ANAHEIM CALIFORNIA CONSTRUCTION EXPERT WITNESS
DIRECTORY AND CAPABILITIES

Lien Law Unlikely To Change — Yet

For those of you following the proposed revisions to the NC lien law that is currently at the NC House Judiciary Subcommittee B, a quick update: the proposed bill (HB 489) is unlikely to be voted on this legislative session due to its unpopularity with several constituency groups, including both the AIA-North Carolinaand the NC Home Builders Association.

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Reprinted courtesy of Melissa Brumback of Ragsdale Liggett PLLC. Ms. Brumback can be contacted at mbrumback@rl-law.com.

Senate Committee Approves Military Construction Funds

With a decrease in funding, as compared to the House bill, the Military Construction and Veteran’s Affairs subcommittee of the Senate moved on a $72 billion construction bill. The House version had approved an additional half billion dollars in funding. Senator Tim Johnson, Democrat of South Carolina, said that he expected easy reconciliation with the House version. The Senate bill will move to the full Senate Appropriations Committee on June 30.

The bill, S 1255, includes funding for construction and remodeling of military housing, as well as construction and remodeling of base facilities.

Read S1255

North Carolina Exclusion j(6) “That Particular Part”

In Alliance Mutual Insurance Co. v. Dove, 714 S.E.2d 782 (N.C. Ct. App. 2011), claimant Murphy-Brown hired insured Dove to repair a broken elevator belt in a grain elevator in Murphy-Brown’s feed mill. The elevator was inside a metal duct and, to access the broken belt, Dove had to cut out a section of the duct. After replacing the belt, Dove welded the metal section back to the duct. Immediately after Dove completed the welding, dust inside the duct ignited, causing an explosion in the elevator, resulting in property damage to the elevator and other property. Murphy-Brown sued Dove for negligence seeking damages for the repair and replacement of the elevator, repair and replacement of the other property, increased grain handling costs during the repairs, and loss of use.

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Reprinted courtesy of CDCoverage.com

Washington Court Limits Lien Rights of Construction Managers

A newly filed, yet unpublished, court opinion opines that a construction manager cannot file a construction lien in Washington state. So, how far reaching is this opinion?

In the case of Blue Diamond Group Inc. v. KB Seattle 1, Inc., et al, a New York construction manager filed a lien against the Westfield Southcenter Mall in Tukwila, Washington. The lien was filed after the owner of a coffee stand failed to pay Blue Diamond for consulting services used in the construction of a kiosk.

Blue Diamond served as the owner’s agent, assisting with managing subcontractors, vendors and other tasks. The manager’s tasks also included paying invoices, managing deliveries, setting schedules and other site managerial tasks. Blue Diamond was not registered as a contractor under Washington’s RCW 18.27.

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Read the court’s decision…

Reprinted courtesy of Douglas Reiser of Reiser Legal LLC. Mr. Reiser can be contacted at info@reiserlegal.com

Insurer Beware: Failure to Defend Ends with Hefty Verdict

Served with a lawsuit that you turned over to your insurer? Insurer refusing to defend you? Well, find some hope in this news. Washington’s IFCA has the claws to ensure that insurers perform their duties.

Contractors heavily rely on the defense provisions of their Commercial General Liability (CGL) policies. In construction, a legal dispute can easily rear its head when you least expect it. Luckily, Washington registered contractors are required to maintain CGL insurance. That insurance often provides contractors with adequate legal defense in the event that they are sued.

But, what if your insurer turns down the defense request? They might be staring at massive damages. A current Reiser Legal client, Australia Unlimited, Inc., recently won a large verdict against Hartford Insurance, after the insurer unreasonably denied their claim. The firm who represented Australia Unlimited Inc. in that case, Hackett Beecher and Hart, were successful in procuring a $5.43 Million verdict

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Reprinted courtesy of Douglas Reiser of Reiser Legal LLC. Mr. Reiser can be contacted at info@reiserlegal.com

The Ever-Growing Thicket Of California Civil Code Section 2782

California Civil Code section 2782 imposes limits on indemnity and defense provisions in construction contracts. Since the initial adoption of S.B. 800¹ in 2002 (eff. January 1, 2003) section 2782² has been revised several times, and legislative history suggests that interest groups representing builders, developers and sub-contractors, as well as the insurance industry, have seen legislative action on these indemnity and defense issues as part of the overall response to the same economic pressures resulting from construction defect litigation that gave rise to S.B. 800. Amendments in 2005, 2007, 2008 and 2011 (each effective January 1 of the following year) have increasingly entangled the provisions of Section 2782 with various provisions of S.B. 800. The application of section 2782 to construction contracts, and in particular contracts between developer-builders and subcontractors, executed after January 1, 2006, will require a concurrent reading and understanding of S.B. 800, the application of which is itself still in flux.

