a good faith dispute with FTR over whether a majority of the 150 PCOs were wrongfully denied, which the District claimed, impacted how much money, if any, it owed FTR. The Court, however, found that argument unavailing. It noted that the purpose of retention is to provide security against potential mechanics liens and to insure that the contractor will complete its scope of work properly and repair any defects. The Court added that once the public entity no longer needs that security, the retention funds must be paid. Since the dispute with FTR for additional monies did not require the District to retain funds as security, the District’s failure to pay is exactly the type of behavior that Public Contract Code § 7107 was enacted to deter. Thus, the Court found that the District was subject to the statutory penalty.

Next, the Second Appellate District in East West Bank addressed the issue of whether a contractor can recover damages on claims that are not submitted within the time limits set forth under a public works contract. On this issue, the Court found that some of FTR’s claims arose from the District’s breach of the contract, in not providing adequate plans and specifications. As a result, the Court – relying on a seldom-used 1959 decision in D.A. Parrish & Sons v. County Sanitation Dist., etc. — held that the time limitations in a public contract do not apply to claims arising from the public entity’s alleged breach of that contract.

The Second Appellate District in East West Bank concluded with a discussion regarding whether a public entity can assert an “unclean hands” defense to FTR’s claim for damages, penalties and attorney’s fees under Public Contract Code § 7107. Reviewing the purpose behind the code section, the Court noted that when the California Legislature enacts a statute forbidding certain conduct for the purpose of protecting one class of persons from the activities of another, a member of the protected class can maintain an action for a violation of that statute, notwithstanding the fact that the plaintiff shared in the illegal transaction. The Court added that the protective purpose of the legislation is only realized by allowing the plaintiff to maintain an action against the defendant within the class that is to be deterred.

In this instance, Public Contract Code § 7107 was intended to protect one class of persons (public works contractors) from the activities of public entities. As a result, the doctrine of “unclean hands” does not apply a matter of law, and FTR (as a member of the protected class) can recover attorney’s fees, in addition to all other damages available as a result of the District’s violation of the statute.

Takeaways

All told, the East West Bank case is good news for contractors on public works contracts. A public entity cannot withhold retention from contactors on projects involving a payment or contract dispute, in the absence of a mechanics lien, a stop notice, or a claim of defective work. Particularly where a payment dispute can take years to resolve through litigation, this case is a reminder that public entities cannot hold onto retention amounts as a means of placing economic pressure on the complaining contractor. Where the public entity engages in that behavior, it will may be liable to the contractor for damages, attorney’s fees and penalties under Public Contract Code § 7107. Moreover, the public entity will not be able to assert an “unclean hands” defense to reduce or eliminate an award in the contractor’s favor.

The East West Bank decision, however, also highlights a split of authority between the California Courts of Appeal regarding whether a contractor will have waived a claim for damages and extra compensation under the (typically) harsh notice provisions in public works contracts. In this instance the Court held that District’s breach of the contract disposed of the notice requirements, but in many instances, courts have would have foreclosed any recovery for FTR’s claims for extra compensation. Thus it is very important for contractors on public works projects to comply with the notice provisions – despite this recent decision — or else risk forfeiture.

For more information on the East West Bank case, navigating the potential perils of public works contracts and other developments in Construction Law, please feel free to contact the attorneys at Gordon & Rees LLP.

Filed under Breach of Contract, Construction Defect, Proposed Change Orders, Public Contract Code § 7107

Recap from ‘Lost in the Rubble?’ – Remember Older Cases and Different Theories When Evaluating Issues

By on April 29, 2015
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I recently attended a Continuing Education seminar in Scottsdale, Arizona where the subject was identified as, “’Lost in the Rubble?’ A Search for Neglected Arizona Construction Law Decisions.” The seminar highlighted two things unrelated to the dramatic title: 1) alternative claim theories in construction cases should be considered, and may be planned for in the beginning stages of a construction project; 2) a dearth of case law on basic issues encountered in construction cases, among many others—an issue encountered fairly often in Arizona.

