Texas Supreme Court Reinforces that Subcontractors May be Liable to Property Owners

Kat Statman and Eddie De Los Santos – The Dispute Resolver – September 16, 2014

On August 22, 2014, the Texas Supreme Court ruled that both the trial court and the court of appeals improperly dismissed a property owner’s claim for negligence against a subcontractor for improper plumbing installation in Chapman Custom Homes, Inc. v. Dallas Plumbing Company. The Court reiterated that a subcontractor has an implied duty to perform with both care and skill and that breach of this duty may result in liability to property owners. The Court’s ruling in this case makes it clear that a subcontractor may be directly liable to a property owner even when the property owner and subcontractor do not have a contractual relationship.

In Chapman, Chapman Custom Homes was hired as a general contractor to build a home in Frisco, Texas. Chapman hired Dallas Plumbing Company to install the plumbing in the new house. The plumbing was allegedly installed improperly, and leaks from the plumbing significantly damaged the structure. The property owner sued Dallas Plumbing alleging breach of contract, breach of warranty, and negligence.

The trial court granted summary judgment for Dallas Plumbing because the property owner did not have a contract with Dallas Plumbing. Additionally, the trial court found the property owner did not allege a violation of a duty owed to it by Dallas Plumbing, independent of the contract.

Looking to a case from 1947, the Texas Supreme Court reversed the decision of the court of appeals. The Court found that, even though Dallas Plumbing and the property owner did not have a contractual relationship, Dallas Plumbing still had a duty to perform the contract with both care and skill. Therefore, the property owner’s suit alleging that Dallas Plumbing had performed work negligently was sufficient to raise an implied duty by Dallas Plumbing to perform its work with care and skill.

The Court further rejected Dallas Plumbing’s argument that the property owner was barred from recovery under the economic loss rule. The economic loss rule states that a party may not recover damages for failure to perform under a contract when the only damages are losing what the party expected to receive under the terms of the contract. The Court specifically noted that, when the tort duty is independent of the contract itself, the economic loss rule will not preclude recovery. In this case, the Court found that Dallas Plumbing had an independent duty to perform with care and skill. Because this duty was independent of the contract between Dallas Plumbing and Chapman Custom Homes, the economic loss rule did not preclude recovery.

There are a number of cases that state a subcontractor cannot be sued by a property owner for defective work because the property owner does not have a contract with the subcontractor, only with the general contractor. This case makes it clear that, while a property owner may not have a contract suit against a subcontractor with whom they do not have a contract, they may have a negligence claim. Importantly, this potential liability is independent of any contract with the subcontractor.

This case also reinforces an independent legal duty that subcontractors have to property owners when they are conducting work. At all times, they must perform the work with both care and skill. Failing to perform a contract with both care and skill may result in liability to the property owner in addition to potential contract liability to the general contractor.

Finally, because this duty and potential liability is independent of the contract between the subcontractor and general contractor, a subcontractor will not be able to escape liability under the economic loss rule. If a subcontractor breaches its duty to perform with care and skill, it will be liable for all damages caused by the breach.

via The Dispute Resolver: Texas Supreme Court Reinforces that Subcontractors May be Liable to Property Owners.

Under Florida Law, a “Sudden” Event Can Occur Over Time

Larry Bache – Property Insurance Coverage Law Blog – September 18, 2014

If you are a frequent reader of this blog, you are likely familiar with the general rule that policy language determined to be ambiguous is read in favor of the insured because the insured is the nondrafting party. A contract is ambiguous when its language is reasonably susceptible to more than one interpretation, or is subject to conflicting interests.

There are two types of ambiguities — patent and latent.

Patent ambiguities are on the face of the document or policy, while latent ambiguities do not become clear until extrinsic evidence is introduced and requires parties to interpret the language in two or more possible ways.

Recently, the Second District Court of Appeal overturned a summary judgment in favor of the insurer, Castle Key Indemnity Company, holding that the term “sudden,” as used in the policy, was a latent ambiguity.

In Price v. Castle Key Indemnity Company,1 water flowed from a pipe going to Mr. Price’s upstairs toilet for approximately thirty days while he was out of town. Castle Key based its denial on the policy’s continuous seepage exclusionary provision:

Seepage, meaning continuous or repeated seepage or leakage over a period of weeks, months, or years, of water, steam, or fuel . . . from, within[,] or around any plumbing fixtures, including, but not limited to shower stalls, shower baths, tub installations, sinks[,] or other fixtures designed for the use of water or steam.

Mr. Price contended that based on that time frame and the total number of gallons that escaped, the water had to have been exiting the pipe at a rate of 6000 gallons per day. Mr. Price argued that such a rate, at a minimum, creates an ambiguity as to whether the incident could be defined as seepage. Mr. Price further argued that the term “sudden” is not defined in the policy and that his situation should be covered because “sudden” can mean unexpected, a definition that may apply to a flow that occurs over time.