The time a construction contract was executed will likely determine which version of section 2782, read in connection with provisions of S.B.800, is applicable. Because of the nature of construction defect litigation, the determination of relative rights and liabilities of developer-builders vis-à-vis subcontractors under construction contracts does not become the subject of litigation, and legal and judicial interpretation, until years after the contracts were entered and work performed. As of the date this article is submitted, there has been no case law interpreting or applying any of the post S.B. 800 amendments, in part, and perhaps primarily, because litigation arising from construction contracts executed after January 1, 2006, has not yet reached the appellate courts.

SECTION 2782 AT THE TIME S.B. 800 WAS ENACTED

Section 2782 was originally enacted in 1967 and amended several times to the version in effect when S.B. 800 became law, at which time the section was relatively simple and straightforward. It then consisted of two subdivisions, which have essentially remained unchanged until the most recent amendment during the 2011 legislative session.

Section 2782 (a) prohibited, and still prohibits, provisions in construction contracts that “purport to indemnify the promisee against liability for damages for death or bodily injury to persons, injury to property, or any other loss, damage or expense arising from the sole negligence or willful misconduct of the promise.” This provision essentially prohibits what had been referred to as so-called Type I or “specific” indemnity provisions. In such agreements, the indemnitor [the promisor, that is, the person or entity indemnifying] will indemnify the indemnitee [the promisee, that is, the person or entity being protected by the indemnity] for the indemnitee’s own negligence, whether active or passive, whether the indemnitee is solely negligent or concurrently negligent with the indemnitor. (See, MacDonald & Kruse, Inc. v. San Jose Steel Co. (1972) 29 Cal.App.3d 413, 419.)³ Section 2782 (a) has remained essentially intact since the enactment of S.B. 800. It still must be considered and applied to interpret a construction contract. Generally, it will apply to contracts not involving a public agency; the next part of section 2782 specifically governs such contracts.

The second subdivision prohibits provisions in any construction contract with a public agency which purport to impose on the contractor, or relieve the public agency from, liability for the active negligence of the public agency. Subdivision (b) has been revised by the 2011 amendment, discussed below. If a construction contract with the public agency is for residential construction, the standards of S.B. 800 likely apply.⁴

This was the extent of section 2782 on January 1, 2003, when S.B. 800 went into effect, and remained so until January 1, 2006. This version will govern interpretation and application of indemnity and defense provisions in construction contracts executed before January 1, 2006.⁵

2005 AMENDMENT

The first “post S.B. 800” change to Section 2782 was in enacted in 2005, effective January 1, 2006, and added two new sections. Subdivision (c) stated (in somewhat greater detail than paraphrased here) that for residential construction contracts, or amendments thereto, entered into after January 1, 2006, a subcontractor cannot be required to indemnify (including the cost to defend) a builder for construction defects that arise out of negligence or design defects of the builder or other independent contractors, or that do not arise out of the scope of the subcontractor=s scope of work. The term “residential construction” was defined by reference to S.B.800 generally, and the term “builder” was defined by reference to section 911 (a part of S.B. 800), for the first time expressly connecting provisions of section 2782 to S.B. 800. Contractual provisions not expressly prohibited were reserved to the agreement of the parties.

What subdivision (c) took away was partially given back by subdivision (d). It stated that “subdivision (c) does not prohibit a subcontractor and builder from mutually agreeing to the timing or immediacy of the defense and provisions for reimbursement of defense fees and costs, so long as that agreement, upon final resolution of the claims, does not waive or modify the provisions of subdivision (c).”⁶ In addition, it stated that this subdivision (c) did not affect the obligations of an insurance carrier under Presley Homes, Inc. v. American States Insurance Company (2001) 90 Cal.App.4th 571, which holds that where an insurer has a duty to defend a developer pursuant to an additional insured endorsement obtained under a subcontractor’s policy, that duty generally applies to the entire action, even if the suit involves both covered and uncovered claims, or a single claim only partially covered by the policy. Finally, subdivision (d) stated that the amendment did not affect the builder’s or subcontractor’s obligations under S.B. 800. Both of these latter provisions, relating to the Presley Homes case, and obligations under S.B. 800, have been carried forward essentially intact in subsequent amendments of section 2782.

This version of section 2782 will be applicable to any contract between a builder as defined by section 911 (see fn. 4, above) and a subcontractor executed between January 1, 2006, and December 31, 2008. Thus, a general contractor, etc., who is not a builder is not subject to the provisions added by the 2005 amendment; this changed with the next amendment.

It is not clear whether this version would apply to a contract entered before January 1, 2006, but amended after that date. Subdivision (c) applies to “all construction contracts, and amendments thereto, entered into after January 1, 2006, for residential construction.” It would seem that the clearest and most logical construction would apply it only to contracts originally made after January 1, 2006, and thereafter amended, but there has been no judicial determination of this issue.

