Construction on the Rise in Washington Town
June 16, 2011 — CDJ Staff
The Kitsap Sun reports that Gig Harbor, a town in the area near Tacoma, Washington, has had a 60% increase in building permit applications as compared to 2010. May, 2011 had as many permits issued for single-family residences in Gig Harbor as were issued for all of 2010. Additionally, a Safeway shopping center on Point Fosdick is described by Dick Bower, Gig Harbor Building and Fire Safety Director, as “a huge project and it’s going to bring in quite a bit of revenue.” He called the increase in building “economic recovery at the grassroots level.”
Bower said that the building officials in other towns have also seen upswings in construction. He anticipates more activity in the future.
Read the full story…
Court Rules on a Long List of Motions in Illinois National Insurance Co v Nordic PCL
May 10, 2012 — CDJ Staff
The case Illinois National Insurance Co. v Nordic PCL, et al. “involves a dispute about whether insurance benefits are available to a general contractor who built structures that allegedly have construction defects. Plaintiffs Illinois National Insurance Company (‘Illinois National’) and National Union Fire Insurance Company of Pittsburgh, PA (‘National Union’) (collectively, the ‘Insurers’), commenced this action for declaratory relief against Defendant Nordic PCL Construction, Inc., f/k/a Nordic Construction, Ltd. ("Nordic"), on August 23, 2011.”
The court was asked to rule on a long list of motions: “Counterclaim Defendants’ Request for Judicial Notice in Support of Their (1) Motion to Dismiss the Counterclaim and (2) Motion to Strike Portions of the Counterclaim, ECF No. 16 (‘Request for Judicial Notice’); Counterclaim Defendants’ Motion to Dismiss Counterclaim Filed October 24, 2011, ECF No. 14 (‘Motion to Dismiss Counterclaim’); Counterclaim Defendants’ Motion to Strike Portions of the Counterclaim Filed October 24, 2011, ECF No. 15 (‘Motion to Strike’); Third-Party Defendant Marsh USA, Inc.’s Motion to Dismiss or, in the Alternative, Stay Proceedings in Favor of Pending State Action, ECF No. 33 (‘Marsh’s Motion To Dismiss Or Stay’); Defendant and Third-Party Plaintiff Nordic PCL Construction, Inc., f/k/a Nordic Construction Ltd.’s Substantive Joinder to Third-Party Defendant Marsh USA Inc.’s Motion to Dismiss or, in the Alternative, Stay Proceedings in Favor of Pending State Action, ECF No. 36 (‘Nordic’s Joinder’); and Third-Party Defendant Marsh USA, Inc.’s Motion for Judgment on the Pleadings on Counts V and VI of Defendant/Third-Party Plaintiff Nordic PCL Construction, Inc.’s Third-Party Complaint, ECF No. 29 (‘Marsh’s Motion for Judgment on the Pleadings’).”
In result, the court reached the following decisions: “The court GRANTS IN RELEVANT PART the Insurers’ Request for Judicial Notice to the extent it covers matters relevant to these motions; GRANTS IN PART the Insurers’ Motion to Dismiss Counterclaim, but gives Nordic leave to amend the Counterclaim in certain respects; DENIES the Insurers’ Motion to Strike; DENIES Marsh’s Motion To Dismiss Or Stay and Nordic’s Joinder; and GRANTS Marsh’s Motion for Judgment on the Pleadings.”
The court provides a bit of background on the case: “This action arises out of alleged construction defects involving two projects on which Nordic acted as the general contractor. Nordic is a defendant in a pending state court action with respect to one of the projects and says it spent more than $400,000 on repairs with respect to the other project. Nordic tendered the defense of the pending state court action to the Insurers and sought reimbursement of the cost of repairs already performed. The Insurers responded by filing this action to determine their rights under the insurance policies issued to Nordic.”
