The King of Construction Defect Scams
June 19, 2012 — CDJ Staff
Echoing Businessweek, the Las Vegas Sun agrees that the Nevada HOA scandal is the “king of all Vegas real estate scams,” and says that the Nevada legislatures should take action. The Sun notes that the case involves only 12 out of 2,356 HOAs in Southern Nevada.
To date, 25 people have plead guilty in the case. At the center were an attorney and contractor who allegedly referred work to each other. To enable this, they assembled a wider conspiracy of people who enriched by the process. In the words of the Sun, those involved “upended the concept of a ‘common interest’ community.”
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Certificate of Merit to Sue Architects or Engineers Bill Proposed
May 3, 2011 — May 3, 2011 Beverley BevenFlorez - Construction Defect Journal
North Carolina may become the twelfth state to require a Certificate of Merit to sue an architect or engineer. If North Carolina Senate Bill 435 (SB435) passes, then plaintiffs when filing a complaint will need to also attach an affidavit of a third-party licensed professional engineer or architect stating that the case has merit.
SB435 is a short two pages in its current form. The bill states that the “third-party licensed professional engineer or licensed architect shall (i) be competent to testify and hold the same professional license and practice in the same area of practice as the defendant design professional and (ii) offer testimony based upon knowledge, skill, experience, education, training, and practice. The affidavit shall specifically state for each theory of recovery for which damages are sought, the negligence, if any, or other action, error, or omission of the design professional in providing the professional service, including any error or omission in providing advice, judgment, opinion, or a similar professional skill claimed to exist and the factual basis for each such claim. The third-party licensed professional engineer or licensed architect shall be licensed in this State and actively engaged in the practice of engineering or architecture respectively.”
A few of the amendments allude to disciplining design professionals who certify civil actions that are without merit. The bill has been referred to the Committee on Judiciary I.
While North Carolina is considering enacting a Certificate of Merit law, eleven other states already require one, including Arizona, California, Colorado, Georgia, Maryland, Minnesota, New Jersey, Oregon, Pennsylvania, South Carolina, and Texas. Christopher D. Montez, a partner with Thomas, Feldman & Wilshusen, LLP, has written a useful summary for each state’s certificate of merit scheme.
Read the text of SB435
Track the progress of SB435
Read more from Christopher D. Montez’s article on Thomas, Feldman & Wilshusen, LLP site
General Contractor/Developer May Not Rely on the Homeowner Protection Act to Avoid a Waiver of Consequential Damages in an AIA Contract
August 4, 2011 — Higgins, Hopkins, McLain & Roswell, LLC
Recently, in Caribou Ridge Homes, LLC v. Zero Energy, LLC, et al., Case No. 10CV1094, Boulder County District Court Judge Ingrid S. Bakke entered a ruling and order on the Plaintiff’s Motion for Determination of Question of Law Pursuant to C.R.C.P. 56(h) on Issue of Damages. The Order found that the Plaintiff was not a homeowner intended to be protected by the Homeowner Protection Act (the “HPA”) and thus could not pursue its claims for consequential damages against Defendant.
By way of background, on June 18, 2008, Plaintiff Caribou Ridge Homes, LLC (“Caribou”) entered into a Standard Form Agreement Between Owner and Contractor AIA Document A114-2001 (the “Contract”) with Defendant Zero Energy, LLC (“Zero Energy”). Plaintiff hired Zero Energy to serve as a general contractor for the construction of a single-family home in the Caribou Ridge subdivision in Nederland, Colorado. A provision in the contract contained a mutual waiver of consequential damages (“Waiver”).
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Reprinted courtesy Higgins, Hopkins, McLain & Roswell, LLC
Exact Dates Not Needed for Construction Defect Insurance Claim
March 1, 2012 — CDJ Staff
The Texas Court of Appeals reversed the decision of the trial court in Vines-Herrin Custom Homes v Great American Lloyds Insurance Company on December 21, 2011. Vines-Herrin Custom Homes built a single-family home in Plano, Texas in 1999. They obtained a commercial general liability policy from Great American, later purchasing coverage from Mid-Continent, which the decision describes as “a sister company of Great American.”
