ANAHEIM CALIFORNIA CONSTRUCTION EXPERT WITNESS
DIRECTORY AND CAPABILITIES

Analysis of the “owned property exclusion” under Panico v. State Farm

The U.S. Court of Appeals for the Tenth Circuit recently concluded that the “owned property exclusion” applied to bar coverage for claims of property damage. See Panico v. State Farm Fire and Cas. Co., 2011 WL 322830 (10th Cir. 2011). In Panico, the plaintiffs sold property in Aspen, Colorado to the Taylors, who sued the Panicos upon discovering the property was not as represented. After refusing to defend, the Panicos sued State Farm for breach of contract. The district court concluded that the Taylors’ claims were not covered under the Panicos insurance policies and granted summary judgment in State Farm’s favor. The U.S. Court of Appeals for the Tenth Circuit affirmed.

Mr. Panico built the house on the property as well as several additions to the house. As the Taylors lived in Florida, they primarily relied on their real estate agent and an inspector to ensure the property was acceptable. According to their complaint, the Taylors discovered that the house was “virtually uninhabitable due to serious design and construction defects, mold, rodents, and drainage problems.” Id. at *1. In their complaint, the Taylors asserted three claims for relief against the Panicos based upon misrepresentation and fraudulent concealment about the condition of the property.

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Reprinted courtesy of Heather M. Anderson of Higgins, Hopkins, McClain & Roswell, LLP. Ms Anderson can be contacted at anderson@hhmrlaw.com

Colorado Court of Appeals Finds Damages to Non-Defective Property Arising From Defective Construction Covered Under Commercial General Liability Policy

The recently decided case of Colorado Pool Systems, Inc. v. Scottsdale Insurance Company (Colo. Ct. App. 10CA2638, October 25, 2012), confirms that absent specific exclusions in the policy, a commercial general liability (“CGL”) policy covers damages to non-defective property arising from a builder’s own defective workmanship.

Colorado Pool Systems, Inc. (“Colorado Pool”) was hired as a subcontractor to install a swimming pool at Founders Village Pool and Community Center (“Founders Village”) in Castle Rock, Colorado.  After the concrete shell of the pool was placed, some of the rebar frame was found to be too close to the surface.  Founders Village demanded that Colorado Pool remove and replace the pool, and Colorado Pool contacted its insurance carrier, Scottsdale Insurance Company (“Scottsdale”), with which Colorado Pool held a CGL policy.  After inspecting the pool, Scottsdale’s claims adjuster stated that the insurance policy would cover losses associated with removing and replacing the pool.

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Reprinted courtesy of Heidi Gassman, Higgins, Hopkins, McLain & Roswell, LLC. Ms. Gassman can be contacted at gassman@hhmrlaw.com

Statute of Limitations Upheld in Construction Defect Case

The Missouri Court of Appeals has ruled in Ball v. Friese Construction Co., finding that Mr. Ball’s claims were barred by the statute of limitations.

Mr. Ball hired Friese Construction Company to build a single-family home. The sale was completed on March 29, 2001. That December, Mr. Ball complained of cracks in the basement floor. SCI Engineering, n engineering firm, hired by Friese, determined that the home’s footing had settled and recommended that Mr. Ball hire a structural engineer to determine if the footings were properly designed and sized. In September 2002, the structural engineer, Strain Engineering, determined that the cracks were due to slab movement, caused in part by water beneath the slab, recommending measures to move water away from the foundation. In 2005, Mr. Ball sent Friese correspondence “detailing issues he was having with the home, including problems with the basement slab, chimney structure, drywall tape, and doors.” All of these were attributed to the foundation problems. In 2006, Friese stated that the slab movement was due to Ball’s failure to maintain the storm water drains.

In 2009, Ball received a report from GeoTest “stating the house was resting on highly plastic clay soils.” He sued Friese in May, 2010. Friese was granted a summary judgment dismissing the suit, as the Missouri has a five-year statute of limitations. Ball appealed on the grounds that the extent of the damage could not be determined until after the third expert report. The appeals court rejected this claim, noting that a reasonable person would have concluded that after the conclusion of SCI and Strain Engineering that “injury and substantial damages may have occurred.”

The court concluded that as there were not “continuing wrongs causing new and distinct damages,” he should have filed his lawsuit after the first two expert reports, not waiting seven years for a third expert to opine.