Furthermore, the court presented a brief procedural history: “The Insurers commenced this declaratory action in this court on August 23, 2011. The Complaint asserts two claims, one seeking a declaration that the Insurers have no duty to provide a defense or indemnification regarding the Safeway Action, the other seeking such a declaration regarding the Moanalua Claims. Along with its Answer, Nordic filed a Counterclaim against the Insurers. The Counterclaim asserts breach of contract, breach of the covenant of good faith and fair dealing, misrepresentations and omissions of material fact, and bad faith, and seeks declaratory relief against the Insurers.”
The procedural history continues: “Nordic also filed a Third-Party Complaint against Marsh, the broker that had procured the Policies from the Insurers for Nordic. Nordic alleges that it reasonably believed that the Policies would provide completed operations insurance coverage for the types of construction defects alleged in the Safeway Action and Moanalua Claims. The Third-Party Complaint asserts breach of contract, negligence, promissory estoppel, breach of fiduciary duties, implied indemnity, and contribution and equitable subrogation.”
In conclusion, “The court GRANTS IN RELEVANT PART the Insurers’ Request for Judicial Notice. With regard to the Insurers’ Motion to Dismiss Counterclaim, the court GRANTS the motion as to Count I (breach of contract), Count II (duty of good faith and fair dealing), Count III (fraudulent and negligent misrepresentation), the portion of Count IV (bad faith) premised on fraud, and Count IV (declaratory relief). The court DENIES the motion as to Count IV (bad faith) that is not premised on fraud. Except with respect to the "occurrence" issue, which the court disposes of here on the merits, and Count V, which concerns only a form of relief, Nordic is given leave to amend its Counterclaim within three weeks of the date of this order. The court DENIES the Insurers’ Motion to Strike, DENIES Marsh’s Motion to Dismiss or Stay and Nordic’s Joinder, and GRANTS Marsh’s Motion for Judgment on the Pleadings with respect to Counts V and VI of the Third-Party Complaint.”
Read the court’s decision…
Liability policy covers negligent construction: GA high court
October 31, 2010 — Original article by
Michael Bradford in Business Insurance
ATLANTA—Negligent construction that results in damage to surrounding property constitutes an occurrence under a commercial general liability policy, the Georgia Supreme Court has ruled.
In a 6-1 opinion Monday in
American Empire Surplus Lines Insurance Co. Inc. vs. Hathaway Development Co. Inc., the Georgia high court upheld a lower court ruling that the general contractor’s claim for damage caused by a subcontractor’s faulty plumbing work was covered.
The ruling on construction defects is the latest in number of such cases across the United States
Read Full Story...
Reprinted courtesy of Michael Bradford of Business Insurance.
Celebrities Lose Case in Construction Defect Arbitration
May 26, 2011 — CDJ Staff
An arbitration panel has ruled that problems with the Idaho home of actors Tom Hanks and Rita Wilson were not due to construction defects but rather to “poor design and bad architectural advice.” The couple had settled with the architectural firm, Lake Flato of San Antonio, Texas for $900,000 and was subsequently seeking $3 million from Storey Construction of Ketchum, Idaho.
Problems with the couple’s home “included leaking roofs, inadequate drainage, fireplaces that did not vent properly and an inadequate air-conditioning system. In 2003, sliding snow from the roof damaged kitchen windows and roof components.”
The arbitration panel, according to the report in the Idaho Mountain Express and Guide, noted that “Hanks and Wilson were responsible for the full $167,623 cost of arbitration, but further denied a Storey Construction counterclaim that alleged Hanks and Wilson filed their claim out of malice.”
Read the full story…
Anti-Assignment Provision Unenforceable in Kentucky
December 20, 2012 — Tred Eyerly, Insurance Law Hawaii
On a certified question from the Federal District Court, the Supreme Court of Kentucky decided that an anti-assignment provision in a policy is unenforceable.Wehr Constructors v. Paducah Div. Assur. Co. of Am., 2012 Ky. LEXIS 183 (Ky. Oct. 25, 2012).
