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.

Washington Supreme Court Upholds Rule That Property Owner and General Contractor Are Not Indispensable Parties in a Lien Foreclosure Action Against the Surety of the Lien Release Bond

Jennifer McMillan Beyerlein | Lane Powell | January 18, 2018

Today, the Washington Supreme Court has clarified any misunderstanding about the necessary parties in a mechanic’s lien foreclosure action when a lien release bond has been posted. In Inland Empire Dry Wall Supply Co. v. Western Surety Co., the Court upheld a divided Court of Appeals by allowing a lien foreclosure action brought by a material supplier to proceed solely against the surety securing the lien release bond. Inland Empire Dry Wall Supply Company alleged that it was not paid for drywall supplied to an apartment complex in Richland, Washington. Inland Empire filed a pre-claim notice and a mechanic’s lien against the property. The general contractor, Fowler General Construction, obtained a lien release bond from Western Surety Company, which identified Fowler as the “Principal” and Western Surety as the “Surety.” Ultimately, Inland Empire filed a lien foreclosure action solely against Western Surety seeking to foreclose its lien claim against bond.

Western Surety sought dismissal of the action, arguing that Inland Empire failed to properly include Fowler as the principal on the bond as required under the mechanic’s lien statute. The trial court granted summary judgment against Inland Empire, finding that the material supplier was required by statute to bring its lien foreclosure action against both the surety and the purchaser of the bond, Fowler. The trial court held that because the bond was the subject of the claim of lien, in place of the apartment complex, that both Fowler and Western Surety were the “owners” of the bond — making both indispensable parties to the lien foreclosure action. Division III of the Court of Appeals, in a split decision, disagreed last January, holding that the only necessary party to a lien foreclosure action involving a lien release bond was the surety.

In reviewing the statutory history of mechanic’s liens in Washington, the Supreme Court noted that the owner of the real property is required to be named in actions where no lien release bond is filed. The Court noted that this makes sense given that forfeiture of the property would be required in order to enforce payment of amounts owed under a mechanic’s lien. When a lien release bond is obtained, however, the real property is released from the lien and becomes “unreachable” and the bond becomes the security for enforcement of payment. In strictly reading the mechanic’s lien statutes, the Court found that neither the real property owner nor the entity who purchased the lien release bond are necessary parties in any action to enforce the lien against the surety who posted the lien release bond. This is because the surety is substituted for the real property owner in the eyes of the mechanic’s lien statutes for purposes of enforcement.

Practice Tip: In dicta, the Court noted that when a property owner or other party to a lien foreclosure action obtains a lien release bond after a lien foreclosure action is initiated, the lien claimant should amend its pleadings to specifically seek to foreclose on the lien release bond to avoid a situation where there is a judgment in favor of the lien claimant, but no security to enforce the judgment.

Public-Private Partnerships: Navigating the Ins and Outs of P3s

Marti McCaleb | Schwabe Williamson & Wyatt | October 3, 2017

Earlier this year, the Public-Private Partnership (P3) Committee of the Washington Capital Projects Advisory Review Board (CPARB) submitted draft legislation that would make significant changes to Washington’s current statutory structure for public-private partnerships. A P3 is a contractual relationship between a public agency and a private sector entity. While their use in Washington has historically been limited and fraught with complications, they are successfully used in many other places to complete wide-scale education, transportation, and civic works projects.

Common P3 Mechanisms

Many types of P3s reflect a broad range of approaches to the balance of power between the public and private parties engaged in a project.

Design-Build (DB). Design-build is the most commonly used P3 delivery mechanism. In a DB, the private partner provides both the design and construction of a project for the public owner. The public owner retains control of the assets and is responsible for operation and maintenance, but the private entity takes on much of the risk associated with the construction process.

Design-Build-Operate-Maintain (DBOM). DBOM is a project delivery method in which the public owner enters into a single contract for the design and construction, and the maintenance and/or operation, of a public-private facility for a set period of time. Financing is secured by the public sector, and the public owner retains ownership and significant oversight of the operations through terms defined in the contract.