In addition, logically it would seem that this version of section 2782 should be applicable to construction contracts for residential construction between a builder and a subcontractor, entered between January 1, 2006, and December 31, 2008; however, legislative history relating to the 2008 amendment discussed below suggests a different result might occur.

2007 AMENDMENT

The second “post S.B. 800” amendment in 2007 (effective January 1, 2008), added subdivisions (e)(1) and (e)(2).

Subdivision (e)(1) added general contractors and subcontractors not affiliated with the builder and imposed essentially the same restrictions on provisions to indemnify, including the cost to defend, them as had been imposed on the “builder” by the 2005 amendment. The amendment refers to section 911 (b), again part of S.B. 800, to define general contractors, etc., not affiliated with the builder.

Subdivision (e)(1) essentially repeated the provisions of subdivision (d) permitting agreement to the timing and immediacy of the defense, the reference to the Presley Homes case, and the general contractor’s or subcontractor’s obligations under S.B. 800.

It appears this amendment was an attempt to harmonize the new restrictions on indemnity and defense provisions with S.B. 800. The 2005 amendment, whether by oversight or intent, covered only builders and not general contractors, although both classes are subject to the provisions of S.B. 800; the 2007 amendment added non-builder-affiliated general contractors.

Again, logically, it would seem that this version of section 2782 should be applicable to construction contracts for residential construction between a general contractor or contractor not affiliated with a builder and a subcontractor, entered between January 1 and December 31, 2008; however, legislative history relating to the 2008 amendment discussed below suggests a different result might occur. The same potential uncertainty regarding applicability to a contract entered before January 1, 2008, but amended after that date, exists for this provision as for the prior amendment, discussed above.

2008 AMENDMENT

The third “post S.B. 800” amendment in 2008 (effective January 1, 2009), reorganized the language relating to prohibited indemnity provisions, added a reference to insurance in that same prohibition, extensively rewrote the provisions governing agreements relating to the timing or immediacy of defense, added language preserving equitable indemnity claims, and added language defining “construction defect” by reference to the standards set forth in S.B. 800.

Subdivisions (a) and (b) remained unchanged.

Subdivision (c) now made a combined reference to builders (again by reference to section 911), as well as general contractors or contractors not affiliated with the builder (again by reference to section 911 (b)), rather than dealing with the two groups in separate but nearly identical subdivisions as previously. It otherwise restated the same limitations that were previously set forth separately in subdivisions (c) and (e), as well as the reference to the Presley Homes case, and the general contractor’s or subcontractor’s obligations under S.B. 800, but with one important addition. The word “insure” was added to the description of prohibited provisions, to-wit: “provisions? that purport to insure or indemnify, including the cost to defend, the builder, [etc.]? are unenforceable” to the extent they arise out of claims of the type previously described.

It is unclear what impact the addition of this single word “insure” will have; and, it will have to be read in light of the preservation of the language that it shall not affect the obligations of an insurance carrier under the holding of the Presley Homes case. Suppose a carrier had issued an additional insured endorsement under which it would otherwise be required to defend a builder or general contractor consistent with the Presley Homes rule: would this newly added single word (restricting the construction contract, to which the carrier is not a party) give the carrier a basis for denying coverage under the insurance contract? Or would the continued inclusion of the express language that it does not affect the obligations of an insurance carrier under Presley Homes control? That is surely an issue that will have to be worked out by the courts.

The new subdivision (d) addressed defense obligations. Again it permitted parties to agree to the timing and immediacy of the defense and provision for reimbursement of defense fees and costs, but imposed a very detailed scheme that appears to limit the extent of such agreement. A subcontractor owes no defense or indemnity obligation until the builder or general contractor provides a written tender of the claim, which has the same force and effect as notice of commencement of a legal proceeding. Upon that tender the subcontractor shall elect to follow one of two ways of performing: subdivision (d) (1) permits the subcontractor to defend with counsel of its choice and to control the defense, if the subcontractor gives written notice of this election within a reasonable time after receipt of the written tender and in no event later than 90 days following that receipt; subdivision (d) (2) provides an alternative by which the subcontractor pays a reasonable allocated share of the builder’s or general contractor’s defense fees and costs within 30 days of receipt of an invoice, subject to reallocation upon final resolution of the claim by settlement or judgment. Subdivision (e) sets forth remedies available to the builder or general contractor if a subcontractor fails to timely and adequately perform its obligations under either of the two alternatives in subdivision (d), including compensatory and consequential damages, reasonable attorneys’ fees in connection with the first alternative, and interest on defense and indemnity costs in connection with the second alternative. Subdivision (e) ends with provisions relating to reallocation of defense costs, and damages for failure to reallocate.