Before building an addition to its hospital, Murray Calloway County Hospital purchased a builder's risk policy from Assurance Company of America.The policy provided, "Your rights and duties under this policy may not be transferred without Assurance's written consent . . . ." The Hospital contracted with Wehr Constructors to install concrete subsurfaces and vinyl floors in order to expand the hospital. After installation, a portion of the floors and subsurface work was damaged. The Hospital submitted a claim to Assurance for $75,000, but the claim was denied.
Wehr sued the Hospital to recover money for its work on the construction project. In settling the case, the Hospital assigned to Wehr any claim or rights the Hospital had against Assurance.
Read the full story…
Reprinted courtesy of Tred R. Eyerly, Insurance Law Hawaii. Mr. Eyerly can be contacted at te@hawaiilawyer.com
Surveyors Statute Trumps Construction Defect Claim in Tennessee
June 19, 2012 — CDJ Staff
The Tennessee Court of Appeals has issued an opinion in the case of Dale v. B&J Enters. (Tenn. App., 2012), affirming the ruling of the Chancery Court for Knox County. The homeowners purchased properties in Knoxville, Tennessee in 2007 and 2008. Subsequently, according to the complaint, they found “significant sink holes and depressions throughout the subdivision.” The plaintiffs determined that a previous developer in 2004 had been aware of the sink holes. The Knox County Metropolitan Planning Commission, upon giving approval, made requirements that included that sink holes, even if they were filled, had to be designated on the site plans. The developer did not indicate these locations on the final plans. The plaintiffs made claims of “failure to disclose, misrepresentation, misrepresentation by concealment, and violation of the Tennessee Consumer Protection Act.” They filed their suit in June 2009.
The defendants in the initial case, argued that they did not create the final plat, the site plan indicating the features and lot lines. This had been the work of the previous developer. In September, 2009, the plaintiffs amended their complaint to include the previous developer and its engineering firm. The engineering firm disavowed any responsibility. The developer noted that the surveyor, Benchmark Associates, had “failed to properly include the sink holes and/or depressions on the final plat.” In June, 2010, the plaintiffs added Benchmark.
Benchmark argued that the plaintiffs’ claims should be dismissed, as Tennessee has a four-year statute of limitations on claims against surveyors. The final plat was recorded on May 19, 2006, and the plaintiff filed their claims against Benchmark on June 16, 2010, slightly less than a month over four years. The plaintiffs argued that “the real issue [was] the tortious misrepresentation by Benchmark.” The Chancery Court found for Benchmark.
On appeal, the plaintiffs raised three issues. They argued that the trial court applied the wrong section of the law, and should have applied the section applying to construction and not surveyors. They also argued that the timeliness of the claim should be based on when the defects were discovered. The also raised the question of whether the laws concerning surveyors bar claims for misrepresentation. The appeals court upheld the decision of the Chancery Court.
For the plaintiff’s first claim, although the statute addressing deficiencies in construction mentions surveying, an earlier court ruling found that the legislature had removed a reference to surveyors in one part of the statute, but failed to do so in the second part. The earlier court had concluded that the “obvious intent of the legislature was to place all limits on actions against surveyors into the new statute.” As the applicable statute states that “any such action not instituted within this four (4) year period shall be forever barred,” the court held that the plaintiffs’ claims must be time barred. Further, as the intent of the legislature was determined to “place all limits on actions against surveyors into one statute,” the court felt that it could not apply the Consumer Protection Act.
Read the court’s decision…
Insurer Must Cover Construction Defects Claims under Actual Injury Rule
March 1, 2012 — Tred Eyerly, Insurance Law Hawaii
The Texas Court of Appeals held that the insured need not prove the exact dates physical damage occurred in order to trigger defense and indemnity coverage. Vines-Herrin Custom Homes, LLC v. Great Am. Lloyds Ins. Co., 2011 Tex. App. LEXIS 10027 (Tex. Ct. App. Dec. 21, 2011).
In 1999, the insured built a home. He was insured under a CGL policy issued by Great American from November 9, 1998 to November 9, 2000. Thereafter, the insured held a CGL policy issued by Mid-Continent from November 9, 2000 to September 18, 2002.