Design-Build-Finance-Operate-Maintain (DBFOM). In a DBFOM, the public owner enters into a single contract for design, construction, finance, maintenance, and operation of a public-private facility over a contractually defined term. No public funds are appropriated to pay for any part of the services that the private partner provides. Instead, the private entity uses a variety of debt leveraging mechanisms, grant funding, or equity investments to finance the project.

Benefits and Drawbacks of the Public-Private Partnership

Proponents of P3s argue that creating systems to incentivize and leverage private spending on public-benefit projects alleviates cost pressures and premiums associated with public projects—like prevailing wage, environmental and labor regulation, and stringent public bid requirements. Opponents argue that allowing private entities to avoid those requirements provides a form of corporate welfare at the expense of the taxpayers. The proposed legislation attempts to find a balance between cost, speed, and risk-shifting mechanisms while still supporting Washington’s commitments to prevailing wage, labor standards, and public bidding.

Washington’s Proposed Legislation

The draft bill, written by a committee of diverse stakeholders, including representatives of public owners, contractors, trades/labor, academia, and others, is intended to overcome hurdles and make P3 projects more available to public entities on a variety of potential projects, while maintaining open and fair competition and emphasis on Washington’s high labor standards, upholding mandatory procurement and contract considerations, and promoting participation by minority-owned and disadvantaged business interests. The draft bill includes the following key provisions:

  1. Value‐based procurement. To procure a P3 project, the public owner must use either a single-step Request for Proposal or a two-step Request for Qualification/Request for Proposal process.
  2. Express “opt‐in” requirement. Public owners are not prohibited from using other project methods; the P3 statute only applies if the owner expressly chooses to implement a project using these standards.
  3. Contract requirements.Requirements include basic project parameters and technical requirements, maximum term, property interest/ownership, compensation, termination, reporting requirements, payment bonds, usage rights, prevailing wage, disadvantaged business plan, and labor requirements.
  4. Public ownership.The property will remain public and control reverts to the public owner upon expiration or termination of the contract.
  5. Flexible funding and financing. Public owners may combine private, state, federal, or other funding/financing sources.
  6. Requirements for subcontractors, labor, and disadvantaged businesses. Every P3 contract must provide for, and the public owner must ensure that adequate protections are made for, subcontractors, prevailing wage, and participation of small, disadvantaged, and/or minority-owned businesses.
  7. Project review. Each proposed project must be reviewed by a specialized subcommittee of the Project Review Committee to evaluate the proposed public use. The subcommittee will issue a recommendation to CPARB, which will ultimately approve or deny the application.

On the Horizon

The draft legislation that the P3 Committee proposed was approved to move forward for legislative review. Financial impacts, risk of default by public partners, and guarantees that new projects would abide by Washington’s strong protections for payment of contractors, prevailing wage, and minority business participation are all issues that will continue to be refined and advanced over the coming year. For now, everyone involved in the construction industry—owners, developers, designers, architects, and contractors—should pay attention to the conversation that has the potential to substantially change Washington’s landscape for public works projects.

It’s Tradition! Pollution Exclusion Applies Only to Traditional Environmental Contamination: New Cases from Washington and Connecticut

Lucas M. Blower | Brouse McDowell | September 17, 2017

In general, a pollution exclusion precludes coverage for liabilities arising from the “discharge, dispersal, release or escape” of “irritants, contaminants or pollutants.” The exclusion was incorporated in commercial general liability (CGL) insurance policies in response to the massive environmental liabilities incurred by companies in the 70’s and 80’s.

And the exclusion has been effective, by in large, in precluding coverage for liabilities that are the result of traditional environmental contamination. But, for some insurers, that was not enough. These insurers argued that the pollution exclusion leaches out in new directions, applying not only to traditional environmental contamination, but extending to apply in new, non-pollution contexts as well.

