And the Winner Is . . . The Right to Repair Act!

Garret Murai | California Construction Law Blog | February 7, 2018

Civil litigation attorneys often talk about “damages.” Because without damages . . .  well . . . you’re out of luck.

But damages come in different flavors. In construction litigation, when it comes to defective construction, there are two basic flavors: actual damages and economic damages. Actual damages include property damage and personal injury, such as a defective roof that causes water damage into the interior of the structure or collapses causing injury to someone inside the structure. In contrast, economic damages would be the cost to repair or replace the defective roof, without any resulting property damage or personal injury.

Background

In Aas v. Superior Court (1998) 64 Cal.4th 916, the California Supreme Court held that economic damages arising from construction defects are not recoverable if the basis for liability is negligence or strict liability. Note, however, that Aas does not limit the ability of a plaintiff to sue for negligence or strict liability for actual damages, and the court’s decision does not limit the ability of a plaintiff to sue for economic damages if the basis for liability is breach of contract.

In response, the California legislature enacted SB 800, also known as the Right to Repair Act (Civil Code sections 895 et seq.), to limit Aas. The Right to Repair Act permits homeowners of newly constructed residential housing, including single family homes and condominiums (but not condominium conversions), to sue for economic damages alone, if the residential housing does not meet the construction standards set forth under the Right to Repair Act and the homeowner has gone through the prelitigation procedures provided under the Act.

Until this past month, there’s been an open question regarding whether homeowners have to comply with the Right to Repair Act’s prelitigation procedures if they are only claiming economic damages or if homeowners have to comply with the Right to Repair Act’s prelitigation procedures when claiming both economic damages and actual damages or actual damages alone. The California Courts of Appeal have reached contrary decisions. See our blog posts on Liberty Mutual Insurance Company v. Brookfield Crystal Cove LLC (2013) 219 Cal.App.4th 98 (holding that the Right to Repair Act does not apply to claims for actual damages); McMillin Albany LLC v. Superior Court (2015) 239 Cal.App.4th 1132 (holding that the Right to Repair Act also applies to claims for actual damages); and Gillotti v. Stewart (2017) 11 Cal.App.5th 875 (holding that the Right to Repair Act also applies to claims for actual damages).

McMillin Albany LLC v. Superior Court

Resolving this appellate court split, the California Supreme Court granted review of the Fifth District Court of Appeals decision in McMillan, and this past month issued a unanimous decision in McMillin Albany LLC v. Superior Court, Case No. S229762 (January 18, 2018).

Analyzing the Right to Repair Act and its legislative history, the California Supreme Court held that following the Aas decision, while “the [California] Legislature preserved common law claims for personal injury, it made the [Right to Repair] Act the virtually exclusive remedy not just for economic loss but also for property damage arising from construction defects.” Thus, held the Supreme Court:

  1. Economic Damages: As to economic damages, “a party suffering economic [damages] from defective construction may now bring an action to recover these damages under the [Right to Repair] Act without having to wait until the defect has caused property damage or personal injury.” (Note: Although the Supreme Court states “now,” it was already well understood that homeowners claiming economic damages were required to comply with the prelitigation procedures of the Right to Repair Act before filing suit).
  2. Property Damage: As to property damage, “the [Right to Repair] Act expressly includes property damages resulting from construction defects among the categories of damages recoverable under the Act,” and thus, the Right to Repair Act provides “the exclusive way to recover such damages.”
  3. Personal Injuries: As to personal injuries, “personal injury damages are not listed as a category recoverable under the [Right to Repair] Act,” and thus, “[t]his omission places personal injury claims outside of the scope of [the Act].”

In addition to addressing the types of damage claims subject to the Right to Repair Act, the California Supreme Court also addressed whether a homeowner can bypass the Right to Repair Act’s prelitigation procedures if the homeowner claims a construction defect not specifically addressed in the construction standards of the Right to Repair Act. The Supreme Court held that a homeowner could not. The Supreme Court explained that in addition to the specific construction standards set forth under the Right to Repair Act, Civil Code section 897 also provides a “catchall standard” that provides that “[t]o the extent that a function or component of a structure is not addressed by these standards, it shall be actionable if it causes damages,” and that this “catchall standard” requires that construction defects not specifically addressed under the construction standards of the Right to Repair Act (whether they cause economic damages or property damages) must also  comply with the Right to Repair Act’s prelitigation procedures.

