ANAHEIM CALIFORNIA CONSTRUCTION EXPERT WITNESS
DIRECTORY AND CAPABILITIES

LEED Certified Courthouse Square Negotiating With Insurers, Mulling Over Demolition

Apparently, Courthouse Square is still unresolved. The County hasnow hired an attorney to handle its insurance claim against Affiliated FM. Is there a lawsuit coming?

Right now, no lawsuit is expected. According to officials, the insurer has been acting in good faith. But, its been quite a while since Salem officials learned that the Courthouse Square building had significant concrete issues that would result in probable demolition of the LEED certified building.

If you have yet to hear about Courthouse Square, let me fill you in briefly. The Salem building was substantially completed in 2000 and LEED certified by the US Green Building Council in 2002. The project cost more than $30 Million to complete and the building was revered for its innovation as a crowning achievement for city leaders.

But, structural problems in the building’s core were discovered as early as 2002, writes Chris Cheatham of Green Building Law Update. Final tests earlier in the year, determined that the building had to be vacated. The building has been clear since July 2010.

Read the full story…

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

Construction on the Rise in Denver

In another sign of a recovery in the housing industry, the Denver Business Journal reports that the pace of new home construction has accelerated in the Denver area. According to the article, in the first seven months of 2012, forty-eight percent more permits were issued than in the first seven months of 2011. In July, 2012, there were sixty-six percent more permits than a year previously. For the Denver metropolitan area, July was the sixteenth consecutive month in which permits were up from a year previously.

Read the full story…

Construction Defects Are Occurrences, Says South Carolina High Court

The South Carolina Supreme Court has left the legislature’s new, expanded definition of “occurrence” in place, declining to declare it unconstitutional. South Carolina included faulty workmanship as an occurrence in response to a Supreme Court decision, which the court later reversed. One of the parties in that earlier decision, Harleysville Insurance, challenged the new law, claiming that the legislature didn’t have the power to pass a law to overturn a court ruling. The court did not concur.

However, the court did determine that the law was not retroactive and covered only claims filed after the law became effective in May 2011. The Chief Justice of South Carolina noted that “insurance coverage for construction liability lacks clarity, particularly with respect to whether construction defects constitute ‘occurrences’ under construction general insurance policies.”

Read the full story…

Insurer Able to Refuse Coverage for Failed Retaining Wall

The Eleventh District of the US Court of Appeals has ruled in the case of Nix v. State Farm Fire & Casualty Company. In this case, the Nixes filed a claim after a portion of the retaining wall in their home collapsed and their basement flooded. State Farm denied the claim “on the ground that the policy excluded coverage for collapses caused by defects in construction and for damage caused by groundwater.”

The court reviewed the Nixes’ policy and found that State Farm’s statement did specifically exclude both of these items. In reviewing the lower court’s ruling, the appeals court noted that State Farm’s expert witness, Mark Voll, determined that the retaining wall “lacked reinforcing steel, as required by a local building code, and could not withstand the pressure created by groundwater that had accumulated during a heavy rainfall.” Additionally, a french drain had been covered with clay soil and so had failed to disperse the groundwater.

The Nixes argued that the flooding was due to a main line water pipe, but their opinions were those of Terry Nix and the contractor who made temporary repairs to the wall. “Those opinions were not admissible as lay testimony. Neither Nix nor the contractor witnessed the wall collapse or had personal knowledge about the construction of the Nixes’ home.”

The lower court granted a summary judgment to State Farm which has been upheld by the appeals court.

Read the court’s decision…

Policyholder Fails to Build Adequate Record to Support Bad Faith Claim

The importance of careful preparation and documentation was the take away lesson in a Texas bad faith case, C.K. Lee v. Catlin Specialty Ins. Co., 2011 U.S. Dist. LEXIS 19145 (S.D. Tex. Feb. 28, 2011).

C.K. Lee owned a commercial shopping center in Houston. Catlin issued a commercial property policy to Lee. On September 12, 2008, Hurricane Ike hit and caused substantial property damage throughout the Texas Gulf Coast area. On September 24, 2008, Lee submitted a claim for damage to the roof of his shopping center to Catlin.

Catlin hired Engle Martin to represent its interests in adjusting the claim. Engle Martin eventually adjusted over 200 Ike-related claims for Catlin.

In November 2008, Engle Martin and Emergency Services Inc., retained by Lee, inspected Lee’s property. Engle Martin observed evidence of roof repairs that had apparently been made both before and after Hurricane Ike. Engle Martin decided it was necessary to use an infrared scan of the roof to help identify which damages, if any, were attributable to wind and which, if any, were attributable to sub par, prior repairs or natural deterioration.

Engle Martin retained Project, Time & Cost (PT&C) to conduct the infrared inspection. PT&C’s inspection determined there was no wind-related damage to the roof and no breaches or openings created by wind. Instead, the roof had exceeded its life expectancy and was in need of replacement due to normal wear and weathering. Consequently, Catlin decided that the damage to Lee’s roof was not caused by winds from Hurricane Ike.

