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.

Supreme Court’s Latest Construction Defect Decision and Its Impact on Construction Insurance Claims

David B. Haber, Frank Soto and Brett Silverberg | Daily Business Review | January 12, 2018

Prior to the Altman decision, homeowners and/or condominium associations were frustrated during the Chapter 558 process after sending a notice of claim because insured construction parties could not get insurers to become involved in pre-suit negotiations. Such a result was antithetical to the purpose of Chapter 558—which was instituted specifically to streamline the construction defect claims process and encourage early alternative dispute resolution.

In Altman, the following question was presented to the Florida Supreme Court: “Is the notice and repair process set forth in Chapter 558, Florida Statutes, a ‘suit’ within the meaning of the CGL policy issued by the insurer, C&F, to the general contractor, Altman Contractors, Inc. (Altman)?” The Florida Supreme Court recently answered in the affirmative and held that the notice process set forth in Chapter 558 does indeed constitute a “suit” within the meaning of the CGL policy at issue—which in turn means that insurance carriers can no longer sit back following receipt of a 558 notice and must instead take an active role earlier in the process.

‘Duty to Defend’

The Altman case stems from defects in the construction of Sapphire Condominium, a high-rise residential condominium in Broward County. C&F insured Altman for the Sapphire project through a policy that provided, in pertinent part, as follows: “[w]e will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.  We will have the right and duty to defend the insured against any ‘suit’ seeking those damages.” Altman sought a declaratory judgment that C&F owed it a duty to defend and indemnify as part of the Chapter 558 pre-suit process to resolve claims for construction defects, and that C&F breached the liability insurance policy by refusing to initially defend Altman in the suit against Sapphire. C&F denied that Sapphire’s 558 notices invoked its duty to defend Altman under the policy because the notices did not constitute a “suit.” Notwithstanding, the Florida Supreme Court held that the Chapter 558 process is included in the policy’s definition of “suit” as an “alternative dispute resolution proceeding.”

The insurance policy at issue in Altman is a standard commercial general liability policy and as such it is likely to have a profound impact on future Chapter 558 construction defect litigation. Accordingly, defense carriers are more likely to be engaged in construction disputes, particularly during the pre-suit stage after a Chapter 558 notice is received—or at least they should in light of this decision. As such, the 558 process, unlike in many past years, is now likely to encourage the claimant and insured to attempt to settle construction defect claims prior to expending time and resources litigating those claims. Such a notion is consistent with the legislature’s aim in creating Chapter 558 as an effective alternative dispute resolution mechanism, intended to curb construction defect litigation.

In light of the foregoing, it is imperative that individual homeowners, homeowner associations and/or condominium associations, along with their experts, prepare detailed inspection reports that set forth the various construction defects affecting their property, what resulting damage is occurring as a result of those defects, the locations of the defects throughout the property, and determine compliance with the applicable building code, plans and specifications. By virtue of more detailed reports in compliance with the requirements of Chapter 558, it seemingly becomes more likely that construction defect disputes will result in settlements at an earlier stage—thereby saving the parties exorbitant amounts of money that otherwise would be expended in litigation.

Court Rules That Insurers Must Treat Notice of Claim for Construction Defects as a “Suit”

Mike Seemuth | The Real Deal | January 21, 2018

The Florida Supreme Court ruled on a case centering on construction of the Sapphire Condominium in Fort Lauderdale and Altman Contractors Inc.

The Sapphire Condominium in Fort Lauderdale (Credit: Keller Williams Realty)

The Florida Supreme Court ruled that filing notice of a claim for a construction defect is equivalent to a filing a “suit” that a general liability insurer may have to defend.

The ruling came in response to a question about the state’s procedural requirements before filing a court claim for a construction defect.

The case centered on the Sapphire Condominium, a high-rise condo in Fort Lauderdale on North Ocean Boulevard.

In 2012, Altman Contractors Inc., the general contractor for the construction of Sapphire, got several notices of claim in 2012 from Sapphire owners, who alleged more than 800 construction defects.

Altman notified its commercial liability insurer of the Sapphire notices of claim and demanded that the insurer defend and indemnify the general contractor against the allegations of defective construction.

But the insurer, Crum & Forster Specialty Insurance Company (C&F), denied Altman’s demand, asserting the notices of claim didn’t amount to a “suit,” which would invoke the insurer’s duty to defend and indemnify the general contractor.

Altman ultimately settled all the Sapphire claims out of court without the involvement of C&F.