After construction was completed, the insured sold the house to the buyer in May 2000. After moving in, the buyer found numerous construction defects in the home, including water entering cracks in the home, and sinking and sagging of parts of the house. The buyer sued the insured, who sought coverage under the two policies. When the insurers refused to defend the underlying suit, the insured sued for a declaratory judgment.
The underlying case went to arbitration and an award of $2.4 million was granted to the buyer. The insured assigned to the buyer his claims against the insurers.
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Reprinted courtesy of Tred R. Eyerly, Insurance Law Hawaii. Mr. Eyerly can be contacted at te@hawaiilawyer.com
Faulty Workmanship Exclusion Does Not Bar Coverage
November 18, 2011 — Tred Eyerley, Insurance Law Hawaii
The court determined that the Faulty Workmanship Exclusion only barred coverage for damages arising from problems with the property under construction itself and not to losses incurred to correct damage from accidents during construction. See 1756 First Associates, LLC v. Continental Casualty Co., 2011 U.S. Dist. LEXIS 117100 (S.D.N.Y. Oct. 3, 2011).
A tower crane collapsed at the construction site, causing damage. First Associates tendered the claim to its insurer, Continental. Continental reimbursed First Associates for certain costs arising from damage to and cleanup of the construction site and building stemming from the crane collapse. Continental refused, however, to reimburse First Associates for costs associated with construction delays resulting from the collapse.
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Reprinted courtesy of Tred R. Eyerly, Insurance Law Hawaii. Mr. Eyerly can be contacted at te@hawaiilawyer.com
Underpowered AC Not a Construction Defect
November 7, 2012 — CDJ Staff
After buying a home in Louisiana, Mike Gines determined that the home’s air conditioning unit was insufficient to maintain an appropriate temperature. He contacted the home builder, D.R. Horton, Inc., which worked with the air conditioning installer, Reliant Heating & Air Conditioning, in order to repair the system. When the problems persisted, Gines filed a class action petition against Horton and Reliant in state court. Horton and Reliant moved the case to the federal courts, whereupon Gines asserted the defendants were in violation of the Louisiana New Home Warranty Act (NHWA). Horton stated that the claim under the NHWA was invalid, because Gines had not alleged actual physical damage to his home.
The district court granted Horton’s motion to dismiss. Gines sought a reversal from the Fifth Circuit Court of Appeals and sought to have two questions of state law addressed by the Louisiana Supreme Court.
The district court ruled that the NHWA was the “sole remedy under Louisiana law for a purchaser of a new home with construction defects. Gines argued that court erred in this, but also conceded that this was the conclusion of the Louisiana Supreme Court.
Further, Gines argued that a provision in the NHWA that allows the inclusion of construction defects that do not cause damage was satisfied by paragraph 6 of the contract. The court noted that Gines did not attach a copy of the contract to either the original or amended complaint, and so the court does not need to address these claims. However, the court cautioned that if a copy had been included, they still would have rejected the claim, as “the cited language does not indicate a waiver of the physical damage requirement.” They also note that “paragraph 13 of the contract shows that Gines was aware to the absence of any such waiver in the contract.”
The court concludes that “the moral of this story is that in order to avoid the harsh result that has obtained here, the buyer of a newly constructed home in Louisiana should seek to obtain in the contract of sale an express waiver of the actual damage requirement of the NHWA.” The appeals court affirmed the decision of the circuit court and denied the application to certify questions to the Louisiana Supreme Court.
Read the court’s decision…
Is There a Conflict of Interest When a CD Defense Attorney Becomes Coverage Counsel Post-Litigation?
