Contractors Can No Longer Make Roof Repairs Following Their Own Inspections

Jason Feld and Alex Chazen | Kahana & Feld | May 30, 2018

California law mandates that any person who conducts roof inspections for a fee can no longer effectuate the actual repairs to the same property. Effective January 1, 2018, Business & Professions Code Section 7197 (Unfair Business Practices) deems it to be an unfair business practice for a home inspector who charges a homeowner a monetary fee for inspecting the property, to perform or offer to perform additional repairs due to the inherent financial interest and conflict raised by identifying alleged defects necessitating repairs. The new law is a result of California AB 1357, which was signed into law on October 5, 2017. The goal of the new law is to disincentivize a roof inspector from creating a report for the sole purpose of obtaining a bid to perform those documented repairs. The roof contractor can perform repairs identified in their report only after a twelve month “cooling period” which provides the homeowner an opportunity to obtain multiple bids/estimates for repairs based upon the inspector’s report. The new law also discourages home inspectors from providing a list of contractors who provide monetary referral fees back to the home inspector upon receiving repair work from the homeowner based exclusively on the home inspection report.

The California Business & Professions Code Section 7195(a)(1) defines a “home inspection” as a “non-invasive, physical examination, performed for a fee in connection with the transfer…of the real property…or essential components of the residential dwelling.” Home inspection includes “any consultation regarding the property that is represented to be a home inspection or any confusingly similar term.” Business & Professions Code section 7195(a)(2) further defines a “home inspection” as including energy efficiency and solar. A “home inspection report” is a written report prepared for a fee issued after an inspection. Business & Professions Code section 7195(c). It is noted that a home inspector does not have to be a licensed architect, professional engineer, or general contractor with a Class “B” license issued by the California Contractors State License Board, but “it is the duty of a home inspector who is not licensed as a general contractor, structural pest control operator, or architect, or registered as a professional engineer to conduct a home inspection with the degree of care that a reasonably prudent home inspector would exercise. Business & Professions Code section 7196.

The new law is codified as Business & Professions Code section 7197(a), which states:

“It is an unfair business practice for a home inspector, a company that employs the inspector, or a company that is controlled by a company that also has a financial interest in a company employing a home inspector, to do any of the following: (1) to perform or offer to perform, for an additional fee, any repairs to a structure on which the inspector, or inspector’s company, has prepared a home inspection report in the past 12 months; (2) inspect for a fee any property in which the inspector, or the inspector’s company, has any financial interest or any interest in the transfer of the property; (3) to offer or deliver any compensation, inducement, or reward to the owner of the inspected property, the broker, or agent, for the referral of any business to the inspector or the inspection company; (4) accept an engagement to make an inspection or to prepare a report in which the employment itself or the fee payable for the inspection is contingent upon the conclusions in the report, preestablished findings, or the close of escrow; and (5) a home protection company that is affiliated with or that retains the home inspector does not violate this section if it performs repairs pursuant to claims made under the home protection contract.”

As a homeowner, it is imperative that any home inspection conducted during the purchase, improvement or renovation of your property be conducted by an independent and certified home inspection company that is separate and apart financially from the retained contractor who will actually perform the necessary repairs. It is also a good custom and practice to obtain a home inspection report with the goal of soliciting multiple bids/estimates for repair from licensed, bonded and insured contractors. This is especially pragmatic with regards to roof inspections and solar installation at your home.

California Design Professionals’ Indemnity Obligations Limited Under 2018 Contracts

Ryan W. Young | Lewis Brisbois Bisgaard & Smith LLP | June 22, 2018

The California Legislature has narrowed the scope of enforceable indemnity agreements applicable to licensed architects, engineers, and land surveyors through its amendment of Civil Code § 2782.8. This represents an important development in the allocation of risk in the construction community, since Section 2782.8 previously limited indemnity clauses only as to design professional service contracts with local public agencies entered into on or after January 1, 2007.

Under amended Section 2782.8, all contracts with non-state agencies for design professional services entered into on or after January 1, 2018, that require licensed architects, engineers, and land surveyors to indemnify their client are now unenforceable, except to the extent the claims against the client arise out of the design professional’s negligence, recklessness or willful misconduct.