Meanwhile, Lee’s contractor, Emergency Services, prepared a report estimating that the total cost of repairing the roof would be $871,187. Engle Martin’s estimate for repair of the roof was $22,864.

Lee filed suit for breach of contract, breach of the duty of good faith and fair dealing, and violations of the Texas Insurance Code. Catlin moved for summary judgment on all claims but breach of contract, arguing that because there was a bona fide dispute concerning the cause of the damages and whether they were covered under the policy, there was no evidence of bad faith or violations of the Texas Insurance Code.

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

Loss Caused by Seepage of Water Not Covered

The anti-concurrent clause in a homeowner’s policy barred coverage for damage caused by hidden seepage. Boazova v. Safety Ins. Co., 2012 Mass. LEXIS 462 (Mass. May 29, 2012).

The insured had a concrete patio built along the rear wall of her house at a grade higher than the home’s foundation. Years later, severe deterioration was discovered in the floor joists, wall studs and other parts of the home. The insured held a homeowner’s policy with Safety. An inspector hired by Safety determined the deterioration was caused by the placement of the concrete patio slab adjacent to the wall of the house, allowing water to seep onto the top of the foundation.

Safety denied coverage because the damage was caused by a combination of surface water, deterioration, settling and improper construction of the concrete patio.

Read the full story…

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

Construction Defects as Occurrences, Better Decided in Law than in Courts

Construction defect claims are now occurrences for insurance purposes in four states, Arkansas, Colorado, Hawaii, and South Carolina, yet there are still frustrations for commercial general liability policyholders. Business Insurance describes court decisions on whether construction defect claims are covered as “incongruous,” and this drives up coverage and litigation costs. Construction firms often find they are defending themselves on two fronts, both the construction defect claim and also whether their insurance covers it.

Frank Armstrong, the Senior Vice President and National Director of Construction Claims for Willis North America says that the problem starts with the word “occurrence,” as various state courts have different interpretations of the word. “Certain pieces of it don’t fit well, at lest according to some courts in the country, with coverage for construction defect risks.”

Another insurance executive, Julian Ehlich, the Senior Vice President of Claims for Aon Risk Solutions’ construction services group notes that “jurisdictions differ, so policyholders don’t know what they’re going to get.”

Read the full story…

High School Gym Closed by Construction Defects

The high school gym in Lake Oswego, Oregon has been shut down because testing has revealed that the construction defects have lead to deterioration of the structural integrity of the roof. The school district noted that there was a chance of collapse if there were a “significant seismic event or heavy rain and winds and snow.” The school district has been in a lawsuit with the builders since 2008, which was recently settled for $600,000.

The school board is still determining whether the original contractor will be asked to correct the defect or if they will bid the job out.

Read the full story...

Public Relations Battle over Harmon Tower

Tutor Pernini claims that CityCenter is portraying the construction firm as “the scum of the earth” in an attempt to influence eventual jurors, according to an article at Vegas Inc. The contractor’s attorneys have requested information regarding the public relations efforts of MGM Resorts and CityCenter, characterizing CityCenter’s PR as a “litigation spin doctor.”

CityCenter has requested that at least one subpoena be canceled. Judge Elizabeth Gonzales has already allowed one to go through, although she has noted that Perini cannot request documents from CityCenter’s lawyers to the litigation consultants under attorney/client privilege. Tutor Perini claims that in 2010, Patricia Glaser, who has represented CityCenter, said her goal was to portray Perini as “the scum of the earth,” and make that certain that judges and juries would not “adopt the world view espoused by the opposing party.”

Read the full story…

Georgia Law: “An Occurrence Can Arise Where Faulty Workmanship Causes Unforeseen or Unexpected Damage to Other Property”

In American Empire Surplus Lines Ins. Co. v. Hathaway Development Co., Inc., No. S10G0521 (Ga. March 7, 2011), insured plumbing subcontractor Whisnant was sued by general contractor Hathaway seeking damages for costs incurred by Hathaway in repairing damage to property other than Whisnant’s plumbing work resulting from Whisnant’s negligently performed plumbing work on three separate projects. On one project, Whisnant installed a pipe smaller

Reprinted courtesy of CDCoverage.com

Florida Law: Defects in Infrastructure Improvements Not Covered in Home Construction Warranties

In April 2012, Governor Rick Scott signed into law House Bill 1013, despite lobbying from homeowner and condominium associations among others. The law was in response to a case in which the court had found that implied warranties covered external subdivision improvements. Prior to the court decision, these were not thought to be covered.

According to an article in the Martindale-Hubble Legal Library, under the new law, road and drainage improvements will not be included implied warranty of a new home. The law took effect on July 1.

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Hawaii State Senate Requires CGL Carriers to Submit Premium Information To State Legislature

In light of the decision in Hawaii’s Intermediate Court of Appeals in Group Builders, Inc.,v. Admiral Insurance Company, 231 P.3d 67(2010), Hawaii’s state senate is requesting that "every domestic and foreign insurance company that has ever issued commercial general liability policies in the State is requested to submit information to the Legislature on the total premiums received for their commercial general liability policies during the past ten years"

Read Full Text of Hawaii State Senate Resolution

Nevada Supreme Court Reverses Decision against Grader in Drainage Case

The Nevada Supreme Court has issued an opinion in the case of Rayburn Lawn & Landscape Designers v. Plaster Development Corporation, reversing the decision of the lower court and remanding the case for a new trial.