For example, in Andersen v. Highland House Co., 93 Ohio St. 3d 547, 757 N.E.2d 329 (2001), the insurers relied on the pollution exclusion to deny a claim based on carbon monoxide poisoning in an apartment—hardly the sort of widespread environmental damage first envisioned by the pollution exclusion. The insurer nonetheless argued that the pollution exclusion applied because carbon monoxide was a “pollutant,” which the policy defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke vapor, soot, fumes, acids, alkalis, chemicals and waste.” Id. at 548. The Ohio Supreme Court, however, disagreed, holding that the pollution exclusion would not apply because it did not “specifically, and unambiguously state that coverage for residential carbon monoxide poisoning is excluded.” Id. at 548. According to the Court, the pollution exclusion was limited to situations involving “traditional environmental contamination.” Id. at 552.

While insurers have been rebuffed in their efforts to expand the scope of the pollution exclusion in Ohio, in other states, they continue to push at the edges of the pollution exclusion, hoping to spread its reach past the confines of traditional environmental contamination. But, in two recent cases—from Washington and Connecticut—the courts rightly halted the insurer’s attempts to expand the exclusion.

The recent decision from Washington’s Supreme Court, in Zhaoyun Xia v. ProBuilders Specialty Ins. Co. RRG, 393 P.3d 748, 750 (Wash. 2017), mirrors Andersen in the facts, and reaches the same conclusion, but by a slightly different route. The underlying claim in Xia was based on the “negligent installation of a hot water heater that led to the release of toxic levels of carbon monoxide in a residential home.” The insurer denied the claim based on the pollution exclusion.

In interpreting the pollution exclusion, the Xia court, similar to the Andersen court, recognized that the pollution exclusion should only apply when the underlying cause of alleged liability “stems from either a traditional environmental harm or a pollutant acting as a pollutant.” Id. at 753. Unlike the Andersen court, however, the Xia court found that the carbon monoxide poisoning could be characterized as pollution. Still, the Xia court found that the insurer’s interpretation of the pollution exclusion violated Washington’s efficient proximate cause rule. Under that rule, a loss is covered, even if there are uncovered events within the causal chain leading to that loss, so long as the initial event—or the “efficient proximate cause”—is a covered peril. In Xia, the court found that the efficient proximate cause of the loss was the negligent installation of the hot water heater, which was covered. Accordingly, the pollution exclusion did not apply.

In Connecticut, likewise, an appellate court addressed a case where the insurer was arguing for an expansive version of the pollution exclusion. In R.T. Vanderbilt Co., Inc. v. Hartford Accident & Indem. Co., 156 A.3d 539 (Conn. App. 2017), the policyholder was accused of mining and selling industrial talc that contained asbestos, which allegedly injured a host of claimants. The policyholder submitted a claim based on the lawsuits to its insurers, which denied the claims, in part, based on the pollution exclusion. The Connecticut appellate court disagreed with the insurers’ interpretation of the exclusion after an exacting review of the policy language. According to the court, the “policy language, when read as a whole, is intended to exclude coverage only for traditional environmental pollution, such as the intentional disposal or negligent release of industrial and other hazardous waste into the public air, land, or water resources.” Id. at 638. Since talc mining didn’t count as traditional environmental pollution, the court held that the pollution exclusion did not apply.

These two cases, and many others like them, should give insurers pause when they argue for a broad application of the pollution exclusion in non-traditional settings. Even if the terms in the pollution exclusion, standing alone, may seem broad enough to encompass ever new risks, the courts have rightly decided that they will not read the terms of the pollution exclusion standing alone. Rather, courts will continue their long-standing practice of interpreting the pollution exclusion solely within the limited context in which it was written. It’s tradition.