Illustrative of the first subject was discussion of application of the UCC to construction disputes. The premise is that construction projects include both sale of goods and labor to install the goods. The rule applied by courts in Arizona is the “predominant purpose test,” which can be simplified to, “what cost more—the material or the cost to install?” This rule and how it was applied in Double AA Builders v. Grand State Const., 210 Ariz. 503 (App. 2006), and other cases, have assumed application of the UCC in construction cases Pace v. Sagebrush Sales Co., 114 Ariz. 271 (1977) and Elar Investments, Inc. v. Southwest Culvert Co., 139 Ariz. 25 (App. 1983). The Double AA case states the rule, that in the absence of contractual language to the contrary, determination whether the remedy in a construction dispute is under the UCC or under common law is by determining the “predominant purpose” of the contract. The rule has been simplified to a review of what cost more—for example, if windows cost more than their installation, disputes about windows that allegedly failed could be evaluated under the UCC. This creates interesting arguments and issues concerning conforming and non-conforming goods, notice of non-conforming goods, and requirement to provide early notification of the breach. I question the application of this rule to instances other than providing materials to the project—but that is not what Double AA seems to say. It provides food for thought…

The second takeaway from the seminar, and practicing construction law in Arizona, is demonstrated by looking at the law governing delay claims in Arizona. Richard E. Lambert, Ltd., v. City of Tucson Dept. of Procurement, 223 Ariz. 184 (App. 2009) is the one Arizona case which addresses how to prove delay claims in the state. The case only discusses defects in a general presentation of a “total delay” analysis without showing a delay to the critical path. There is no case in Arizona identifying whether something less than a critical path method schedule analysis is required to prove a delay claim—and no case requiring that type of detail. Most practitioners here—me included—would look to case law in federal court in evaluating delay and other claims where Arizona case law is thin. Therefore, as a rule of thumb, remember to evaluate all potential arguments, and where there is no local law on the subject, find the best alternative to supply the missing law.

Filed under Construction Defect, Uniform Commercial Code

Recent Amendments (AB 125) to NRS Chapter 40 Even the Playing Field for Builders and Contractors

By and on April 6, 2015
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On February 24, 2015, Governor Brian Sandoval signed Assembly Bill 125 (“AB 125”) into law. Dubbed the “Homeowner Protections Act of 2015,” AB 125 makes substantial changes to Nevada’s construction defect laws, particularly regarding the burdens placed on homeowners and their counsel during pre-litigation NRS Chapter 40 proceedings. The changes set forth in AB 125 are effective immediately (and in some instances, retroactively). Highlights of relevant revisions are as follows:

  • Contractual Indemnity. Contractual indemnity provisions are now void and unenforceable if they require a subcontractor to defend and indemnify a “controlling party” from liability resulting from: (1) the intentional act or omission of the controlling party; or (2) another trade’s modification of the subcontractor’s work.
  • OCIP Disclosures. Developers must now disclose certain information regarding Owner Controlled Insurance Policies in a subcontractor’s contract documents.
  • Offers of Judgment. Parties may now serve Offers of Judgment (“OOJ”) at any time after a homeowner serves his NRS Chapter 40 Notice. If the homeowner reject the OOJ and fails to obtain a more favorable judgment during trial, he will be precluded from recovering his attorneys’ fees and costs from the date of service of the OOJ to the date of entry of judgment. He may also be required to pay for the offering party’s reasonable fees and costs.
  • Definition of a Constructional Defect. AB 125 limits the definition of a constructional defect to a defect which: (1) presents an unreasonable risk of injury to a person or property; or (2) is not completed in a good and workmanlike manner and proximately causes physical damage to the residence, appurtenance, or real property to which the appurtenance is affixed.
  • NRS Chapter 40 Notices. Homeowners are now required to identify in specific detail each defect that is the subject of their claim, including its exact location. They must also describe the cause of the defect, and the nature and extent of any damage or injury resulting from the defect. Additionally, homeowners must include a signed statement verifying the existence of each defect listed in the notice. If a notice is sent by an HOA, the statement must be signed by a member of the HOA’s executive board or an officer under penalty of perjury.
  • Visual Inspections. Homeowners must be present during visual inspection of their properties, and must identify the exact location of each alleged defect verified in their NRS Chapter 40 Notice. AB 125 imposes the same requirements on experts if the NRS Chapter 40 Notice was based upon an expert opinion.
  • Homeowners’ Warranties. Before serving a NRS Chapter 40 Notice, homeowners must submit their claim under their homeowners’ warranty, and may only include claims in the NRS Chapter 40 Notice that were denied by their insurer.
  • Removal of Attorneys’ Fees. AB 125 eliminates attorneys’ fees as recoverable damages under section 40.655.
  • Changes to the Statute of Limitation. The statute of limitation for constructional defect claims is now six years after substantial completion of the improvement. Additionally, the statute of limitations tolls from the time a NRS Chapter 40 Notice is given until: (1) one year after the notice of claim; or (2) thirty days after NRS Chapter 40 mediation is concluded or waived. Statutes of limitation and repose may be tolled for longer than one year only if a claimant demonstrates “good cause.”
  • Standing of Homeowners’ Associations to Sue. Homeowners’ Associations may not bring actions in its own name or on behalf of its unit owners’ for any constructional defect unless the action pertains exclusively to common elements.