Conclusion

The California Supreme Court’s decision in McMillin is a big win for builders, general contractors, subcontractors, material suppliers, manufacturers, and design professionals and clarifies that for newly constructed residential housing purchased on or after January 1, 2003:

  1. With the exception of claims for personal injuries, claims for both economic damages, as well as property damage, are subject to the prelitigation procedure set forth under the Right to Repair Act; and
  2. The Right to Repair Act applies to all construction defect claims including construction defects not specifically addressed under the construction standards of the Right to Repair Act.

Although homeowners suffered a loss under McMillin, homeowners still have the ability even after the decision, to bring a claim for personal injuries, breach of contract, fraud and strict liability without first having to comply with the Right to Repair Act’s prelitigation procedures.

Washington Legislature to Consider Reforms to Statute Governing Residential Construction Disputes

Grant S. Degginger | Lane Powell PC | January 31, 2018

Efforts are now underway in both houses of the Washington legislature to improve the legal landscape for residential construction defect litigation by adding a mediation option similar to what has been common in commercial and public works contracts.

The House Judiciary Committee is considering House Bill 2475, a bill introduced by Representative Cindy Ryu (D-Shoreline). Meanwhile, Senator Mark Mulle (D-Issaquah) has filed a similar proposal, Senate Bill 6523. Both bills propose several changes to RCW 64.50, the statutes governing the prerequisites for filing a residential construction defect lawsuit. As currently written, the statute requires a homeowner or a condominium association to serve a written notice on any construction professional (defined to include any contractor, subcontractor, developer, declarant, architect, engineer and/or inspector) detailing the defect at issue 45 days before filing suit. The construction professional then has 21 days to serve a written response to the notice proposing one of three options:

  • Propose to inspect the residence within a specified period of time and based upon the inspection offer to remedy the defect, compromise by making a cash payment or dispute the claim;
  • Offer to compromise and settle the claim with a monetary payment without inspection. The offer may include a proposal to purchase the residence that is subject of the claim and pay the claimant’s reasonable relocation costs; or
  • State that the construction professional disputes the claim and will not remedy the construction defect or offer to compromise and settle the claim.

The bills would revise the notice and opportunity to cure process and they would add mediation as a fourth option. Thus, a construction professional could respond to a notice of construction defect by offering to mediate, which would give the claimant 30 days to serve an acceptance or rejection of the offer to mediate. If the claimant rejects the mediation offer, then the notice and opportunity to cure process is terminated. If the mediation is accepted, then the parties have 30 days to do the following:

  • Select a mediator;
  • Agree on a mediation date;
  • Agree on what materials will be submitted at mediation;
  • Complete their respective investigation of the alleged defects;
  • Disclose each party’s proposed repair plan and the estimated costs of repair; and
  • Any other deadlines mutually agreed to by the parties.

The parties can mutually agree to modify the deadlines and the selected mediator is permitted to unilaterally extend deadlines by no more than 90 days.

The bills currently have a provision that allows either party to terminate the mediation process without cause and without costs. Given the time and expense that the parties may have incurred preparing for a construction defect mediation, including the mediator’s time, investigation and expert costs, it only would be fair to require that the party who terminates the mediation should pay at least the cost of any lost deposits for the mediator’s services. Although not currently in the proposed legislation, such an amendment would be reasonable.

The bills also extend the applicable statutes of limitations and repose following service of a claim under RCW 64.50.020 from 60 days after the period of time which the filing of an action is barred until 105 days after termination of the notice and opportunity to cure process; however, the new tolling period applies to claims by one construction professional against another construction professional only if the construction professional serves the claimant’s notice of claim upon the other construction professional within 60 days of receipt of the notice of claim or the amended notice of claim.