September 1, 2011 — Chad Johnson of Higgins, Hopkins, McLain & Roswell, LLC
In Weitz Co., LLC v. Ohio Cas. Ins. Co., the U.S. District Court for the District of Colorado was asked to rule on a motion to disqualify counsel in an insurance coverage action. 11-CV-00694-REB-BNB, 2011 WL 2535040 (D. Colo. June 27, 2011). Motions to disqualify counsel are viewed with suspicion, as courts “must guard against the possibility that disqualification is sought to ‘secure a tactical advantage in the proceedings.’” Id. at *2 (citing Religious Technology Center v. F.A.C.T. Net, Inc., 945 F. Supp. 1470, 1473 (D. Colo. 1996).
Weitz Company, LLC (“Weitz”) is a general contractor and defendant in an underlying construction defect suit which had concluded before the action bringing rise to this order. In the underlying action, Weitz made third-party claims against subcontractors, including NPW Contracting (“NPW”). Weitz was listed as an additional insured under NPW’s policies with both Ohio Casualty Insurance Company and Mountain States Mutual Casualty Company (collectively “the Carriers”). The Carriers accepted Weitz’s tender of defense under a reservation of rights. However, neither insurance carrier actually contributed to Weitz’s defense costs in the underlying action. At the conclusion of the construction defect action, the parties unsuccessfully attempted to apportion the attorney’s fees and costs. Eventually, Weitz brought suit against the recalcitrant carriers. The Lottner firm, which had previously represented Weitz in the underlying construction defect action, continued to represent Weitz in this coverage action.
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Reprinted courtesy of Higgins, Hopkins, McLain & Roswell, LLC. Mr. Johnson can be contacted at johnson@hhmrlaw.com
Construction Law Client Alert: California Is One Step Closer to Prohibiting Type I Indemnity Agreements In Private Commercial Projects
June 15, 2011 — Haight Brown & Bonesteel, LLP
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.
Read the full story…
Reprinted courtesy of Steve Cvitanovic of Haight Brown & Bonesteel, LLP.
Sometimes It’s Okay to Destroy Evidence
August 17, 2011 — CDJ Staff
The Minnesota Supreme Court has ruled in the case of Miller v. Lankow that Mr. Miller was within his rights to remediate his home, even though doing so destroyed the evidence of water intrusion.
Linda Lankow built a home in 1992. In 2001 or 2002, Lankow discovered a stucco problem at the garage which she attributed to moisture intrusion. She asked the original contractor to fix the wall. In 2003, Lankow attempted to sell her home, but the home inspection revealed fungal growth in the basement. Lankow made further repairs, including alterations to the landscaping.
In 2004, Lankow put her house on the market once again and entered into an agreement with David Miller. Miller declined to have an independent inspection, as the home had been repaired by professional contractors.
In 2005, Miller put the house on the market. A prospective buyer requested a moisture inspection. The inspection firm, Private Eye, Inc. found “significant moisture intrusion problems.”
Miller hired an attorney who sent letters to the contractors and to Lankow and her husband. Lankow’s husband, Jim Betz, an attorney, represented his wife and sent a letter to Miller’s attorney that Miller had declined an opportunity to inspect the home.
In 2007, Miller’s new attorney sent letters to all parties that Miller had decided to begin remediation work on the house. All stucco was removed. Miller then filed a lawsuit against the prior owners, the builders, and the realtors.
Two of the contractors and the prior owners moved for summary judgment on the grounds that Miller had spoliated evidence by removing the stucco. They requested that Miller’s expert reports be excluded. The district court found for the defendants and imposed sanctions on Miller.
The Minnesota Supreme court found that “a custodial party’s duty to preserve evidence is not boundless,” stating that “it may be particularly import to allow remediation in cases such as the one before us.” Their reasoning was that “remediation of the moisture intrusion problem in the home may be necessary, even essential, to address immediate health concerns.”
Given that Miller needed to remediate the problem in order to continue living there, and that he had given the other parties a “full and fair opportunity to inspect,” the court found that he was within his rights. The court reversed the judgment of the lower court and remanded it to them for review.
Read the court’s decision…
The Ever-Growing Thicket Of California Civil Code Section 2782
January 6, 2012 — Michael D. Worthing, Borton Petrini
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.