While the full implications of AB 125 will not be known until it is put into practice, it is clear that the law creates new obligations for almost every party involved in a constructional defect lawsuit. It is essential that companies review AB 125 carefully to determine the impact on their business practices. To discuss how this law will impact your construction practice, please contact Robert E. Schumacher at rschumacher@gordonrees.com.

For a complete text of all revisions, click here.

For a comparative analysis of the new and old versions of NRS Chapter 40, click here.

Filed under Assembly Bill 125 (AB 125), Construction Defect, Contractual Indemnity, Homeowner Protections Act of 2015, Homeowners Association (HOA), NRS Chapter 40 Notice, Statute of Limitations

Common Law Indemnity Claims May Be Superfluous in Comparative Fault States

By on March 23, 2015
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A recent Oregon Supreme Court decision in a construction defect case (Eclectic Investments, I LLC v. Patterson, 357 Or. 25 (March 19, 2015)), may signal the end of common law indemnity claims in many cases in Oregon and signal an ongoing trend in comparative fault states.

Common law indemnity is a court-created doctrine that allows a defendant to make another party pay for a plaintiff’s damages that the defendant was found liable for. Under the doctrine (as applied traditionally in Oregon and several other jurisdiction), a defendant with “passive” negligence could shift responsibility to a party whose “active” negligence caused the injury for which they were both being sued.

The court in Eclectic noted that this passive/active indemnity doctrine developed before the Oregon Legislature created the modern comparative fault system. See Oregon Revised Statutes §§ 31.600, 31.605. Under that system, defendants in Oregon are only responsible for their own fault and not their co-defendants’ fault. That is, Oregon law provides for several liability—not joint—among tortfeasors.

The Eclectic court reasoned that under this new scheme, there is be no need for a common law indemnity claim among defendants:

In cases in which the Oregon comparative fault negligence statutes apply and in which jurors allocate fault—and thereby responsibility—for payment of damages between tortfeasors, and each tortfeasor’s liability is several only, a judicially created means of allocating fault and responsibility is not necessary or justified.

Eclectic, 357 Or. at 38. Further, the court noted that this was in line with cases in other jurisdictions that have “held that the statutory adoption of a comparative negligence scheme effectively abrogates the theory of indemnity bases on the active/passive negligence dichotomy.” Eclectic, 357 Or. at 37.

Finally, the court noted that defense costs may still be shifted under limited circumstances, and suggested that they may only be available when a tortfeasor has committed a tort that “required the [passive defendant] to protect its interests by defending a claim brought by plaintiff or that plaintiff’s claim against the [passive defendant] existed only because of the tort of the [active tortfeasor].” Eclectic, 357 Or. at 39.

What does this mean? It may lead to streamlining of pleadings in multi-defendant cases (common in construction defect) by eliminating many of the superfluous indemnity cross-claims. It also clarifies that, under Oregon law, the defendants may be stuck with the allocations made by the jury, and defendants should not hope to re-shift the liability during post-verdict motions by arguing about whether their negligence was “passive” or “active.”

Filed under Construction Defect, Indemnity

Municipalities Take Construction Defect Laws Into Their Own Hands

By on November 17, 2014
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Cities in Colorado are taking matters into their own hands to increase condo construction despite the Colorado Legislature’s failed attempts to address the litigious environment around construction defect claims.

CON BLOG_lakewoodIn October 2014, Lakewood became the first Colorado city to pass an ordinance aimed at increasing condo construction after it has become nearly non-existent since the passage of the Colorado Construction Defect Action Reform Act due to developer’s fears of being sued.  For example, in 2008 condos represented 26 percent of new home starts in metro Denver, compared to the current 4.6 percent.  The Lakewood ordinance gives builders and developers a “right to repair” before facing litigation and requires condominium boards to get the majority consent from homeowners prior to filing suit.  Colorado state law only requires the consent of a majority of a homeowner association board – not the homeowners themselves – to authorize litigation.  There also is no “right to repair” requirement.  Following Lakewood’s passage of the ordinance, other communities in the Denver metro area are considering whether they should follow suit.