Application of these requirements in actual litigation is likely to be cumbersome and potentially fraught with conflicts. If retained pursuant to subdivision (d) (1) does the attorney represent the builder, the subcontractor, or both? To whom does the attorney owe his or her fiduciary duty? Can an appropriate informed written consent be formulated, for example, under Rule 3-310 of the California Rules of Professional Conduct, or Rule 1.7, ABA Model Rules of Professional Conduct? Could an attorney retained by a subcontractor blame the subcontractor if that is in the developer’s best interests? If multiple subcontractors elect to defend directly, how would the defense be coordinated among the potentially multiple attorneys so retained? Would an attorney retained by one subcontractor be able, or inclined, to blame another subcontractor who also chose to defend directly, in other words, what would prevent inconsistent defense positions amongst the various counsel retained by subcontractors for the developer? There may be solutions to such practical and professional considerations but it seems an ethical thicket awaits any attorney involved in such circumstances.

Subdivision (e) and (f) preserve equitable indemnity claims for the builder, general contractor or subcontractor, the first in general, the second as against any supplier, design profession, or product manufacturer. Finally, the 2008 amendment added for the first time, in subdivision (h), language defining "construction defect" as used in section 2782 as a violation of standards set forth in S.B. 800.

The inclusion of these last three subsections would seem to work against simplification of litigation. A builder or general contractor is likely to allege a claim for equitable indemnity against any and all subcontractors in addition to claims for contractual indemnity and defense (however limited by the other provisions of section 2782). Nothing in the section suggests the subcontractor should, or even can, somehow take on the representation of the builder, etc., in connection with a claim of equitable indemnity back against the subcontractor.

And the limited definition of “construction defect” in subdivision (h) appears to raise an issue of the applicability of the limitations set forth in subdivision (c). Although there is a school of thought that section 941 limits residential construction defect claims only to breach of the performance standards under S.B. 800, it is still common for CD complaints to plead other legal theories, e.g., breach of contract, breach of warranty, negligence, etc., in addition to violation of S.B. 800 standards. With the addition of subdivision (h) it is arguable that the restrictions on indemnity and defense provisions spelled out in subdivisions (c) and (d), both of which relate to claims for residential construction defects, are applicable only to claims for violation of S.B. 800 standards, and not other residential construction defect claims. In other words, a developer might conceivably still be entitled to a broader scope of indemnity and concomitant defense for other types of claims, such as breach of contract, breach of warranty, negligence, etc., so long as the indemnity does not violate the limitation of subdivision (a) against Type I indemnity, which as noted above, has remained intact through these revisions.

Finally, it would seem that this version of section 2782 should be applicable to contracts executed between builders, general contractors, etc., on the one hand and subcontractors on the other hand on and after January 1, 2009. And, as noted above in connection with the 2005 and 2007 amendments, logic would suggest that those versions would ordinarily apply to contracts executed during the time periods mentioned above. But, the Legislative Counsel’s Digest for the 2008 amendment as it finally was enacted into law includes the following statements:

This bill would delete the provisions applicable to construction contracts entered into on or after January 1, 2008, that purport to indemnify the general contractor or contractor not affiliated with the builder. The bill would revise the provisions applicable to contracts entered into after January 1, 2006, to instead apply to contracts entered into after January 1, 2009, and to apply to agreements that purport to insure or indemnify the builder or the general contractor or contractor not affiliated with the builder, as described.

Although it seems a startling result, this legislative history suggests an argument can be made that the 2008 amendment retroactively nullified the effect of the 2005 and 2007 amendments, so that contracts executed from January 1, 2006, as to builders or January 1, 2008, for general contractors, etc., through December 31, 2008, are still governed by the provisions of section 2782 as it was on the books prior to the first post-S.B. 800 amendment in 2005.

2011 AMENDMENT

Section 2782 has been amended yet again in the 2011 session of the California Legislature, effective January 1, 2012; however, the substantive changes affect certain contracts entered on or after January 1, 2013. All of the provisions contained in the 2008 amendment have been carried forward in the most recent amendment, although re-numbered: (c) became (d), etc., through (h) becoming (i). So, the law governing construction contracts entered into after January 1, 2009, for residential construction, as between a builder, or a general contractor, etc., not affiliated with a builder, and regarding insurance, indemnity or defense relating to claims for construction defects, remains the same as in the 2008 amendment.

As noted above the substantive changes to section 2782 all affect contracts entered into on or after January 1, 2013. Subdivision (b) has been amended such that any provision in a contract with a public agency that purports to impose on any contractor, etc., or relieve the public agency from, liability for the active negligence of the public agency will be void and unenforceable. A new subdivision (c) has been added that imposes a similar restriction on construction contracts with the owner of privately owned real property to be improved and as to which the owner is not acting as a contractor or supplier of materials or equipment to the work. This new restriction in subdivision (c) does not apply to a homeowner performing a home improvement project on his or her own single family dwelling.