Read the court’s decision…

Federal Judge Dismisses Insurance Coverage Lawsuit In Construction Defect Case

A federal judge dismissed a coverage lawsuit brought by Mid Continent Casualty Company against its insured, Greater Midwest Builders Ltd.

Plaintiff brought this declaratory judgment action in response to a suit filed in Johnson County District Court, seeking a judicial determination that it had no coverage obligation for claims asserted against its insured. This case was stayed until the state court action entered judgment against the insured. The prevailing parties then commenced a garnishment action against the plaintiff, and another insurance company, in state court in Missouri. The court was asked whether it should lift the stay and proceed with the case, or decline jurisdiction in favor of resolution in the Missouri state court.

The court granted the motion to dismiss holding that proceeding with the case would lead to protracted, piecemeal litigation, while deferring to the Missouri state court would decide all the claims involved in the dispute.

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Construction Defect Litigation at San Diego’s Alicante Condominiums?

According to recent posts in the Alicante HOA website, construction experts and legal counsel have been retained. The HOA board has been informed that testing of a variety of the building’s components are underway or will begin in the near future.

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Seven Tips to Manage Construction Defect Risk

Jody T. Wright looks at “seven strategies being used around the country to identify, manage and mitigate your exposures” in a piece in Business Insurance. Wright, Senior VP, Construction Department Manager for Lockton Companies in Denver, gives seven simple steps from the perspective of a insurer.

His first step is to match your project to your insurance. He suggests keeping the riskier projects separate, noting that from an insurer’s point-of-view, “any project that creates a homeowners association carries a higher potential threat of future litigation.” This leads to his second point: you need to “determine what makes your liability insurer nervous.” In other words, talk with your insurer.

His third point suggests that builders look back and see if there is a pattern of problems that have lead to payouts from your insurer. Keep your insurer happier by making sure these areas don’t continue to be problems. Nor should you look for new problems. He suggests against leading in new technologies.

Three more points deal with being careful about with whom you associate. He tells builders to negotiate their contracts, avoiding clauses that would obligate a builder to “indemnify the owner for the negligent work of others that they did not control.” Avoid subcontractors “with loss patterns that might affect your project and reputation.” Builders should identify “owners with a pattern of suing contractors” adding that risk to the cost of the job. They should also identify “the most effective attorneys and expert witnesses” and get them involved before the litigation starts.

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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.

Contractor Liable for Soils Settlement in Construction Defect Suit

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

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

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

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

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

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

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

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

Read the court’s decision…

Residential Construction: Shrinking Now, Growing Later?

Jim Haugey, the Chief Economist for Reed Construction Data noted that new residential construction spending fell 0.2% in June and a slightly larger drop of 0.5% in residential remodeling. While economic growth is still low, Haugey states that homebuilders have “record low inventories.” He forecasts a shrinkage of 1.5% in 2011, followed by about 20% growth in 2012.

Read the full story…

Judge Okays Harmon Tower Demolition, Also Calls for More Testing

Vegas.Inc reports that Clark County District Court Judge Elizabeth Gonzalez has permitted the demolition the tower, which MGM Resorts has claimed is a safety hazard. Perini Building Co. claims that the building does not need to be demolished. CityCenter claims that repairing the building would take nearly a year longer than a demolition and cost about $200 million. Further, CityCenter assumes that the building’s reputation would cost it another $30 million.

Subsequently, Judge Gonzalez ruled that the pattern of destructive testing would not support a claim that there were an estimated 1,400 defective items in the building. An attorney for CityCenter, Steve Morris, has suggested that they may seek more testing, impossible to do once the building is demolished. CityCenter issued a statement that “nearly every time CityCenter has chipped away concrete to review structural work at the Harmon, we have found defects.” They describe the building as “unusable.”

Tutor Perini contends that it “remains confident that it will prevail when the issues of safety, reparability and responsibility for the issues facing the Harmon tower are considered.

Read the full story…

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…

Homeowners Not Compelled to Arbitration in Construction Defect Lawsuit

A California appeals court has ruled that developers cannot enforce CC&Rs in a case where a developer cited an arbitration clause it had inserted into the CC&R. The homeowners are alleging construction defect and wished to sue the developer who claimed a right to this under the CC&Rs.

