New Construction Lien Legislation In Tennessee

Kathryn K. Van Namen | Butler Snow | August 26, 2019

Changes to Remedies in Lien Enforcement Actions

New legislation in Tennessee has limited the recovery of attorney’s fees, expenses, and actual and liquidated damages in instances where a real property owner seeks to enforce a lien. Public Chapter 142, signed by Governor Lee and effective as of April 5, 2019, repealed Tennessee Code Annotated § 66-21-108. Section 108 provided that an owner who prevailed in an action challenging the validity of a lien was entitled to recover reasonable attorney’s fees, costs incurred by the owner to challenge the validity of the lien, liquidated damages in an amount equal to ten percent of the fair market value of the property, but not to exceed $100,000, and any actual damages incurred by the owner.

The construction industry in Tennessee expressed serious concern based on the risk of liability for general contractors and their subcontractors in the case of any invalid mechanic’s or materialmen’s liens and lobbied for change. The Tennessee Bar Association also previously proposed an amendment to Section 108 to remove the threat of penalizing legitimate lienors for simply pursing their valid lien rights, but the legislation was Section was repealed completely.

Residential Contractors New Continuing Education Requirements

The General Assembly also created new legislation addressing contractor licensing classifications and requiring continuing education for residential contractors, which will be effective as of January 1, 2020. The new provisions to Tennessee Code Annotated § 62-6-112 require all general contractors engaged in residential construction who were licensed on or after January 1, 2009, to complete eight hours of continuing education every two years. The Tennessee Board for Licensing Contractors must approve the continuing education and offer both online and in person options. However, membership in certain trade associations can constitute four hours of continuing education annually.

Changes to Time for Notices of Nonpayment, Rights to Payment, and Retainage

Another critical construction bill to watch during the next legislative session is SB324. As introduced in January 2019, the bill seeks to amend multiple provisions of the Tennessee Code.

First, the bill seeks to amend Tennessee Code Annotated § 66-11-112(a) by increasing the time for “remote contractors” or subcontractors or others who furnish material, services, equipment or machinery on a project to record and enforce mechanic’s and materialmen’s liens from 90 days on the date the improvement is complete to no later than 12 months. The bill also seeks to increase the same length of time for “remote contractors” to serve notices of nonpayment on the owner and prime contractor. Rather than requiring a notice of nonpayment within 90 days of the last day of each month within which the work or labor was provided or supplies, materials, equipment, or machinery furnished, the proposed amendment seeks to allow the remote contractor a full twelve months from the last day of each month the work was performed to provide the requisite notice.

The bill also seeks to amend Tennessee Code § 66-34-103(b) which addresses retainage and would reduce the time owners have to release and pay all retainage for work completed from 90 days to 30 days after the owner receives the certificate of occupancy or the work is substantially complete. It would maintain the language requiring prime contractors to pay all retainage to any subcontractors within 10 days of receipt from the owner.

No More Pay-if-Paid Provisions?

Most importantly, SB324 seeks to prevent the commonly used “pay-if-paid” provisions in contracts between general contractors and their subcontractors. The proposed addition of a new section, Tennessee Code § 66-34-305, would effectively prohibit any condition precedent for payment clauses commonly used to require payment from the prime contractor to its subcontractors only if the prime contractor receives payment from the owner. It would also add Tennessee Code § 66-34-306 which would allow prime contractors and remote subcontractors to suspend performance of the work on a project without penalty until payment is received and entitle the contractor or subcontractor to its pro rata share of any interest provided for in Section 66-34-601. This language would only be applicable to contracts entered into after the effective date. This will be one to watch during the 2020 legislative session.

Think Twice About Depreciating Repair Costs in Our State, says the Tennessee Supreme Court

Andres Avila | SDV Insights | June 11, 2019

Tennessee’s Supreme Court recently held that an insurer may not withhold repair labor costs as depreciation when the policy definition of actual cash value is found to be ambiguous. Tennessee joins other states like California and Vermont that prohibit the depreciation of repair labor costs in property policies.