While the home was under construction, Emil G. Cerullo sought to purchase it. At the time, it was under contract to another buyer. Two months later, Vines-Herrin told Cerullo that the deal had “fell through.” Cerullo bought the house with modifications from the original plan. Upon moving in, Cerullo began having water intrusion and other problems. “Cerullo noticed water gathering on window sills and damage to the sheetrock and baseboard.” Additional problems followed, including cracks, leaks, “and in early 2002, the ceiling and roof began to sag.”
Cerullo sued Vines-Herrin, claiming negligent construction. Vines-Herrin filed a claim seeking defense and indemnification under the insurance policies. Coverage was denied and Vines-Herrin filed suit to require coverage and also bringing claims for “breach of the duty of good faith and fair dealing, breach of contract, and DTPA and insurance code violations.”
In May, 2006 Vines-Herrin stated that it had no more defense funds and went into arbitration with Cerullo. The underlying construction defect action was settled for about $2.5 million. As part of the settlement, “Cerullo became the rightful owner of all remaining claims, rights, and causes of action against” Vines-Herrin’s insurers. He then joined the coverage lawsuit.
The non-jury trial was held under the controlling law of the time which “imposed a duty to defend only if the property damage manifested or became apparent during the policy period.” The court concluded in Cerullo’s favor. During the post-judgment motions, the Texas Supreme Court rejected the manifestation rule. Under this ruling, the trial court set aside its judgment and found in favor of the insurance companies. The trial court noted that although “the Residence was covered by an uninterrupted period of insurance (which began before the Residence was constructed) and that the damages to the Residence manifested during the uninterrupted period of insurance coverage,” “Mr. Cerullo failed to allege the date when actual physical damage to the property occurred.”
The first claim by Cerullo and Vines-Herrin was that the “Final Judgment” occurred in October 2004, and that all proceedings thereafter were void. The court rejected this as the “final judgment” is not “final for the purposes of an appeal unless it actually disposes of every pending claim and party or unless it clearly and unequivocally states that it finally disposes of all claims and all parties.” Despite the use of the word “final,” the trial court’s decision did not do this.
The second issue was the application of the Texas Supreme Court case Don’s Building Supply Inc. v. OneBeacon Insurance. In this case, framing rot due to defective stucco was not discovered until after the end of the policy period. The Supreme Court noted that “the key date is when injury happens, not when someone happens on it.”
The appeals court found that the trial court misapplied the Don’s Building Supply decision. Rather than an exact date, “so long as that damage occurred within the policy period, coverage was provided.” The appeals court noted that “Cerullo alleged the house was constructed in 1999 and he purchased it in May 2000.” “By April of 2001, Cerullo noticed that the windowsills in the study were showing signs of leakage and water damage.” As the court put it, “the petitions then alleged a litany of defects.”
The court noted that coverage by Great American was in effect from November 9, 1999 to November 9, 2000. In May of 2000, the house suffered “substantial flooding from a rainstorm that caused damage.” This was during the policy period. “As a matter of law, actual damages must occur no later than when they manifest.”
The court concluded that as damage manifested during the period of coverage, so must have the damage. The court ruled that “contrary to the trial court’s determination otherwise, the evidence showed Great American’s duty to indemnify was triggered, and expert testimony establishing the exact date of injury was not required to trigger the duty.”
Read the court’s decision…
One Colorado Court Allows Negligence Claim by General Contractor Against Subcontractor
December 20, 2012 — Heather Anderson , Higgins, Hopkins, McLain & Roswell
Judge Paul King of the Douglas County District Court recently confirmed that subcontractors in residential construction owe an independent duty, separate and apart from any contractual duties, to act without negligence in the construction of a home in Colorado. See Order, dated September 7, 2010, Sunoo v. Hickory Homes, Inc. et al., Case No. 2007CV1866; see alsoCosmopolitan Homes, Inc. v. Weller, 663 P.2d 1041 (Colo. 1983); A.C. Excavating v. Yacht Club II Homeowners Ass’n, Inc., 114 P.3d 862 (Colo. 2005). He also verified that the holding in the B.R.W. Inc. v. Dufficy & Sons, Inc., 99 P.3d 66 (Colo. 2004)[1] case does not prohibit general contractors, such as Hickory Homes, from enforcing a subcontractor’s independent duty to act without negligence in the construction of a home.