The case originated in a construction defect suit in which Plaster Development Corporation was sued by homeowners. Plaster filed a third-party complaint against its subcontractor, Reyburn. The testimony of Reyburn’s owner was considered to be admission of liability and so the court limited the scope of Reyburn’s closing argument and did not allow the jury to determine the extent of Reyburn’s liability. Reyburn appealed.

Plaster, in their case, cited California’s Crawford v. Weather Sheild MFG, Inc. The court held the application of these standards, but noted that the “an indemnitor’s duty to defend an indemnitee is limited to those claims directly attributed to the indemnitor’s scope of work and does not include defending against claims arising from the negligence of other subcontractors and the indemnittee’s own negligence.”

On the matter of law against Reyburn, the court concluded, “Given the conflicting evidence at trial as to whether Reyburn’s work was implicated in the defective retaining walls and sidewalls, and viewing the evidence and inferences in Reyburn’s favor, we conclude that a reasonable jury could have granted relief in favor of Reyburn.” The Nevada Supreme Court conduced that the district court should not have granted Plaster’s motion for judgement.

Further, the Nevada Supreme Court found that the district court should have apportioned the fees and costs to those claims directly attributed to Reyburn’s scope of work, “if any,” and should not have assigned all attorney costs and court fees to Reyburn.

Read the court’s decision…

The King of Construction Defect Scams

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.”

Read the full story…

Judge Concludes Drywall Manufacturer Sold in Florida

A Florida judge has concluded that the Chinese drywall manufacturer Taishan actively sought to sell its products in Florida and cannot now claim that it was not involved. Judge Joseph Farnia also noted that the main distributor of the drywall was, as noted in the Miami Herald, an arm of the company. Lennar Hones has sued the firm after installing drywall manufactured by the company in hundreds of homes.

Taishan’s activities in Florida included not only distributing samples, but also hosting tours of their plants in China for construction executives, and even making customized runs. According to other reports, has lost past cases over defects in their drywall.

Read the full story…

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.

Although Property Damage Arises From An Occurrence, Coverage Barred By Business Risk Exclusions

The homeowners hired the insured to raise the structure of their home twenty-four inches above the flood zone. Lafayette Ins. Co. v. Peerboom, 2011 U.S. Dist. LEXIS 58985 (S.D. Miss. June 2, 2011). When the insured’s crew returned from lunch one day, they found the house had fallen from hydraulic jacks being used to raise the structure a few inches at a time. There was substantial damage to the entire structure.

The homeowners sued, asserting several claims, including negligence and breach of contract. The complaint alleged the homeowners entered a contract with the insured to raise their structure while maintaining its integrity. However, the insured failed to use proper equipment, which caused the house to fall and be completely destroyed.

The insured tendered the claim to its insurer, Lafayette Insurance Company. Lafayette defended under a reservation of rights and filed suit for a declaratory judgment. Lafayette’s subsequent motion for summary judgment contended there was no “occurrence” alleged in the underlying complaint and, even if there was, the business risk exclusions barred coverage.

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

2011 West Coast Casualty Construction Defect Seminar – Recap

Event exhibitors and sponsors contribute to an informative and engaging environment

This year’s meeting was the best yet for the industry-leading construction defect and claims event.

This year’s seminar concluded on May 13, 2011 with the Construction Defect Community Charitable Foundation Golf Tournament, held at Strawberry Farms Golf Course.

The Disneyland Hotel in Anaheim, California was the place where more than 1,500 attendees convened for two days of professional development activities and seminars that included CLE workshops and panel discussions of special interest to legal and insurance professionals concerned with construction defect and claims litigation. Key events included “Challenges for Experts in Construction Defect Claims and Litigation,” “Keeping Up with Construction Defect Coverage,” and “Tips for Avoiding the ‘Perfect Storm’ in Handling of Wrap Claims.”

Supporting the golf tournament at the 15th hole

This year’s Ollie award was given to George D. Calkins II, Esq. The West Coast Casualty Jerrold S. Oliver Award of Excellence was named in honor of the late Judge Jerrold S. Oliver, and recognizes an individual who is outstanding or has contributed to the betterment of the construction community.

In addition to being the most comprehensive professional development seminar in the area of construction defects, this year’s seminar was equally valuable as a networking opportunity for members of the industry. People participated in professional development events during the day and then continued networking in the evening at numerous social events. The Lawn Party as well as the legendary Wood, Smith, Henning & Berman events were very well attended. Additional valuable networking events were hosted by a number of industry professionals at the House of Blues, and Tortilla Joe’s.

As of this writing the 2011, West Coast Casualty's Construction Defect Seminar has applied for or has already received the following continuing education accreditation in the following areas;

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For more information about next year’s event, visit West Coast Casualty.