In Lammert v. Auto-Owners (Mut.) Ins. Co., No. M201702546SCR23CV, 2019 WL 1592687, the Lammerts and other insureds sought property damage coverage from Auto Owners Insurance for hail damage to a home and other structures they owned in Tennessee.

Auto-Owners Insurance agreed to settle the claims on an actual cash value basis (ACV), which is a method of establishing the value of insured property that must be replaced to determine the indemnity by the insurer. There are multiple methods to calculate ACV. Auto-Owners decided to use the ACV calculation method of deducting depreciation from the cost to repair or replace the damaged property. Depreciation is the decline in value of a property since it was new because of use, age or wear. The rationale behind this method is that an insured should not make a profit by recovering the cost of, for example, a new roof for a damaged roof that was ten years old, and thus depreciation is deducted from the indemnity.

Auto-Owners, however, decided to deduct both the materials and the repair and replace labor costs, as depreciation, when calculating the ACV. Neither of both policies under dispute specifically mentioned that repair labor costs could be depreciated in their ACV definitions. The parties thus disagreed on whether depreciation applies only to the materials or to both materials and repair labor.

One of the policies defined ACV as “the cost to replace damaged property with new property of similar quality and features reduced by the amount of depreciation applicable to the damaged property immediately prior to the loss;” while the other did not define ACV but stated that ACV included a deduction for depreciation.

The insureds argued that depreciation should be limited only to the cost of the replacement materials. In their view, the language “depreciation applicable to the damaged property” eliminates labor costs, which are intangible and cannot be depreciated because they do not age or wear out. The insureds also argued that the “prior to the loss” policy language eliminated labor costs because the costs at issue were post-loss repair costs. Auto-Owners contended that neither policy was ambiguous because depreciation of a property is calculated based on the total replacement cost, which includes both labor and materials.

Allowing Auto-Owners to depreciate the cost of labor would leave the insureds with an out of pocket loss inconsistent with the principle of indemnity of insurance to make insureds whole. However, allowing the deduction may in turn cause a windfall to the insureds, also defeating the purpose of indemnity. The Tennessee Supreme Court sided with the policyholders and solved the dilemma by citing to case law from, among others, Oklahoma, Arkansas, Nebraska and Minnesota, as well as regulations in Vermont, California and Mississippi.

The Court noted that Oklahoma uses the “broad evidence” rule to determine ACV. This method, also followed in New York, allows insurers to consider any and every fact and circumstance that logically tends to a correct estimate of the loss.

Accordingly, in Redcorn v. State Farm Fire & Cas. Co., 55 P.3d 1017, 1020 (Okla. 2002), the Oklahoma Supreme Court ruled that repair labor must be depreciated under the “broad evidence” method.

A decade later, the Arkansas Supreme Court was more persuaded by the dissenters than the majority in Redcorn and concluded that labor was not depreciable because labor does not lose value due to wear and tear over time in Adams v. Cameron Mutual Insurance Co., 2013 Ark. 475, 430 S.W.3d 675 (2013). However, in 2017 the Arkansas legislature abrogated Adams and enacted Arkansas Statute section 23-88-106, which specifically included the cost of labor in its definition of an expense depreciation.

The Tennessee Supreme Court further noted that Nebraska, which also uses the “broad evidence” rule, sided with the Oklahoma Supreme Court majority. It held that property is a combination of materials and labor and thus repair labor costs must also be depreciated from the replacement cost to determine ACV. Henn v. American Family Mutual Insurance Co., 295 Neb. 859, 894 N.W.2d 179 (2017). The court also considered a third approach from Minnesota, which also follows the “broad evidence” rule. In Wilcox v. State Farm Fire & Cas. Co., 874 N.W.2d 780, 785 (Minn. 2016), the Minnesota Supreme Court held that certain labor costs may be depreciable making it an issue of fact rather than law.

The Court then turned for guidance to case law from the federal circuit courts of appeals involving the law of Missouri, Kansas and Kentucky. The Tennessee Court found that Missouri and Kentucky lean towards allowing insurers to deduct repair labor costs as depreciation; while Kentucky, on the other hand, leans towards seeing depreciation as an ambiguous term and thus interpreted against insurers, preventing carriers from subtracting repair labor costs as depreciation.