Proponents of the ordinance hope it will spur condo construction while opponents argue it allows developers to become slums. Cities are hoping to add more condos around transit stops rather than apartments to give people a sense of ownership to create more stable, lasting communities.  Because of the overly litigious environment, insurance premiums for the construction of condominiums are 25 percent to 45 percent higher in Colorado.  Consequently, only projects capable of generating a higher profit margin for developers are high-end condos, leaving no construction of low- to mid-priced condos.  Additionally, some national builders will not even build condos in Colorado for fear of being sued.

Whether this ordinance, which overrides state law, will withhold a challenge in court is a question likely to emerge in the near future.  While home-rule municipalities have the ability to pass ordinances that are strictly of local concern, some argue that this ordinance addresses a matter of statewide concern and, therefore, is unconstitutional.  Although a question exists of whether this ordinance is constitutional, at a minimum, it has created a dialogue among other communities to discuss the state of the economy and the need to find a solution.

Filed under Condominiums, Construction Defect, Municipalities

HOA Does Not Own Cause of Action for Alleged Solar Heat-Gain-Related Defects

By on October 21, 2014
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Over six years following the plaintiff HOA’s initial 2008 construction and design defect complaint, Beacon Residential v. Catellus Third and King, LLC, et al. continues to generate new law and to address legal issues of import and interest to those in the construction defect community.

In its latest ruling, a California Superior Court found that the plaintiff HOA does not own claims related to alleged solar heat-gain as they belong to the former owner(s) of the project. In reaching its decision, the court relied heavily upon the findings in Krusi v. Amoroso Construction Co., Inc., 81 Cal. App.4th, 995 (2000), in which the court found that subsequent owners of property do not own claims for known defects that arose and caused damage prior to their ownership.

ICON BLOG_neighborhoodn its complaint, the HOA alleged causes of action for design and construction liability related to solar heat-gain and ventilation. Members of the HOA asserted their units were becoming too hot due to the alleged defects.  The HOA suit named the two developers, the general contractor and its subcontractors, and the two project architects, HKS and SOM.
Of particular importance to the court’s ruling was the fact that the project was sold by the first developer to the second developer, who then sold the units as condominiums and formed the plaintiff HOA.  The plaintiff’s complaint alleged that both developers knew of the alleged solar heat-gain-related claims, which the court considered a judicial admission by the plaintiff.  Given this admission regarding prior knowledge by the developers, and the fact that the developers had previously suffered damages, the court found that the heat-gain-related causes of action were owned by one or both of the developers, but certainly not the HOA.

On October 1, 2014, the court issued an order sustaining both architects’ motions to strike.  In making its ruling, the court relied upon the following language from Krusi:

[A] duty may run from an architect, engineer, or contractor to a subsequent owner of real property.  It does not mean that, in a case implicating damage to such property, once a cause of action in favor of a prior owner accrues, another cause of action against the same defendant or defendants can accrue to a subsequent property owner – unless, of course, the damage suffered by that subsequent owner is fundamentally different from the earlier type.

In short, the court ruled that when alleged defects of the same type cause damages to a prior owner or owners of a building, the subsequent owner (herein, the HOA) does not own the cause of action for damages caused by the same alleged defects. The plaintiff has verbally noted its intent to take a writ regarding the subject ruling, and we await the plaintiff’s next move.  For now, however, the ruling that a subsequent owner of a property does not own a cause of action if the prior owner knew of the alleged defects and suffered damages therefrom, has implications for all who practice law in the arena of construction defect litigation, and their respective clients.

Image courtesy of Flickr by Lauren Wellicome

Filed under Construction Defect, Homeowners Association (HOA), Solar Heat-Gain Defects

11th Circuit Interprets Post-1986 CGL Policy Under Florida Law

By on September 2, 2014
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In July 2014, the 11th U.S. Circuit Court of Appeals issued an unpublished decision interpreting the terms of a commercial general liability (CGL) policy in a construction defect dispute which, as a result of an endorsement, did not include a subcontractor exception with respect to the scope of “your work.”

According to the unpublished opinion in J.B.D. Constr., Inc. v. Mid-Continent Cas. Co. (MCC), 2014 U.S. App. LEXIS 13358 (11th Cir. Fla. July 11, 2014), in connection with a storm, certain project work proved to have been defectively installed, the result of which allowed water to penetrate the structure and damage completed work. In J.B.D., the 11th Circuit held that not only did the “your work” exclusion of the CGL policy support denial of claims made by the contractor for the cost to repair damage to its work, but it also supported denial of the contractor’s claim with respect to property damage that occurred as a result of its subcontractor’s defective work.