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Reprinted courtesy of Heather Anderson, Higgins, Hopkins, McLain & Roswell, LLC. Ms. Anderson can be contacted at anderson@hhmrlaw.com
Mortar Insufficient to Insure Summary Judgment in Construction Defect Case
January 6, 2012 — CDJ Staff
The US District Court of Nevada issued a summary judgment in the case of R&O Construction Company V. Rox Pro International Group, Ltd. on December 19, 2011. The case involved the installation of stone veneer at a Home Depot location (Home Depot was not involved in the case). R&O’s subcontractor, New Creation Masonry, purchased the stone veneer from Arizona Stone. Judge Larry Hicks noted that “the stone veneer failed and R&O was forced to make substantial structural repairs to the Home Depot store.”
Rox Pro asked the court for a summary judgment, which the court granted only in part. The court looked at two issues in the case, whether the installation instructions constituted a breach of implied warranty of merchantability, and whether there was a breach of an implied warranty of fitness for a particular purpose.
Judge Hicks found that there was a breach of implied warranty of merchantability. The instructions drafted by Real Stone and distributed by Arizona Stone were not sufficient for affixing the supplied stones, according to R&O’s expert, a claim the plaintiffs dispute. “Because there is an issue of material fact concerning the installation guidelines, the court shall deny Arizona Stone’s motion for a summary judgment on this issue.”
On the other hand, the judge did not find that the instructions had any bearing as to whether R&O bought the stone, since the stone was selected by the shopping center developer. This issue was, in the view of the judge, appropriately dismissed.
Read the court’s decision…
MGM Seeks to Demolish Harmon Towers
September 1, 2011 — CJD Staff
Citing public safety concerns and the cost of repair, MGM Resorts International is seeking to demolish the unfinished hotel tower. The company has a few hurdles to go through before they start laying the charges to implode the structure. Any plans would have to be approved by not only Clark County officials, but also the district court has an order blocking any activity during litigation between MGM and the general contractor on the project, Perini Building Company.
Architectural Record reports that MGM states it would take “approximately 18 months to conduct test and come up with an approved, permitted design to fix the Harmon.” MGM feels that repairs would then take another two to three years. Perini contends that they could “provide stamped drawings detailing all necessary repairs within three months.” They attribute MGM’s desire to demolish the building as “buyer’s remorse.”
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Condo Buyers Seek to Void Sale over Construction Defect Lawsuit
November 7, 2012 — CDJ Staff
A Michigan couple seeks to void their purchase of a condo in Texas after discovering that the complex was undergoing a construction defect lawsuit. ABQ Journal reports that Charles M. Lea and Olga Y. Ziabrikova said that they would not have purchased the condo if they had known the association was already alleging construction defects. The condo association discovered the defects “by at least late 2010,” according to the suit. The couple bought their condo in August 2011 and heard of the defects only in March 2012.
The couple notes that no one involved with the sale informed them of the construction defect complaints. The community association’s lawsuit states that problems have lead to $2.5 million in damages. The developer, Vegas Verde Condo Partners, have filed a general denial of the construction problems.
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Allowing The Use Of a General Verdict Form in a Construction Defect Case Could Subject Your Client to Prejudgment Interest
August 16, 2012 — Heather Anderson, Higgins, Hopkins, McLain & Roswell, LLC
A recent opinion from the Colorado Court of Appeals is a cautionary tale concerning the calculation of pre-judgment interest. See Hendricks v. Allied Waste Transportation, Inc., 2012 WL 1881004 (Colo. App. 2012). The Hendricks sued Allied after one of its drivers backed into the corner of their home with an Allied garbage truck. At trial, a jury awarded the Hendricks $160,100 in damages. Although the jury was instructed on the cost of repairs, diminution in value, and non-economic damages, the parties agreed to a general verdict form that did not ask the jury to specify the types of damages awarded. Id. at *1. The Hendricks sought to amend the judgment to include prejudgment interest and costs, which the trial court granted.
Allied appealed, arguing that the trial court erred by awarding the Hendricks prejudgment interest from the date their property was damaged. Id. at *7. The Colorado Court of Appeals found no error, and affirmed.