The Tennessee Court then turned to insurance departments’ regulations of the point in California, Vermont and Mississippi. California (Cal. Code Regs. tit. 10, § 2695.9(f)(1) (2019)) and Vermont (Insurance Bulletin No. 184) prohibit the depreciation of repair and replacement labor. On the other hand, the Mississippi Insurance Department Bulletin 2017-8 declared the absence of a statutory prohibition to labor costs depreciation in that state but that insurers should clearly provide for it in the insurance policy if they intended to do so.

Tennessee acknowledges both the “broad evidence” rule and the replacement-cost-less-depreciation method to determine ACV. The Tennessee Supreme Court was persuaded that, since neither of the policies explicitly stated whether labor costs are depreciable when calculating ACV, there was an ambiguity that had to be interpreted against insurers and in favor of insureds.

This decision in Tennessee serves as a warning that, absent policy language stating otherwise, property insurers cannot depreciate repair labor costs when calculating the ACV of a property using the replacement cost less depreciation method in Tennessee.

Tennessee High Court Excludes Labor Costs from Insurer’s Actual Cash Value Depreciation Calculations

Michael S. Levine and Geoffrey B. Fehling | Hunton Andrews Kurth | April 24, 2019

The Tennessee Supreme Court has refused to construe an ambiguous definition of actual cash value to allow for deduction of labor costs as part of depreciation calculations where that subset of repair costs are not clearly addressed in the policy. Despite the split of authority nationwide, the Tennessee case presents a straightforward application of policy interpretation principles to a common valuation issue in first-party property claims.

In Lammert v. Auto-Owners (Mutual) Insurance Co., No. M2017-2546-SC-R23-CV (Tenn. Apr. 15, 2019), insureds brought a class-action lawsuit against their property insurer, Auto-Owners, alleging breach of contract. The plaintiffs each owned buildings damaged by a hail storm and had each submitted claims to Auto-Owners. Auto-Owners accepted the claims and determined that the losses would be determined on an actual cash value basis. In performing those valuations, Auto-Owners depreciated both the building materials and the labor costs associated with repairing the properties. The insureds challenged the labor cost depreciation. Auto-Owners moved to dismiss the lawsuit. In response, the insureds requested that the district court certify to the Tennessee Supreme Court whether, “[u]nder Tennessee law, may an insurer in making an actual cash value payment withhold a portion of repair labor as depreciation when the policy (1) defines actual cash value as ‘the cost to replace damaged property with new property of similar quality and features reduced by the amount of depreciation applicable to the damaged property immediately prior to the loss,’ or (2) states that ‘actual cash value includes a deduction for depreciation?”’

In their briefing to the Court, the insureds asserted that to allow for depreciation of both materials and labor would defeat the purpose of indemnity, which is to make the insureds whole after the hail storm. In response, Auto-Owners argued that applying depreciation only to materials would result in a windfall to the insureds by leaving them in a better position than they were in before the loss (by receiving full value of non-depreciated labor costs). Given the policy’s lack of clarity as to whether depreciation should apply to labor costs, the Court sided with the insureds.

The Court discussed the split of authority among state and federal courts nationwide, but applied basic policy interpretation principles that undefined policy terms are to be construed according to their plain, ordinary, popular meaning and that ambiguous policy language must be construed against the insurer and in favor of coverage. The Court found that both parties presented plausible interpretations of the policies, neither of which explicitly stated whether labor expenses were depreciable when calculating actual cash value.

The Court recognized the principle under Tennessee law that the purpose of indemnity insurance is to reimburse and restore the insured to the position he or she was in before the loss. The Court also looked to the dictionary meaning of “depreciation,” which is “a reduction in value or price of something; specif[ically] a decline in an asset’s value because of use, wear, obsolescence, or age.” Despite Auto-Owners’ plausible interpretation that all components of repair costs, including labor, are subject to depreciation, the Court found that it is also reasonable that a homeowner would understand that depreciation would only be applicable to material goods that can age and experience wear and tear and that an insurer calculating actual cash value of repair costs would only apply depreciation to the physical materials that actually deteriorated. If Auto-Owners had wanted a more technical definition of depreciation that is not evident on the face of the policy, they had the burden of clarifying the policy to incorporate that meaning.