Many construction contracts for commercial or public works projects attempt to encourage early claim resolution by requiring the parties to engage in mediation before they can commence litigation. This bill seeks to extend this practice to the field of residential construction. The objective is that the mediation option will encourage early case assessments and timely resolution of disputes.

CA Supreme Court Clarifies Scope of Right to Repair Act

Kevin Meade and Scott Halberstadt | The Amin Law Group | February 1, 2018

After a long wait, the California Supreme Court issued its opinion in McMillin Albany, LLC v. Superior Court regarding the application and interpretation of California’s Right to Repair Act (the comprehensive statutory scheme for construction defect claims for newly built residences; also known as “SB800”; hereafter “the Act”).  In its unanimous ruling, the court clarified that the Act is “the virtually exclusive remedy not just for economic loss but also for property damage [claims] arising from construction defects”.  As such, the court held that the underlying litigation brought by the homeowners was subject to the Act’s prelitigation procedures, and the Court of Appeal was correct to order a stay on the litigation until the homeowners followed those procedures.  In addition to having shortened statutes of limitations, the Act also gives builders the option to either inspect the property and offer repairs, or to proceed directly into litigation with the homeowner.  The court held that even if a plaintiff tries to plead around the Act, the builder can still enforce the right to repair, as the Act was intended by the legislature to supplant common law causes of action like negligence and strict liability.

We wrote about this issue last year, noting that two of the six appellate districts in California had previously issued opinions in line with the Supreme Court’s (later) ruling in McMillin.  Clarity from the high court was needed after uncertainty had resulted in the construction defect (“CD”) community in California after the 4th Appellate District Court issued its opinion in Liberty Mutual Ins. Co. v. Brookfield Crystal Cove LLC in 2013, holding that the pre-litigation procedures in the Act are mandatory only where the homeowners plead statutory causes of action under the Act.  In Liberty Mutual, the court held that since the homeowners only brought causes of action in common law (i.e., negligence and/or strict liability), and did not include any claims under the Act, the pre-litigation procedures in the Act, including the automatic stay, did not have to be followed.  We noted at the time that while the Supreme Court had not yet issued its opinion in McMillin, the two appellate rulings regarding the Act were “a source of optimism to those in favor of overturning Liberty Mutual.”

The genesis of the creation of the Act is found in Aas v. Superior Court (2000) 24 Cal.4th 627, 632 (Aas), where the California Supreme Court held that the economic loss rule bars homeowners suing in negligence for construction defects from recovering damages where there is no showing of actual property damage or personal injury.  Emphasizing long-standing case law, the court in Aas explained that requiring a showing of more than mere economic loss was necessary to preserve the boundary between tort and contract theories of recovery, and to prevent tort law from expanding contractual warranties beyond what home builders had agreed to provide.  The court essentially invited the California Legislature to alter the Aas limits on recovery and to add whatever additional homeowner protections it desired.  Within two years, after the stakeholders in California’s CD community (homeowner and home builder construction interest groups) provided significant input, the Legislature passed the Act.

The court’s opinion in McMillin focused on the intent of the Legislature in enacting the Act and concluded that the Act was intended not to merely alter the common law (i.e. abrogating Aas by supplementing common law remedies with a statutory claim for purely economic loss), but rather to supplant the common law “with new rules governing the method of recovery in actions alleging property damage.” Where the court held that the Act is “the virtually exclusive remedy” for economic loss and property damage claims arising from construction defects, it made clear that the only areas that the Legislature intended to preserve for common law claims in a residential CD setting are breach of contract, fraud and personal injury.  “For economic losses, the Legislature intended to supersede Aas and provide a statutory basis for recovery,” the court wrote, adding for personal injuries, the Legislature preserved the position and kept the common law as an avenue for recovery. “And for property damage, the Legislature replaced the common law methods of recovery with the new statutory scheme.”

The opinion provided the following concise summary of its key finding, as follows:

 

“[T]he legislative history confirms what the statutory text reflects:  the Act

was designed as a broad reform package that would substantially change

existing law by displacing some common law claims and substituting in

their stead a statutory cause of action with a mandatory prelitigation process.”