Section 2782.8, as amended, also caps a design professional’s liability for the cost to defend their client to the design professional’s proportionate percentage of fault. The design professional, however, is required to meet and confer with other parties to an action regarding unpaid defense costs, where one or more of the defendants has dissolved or become bankrupt.

This limitation of the duty and cost to defend, however, does not apply to (1) any contract for design professional services where a project-specific general liability policy insures all project participants for general liability on a primary basis and also covers all design professionals for their liability arising out of their services on a primary basis; and (2) a design professional who is a party to a written design-build joint venture agreement.

All design professional service contracts with non-state agencies entered into on or after January 1, 2018, are now deemed to incorporate by reference the provisions of this section and the provisions cannot be waived.

Civil Code § 2782.8 is silent, however, as to the trigger date for the above-referenced duty to defend. Consequently, parties to this kind of contract should address the timing of the defense obligation in the contract, because California law requires an immediate defense upon a proper request, unless the parties state otherwise.

California Supreme Court Rules Broadly in Favor of Insureds

David E. Weiss and Kerry Roberson | ReedSmith | June 11, 2018

On Monday, June 4, 2018, the California Supreme Court ruled that an insurance company must provide liability coverage to its corporate insured against claims of negligent hiring, retention, and supervision of its employee, who allegedly sexually assaulted a 13-year-old child. The case is Liberty Surplus Ins. Corp. v. Ledesma & Meyer Construction Co., Inc., Case No. S236765 (June 4, 2018). This decision is “of exceptional importance to injured parties, employers, and insurance companies doing business in California,” wrote the U.S. Court of Appeals for the Ninth Circuit, in an order certifying the issue to the California Supreme Court.

In 2002, Ledesma & Meyer Construction Co. (L&M) entered into a contract with the San Bernadino School District for a construction project at a local middle school. L&M hired Darold Hecht to work on the project. In 2010, a 13-year-old student at the school (Jane Doe), filed suit asserting numerous claims against L&M, alleging that she was sexually abused by Hecht. One of Doe’s claims against L&M alleged negligent hiring, retention, and supervision of Hecht. L&M’s insurer, Liberty Surplus Insurance Corporation, agreed to defend L&M under a reservation of rights.

Liberty sought declaratory judgment in federal court that Liberty was not obligated to defend or indemnify L&M against Doe’s lawsuit, arguing that L&M’s negligence did not constitute an “occurrence” under the commercial general liability policy. The policy provided L&M coverage for liabilities arising from “bodily injury” caused by an “occurrence.” The policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The District Court held that Liberty was not obligated to defend or indemnify L&M in the underlying action because L&M’s negligent hiring, retention, and supervision of Hecht was “too attenuated from the injury-causing conduct” of Hecht to fit the policy definition of “occurrence.”

L&M appealed to the United States Court of Appeals for the Ninth Circuit, which then issued an order certifying the issue to the Supreme Court of California. The Ninth Circuit sought guidance because “California law [wa]s unsettled in this area,” and because of the “significant precedential and public policy importance” of the outcome. The Supreme Court of California agreed to answer the following question: “When a third party sues an employer for the negligent hiring, retention, and supervision of an employee who intentionally injured that third party, does the suit allege an ‘occurrence’ under the employer’s commercial general liability policy?”

The Court explained that the term “accident” in liability insurance policies in California is a settled matter. “[A]n accident is ‘an unexpected, unforeseen, or undersigned happening or consequence from either a known or unknown cause” and refers to the conduct of the insured. Additionally, the term “includes negligence,” which indicates that a policy that provides coverage to the insured for injuries caused by an “accident” includes coverage for injuries resulting from the insured’s negligent actions.

The Court also analyzed the District Court’s decision and determined that the court engaged in faulty reasoning both in terms of causation and its reading of the relevant case law. The District Court determined that L&M’s alleged negligent actions were “too attenuated” from Hecht’s actions to be considered the “cause” of Doe’s injuries. However, this line of reasoning runs contrary to California cases that have recognized that negligent hiring, retention, or supervision can be a substantial factor in causing the harm to a third party due to the actions of an employee.