The Lammert decision applies bedrock contract interpretation principles to resolve ambiguous policy language. The decision is also interesting because it addresses a basic property valuation issue that is often disputed but rarely litigated because contested valuation issues that relate to the value or quantum of loss suffered are frequently resolved through the appraisal process, even though issues of policy interpretation and construction should be determined by a court. The concepts of market value, replacement cost, and actual cash value are relevant in nearly every property insurance claim, but despite their ubiquity, the applicable valuation method must be clearly set forth in the policy. Where there is ambiguity, it should be resolved in favor of the insured. This is especially true where, as in Lammert, the undefined term’s ordinary meaning conflicts with the insurer’s preferred technical or industry-specific meaning.

Consequences for Exceeding the Limit…Maybe…

I’Ashea Myles-Dihigo | Leitner, Williams, Dooley & Napolitan | August 3, 2018

Sometimes I speed…okay, most times I speed.  Not anything dangerous, but I do keep up with the flow of traffic on the interstate.  Don’t judge.  With a daily commute into the office that is always over an hour, any bit of time savings is justified in my opinion.  
While I may be able to justify exceeding the speed limit as I travel down the interstate, the Tennessee Court of Appeals has recently clarified the effects of exceeding the monetary limits of your general contractor’s license in its holding in Pickens v.  Underwood.  In that case, timing was everything.  General contractor, Pickens, entered into a contract to construct a house for the Underwoods. Pickens v. Underwood, No. E2017-02120-COA-R3-CV, 2018 Tenn. App. LEXIS 322, at *2-3 (Ct. App. June 12, 2018).  The parties entered into their contract on June 2, 2008. Id.   The dispute over final payment arose on May 9, 2009.  Id. at *3.  At the time the parties entered into the contract, Pickens’ limit on his contractor’s license was $350,000, yet at the time the project was complete, the final bill was over $670,000.  Id. When the Underwoods failed to pay for the work, Pickens filed suit for breach of contract, unjust enrichment, promissory fraud and mechanics’ and materialmen’s lien. Id.
The Underwoods counter sued for fraud, cost overruns, violations of the Tennessee Consumer Protection Act and for entering into a contract in excess of the contractor’s license limit. Id. The complaint in this matter was filed on July 21, 2009. Id. at *32. Counsel for Pickens agreed to stipulate that he was an unlicensed contractor and thereby agreed to limit his damages to actual documented expenses.  Id. at *3.  The trial court disagreed with the stipulation and confirmed that Pickens, though over the monetary limit of his contractor’s license, was licensed for purposes of Tennessee Code Annotated §§ 62-6-101, et seq. Id. at *4.  The Underwoods appealed.
The Court of Appeals affirmed. They reasoned that just prior to the filing of the parties’ complaint, the Legislature made a substantive change to Tennessee Code Annotated § 62-6-103 which governed the monetary limits on contractors’ licenses. Id. at *32.  The effect of the amendment expanded the limitation of actual documented expenses to any contractor required to be licensed under the statute and rules whereas before the limitation only applied to unlicensed contractors. Id.
The Court held that the date the parties entered into the contract was controlling regarding which statute should apply in the case. Id. When Pickens entered into the contract and performed the work, he was not subject to the limitation because he was properly licensed under the old Tenn. Code. Ann. § 62-6-103.  The Court declined to apply the new code changes retroactively to the pre-existing contract.  Therefore, his recovery would not be limited to actual documented expenses as reflected in the new schematic. Id. at *33.
While it is never a good idea to exceed the monetary limits of your contractor’s license, if you happen to find yourself in that position, you may still be able to recover the full contractual price as damages.  Based on the holding in Pickens, the Court will look to the law in effect at the time of the contract to determine whether or not your recovery is limited.