Read the full story…5
Reprinted courtesy of Heather Anderson, Higgins, Hopkins, McLain & Roswell, LLC. Ms. Anderson can be contacted at anderson@hhmrlaw.com
Arizona Homeowners Must Give Notice of Construction Defect Claims
August 2, 2012 — CDJ Staff
Chris Combs of the Combs Law Group notes that “the new home construction industry is recovering” and that some of the buyers of these homes “will have claims for construction defects.” But not so quick on filing that claim.
Under Arizona law, as Mr. Combs notes the law “requires that, at least 90 days before filing any lawsuit, the buyer furnish notice by certified mail to the homebuilder specifying in detail the construction defect.” Only if there is no agreement over proposed repair can the homeowner file a lawsuit.
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California Supreme Court Finds Associations Bound by Member Arbitration Clauses
September 13, 2012 — CDJ Staff
In a decision with great implications for construction defect suits in California, the California Supreme Court has ruled in Pinnacle Museum Tower Association v. Pinnacle Market Development that arbitration clauses binding on the members of the association are also binding on the association itself. They concluded this, even though “the association did not exist as an entity independent of the developer when the declaration was drafted and recorded.” The opinion, written by Justice Baxter, was joined by four additional justices, with two separate concurrences and a dissenting opinion by Justice Kennard.
The Pinnacle homeowners sought to bring suit over construction defect claims. In response, the developer filed a motion to compel arbitration. The association argued that the arbitration clause signed by its individual members was not binding on it. The Appeals Court invalidated the arbitration agreement “finding it marked by slight substantive unconscionability and high degree of procedural unconscionability. The Appeals Court determined that “for all intents and purposes, Pinnacle was the only party to the ‘agreement,’ and there was no independent homeowners association when Pinnacle recorded the CC&R’s.” However, the California Supreme Court said that this was “not persuasive in light of the statutory and contract principles in play.”
The opinion notes that “the Project CC&R’s provides that Pinnacle and, by accepting a deed to any portion of the Project property, the Association and each individual condominium owner agree to submit any construction dispute to binding arbitration in accordance with the FAA.” The Court noted that “settled principles of condominium law establish that an owners association, like its constituent members, must act in conformity with the terms of a recorded declaration,” which, as the Court notes, includes the CC&Rs.
After finding that the terms were binding on the Association, the Court then questioned whether the terms were “unenforceable as unconscionable,” noting that “the party resisting arbitration bears the burden of proving unconscionability.” But the Court found that “the arbitration provisions of article XVIII are not substantively unconscionable.” Additionally, they found “no support for the Association’s claims of unfairness and absence of mutuality.”
Read the court’s decision…
Defective Drains Covered Despite Water Intrusion Exclusion
July 10, 2012 — CDJ Staff
The US District Court in Washington State has granted a summary judgment in Hiller v. Allstate Prop. & Cas. Ins. Co. The Hillers bought a new home in Wenatchee, Washington and insured it with an “all risk” policy from Allstate. Subsequently, Mr. Hiller discovered that the carpet in the basement was saturated with water. Hiller notified Allstate who requested that he determine the source of the water intrusion. Hiller poured water into a downspout drain and found this caused water to leak into the home’s basement.
Further investigation with the homes original excavation contractor revealed that “the end of the drain pipe was partially blocked by rocks and had been wrapped with fabric landscaping material.” Additionally, “a ‘T’ pipe installed at the foot of the drain was directing water toward the house’s concrete foundation.” Allstate denied the claim “under the policy’s surface water, subsurface water, inherent vice, and latent defect exlusions.” After the denial, Hiller “discovered that the foundation had not been treated with waterproof sealant and that several concrete form pins were still in place.”
The court noted that “there is no genuine dispute about the cause of the claimed loss.” This left the court concluding that “the only relevant question for the purposes of the instant cross-motions for summary judgment is whether a loss caused by defective construction is covered under the Hillers’ ‘all risk’ insurance policy.” Under Washington’s “efficient proximate cause” rule, “where an insured risk itself sets into operation a chain of causation in which the last step may have en an excepted risk, the excepted risk will not defeat recovery.” The court found that a loss caused by defective construction is in fact covered under the policy, noting that “the policy does not contain an exclusion for defective construction.”
The court concluded that the defective drain was not an inherent vice, as it “cannot properly be characterized as defects ‘inherent [in the] nature of the commodity which will cause it to deteriorate with a lapse of time.” Nor was it a latent defect, “one that could not have been discovered by inspection.” The court concluded that “both of the construction defects at issue could have been discovered by a reasonable inspection.”