The Florida Supreme Court has yet to interpret a post-1986 CGL policy that does not include the subcontractor exception. However, in two consecutive opinions, the Florida Supreme Court did interpret a CGL policy to determine whether property damage to a contractor’s completed work caused by the defective work of subcontractors constituted an occurrence under a CGL policy, which was covered by the policy. Auto-Owners Ins. v. Pozzi Window Co., 984 So. 2d 1241 (Fla. 2008); U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871 (Fla. 2007).

In J.S.U.B., the Florida Supreme Court considered a CGL policy that included the subcontractor exception. The J.S.U.B. court held that the costs to repair damage to property caused as a result of a subcontractor’s defective work is an occurrence and, therefore, a covered claim under a CGL policy. Insurers, contractors, developers and practitioners will be watching, if and when the Florida Supreme Court decides the issue addressed in J.B.D.

Worthy of note: In J.B.D., the insurer, MCC, determined after a claim was made that it had no duty to defend the contractor in the case. The 11th Circuit – citing Jones v. Fla. Ins. Guar. Ass’n, 908 So. 2d 435, 442–43 (Fla. 2005) – disagreed finding that MCC had a duty to defend under Florida law based upon the facts stated in the contractor’s complaint. The 11th Circuit found that “[e]ven if the facts in the complaint potentially bring the suit within policy coverage, an insurer may avoid the duty to defend if an exclusion applies to the face of the complaint.”

Based upon MCC’s conduct, the 11th Circuit held that MCC breached its duty to defend and remanded the case for a determination of J.B.D.’s damages, including consequential damages, from the time of tender through the conclusion of the case at the trial level.

Filed under Commercial General Liability (CGL) Policy, Construction Defect, Subcontractor Exception

Right to Recovery for Construction Defects in Foreclosed Home – Does It Matter Who Owns the Home?

By on July 28, 2014
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The recent flurry of foreclosures in California results in the ownership of a foreclosed home being forcibly transferred to new owners, often the bank lenders.  Sometimes these foreclosed homes also are in the middle of lengthy construction defect litigation.  When a home is foreclosed upon in the middle of litigation, this can result in a dispute over who can recover damages for the alleged defects.  For example, what rights do the former homeowners, who started the case, have against the contractors for construction defects in homes they no longer own and what rights do the bank lenders have as the new owner?  Turns out, despite no longer owning the home, the former homeowner still maintains the right to recover money for the construction defects unless the right was assigned to the bank lenders.

CONBlog_foreclosureIt is well settled in California that construction defect claims are personal property.  (See Siegel v. Anderson Homes, Inc. (2004) 118 Cal.App.4th 994.)  As personal property, the right to construction defect claims can be assigned to subsequent owners, but the right is not automatically transferred with a change in ownership of the house.

In Vaughn v. Dame Construction Co. (1990), the California Court of Appeal held the former owner of a condo – who had sold the condo and then filed a lawsuit for construction defect claims against the contractor – was still the real party in interest and could continue her lawsuit.  In reaching the decision, the court emphasized that the “essential element of the cause of action is injury to one’s interests in the property – ownership of the property is not.”  Accordingly, a homeowner who files a lawsuit against a contractor for construction defects and then has the house foreclosed on during the litigation will most likely be able to continue with the construction defect case and recover damages even though he or she no longer owns the home.

In the foreclosure context, it is unlikely that the homeowner will make any assignment of the construction defect rights at the time the bank takes the home away.  Nevertheless, not all is lost for the bank.  If a bank lender can show the former homeowner assigned his or her rights in any legal cause of action relating to injury or damage to the home at an earlier point in time, the bank can pursue the construction defect causes of action, not the former homeowner.  (See Kasdan, Simonds, McIntyre, Epstein & Martin v. World Sav. & Loan (9th Cir. 2003) 317 F.3d 1064.)

There is no magic document for a homeowner to assign his or her cause of action to another.  Common places to find an assignment are the deed of trust or the home loan documents between the bank and the homeowner.  These documents may contain provisions stating that the assignments of the construction defect cause of action/damages are effective upon foreclosure of the home.  Accordingly, the loan documents and deed should be reviewed anytime a home involved in construction defect litigation is foreclosed upon to determine who can pursue the litigation to recover damages.

Image courtesy of Flickr by Jeff Turner

Filed under Construction Defect, Foreclosed Homes, Right to Recovery

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