The Marina del Rey Argonaut reports that particular appeal dealt only with whether the developer could compel arbitration. The underlying construction defect issues will subsequently have to be determined at trial.

The attorney for the homeowners’ association, Dan Clifford, noted that “arbitration has to be agreed to by both parties.” The covenant was drafted by the developer and in addition to requiring arbitration, it had a clause that it could not be amended without the consent of the developers. The court ruled that CC&Rs “can be enforced only by the homeowners association, the owner of a condominium or both.”

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The Complete and Accepted Work Doctrine and Construction Defects

Matthew C. Bouchard of Lewis & Roberts PLLC, writes how North Carolina is “bucking the trend” on the “complete and accepted work doctrine.” As he notes, in most states “a contractor can be found liable for personal injuries suffered by third parties from accidents occurring after the contractor’s work is completed and accepted.” But one exception is North Carolina.

He gives the example of a case, Lamb v. D.S. Duggins Welding, Inc., in which a site superintendent was “injured by the alleged negligence of the project’s steel deck installer, a sub-subcontractor in the contractual chain” “after the sub-sub’s work had been completed and accepted.” The trial court held that the “completed and accepted work doctrine” ended the subcontractor’s liability. The case noted that “employees of the general contractor had modified the installation of the perimeter safety cable in question after the sub-sub had demobilized from the site.”

Mr. Bouchard notes that “once a project is accepted and turned over, the contractor typically loses control over maintenance of the new facility.” However, he notes that “where the contractor’s work constitutes negligence ?Ķ the doctrine may not apply.” Nor does it end breach of contract claims. It only covers third parties.

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Construction Spending Dropped in July

Bloomberg News reports that after four months of gains in construction spending, July saw a drop of 0.9 percent, wiping out June’s gain of 0.4 percent. Despite the overall decline in spending, there was an increase of 1.5 percent in expenditure on building new single-family homes and 2.8 percent on multifamily residential construction.

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Texas Construction Firm Files for Bankruptcy

A Texas construction firm, founded in 1937, filed for bankruptcy, bringing twenty-two projects to a sudden halt, and resulting in the loss of jobs for hundreds of employees. Ballenger Construction told its employees to go home, as it could not complete the jobs. In some cases, work will need to be done to ensure that the work sites do not cause public safety hazards.

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Home Repair Firms Sued for Fraud

The Illinois Attorney General has filed a lawsuit in Cook County Circuit Court alleging that two connected firms took money from homeowners and then failed to perform the contracted work. One of the three defendants, Chris Bidigare, was an owner of agent of both Fairway Construction and Maintenance Services, LLC, and Rock Construction Management, LLC.

In once case, according to the article on the OakPark Patch, one homeowner provided a $111,000 down payment, only to have the company cancel the job and refuse to return the money. One homeowner was told by Fairway that she should contact their insurance provider. The insurance provider told her that Fairway’s insurance had been cancelled due to non-payment.

The suit seeks to bar the three defendants from working in home repair in Illinois.

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Florida trigger

In Mid-Continent Casualty Co. v. Siena Home Corp., No. 5:08-CV-385-Oc-10GJK (M.D. Fla. July 8, 2011), insured residential real estate developer Siena was sued by homeowners seeking damages for moisture penetration property damage resulting from exterior wall construction defects. Siena’s CGL insurer Mid-Continent filed suit seeking a declaratory judgment of no duty to defend or indemnify in part on the basis that the alleged “property damage” did not manifest during the Mid-Continent policy period.

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Reprinted courtesy of CDCoverage.com

SB800 Cases Approach the Courts

California’s Right to Repair Law turns ten this year and cases under the statute are finally coming to trial, as John V. O’Meara of Bremer Whyte Brown & O’Meara writes for the Martindale-Hubble Legal Library. Mr. O’Meara notes that SB800 eliminated “the traditional definitions of construction defect,” replacing them with “functionality standards.” He argues that these standards are not uniform: “some standards require damage and others do not.” He also wonders what terms like “significant cracks,” “intended water” and “materially comply” mean in a court.

Mr. O’Meara states that “defendants in construction defect cases have a right to know the standards that apply to a case, the definitions that will be presented to the jury, and the burden of proof that attaches.”

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