- California Civil Code section 43.99, and sections 895 to 945.5.
- All statutory references in this article are to the California Civil Code unless otherwise specified.
- 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.
- 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.
- 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).
- 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.
- 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.
Negligent Construction an Occurrence Says Ninth Circuit
June 30, 2011 — CDJ Staff
One June 27, the US Court of Appeals has rejected an appeal from Mid-Continent Casualty Company. Mid-Continent had appealed a summary judgment granted to Titan Construction Company.
Titan Construction had built condominiums for the Williamsburg Condominium Association, which later filed a construction defect lawsuit against Titan and other defendants. Titan settled with the developer, Kennydale, assigning its rights against Mid-Continent to Kennydale. Mid-Continent filed suit, claiming that “it had no obligation to indemnify or defend Titan, Kennydale, or various other defendants.” The district court found in favor of Mid-Continent, granting a summary judgment, concluding that Titan’s insurance covered “occurrences,” and none had taken place.
On appeal, the court found that the negligent construction of the condominiums constituted an “occurrence” The case was remanded and the district court this time found in favor of Titan, “concluding that Mid-Continent failed to raise a triable issue as to the applicability of the remaining policy exclusions.
The Ninth Circuit Court of Appeals has now affirmed that decision and Titan’s summary judgment stands.
Read the court’s decision…
Homebuilding Still on the Rise
December 20, 2012 — CDJ Staff
The National Association of Home Builders reports that spending on private homes was up three percent in October 2012, bringing it to a four-year high. This was part of a trend in which fourteen of the last fifteen months have seen increases in spending on residential construction. Likewise, multifamily residences have seen thirteen months of increased spending, putting it 82% higher than its low, two years ago. ¬?In addition to new homes, remodeling is also up, reaching its highest point in five years.
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Colorado Court of Appeals holds that insurance companies owe duty of prompt and effective communication to claimants and repair subcontractors
March 1, 2011 — Courtesy
Colorado Construction LitigationIn Dunn v. American Family Insurance, 09CA2173, 2010 WL 4791948 (Colo. App. Nov. 24, 2010), the Dunns reported a claim to American Family on their homeowners insurance policy after sewer and water backup caused sewage to flood their basement. American Family gave the Dunns contact information for a contractor (ICA) to remediate the flooding. However, ICA was unsuccessful and sewage began to infiltrate the Dunns’ HVAC system. Subsequently, black mold was detected in the HVAC system, the Dunns suffered health and respiratory problems, and they soon after vacated the home. The Dunns hired and fired two more contractors for unsatisfactory work throughout the winter before hiring a fourth to finish the job. Because the home remained vacant and unheated throughout the winter, the water pipes ruptured. The mold spread throughout the entire home and all of the contents needed to be replaced, which amounted to a claim of $340,000 on the policy.
American Family agreed to pay the full $340,000. However, the Dunns brought suit claiming that American Family breached the implied duty of good faith and fair dealing by: 1) failing to screen ICA for expertise; 2) failing to screen ICA for liability insurance coverage; 3) failing to monitor ICA’s work; 4) failing to advise them that flooding can cause further damage, including freezing pipes and mold; and, 5) failing to adequately and promptly communicate with them and remediation subcontractors in the course of investigating and handling their claim. The trial court found no duty owed by American Family beyond adjustment and timely payment of claims. Because American Family paid timely and in full, they dismissed all of the Dunns’ claims. However, the Court of Appeals reversed in part.
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Reprinted courtesy of Chad Johnson, Higgins, Hopkins, McLain & Roswell, LLC. Mr. Johnson can be contacted at johnson@hhmrlaw.com
Arbitration Clause Found Ambiguous in Construction Defect Case
October 28, 2011 — CDJ Staff
The California Court of Appeals ruled on September 28 in the case of Burch v. Premier Homes. Ms. Burch bought a home after negotiating various addendums to the contract. The contract was a standard California Association of Realtors contract to which both the buyer and seller made additions. At issue in this case was paragraph 17 of the contract which included that “Buyer and Seller agree that any dispute or claim in Law or equity arising between them out of this Agreement or resulting transaction, which is not settled through mediation, shall be decided by neutral, binding arbitration.”