Altman also asked the U.S. District Court for the Southern District of Florida to rule that C&F had a duty to provide defense and indemnity against the Sapphire claims. The district court ruled in favor of the insurer, and Altman appealed to the U.S. Court of Appeals for the 11thCircuit.

The appellate court responded by certifying a question for the Florida Supreme Court about chapter 558, Florida Statutes, which lays out a notice-and-repair process that must happen before claimants can sue for construction defects.

The Florida Supreme Court ruled that the notice-and-repair process that Sapphire initiated was a “suit” within the meaning of the general liability insurance policy that Altman bought from C&F.

Subcontractor Pass-Through Claims Are Vulnerable to the Severin Doctrine

Eric Frechtel and Amy Elizabeth Garber | Bradley Arant Boult Cummings LLP | January 24, 2018

Two recent decisions – one from the U.S. Civilian Board of Contract Appeals and the other from the U.S. Court of Federal Claims – provide opposing holdings on whether the government can raise a “Severin doctrine” defense to subcontractor “pass-through” claims based on broad language in subcontractor progress payment releases. In light of these different perspectives, contractors should take steps to ensure that such releases do not doom legitimate subcontractor pass-through claims.

Pass-Through Claims and the Severin Doctrine

Subcontractors cannot directly sue the government because they do not contract with the government, i.e., they are not in “privity” of contract. A pass-through claim is a subcontractor claim against the government that a prime contractor (who is in privity of contract with the government) brings on behalf of a subcontractor. The Severin doctrine holds generally that a prime contractor presenting a pass-through claim can recover damages only if the prime contractor remains liable to the subcontractor for those damages.

The Board (Turner Construction Co. v. Smithsonian Institution)

Turner, the prime contractor, passed through approximately $7 million in subcontractor delay and disruption claims in a dispute involving the renovation of the National Museum of American History. Each progress payment release stated, in relevant part, that the subcontractor: “represents and warrants that there are no outstanding claims by the [subcontractor]… through the date of Application for Payment No. __ except for any retention, pending modifications and changes, or disputed claims for extra work as stated herein[;]” and “does hereby forever release, waive, and discharge … any and all … claims and demands … by reason of delivery or material and/or performance of work relating to the project through Application for Payment No. __, except for those items listed under No. 1 above.” The relevant progress payment releases did not list the pass-through delay and disruption claims under No. 1. The board held that even though the progress payment releases did not carve out the pass-through claims, the Severindoctrine did not bar them mainly because the releases were “clearly tied” to each progress payment. Their main purpose was to ensure that subcontractors had paid lower tiers and that the project site remained unencumbered, not to relieve Smithsonian, vis-à-vis releasing Turner, from any liability for overall project delay.

The Court (MW Builders, Inc. v. United States)

The court in MW Builders, on the other hand, broadly applied subcontractor progress payment releases to bar pass-through claims. MW Builders, the prime contractor, passed through approximately $1 million in subcontractor delay claims in a dispute involving the construction of an Army Reserve Center in Sloan, Nevada. The progress payment releases in question were from one subcontractor, Bergelectric, which stated in relevant part: “[Bergelectric] irrevocably and unconditionally releases and waives … any other claims whatsoever in connection with this Contract … through the end of the period covered by this Application ….” These releases covered the entire period of Bergelectric’s delay claim.

In contrast with the Smithsonian disposition, the court held that the Severin doctrine barred the Bergelectric pass-through claim. Unlike the board’s narrow interpretation of the progress payment releases in Smithsonian, the court declined to consider evidence of the limited intent of the releases. Instead, based on the broad language in the releases and the fact that the releases did not expressly reserve Bergelectric’s delay claim, the court determined that the releases barred all claims by the subcontractor.

Takeaway Points

These two recent decisions involved similar language in progress payment releases but had opposite results. In the board case, the subcontractor claims survived under a narrow interpretation of the progress payment releases, while in the court case, the subcontractor claims fell victim to the government’s Severin doctrine defense based upon a broad interpretation of the release language. Together these cases demonstrate the unpredictability of whether a judge will construe broad language in progress payment releases as a bar to subcontractor pass-through claims; and they serve as a reminder that contractors must be wary of the Severin doctrine. In anticipation of the government’s defense, contractors should carve out subcontractor pass-through claims from progress payment releases. It is also prudent for prime contractors and subcontractors to enter into “liquidation agreements” to define and preserve subcontractor pass-through claims. Without such vigilance, otherwise meritorious claims could be vulnerable to the government’s Severin doctrine defense.