Washington Federal Court Rejects Policyholder’s “Separate Claim” Argument

Jason Morris | PropertyCasualtyFocus | July 14, 2017

In April, a federal district court in the Western District of Washington issued a decision in National Union Fire Insurance Co. v. Zillow, Inc.While at first blush, it may seem only of interest to those who work with media policies, this decision has potential broader application. In short, the decision rejects the argument that a demand letter and subsequent litigation based on the facts asserted in the demand letter are separate claims and thus should be treated as such for claim evaluation purposes. While policyholders have successfully convinced courts in other jurisdictions to accept the opposite position, the decision in Zillow provides a helpful counterweight.

How much is my suit worth? Zestimate: $8 Million

In July 2014, VHT, Inc., a property photography company that may or may not have been founded by avid viewers of the cable classic TV-series Behind the Music, sent Zillow a demand letter, asserting that “Zillow was misusing VHT’s images and demanding that Zillow,” in the words of the opinion, “immediately take those images down.”

According to National Union, Zillow did not remove the images, and about a year later, VHT filed suit against Zillow for infringement. Using, among other things, the demand letter itself, VHT obtained an $8 million jury verdict against Zillow.

After 13-Month Delay in Providing Copy of Demand Letter, National Union Files Suit

Zillow notified National Union of the suit shortly after its filing in July 2015. A month later, Zillow provided National Union a copy of VHT’s demand letter, the one VHT sent to Zillow 13 months earlier. In September, National Union informed Zillow that National Union believed there was no coverage, as the claim was first made when the demand letter was sent in July 2014, prior to the policy period, and Zillow had failed to timely report the claim. National Union filed suit a year later in September 2016.

Court Finds “Separate Claim” Argument Ignores “Basic Grammatical Considerations”

In defense, Zillow contended “that the 2014 demand letter was a separate ‘Claim’ from the VHT litigation and therefore Zillow’s failure to report the 2014 letter should not affect National Union’s obligation to cover the timely-reported VHT litigation,” arguing: (1) the policy’s use of the word “or” in the definition of “Claim” makes the claims different, (2) there are differences in the demand letter and litigation, and (3) National Union could have used other language.

The court rejected the “or” argument, finding:

Zillow gives too much weight to the term “or,” the use of which is required by basic grammatical considerations. If National Union had used the term “and” in place of “or,” the clause would require National Union to cover only those claims where there had been a demand letter and a lawsuit. Further, the definition of “Claim” is necessarily broken into two clauses. . . .The first clause is modified by the term “written demands,” followed by the categories of demands that qualify as a Claim under the Policy. . . . The second clause includes only the term “Suit,” which is not modified by “written demands,” and therefore must be separated from the first clause.

In doing so, the court dismissed a contrary result in the Northern District of Georgia decision Cox Communications, Inc. v. National Union Fire Insurance Co., reasoning that “the court’s analysis in Cox did not address this argument” and that “[c]ourts that have addressed Zillow’s argument regarding the disjunctive use of the term ‘or’ have rejected it.”

Next, the court disagreed with Zillow’s argument “that the demand letter is not related enough” to the litigation, finding that the “VHT complaint alleges identical facts,” which was more than sufficient to satisfy the “relevant question [of] whether the two Claims involve the same relevant acts.”

The court essentially sidestepped Zillow’s argument that the policy lacked “commonly used language that would have defined the 2014 letter as part of the same Claim as the litigation” by finding that Zillow “ignore[d] Policy language that highlights the importance of the Policy’s ‘Claims first made’ provision.’” But the court found that, among other things, Zillow ignored the policy’s language providing National Union the “rights to direct the court of any Claim,” “direct the potential litigation in this case,” “the opportunity to settle a claim, with the insured’s consent, and the right to investigate any Claim.”

Is the Ninth Circuit on Board?

Attention now turns to the Ninth Circuit Court of Appeals, as Zillow appealed the decision. Should the Ninth Circuit affirm, insurers will have at their disposal an opinion providing a strong affirmation of the insurer’s contractual rights in the face of an insured’s multimillion dollar jury verdict.