Additionally, the District Court misplaced reliance on a number of cases to support its proposition that L&M’s allegedly negligent actions do not qualify as “accidents” simply because they did not anticipate the injury to occur. However, the cases that the District Court cited were distinguishable from the case at hand in various critical ways and thus did not support the District Court’s proposition.

Minkler v. Safeco Ins. Co. of America is the controlling authority on this issue (Minkler v. Safeco Ins. Co. of America (2010) 49 Cal.4th 315.) In Minkler, a Little League coach was sued by a player for sexual molestation. The player also sued the coach’s mother for negligent supervision and failure to prevent the molestations in her home. The coach and the mother committed independent torts, but the coach’s intentional actions did not preclude the mother from coverage. Although insurance does not usually cover intentional injuries, the Court stated, “[t]here is no overriding policy reason why a person injured by sexual abuse should be denied compensation for the harm from insurance coverage purchased by the negligent facilitator.”

If the Court had decided in Liberty’s favor, employers would not be covered for claims of negligent hiring, retention, or supervision in situations where employees engage in intentional actions, a result that would be fundamentally inconsistent with existing California case law. For that reason, the court ruled in favor of L&M, stating that, “absent an applicable exclusion, employers may legitimately expect coverage for [claims of negligent hiring, retention, or supervision whenever the employee’s conduct is deliberate] under comprehensive general liability insurance policies, just as they do for other claims of negligence.” This holding protects the reasonable expectations of policyholders and makes clear that the coverage analysis should be focused on the conduct alleged against the particular insured seeking coverage. Thus, if there are claims against multiple actors, the specific claims against each individual actor need to be analyzed separately.

The California Supreme Court’s decision will have implications beyond the employment situation dealt with in the case; for instance, the Court ordered briefing deferred in Travelers Property Casualty Co. of America v. Actavis, Inc., Case No. S245867, pending this decision. In that case, the Court will consider whether Travelers owed its pharmaceutical company insured a duty to defend or indemnify in an action involving underlying claims involving liabilities arising from the sale and marketing of opioids. We will report on that decision as soon as it comes down.

Enforcing A Mechanic’s Lien In California? Don’t Waive Your Right To Arbitrate The Dispute

Jeffrey N. Brown | Thompson Coburn LLP | June 13, 2018

On June 6, 2018, the California Court of Appeal held that a contractor waived its right to arbitrate disputes because it recorded a mechanic’s lien and then didn’t follow California Code of Civil Procedure Section 1281.5 in its subsequent lawsuit to foreclose on the lien. In Von Becelaere Ventures, LLC v. Zenovic, the parties entered into a construction contract for a single-family residence in Laguna Beach, California. The contract had an arbitration provision as follows:

If any dispute arises concerning this Contract or the interpretation thereof, or concerning construction of the Improvements, or the Limited Warranty, customer service, defects, damages, or obligations therewith (a “Construction Dispute”), such Construction Dispute will be settled by binding arbitration.

After a dispute arose, Zenovic, the contractor, recorded a mechanic’s lien in the amount of almost $450,000, and Von Becelaere Ventures, the owner, filed a construction defect lawsuit, alleging that Zenovic breached the construction contract by

“(a) failing to properly perform and construct the Work;

(b) failing to hire properly licensed and insured subcontractors;

(c) failing to comply with proper license and insurance requirements;

(d) failing to obtain written subcontract agreements;

(e) failing to properly supervise the Work;

(f) failing to maintain and provide upon request proper accounting records;

(g) failing to properly manage expenses and allowing gross overages;

(h) failing to comply with requirements regarding change orders, improperly billing for extra work and improperly categorizing work as extra work which should have been covered under the contract as included work; and

(i) improperly filing and asserting an untimely mechanics lien and threatening to file suit to foreclose on the improper lien.”