The 2011 bill amending section 2782 also added a new section 2782.05, which will make void and unenforceable any provision in any construction contract (again, entered on or after January 1, 2013) that purports to insure or indemnify, including the cost to defend, a general contractor, construction manager, or other subcontractor, by a subcontractor for claims that arise out of the active negligence or willful misconduct of the general contractor, etc., or other independent contractors, etc., or to the extent the claims do not arise out of the scope of work of the subcontractor. However, the section also includes a long list of situations to which it does not apply, including all of those covered by section 2782 (residential construction subject to S.B. 800, public agency contracts subject to section 2782 (b), and direct contracts with private property owners subject to the new section 2782 (c)) as well as eight other categories. This apparently is intended to serve as a “catch-all” to extend a limitation on indemnity agreements to all construction contracts not previously swept into this widening legislative scheme, although the exact phrasing is slightly different.⁷

The new section 2782.05 then permits a mutual agreement to the timing or immediacy of a defense under a scheme essentially identical to that imposed in the 2008 amendment to section 2782: defend with counsel of choice, and maintain control of the defense; or, pay a reasonable allocated share of defense fees and costs. The same logistical and ethical difficulties presented by the 2008 scheme discussed above would likely be present in cases that fall under the new section 2782.05.

CONCLUSION

The California Legislature has been revising section 2782 since shortly after the adoption of S.B. 800. Each revision has been more complicated than the last, and each has tied certain provisions of section 2782 more closely to S.B. 800. In particular, with regard to construction defect claims relating to residential dwellings which are subject to S.B. 800, the Legislature has apparently attempted to exercise more and more control over the scope of allowable indemnity and dictated a very narrow scheme to govern how the defense obligation arising from a contractual indemnity is to be implemented. It seems likely that any attempt to manage the defense of a construction defect case under the options that allow a subcontractor to defend directly and control the defense will create a logistical problem and an ethical difficulty for any attorney attempting to defend a developer at the behest and direction of a subcontractor. Finally, as set forth in the current version of section 2782 relating to contractual indemnity and defense of S.B. 800 type cases (subdivisions (c) through (h) in the 2008 version, now subdivisions (d) through (i) in the 2011 amendment), the Legislature has apparently narrowed the application to only claims of violation of S.B. 800 standards. This may have, in essence, removed the restrictions on indemnity and defense provisions as they relate to other theories pleaded against developers in construction defense cases, e.g., breach of contract, breach of warranty, negligence, and the like. It is not at all clear that the Legislature has accomplished what it set out do accomplish. Rather, the law may have come full circle back to where it began, except for one legal theory, i.e. violation of S.B. 800 standards, currently being used in residential construction defect cases. For any other legal theory the limitation of section 2782 (a) may be solely controlling.

1. California Civil Code section 43.99, and sections 895 to 945.5.
2. All statutory references in this article are to the California Civil Code unless otherwise specified.
3. Type I or specific indemnity does not exactly match the scope of proscribed indemnity as described in section 2782 (a) but it is the closest. More recent case law in California has eschewed a mechanical application of the MacDonald & Kruse typology in favor of examining the precise text of the actual contract (See, e.g., St. Paul Mercury Ins. Co. v. Frontier Pacific Ins. Co. (2003) 111 Cal.App.4th 1234, 1246, n. 6) but some recent cases still use the Type I, II and II classifications. And, an understanding of that “historical” typology is useful as an aid to evaluating and understanding express indemnity in general.
4. The provisions of S.B. 800 other than the prelitigation procedures of sections 910 through 938 apply to general contractors, subcontractors, etc., pursuant to section 936. The prelitigation procedures generally involve a “builder,” which is specifically defined in section 911 (a) by reference to entities or individuals in the business of selling residential units to the public or of building, developing, or constructing residential units for public purchase. Pursuant to section 911 (b) the term builder does not include general contractors, etc., not affiliated with the builder. Thus, a general contractor who constructs residential housing pursuant to a contract with a public agency is still subject to claims for violation of the standards set forth in sections 896 and 897, resulting from its negligent act or omission or breach of contract, pursuant to section 936.
5. As noted above, there has been no case law yet interpreting any of the “post S.B. 800” changes to Section 2782. One of the most important legal decisions relating to express indemnity and defense obligations and rights between developer-builders and sub-contractors was published after two of the amendments but based upon contracts executed and the language of section 2782 prior to January 1, 2006. (See, Crawford v. Weather Shield Mfg., Inc. (2008) 44 Cal.4th 541, 547, 566-67, fn. 14).
6. Subcontractor dissatisfaction with the perceived inadequacy of protection afforded by this provision apparently became the impetus for a 2008 amendment to section 2782, discussed below, at least based upon the numerous (form) letters submitted to legislators in connection therewith.
7. Section 2782 (a), where we started, and which has continued without change, prohibits indemnity for claims arising out of the sole negligence or willful misconduct of the promisee; sole negligence can be either active or passive. The various versions relating to residential construction prohibit indemnity for the negligence of the builder, etc., suggesting there is no express contractual indemnity for the negligence of the subcontractor if the builder, etc., is at all negligent. This is tempered a bit by the preservation of the right to equitable indemnity, which will now be found in section 2782 (g) and (h).