The seller/defendant’s Addendum 2 “included provisions relating to the arbitration of disputes that may arise.” Ms. Burch’s realtor, Lisa Morrin, told Burch that “she had never seen a proposed contractual provision that would require a home buyer to agree to arbitrate with a builder over construction defects.” Ms. Burch told Morrin that she did not want to buy the property if she would have to give up her rights under California law.
As part of Addendum 2, the buyer had to buy a warranty from the Home Buyers Warranty Corporation. The sale was held up for a while, as Ms. Burch waited for a copy of the warranty. When she received it, she took further exception to Addendum 2. Scott Warren of Premier Homes said he could not sell the property without Addendum 2. Ms. Burch told her realtor that despite the claims made by Mr. Warren that this was for her benefit, she felt it was more to the benefit of Premier Homes. Don Aberbrook of HBW agreed to the clause, contained in the final sentence of Addendum 2, being struck.
Subsequent to buying the home, Burch submitted a claim concerning construction defects. HBW denied the claim and Burch began an action against the defendants. Premier filed a motion to compel arbitration which Burch opposed.
The trial court ruled that the striking out of the arbitration clause at the end of Addendum 2 “created a conflict with respect to the parties’ intent as to the scope of arbitration.” The trial court found that “the parties’ intention was to preserve Burch’s right to make state law claims including her right to a jury trial for any non-warranty claims against the builder.”
The appeals court in their ruling looked at the standard of review and concluded that the purchase agreement was ambiguous and that extrinsic evidence was required to resolve that ambiguity. As the contract contained contradictory provisions as to whether or not arbitration was required, it was necessary for the trial court to examine these claims. The appeals court found that the evidence supported the conclusions of the trial court.
Finally, the appeals court found that “there was no valid agreement to arbitrate disputes.” The court noted that arbitration can only happen by mutual consent and “it is clear that Burch did not enter into an agreement to arbitrate any construction defect disputes she might have.”
Read the court’s decision…
Claims Under Colorado Defect Action Reform Act Count as Suits
July 10, 2012 — CDJ Staff
The Colorado Court of Appeals has affirmed the judgment of the lower court in Melssen v. Auto-Owners Insurance. The Melssens built a custom home for the Holleys, during which time the Melssens retained a comprehensive general liability policy from Auto-Owners, which “obligated Auto-Owerns to defend the Melssens with respect to any ‘suit’ seeking damages for ‘property damage’ during the policy period.” Soon after the house was constructed, cracks developed in the drywall, then outside stucco and basement slab. The Holleys contended that “approximately $300,000 of damages to the Holleys’ property was caused by the Melssens’ engineering and construction defects” and filed a claim under the Colorado Defect Action Reform Act (CDARA). The Melssens “demanded Auto-Owners defend and indemnify the Melssens and forwared Auto-Owners the notice of claim.”
Although the Melssens notified Auto-Owners in June 2008, it was not until October 2008 that Auto-Owners denied coverage stating that the claims were sustained outside the policy period. The Melssens filed an action against Auto-Owners. At trial, the jury ruled in favor of the Melssens awarding them damages, to which the trial court added costs and attorney fees.
On appeal, Auto-Owners contended that the trial court erred in allowing the Melssens to argue that the CDARA notice of claim “was the functional equivalent of a complaint commencing a suit.” The appeals court found that “the CDARA notice of claim process constituted an alternative dispute resolution proceeding under the policy.” The court agreed that jury should not have been asked to determine if a CDARA action is a “suit,” but as the jury found for the Melssens, the concluding it “constituted harmless error.” Further, the court found that an action under the CDARA satisfied the definition of a “suit.”
The court found for the Melssens, affirming the lower court’s decision and remanding the case to the lower court for the awarding of appeals costs to the Melssens.
Read the court’s decision…