 

Prior to the Supreme Court ruling in McMillin, it was typical for plaintiffs to ignore the pre-litigation notice and procedures contained in the Act, thereby depriving homebuilders of the benefits associated with that notice and procedures.  With this ruling, the state court judges in California now have clarity that the Act serves as plaintiffs’ exclusive remedy for economic loss and property damage claims in the residential construction setting.

 

 

 

Kevin Meade is an attorney at The Amin Law Group.

Scott Halberstadt is an attorney at The Amin Law Group.

CA Supreme Court: Right to Repair Act (SB 800) is the Exclusive Remedy for Residential Construction Defect Claims – So Now What?

Steven M. Cvitanovic | Haight Brown & Bonesteel | January 25, 2018

A torrent of alerts have been flooding e-mail inboxes regarding the California Supreme Court’s decision in McMillin v. Superior Court, to reverse the Liberty Mutual Insurance Company v. Brookfield Crystal Cove LLC (2013) case, but with little discussion about the practical effects of the ruling.This alert will discuss how this ruling affects litigation of SB 800 Claims and Builders.

Background on Liberty Mutual Case

In 2002, the California Legislature enacted comprehensive construction defect litigation reform referred to as the Right to Repair Act (the “Act”). Among other things, the Act establishes standards for residential dwellings, and creates a prelitigation process that allows builders an opportunity to cure the construction defects before being sued. Since its enactment, however, the Act’s application has been up for debate. Most notably, in Liberty Mutual Insurance Company v. Brookfield Crystal Cove LLC (2013), the California Court of Appeal for the Fourth District held the Act was the exclusive remedy only in instances where the defects caused only economic loss, and that homeowners could pursue other remedies in situations where the defects caused actual property damage or personal injuries.

Liberty Mutual remained the law of the land until the Fifth District issued a contrary ruling in McMillin Albany LLC v. The Superior Court of Kern County. In McMillin, the homeowners sued the builders for negligence, strict product liability, breach of contract, breach of warranty, and violations of the Act. In turn, the builders asked the homeowners to stay the litigation so that the parties could proceed with the Act’s prelitigation requirements – that is, so that the builders could have an opportunity to cure the defects. The homeowners did not agree to the stay, and instead withdrew their claim under the Act. The builders subsequently moved to stay the action, which the trial court denied based on Liberty Mutual. The builders appealed. The Fifth District sided with the builders, holding the Act’s prelitigation progress applied even though the homeowners had dismissed their statutory claim under the Act. The California Supreme Court subsequently granted review to resolve the District split between Liberty Mutual and McMillin.

The California Supreme Court Decision

The California Supreme Court recently held, after a lengthy discussion on legislative intent, that the Act is the virtually exclusive remedy not just for economic loss but also for property damage arising from construction defects. In doing so, the Court made three critical findings: 1) the prelitigation requirements apply to “any action” seeking damages for construction defect, not just those brought under the Act; 2) a homeowner who suffers only economic loss may present a claim under the Act without waiting for the defect to cause actual property damage; and 3) the Act preserves common law tort claims for construction defects resulting in personal injury. In light of these findings, the Court ruled that even though the homeowners had withdrawn their claim under the Act, they were nonetheless required to initiate the prelitigation procedures because their alleged damages arose from construction defects of the residential homes.

How Does the Ruling Affect Builders – and their Lawyers?

This decision should speed up litigation and reduce attorneys’ fees for Builders. As attorneys for Builders can appreciate, complaints that contain common law causes of action are a major distraction; we are forced to spend time evaluating theories of liability that Liberty Mutual said were not pre-empted by SB 800. This additional work increased the cost of the litigation for Builders and their insurers, which obviously the Plaintiffs’ attorneys liked because it increased settlement leverage. Now, McMillin returns the legal landscape back to where it should have been, restoring more order to the legal process.