With these facts determined, the court found for the Hillers.
Read the court»s decision…
Insurance for Defective Construction Now in Third Edition
November 7, 2012 — CDJ Staff
Available both in print and online, the International Risk Management Institute, Inc has brought out a third edition of Insurance for Defective Construction. The work is written by Patrick J. Wielinski of Cokinos, Bosien & Young, a Dallas-Fort Worth law firm. Mr. Wielinski practice focuses on insurance coverage. Insurance for Defective Construction is described as “a must read for anyone who buys, sell, or underwrites construction insurance or who becomes involved in construction claims.”
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When Does a Claim Against an Insurance Carrier for Failing to Defend Accrue?
November 7, 2012 — David McLain, Colorado Construction Litigation
The following is an update on our December 20, 2010 article regarding United States Fire Insurance Company v. Pinkard Construction Company, Civil Action No. 09-CV-01854-MSK-MJW, and its underlying dispute, Legacy Apartments v. Pinkard Construction Company, Case No. 2003 CV 703, Boulder County Dist. Ct. That article can be found here.
The present action, St. Paul Fire and Marine Insurance Co., et al. v. The North River Insurance Co., et al., Civil Action No. 10-CV-02936-MSK-CBS, encompasses the coverage battle that ensued between Pinkard’s insurers, Travelers Indemnity Company of America (“Travelers”) and United States Fire Insurance Company (“USFI”), following the settlement of Legacy’s construction defect claims against Pinkard. A short history of the underlying facts is as follows:
In 1995, Pinkard constructed the Legacy Apartments housing complex in Longmont, Colorado. Following construction, Legacy notified Pinkard of water leaks associated with various elements of construction. Legacy ultimately filed suit against Pinkard in 2003, and would go on to clarify and amend its defect claims in 2004, 2006, and again in 2008. Following Pinkard’s notification of Legacy’s claims, USFI provided a defense to Pinkard, but Travelers refused to do so, on the purported basis that Legacy’s allegations did not implicate property damage under the terms of Travelers’ policy.
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Reprinted courtesy of David M. McLain, Higgins, Hopkins, McLain & Roswell, LLC. Mr. McLain can be contacted at mclain@hhmrlaw.com
Harsh New Time Limits on Construction Defect Claims
April 26, 2011 — April 26, 2011 by Scott F. Sullan, Esq., Mari K. Perczak, Esq., and Leslie A. Tuft, Esq. of
Sullan2, Sandgrund, Smith & Perczak, P.C. in the
HindemanSanchez blogA recent Colorado Supreme Court decision, Smith v. Executive Custom Homes, Inc., 230 P.3d 1186 (Colo. 2010), considerably shortens the time limit for bringing many construction defect lawsuits. Homeowners and homeowner associations risk losing the right to seek reimbursement from builders, developers and other construction professionals unless they carefully and quickly act upon discovery of evidence of any potential construction defect.
The Statute of Limitations for Construction Defect Claims
Colorado’s construction defect statute of limitations limits the time for homeowners and homeowners associations to bring lawsuits for construction defects against “construction professionals,” including developers, general contractors, builders, engineers, architects, other design professionals, inspectors and subcontractors. The statute requires homeowners and associations to file suit within two years “after the claim for relief arises.” A claim for relief “arises” when a homeowner or association discovers or reasonably should have discovered the physical manifestation of a construction defect.
The two-year time limitation applies to each construction defect separately, and will begin to run upon the appearance of a “manifestation” of a construction defect (which may include, for example, a condition as simple as a roof leak or drywall cracks), even if the homeowner or association does not know the cause of the apparent problem.
The Smith Opinion and its Effect on the Statute of Limitations
In Smith v. Executive Custom Homes, Inc., the plaintiff homeowner, Mrs. Smith, slipped on ice that had accumulated on her sidewalk because of a leaking gutter and suffered injury. When she first noticed the leak, she reported it to her property manager, who reported it to the builder. The builder attempted to repair the gutter, unbeknownst to Mrs. Smith, and she did not notice further problems until approximately one year after she first observed the leak, when she fell and suffered serious injury. She sued the builder within two years of her injury, but nearly three years after she first learned of the leak.