Courtesy of Michael D. Worthing of Borton Petrini, LLP. Mr. Worthing can be contacted at mworthing@bortonpetrini.com.

Webinar on Insurance Disputes in Construction Defects

Seth Lamden, of the firm Neal Gerber Eisenberg will be presenting a webinar on “Insurance Coverage Disputes in Construction Defects” on July 17, 2012 at 1 p.m. EDT. Mr. Lamden’s presentation will focus on “handling both the construction and insurance components of construction defect claims.” He will be discussing recent case law and new insurance products. The presentation will present information on evaluating various types of insurance policies, explaining common issues, contract requirement, and the economic loss doctrine. Mr. Lamden will advise attendees on how to avoid getting into a construction defect case. He will conclude his presentation with a brief question-and-answer session.

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Ensuing Loss Found Ambiguous, Allowing Coverage

The court determined the ensuing loss provision was ambiguous and found coverage for the home owners in Platek v. Town of Hamburg, 2012 N.Y. App. Div. LEXIS 5371 (N.Y. App. Div. July 6, 2012).

The burst of a water main caused water damage to the insureds' basement. Allstate disclaimed coverage under exclusion 4 for losses caused by "[w]ater . . . on or below the surface of the ground, regardless of its source . . . [,] includ[ing] water . . . which exerts pressure on or flows, seeps or leaks through any part of the residence premises."

Another policy provision covered "sudden and accidental direct physical loss caused by fire, explosion or theft resulting from item []. . . 4 . . . ." Plaintiffs argued that this exception applied because their claimed loss was caused by an "explosion" of the water main.

Read the full story…

Reprinted courtesy of Tred R. Eyerly, Insurance Law Hawaii. Mr. Eyerly can be contacted at te@hawaiilawyer.com

Construction Defect Case Not Over, Despite Summary Judgment

The Supreme Court of Oregon has concluded in an en banc decision that a motion to reconsider a summary judgment is not a motion for a new trial. In coming to their conclusion the court overturned an earlier Oregon Supreme Court case, Carter v. U.S. National Bank. Although the decision does not bear on construction defects, the underlying case did. Due to the decision, these claims can now be evaluated in a trial.

The case, Association of Unit Owners of Timbercrest Condominiums v. Warren, came about after an apartment complex was converted into condominium units. The developers hired Big Al’s Construction for some of the remodeling work. The condominium association later sued the developer and the contractor over claims of construction defects. The defendants filed a motion for summary judgment, which the court granted.

But that wasn’t the end of things. The plaintiff soon filed a “motion to reconsider,” noting that the summary judgment seemed to be in conflict with both law and other recent rulings, and additionally, the grounds for the decision were not in the order. The judge then notified the parties that the court had “pulled the trigger too quickly” and had seven questions for the parties to answer.

The court dismissed all claims against the defendants. The defendants filed their responses, objecting that that “‘there is no such thing’ as a motion for reconsideration.” Further, while “the rules do allow for post-judgment review of pre-judgment rulings through a motion for a new trial,” the plaintiffs had not filed for a new trial. But did they need one? They did file an appeal.

The judge in the case admitted that there was no such thing as a motion to reconsider, and felt bad about prematurely signing the judgment. The case was sent to the Court of Appeals to determine if the motion to reconsider was a request for a new trial. The Court of Appeals concurred.

In reviewing the decision, the Oregon Supreme Court concluded that there were a maximum of three questions to address. Was the motion for reconsideration a motion for a new trial? If so, was the later notice of appeal premature? And if so, was the plaintiff required to file a new appeal? The court determined that the answer to the first question was no.

Prior decisions pointed to the conclusion “that a motion for reconsideration of a summary judgment amounts to a motion for a new trial,” but here the court concluded that “our prior cases erred,” and turned to the summary judgment rule for clarification. The court noted that “the rule contemplates that summary judgment and trial are separate and distinct events.” With this conclusion, the Oregon Supreme Court remanded the case to the Court of Appeals for further proceedings.

Read the court’s decision…

Contractor Liable for Soils Settlement in Construction Defect Suit

The California Court of Appeals ruled on January 9 in Burrow v. JTL Dev. Corp., a construction defect case in which houses suffered damage due to improperly compacted soil, upholding the decision of the lower court.