So now that Plaintiffs’ lawyers are relegated to litigating under SB 800, the Builders should hold the Plaintiffs’ lawyers feet to fire in the Prelitigation Procedure and demand a dismissal of prematurely filed claims. Plus, Builders need to look at instituting the Right to Repair on a case-by-case basis. If there is a claim involving a small number of homes, it may make sense to perform repairs, whereas repairs in large cases with dozens of homes may not make sense. Before performing repairs, Builders should check to see if the repairs count against a self-insured retention, since frequently they are not.

McMillin is a win for builders of residential homes because it returns clarity to the legal process and eliminates disputes about common law theories of liabilities. This should ease some of the fees associated with these cases and speed them up towards a resolution. And just as importantly, it decreases Plaintiffs’ settlement leverage, which is always a good thing.

This document is intended to provide you with information about construction law related developments. The contents of this document are not intended to provide specific legal advice. This communication may be considered advertising in some jurisdictions.

Florida Supreme Court Confirms 558 is Not a Civil Proceeding, Allowing Contractors and Design Professionals to Resolve Defect Disputes as Intended by the Legislature

Brian A. Wolf and Joseph R. Young | Smith Currie & Hancock | December 14, 2017

Contractors and design professionals are entitled to notice of alleged defects in their work and the opportunity to fix them without intervention by insurance companies and needless litigation. Today, Florida’s Supreme Court in Altman Contractors, Inc. v. Crum & Forster Specialty Insurance Co., No. SC15-1420 (Dec. 14, 2017), held that the Florida Statute Chapter 558 dispute resolution process is not a civil proceeding. This means that contractors and subcontractors who receive a 558 demand are free to participate in the notice and right to cure process without notifying their insurers of non-covered claims for construction defects unless otherwise specified in their insurance policy.

Chapter 558, Florida Statutes, was enacted almost 15 years ago with the express purpose of resolving construction defect claims without expensive and time-consuming litigation. Chapter 558 was originally known as the notice and right to cure statute. Unfortunately, the statute is now more commonly referred to as the “construction defect statute.” The trend has been for owners, contractors and design professionals to engage in expensive and protracted processes often lead by condo-lawyers and their engineering consultants, and on the other side, insurance companies, their lawyers and adjusters.

In Altman Contractors, Inc. v. Crum & Forster Specialty Insurance Co., the contractor’s reaction to an extensive 558 notice was an attempt to force its insurer to pay for the 558 process. Altman Contractors argued that its commercial general liability policy contractually obligated its insurance company to defend against the 558 process because it was no different than a lawsuit. Altman attempted to convince the Supreme Court that the 558 notice and right to cure process was a “civil proceeding” as defined by language of their insurance policy.

The Supreme Court expressly held that the chapter 558 presuit process is a mechanism for resolving disputed construction defect claims but it is not a civil proceeding. The Court reasoned that chapter 558 is a notice and repair process which is not equivalent to a lawsuit because participation is voluntary and does not involve a third-party acting like a judge. The Court noted that the 558 process does not take place in a court setting and the parties are free to resolve or not resolve the defect claims as they choose.

It is critical to note that the Supreme Court determined that that the 558 process would fit the insurance policy’s definition of a “suit” if the insured submitted to the 558 process with the insurer’s consent. The Court reasoned that the 558 process is an alternative dispute resolution proceeding as defined by the insurance policy that Crum & Forster Specialty Insurance Co. sold to Altman Contractors, Inc. The Supreme Court relied on the language of the insurance policy which included a specific definition of a “suit” in the context of the insurer’s duty to defend.

The Court’s holding is important because it allows contractors to request and obtain consent of their commercial general insurance company for the insurance company to pay for and participate in the 558 process. The Court’s holding provides contractors with guidance for triggering their insurance company’s duty to pay for the defense of a 558 proceeding. If the contractor elects to trigger defense coverage, then it is incumbent on the contractor to notify its insurer of the 558 claims and specifically request the insurer’s consent to the process before participating in the 558 process.

Contractors and design professionals who receive a 558 notice and demand to cure should take care to consult with their construction attorney to review their insurance coverage and determine whether and how to involve insurance in the 558 process. The determination will depend on whether any of the defects alleged in the 558 notice are covered by insurance and the specific triggering language of all applicable insurance policies.