Despite the appellate court’s finding that the terms of the insurance contract were not facially ambiguous, i.e., patent, the terms of the policy were latently ambiguous.

The appellate court held:

However, the basic undisputed facts agreed to by the parties demonstrate the existence of the alleged latent ambiguities in the terms of the contract. Specifically, based on the undisputed fact that a large amount of water flowed from the pipe over time, the meaning of the contractual terms of “seepage” and “sudden” are less than clear. Additionally, the relevant facts regarding the cause of the escaped water — whether it escaped as an escalating leak or as a burst that continued at a constant rate — remain at issue. Because these “latent ambiguit[ies] affecting a disputed contract provision” existed, “there necessarily [existed] a disputed issue of material fact.

This is a great holding for Florida’s policyholders. I appreciate the Second District’s application of the definition for “sudden” meaning unexpected, and how that “unexpected” event may occur over a period of time and still be covered under the policy, if a trier of fact determines such.

1 Price v. Castle Key Indemnity Co., No. 2D13-1809, (Fla. 2d DCA Sept. 3, 2014).

via Under Florida Law, a “Sudden” Event Can Occur Over Time : Property Insurance Coverage Law Blog.

Liens With Intentionally Incorrect Information May Still Be Enforceable

Adam L. Gill and Jeffrey L. Hamera – Duane Morris – September 8, 2014

Generally, lien waivers that contain fraudulent information are not enforceable. However, not all intentionally misleading statements are fraudulent. The crux of the issue is whether a lien waiver simply states that the subcontractor has been paid a specific amount or whether the subcontractor claims that the work completed is worth the amount stated in the waiver.

The Illinois Appellate Court addressed this issue briefly in Casablanca Lofts, LLC v. Blauvise (2014 Ill. App. Unpub. Lexis 1377 (1st Dist. June 26, 2014)).  In arbitration, prior to litigation, the developer/owner of a condominium project, Casablanca Loft, discovered that the electrical subcontractor had submitted three lien waivers totaling $135,000 and had been paid $135,000.  Id. at ¶6.  However, the electrical subcontractor had only provided material and labor with a value of $19,000.  Id.  Casablanca Lofts then filed a complaint against the electrical subcontractor alleging that it fraudulent misrepresented the amount owed for labor and materials.  Id. at ¶¶5, 7.  The trial court found that the electrical subcontractor and its owner did not make false statements in the lien waivers, because “the mechanics lien waivers don’t say anything about the amount of work done….”  Id.  at ¶12.  The Illinois Appellate Court affirmed the trial court’s ruling without comment on the issue.

This case provides a sobering reminder to owners and general contractors.  Obtaining lien waivers is not merely a clerical requirement.  Lien waivers are a critical element of the construction payment process.  The lien waivers provided by the Casablanca Lofts subcontractor did not provide a statement regarding the value of the work actually performed or provide a percentage of work completed.  Owners and general contractors should require that subcontractors provide lien waivers prior to disbursing funds.  Owners, or their agents, and general contractors should examine lien waivers to verify that the amount stated in the lien waivers conform to the work actually performed.  Finally, in order to avoid overpaying subcontractors, lien waivers should indicate the value or percentage of work actually performed.

via Liens With Intentionally Incorrect Information May Still Be Enforceable – Real Estate and Construction – United States.

Is That Covered?

Michael R. Kelley – September 2014

If you or your clients have ever had the experience of submitting a claim to an insurance company, you probably know how difficult it can be to get the insurance company to pay the full amount of damages.  Even if the company agrees that a loss is covered, insurers frequently dispute the amount of the loss in an attempt to pay less.  Insurance companies have an approved list of experts (construction contractors, engineers, etc.) that they use to justify paying as little as possible.

In a bit of good news for policyholders, a Pennsylvania Court has held that an insurer’s failure to pay the proper amount of damages and follow its own appraisal rules may subject that insurer to bad faith damages.


In Currie et al. v. State Farm Fire & Casualty Co., No. 13-6713, 2014 WL 4081051 (E.D. Pa. Aug. 19, 2014), Robert and Kathleen Currie’s home was severely damaged by Superstorm Sandy in 2012.  State farm agreed that the loss was covered, but offered only $57,000 to cover the claim.  The Currie’s hired their own loss adjuster, who concluded that the total damages were actually $364,000.  Given the dispute, the Currie’s demanded that State Farm follow the appraisal process set forth in the policy to resolve the dispute.  State Farm refused and told the Curries to take its offer or get nothing.


The Eastern District Court in Pennsylvania ruled that State Farm’s arguments against using its own appraisal process were “disingenuous” and determined that the Currie’s bad faith claim against State Farm could proceed to trial.  If successful, the Curries can recover the full $364,000 for their loss, plus attorneys fees, punitive damages, and a special interest rate against State Farm.


Chalk one up for Policyholders!

via McNees Wallace & Nurick LLC – Publication/Article Search – Is That Covered?.