Turf Construction entered into a deal with JTL to develop a parcel they acquired. A third firm, Griffin Homes, withdrew from the agreement “when a geotechnical and soils engineering firm reported significant problems with soil stability on 14 of the lots.” Turf Construction then took over compacting and grading the lots. Turf “had never compacted or graded a residential tract before.” Robert Taylor, the owner of Turf, “testified he knew there was a significant problem with unstable soils.”

After homes were built, the plaintiffs bought homes on the site. Shortly thereafter, the homes suffered damage from soil settlement “and the damage progressively worsened.” They separately filed complaints which the court consolidated.

During trial, the plaintiff’s expert said that there had been an inch and a half in both homes and three to five inches in the backyard and pool areas. “He also testified that there would be four to eight inches of future settlement in the next fifteen to twenty years.” The expert for Turf and JTL “testified that soil consolidation was complete and there would be no further settlement.”

Turf and JTL objected to projections made by the plaintiffs’ soil expert, William LaChappelle. Further, they called into question whether it was permissible for him to rely on work by a non-testifying expert, Mark Russell. The court upheld this noting that LaChappelle “said that they arrived at the opinion together, through a cycle of ‘back and forth’ and peer review, and that the opinion that the soil would settle four to eight inches in fifteen to twenty years was his own.”

Turf and JTL contended that the court relied on speculative damage. The appeals court disagreed, stating that the lower court based its award “on evidence of reasonably certain damage.”

Turf also that it was not strictly liable, since it did not own or sell the properties. The court wrote that they “disagree because Turf’s grading activities rendered it strictly liable as a manufacturer of the lots.” The court concluded that “Turf is strictly liable as a manufacturer of the lots.”

Judge Coffee upheld the decision of the lower court with Judges Yegan and Perren concurring.

Read the court’s decision…

New Web Site Tracks Settled Construction Defect Claims

Peter Lissner, a former Nevada homebuilder, has created a new site to help track homes that have been involved in construction defect litigation. His site, housefaxreview.com, collections documentation about homes where claims of construction defects have been made. He told The Builders Magazine concerns about “the number of homes that have been served notices, received compensation, yet the homes weren’t repaired.” On the site, the creator is identified as “a family owned builder.” According to the site, “the builder had no claims until the neighborhood reached the statutory claims limit 10 years.”

Lissner also claims that in many cases, after settling construction defect lawsuits, the homeowners sell to subsequent buyers without disclosing the lawsuit or their failure to repair. “Who is going to let the new homeowner know about the issue?” he asks.

Documents on the site are priced according to their relevance. Lissner notes that those who provide documents to the site will receive free access.

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Amerisure Case to be Heard by Texas Supreme Court

The Fifth Circuit Court of Appeals has withdrawn its decision in Ewing Construction Company Inc. v. Amerisure Insurance Company, according to Insurance Developments. The Fifth Circuit had concluded that “a contractor’s obligation to perform its contact in a workmanlike manner constituted an ‘assumption of liability.’” Two questions have now been certified to the Texas Supreme Court. The dissent in the case argued the majority had misread Texas Supreme Court precedent. The court will now have the opportunity to clarify this matter.

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Construction Law Client Alert: California Is One Step Closer to Prohibiting Type I Indemnity Agreements In Private Commercial Projects

On June 1, 2011 by majority vote, the California Senate passed Senate Bill 474, which would amend Civil Code section 2782, and add Civil Code section 2782.05. The passage of this new law is a critical development for real estate developers, general contractors and subcontractors because it will affect how these projects are insured and how disputes are resolved.

Civil Code section 2782 was amended in 2007 to prohibit Type I indemnity agreements for residential projects only. Since 2007, various trade associations and labor unions have lobbied to expand those very same restrictions to other projects. These new provisions apply to contracts, entered into after January 1, 2013, that are not for residential projects, and that are not executed by a public entity. The revisions provide that any provision in a contract purporting to indemnify, hold harmless, and defend another for their negligence or other fault is against public policy and void. These provisions cannot be waived.

A provision in a contract requiring additional insured coverage is also void and unenforceable to the extent it would be prohibited under the new law. Moreover, the new law does not apply to wrap-up insurance policies or programs, or a cause of action for breach of contract or warranty that exists independently of the indemnity obligation.

The practical impact of this new law is that greater participation in wrap-up insurance programs will likely result. While many wrap-up programs suffer from problems such as insufficient limits, and disputes about funding the self-insured retention, the incentive for the developer or general contractor to utilize wrap-up insurance will be greater than ever before because they will no longer be able to spread the risk of the litigation to the trades and the trade carriers.

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Reprinted courtesy of Steve Cvitanovic of Haight Brown & Bonesteel, LLP.

United States District Court Confirms That Insurers Can Be Held Liable Under The CCPA.