Shortly after being served with the Von Becelaere Ventures lawsuit, Zenovic filed his own lawsuit, asserting causes of action for breach of contract, reasonable value, account stated, open book account, abuse of process, breach of the covenant of good faith and fair dealing, and foreclosure on mechanic’s lien.

Not long after, Zenovic filed a motion seeking to compel arbitration under the arbitration provision of the construction contract. The trial court denied that motion. On appeal, the Court of Appeal affirmed the trial court’s decision that Zenovic waived his right to compel arbitration because he didn’t comply with Section 1281.5, which provides:

Any person who proceeds to record and enforce a claim of lien by commencement of an action pursuant to Chapter 4 (commencing with Section 8400) of Title 2 of Part 6 of Division 4 of the Civil Code, does not thereby waive any right of arbitration the person may have pursuant to a written agreement to arbitrate, if, in filing an action to enforce the claim of lien, the claimant does either of the following: (1)Includes an allegation in the complaint that the claimant does not intend to waive any right of arbitration, and intends to move the court, within 30 days after service of the summons and complaint, for an order to stay further proceedings in the action. (2) At the same time that the complaint is filed, the claimantfiles an application that the action be stayed pending the arbitration of any issue, question, or dispute that is claimed to be arbitrable under the agreement and that is relevant to the action to enforce the claim of lien.

Here, Zenovic “neither included an allegation in the complaint filed in the [mechanics lien] action stating he did not intend to waive any right of arbitration and intended to seek a stay of the [mechanics lien] action (§ 1281.5, subd. (a)(1)), nor filed an application for stay at the time he filed the complaint in the [mechanics lien] action (§ 1281.5, subd. (a)(2)).” As a result, the Court of Appeal held that he waived his right to compel arbitration of the owner’s construction defect claims. The Court held that Section 1281.5 “means what it says,” and that Zenovic’s failure to comply “waived the right to arbitrate construction disputes under the terms of the construction contract.”

California Supreme Court Rights the “Occurrence” Ship: Unintended Harm Resulting from Intentional Conduct Triggers Coverage Under Liability Insurance Policy

Scott S. Thomas | Payne & Fears | June 6, 2018

SUMMARY

In a ruling that bodes well for policyholders, the California Supreme Court provides much-needed clarity on the question of when a so-called “intentional act” may give rise to insurance coverage under a liability insurance policy. In Liberty Surplus Insurance Corp. v. Ledesma & Meyer Construction Co., Case No. S23765 (Cal. June 4, 2018), the Court holds that an employer’s potential liability for negligent hiring, after its employee allegedly abused a 13-year old student, is the result of an “occurrence” and is thus covered under the employer’s liability insurance policy.

COURT OPINION

The court’s opinion dispels the misguided notion that an intentional act resulting in unintended harm is never an “occurrence” and can never trigger coverage. What matters, according to the Court, is that, from the insured’s point of view, the consequences of its conduct are “unexpected, unforeseen, or undesigned” – even if the conduct is intentional. And in a concurring opinion, Justice Liu rightfully questions the legitimacy of the notion that intentional conduct cannot trigger coverage, even when it produces an unintended result, unless, in the words of a 1989 appellate court decision, some “additional, unexpected, independent, and unforeseen happening occurs that produces the damage.” As Justice Liu explains, this intervening “happening” may be something as simple as the insured’s mistaken belief that he was acting in self-defense, or that the victim had consented to the insured’s conduct. This much-needed clarification restores vitality to the fundamental principle that injuries are “accidental” when they are “unexpected, unforeseen, or undesigned,” regardless of their cause.

KEY TAKEAWAYS

This ruling will apply in many contexts: For example, contractors who “intentionally” build things; competitors who “intentionally” disparage another’s product; employers who “intentionally” hire employees who do bad things. The Court’s decision restores the law’s fidelity to fundamental principles enunciated in the seminal California “occurrence” case: Gray v. Zurich, 65 Cal. 2d 263 (1966). And it ought to dampen insurers’ enthusiasm for denying claims on the spurious ground that the insured’s conduct – even though it resulted in bodily injury or property damage that the insured did not expect or intend to cause – was “intentional.”