Tennessee Court of Appeals Holds Defendant Has the Burden of Offering Alternative Measure of Damages to Prove that Plaintiff’s Measure of Damages is Unreasonable

Gus Sara | The Subrogation Strategist | July 5, 2018

In Durkin v. MTown Construction, LLC, 2018 Tenn. App. LEXIS 128, the Court of Appeals of Tennessee considered whether the lower court properly took judicial notice of an alternative measure of damages to the measure of damages advanced by the plaintiff. The Court of Appeals held that the defendant has the burden of offering evidence of alternative measures of damages if it seeks to argue that the plaintiff’s measure of the damages is unreasonable. The Court of Appeals found that the lower court erred in taking judicial notice of alternative measures of damage when the defendant failed to meet its burden of proof. The court’s holding establishes that, if the defendant does not offer evidence of alternative measures of damage, then the measure of damages introduced by the plaintiff will apply.  

In Durkin, the plaintiff hired defendant MTown Construction (MTown) in 2016 to replace the roof of his residence. After removing the original roof, MTown placed tarps over the structure to prevent water intrusion until the new roof was installed. Subsequently, the interior of the home incurred significant water damage during a rain event. Mr. Durkin sued MTown for the water damage, alleging that MTown inadequately protected the structure from water intrusion. At trial, the plaintiff introduced evidence of the cost to repair the structure, which totaled $118,926.12. MTown did not offer any evidence of alternative measures of damage. The trial court found MTown liable for the damage, but decided that the appropriate measure of damages was the diminution of the market value of the property. The judge took judicial notice of certain aspects of witness testimony[1] to conclude that the diminution in the market value of the home before and after the loss was $144,000, which was the full value of the home as per the plaintiff’s testimony. The judge then subtracted the assessed annual tax of $25,500 and awarded the plaintiff $118,500 for the dwelling. The defendant appealed, arguing that the judge improperly took judicial notice of unsubstantiated and disputed facts to determine the diminished value of the home.

The Court of Appeals acknowledged that, in Tennessee, the proper measure of damages for injury to real property is the lesser of either: (1) the cost of repairing the injury, or (2) the difference in the value of the premises immediately prior to and immediately after the injury (also referred to as the diminution of property value). Generally, the measure of damages will be the cost of repairs unless the repairs are not feasible or the cost of repairs is disproportionate to the diminution in the value of the property. However, the court held that the burden was on the defendant to show that the cost of repairs was disproportionate to the diminution value. While recognizing that a property owner can testify as to the value of his home, the Court of Appeals found that the evidence regarding the post-loss value of the home was insufficient and unreliable. The Court of Appeals further held that the defendant had the burden of proving an alternative measure of damages. Since the defendant failed to carry its burden of proving the diminution of value measure of damages, the Court of Appeals ruled that the lower court should have calculated the damages based on the cost of repairs rather than seek out additional valuation evidence or take judicial notice of certain facts to reach a diminution value. The court remanded the case for further proceedings on the damages issue.

The Durnik case establishes that, in Tennessee, the defendant has the burden of introducing evidence of an alternative measure of damages to challenge the measure of damages presented by the plaintiff and that it is improper for the trial court to take judicial notice of an alternative measure of damages on its own. This case also reminds us of the importance of understanding the measures of damage potentially applicable to a case, and being prepared to offer sufficient evidence in support of the measure of damages that you wish to advance. This case also sheds light on the importance of knowing the value of your claim under each applicable measure of damages, as well as recognizing which measure of damages is likely to apply in your respective jurisdiction.


[1] During cross-examination, plaintiff vaguely testified that he believed that the value of the home on the day before the loss was $144,000, and that on the day after the loss the County Tax Assessor told him that the value was still $144,000. However, plaintiff produced a microbial remediation expert who testified that, because the water in the house remained untreated for over 72 hours, the home required more extensive remediation. Based on the expert’s testimony, the judge disregarded the plaintiff’s testimony about the post-loss value of the home and concluded that the value after the loss was zero because no one would buy the house in such condition. As such, the judge found that the diminished value was $144,000 (the full value of the home).