In D.R. Horton, Inc.-Denver v. The Travelers Indem. Co. of Am., 10-CV-02826-WJM-KMT, 2012 WL 527204 (D. Colo. Feb. 16, 2012), the court was asked to rule on Travelers’[1] motion to dismiss D.R. Horton, Inc. ?Äì Denver’s (“DRH”) claim that Travelers violated the Colorado Consumer Protection Act (“CCPA”).

In the underlying construction defect case (“CD case”), DRH, as the developer and general contractor of a construction project, tendered the defense of the CD case to certain subcontractors and to Travelers as an insurer to those subcontractors. Travelers accepted the duty to defend DRH. DRH hired counsel to defend it, and the attorney fees and costs of suit were billed to Travelers. However, for a period of over five years, Travelers failed to actually pay any portion of the defense of DRH. Finally, on October 31, 2008, Travelers offered checks for payment of only 4% of the costs and fees incurred. DRH then returned the checks to Travelers and provided Travelers with authority to support its position that the amounts in Travelers’ checks were inadequate. Thereafter, Travelers dug its heels in, and resubmitted the same checks.

DRH was then forced to file a coverage action against Travelers for declaratory judgment, breach of contract, bad faith breach of insurance contract, and deceptive trade practices under the CCPA. In its motion to dismiss DRH’s CCPA claim, Travelers’ argued that DRH failed to plead specific facts that Travelers engaged in a deceptive trade practice under C.R.S. § 6-1-105, and DRH failed to plead sufficient facts showing that Travelers’ actions significantly affect the public ?Äì a necessary element of a CCPA claim.

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Reprinted courtesy of Chad Johnson, Higgins, Hopkins, McLain & Roswell, LLC. Mr. Johnson can be contacted at johnson@hhmrlaw.com

Pictorial Construction Terminology Dictionary — A Quick and Helpful Reference

Does it seem like contractors speak their own language? Construction defect professionals can be hampered by not knowing the terminology. The Bert L. Howe & Associates, Inc. web site has a handy Pictorial Construction Terminology Dictionary in which more than a thousand terms are not only defined, but illustrated with pictures that give a visual component to each definition.

Whether you’re wondering what a balustrade is, or you need to identify a joist girder, or hundreds of other terms, the Pictorial Construction Terminology Dictionary is there to help you. It can be found at http://www.berthowe.com/bhapedia.php.

One World Trade Center Due to Be America’s Tallest and World’s Priciest

As One World Trade Center rises, so does the price tag. After construction delays and cost overruns, the cost of the building at the site of the September 11 attacks has risen to $3.8 billion. Part of the expense of the skyscraper is the heavily reinforced base of the building. The elevator shafts are also heavily reinforced, all part of guarding against future terrorist attacks.

In comparison, the world’s tallest tower, the Burj Khalifa in Dubai, cost only $1.5 billion, less than half the cost of One World Trade Center. As a result, the Port Authority does not see the building as being profitable in near future. In order to fund it, the agency is raising tolls on bridge and tunnel traffic.

Currently, about the half the unfinished building is leased. Construction is expected to conclude in 2013.

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Defect Claims as Occurrences? Check Your State Laws

Although four states have defined construction defect claims as occurrences, contractors are still dealing with “coverage gaps for faulty work construction,” says Mike Tsikoudakis in a piece at Business Insurance. He quotes Julian Ehrlich, the senior VP of claims for Aon Risk Services that “one of the interesting and compelling aspects of the issue of coverage for defective construction is that jurisdictions differ, so policyholders don’t know what they’re going to get.” He further notes that “in context of construction defect, the term ‘occurrence’ is ambiguous.”

One problem, as noted by Jeffrey J. Vita, a partner at Saxe Doernberger & Vita, is that construction firms end up needing to simultaneously defend against defect claims and to also file suit to be certain their insurance firms will cover claims. Insurance for construction defect claims is described as “expensive and somewhat limited.” Mr. Vita expects more states to help this situation with new laws, clarifying what is an occurrence.

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Exclusion Bars Coverage for Mold, Fungus

The court considered whether rain damage to a house was barred by the policy's mold exclusion. Stewart v. State Farm Fire & Cas. Co., 2012 U.S. Dist LEXIS 127804 (D. S.D. Sept. 7, 2012).

The insureds hired DJ Construction to build a new home. Before construction was completed, it was discovered that DJ Construction and some of its subcontractors had failed to protect the partially constructed house from the elements, which allowed melting snow and rain to intrude into the house. Soon after this discovery, DJ Construction abandoned the project. The house remained incomplete and uninhabitable.

The insureds sued DJ Construction.

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Reprinted courtesy of Tred R. Eyerly, Insurance Law Hawaii. Mr. Eyerly can be contacted at te@hawaiilawyer.com