The Colorado Supreme Court dismissed Mrs. Smith’s claims as untimely and held that under the construction defect statute of limitations, the two-year period for suing for injuries due to construction defects begins when the homeowner first observes the physical manifestation of the defect, even if the resulting injury has not yet occurred. The court acknowledged that this ruling could result in “unfair results,” especially if a serious and unforeseeable injury occurs more than two years after the first time the homeowner noticed the problem, and as a result the victim is unable to seek redress from those responsible for the defect.
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Reprinted courtesy of Scott F. Sullan, Esq., Mari K. Perczak, Esq., and Leslie A. Tuft, Esq. of Sullan2, Sandgrund, Smith & Perczak, P.C., and they can be contacted through their web site.
California Bill Would Notify Homeowners on Construction Defect Options
October 23, 2012 — CDJ Staff
The California Building Industry Association supported Assembly Bill 1892, but its goals of informing homeowners of their rights under SB800 have been accomplished through the administrative process. The Department of Consumer Affairs has now posted text on its web site noting that “prior to pursuing legal action or responding to a construction defect solicitation, you must first contact your home builder.” The text goes on to note that “if the homebuilder fails to follow any of the procedures, the homeowner is entitled to proceed with the filing of an action.”
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Montrose Language Interpreted: How Many Policies Are Implicated By A Construction Defect That Later Causes a Flood?
March 17, 2011 — By Shaun McParland Baldwin, March 17, 2011
The Court of Appeals of Indiana recently addressed the “Montrose” language added to the CGL ISO form in 2001 in the context of a construction defect claim where a fractured storm drain caused significant flooding a year after the drain was damaged. The insuring agreement requires that “bodily injury” or “property damage” be caused by an “occurrence” and that the “bodily injury” or “property damage” occur during the policy period. The Montrose language adds that the insurance applies only if, prior to the policy period, no insured knew that the “bodily injury” or “property damage” had occurred in whole or in part. Significantly, it also states that any “bodily injury“ or “property damage” which occurs during the policy period and was not, prior to the policy period known to have occurred, includes a continuation, change or resumption of that “bodily injury” or “property damage” after the end of the policy period.
In Grange Mutual Cas. Co. v. West Bend Mut. Ins. Co., No. 29D04-0706-PL-1112 (Ct. App. IN March 15, 2011), http://www.ai.org/judiciary/opinions/pdf/03151109ehf.pdf, Sullivan was the General Contractor for a school construction project. Its subcontractor, McCurdy, installed the storm drain pipes. One of the storm pipes was fractured in 2005 while McCurdy was doing its installation work. More than a year later, the school experienced significant water damage due to flooding. It was later discovered that the flooding was due to the fractured storm drain. Sullivan’s insurer paid $146,403 for the water damage. That insurer brought a subrogation claim against McCurdy and its two insurers: West Bend and Grange. West Bend had issued CGL coverage to McCurdy while the construction was ongoing , including the date in which the storm pipe was fractured. Grange issued CGL coverage to McCurdy at the time of the flooding. Those two carriers jointly settled the subrogation claim and then litigated which insurer actually owed coverage for the loss. Significantly, the loss that was paid included only damages from the flooding, not any damages for the cost of repairing the pipe.
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Reprinted courtesy of Shaun McParland Baldwin of Tressler LLP. Ms Baldwin can be contacted at sbaldwin@tresslerllp.com
Texas res judicata and co-insurer defense costs contribution
March 23, 2011 — Original story by CDCoverage.com, March 23, 2011
In Truck Ins. Exchange v. Mid-Continent Casualty Co., No. 03-08-00526-CV (Tex. App. 3d Aug. 27, 2010), insured contractor DCI was sued by the project owner seeking damages for defective construction. DCI tendered its defense to its CGL insurers Truck and Mid-Continent. Truck agreed to defend while Mid-Continent denied a defense. While the underlying suit was pending, Mid-Continent sued DCI, but not Truck, and obtained a judicial declaration of no duty to defend or indemnify DCI in the underlying suit. After settling the underlying suit, Truck sued Mid-Continent seeking contribution towards defense costs and indemnity payments. The state trial court entered summary judgment for Mid-Continent. The intermediate appellate court affirmed.
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Reprinted courtesy of CDCoverage.com
