Monthly Archives: October 2016

Construction Defect Lawsuits Often Hinge on Document Retention

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Jason E. Handin | Daily Business Review | October 26, 2016

The outcome of construction defect lawsuits often comes down to the validity of expert witness testimony and — most importantly — project documentation.

The chances of overcoming a construction defect claim without the documents that detail the entire life of the project in question are not very good. Without documentation, expert witnesses have limited information to review in order to form their opinions. A lack of documents can result in the expert’s opinions being stricken from the record through a Daubert challenge due to a lack of grounds or factual basis for those opinions.

While retaining project documents is of the utmost importance and many entities do so to some degree, construction and design companies still frequently fail to retain them for a sufficient amount of time. These companies often operate without any formalized plan for document retention and use the nebulous phrase “industry standards” or the common excuse of “this is the way we’ve always done it,” to determine how long to retain project documents. These construction and design companies are not retaining documents to the extent necessary to avoid legal risk.

Instead, the Florida statute of repose, in Section 95.11(3)(c) of the Florida Statutes, should govern how long project documents are retained. The statute of repose details the absolute time period in which a construction defect lawsuit may be filed. This includes both the four-year statute of limitations pertaining to construction defect lawsuits and the 10-year statute of repose.

The statute of limitations states that a lawsuit based on the “design, planning or construction of an improvement to real property” must be filed within four years after one of the following occurs: possession of the property by the owner, the date of the certificate of occupancy’s issuance, the date of abandonment of the project if it was not completed, or the date of the completion or termination of the owner’s contract with the engineer, architect or contractor being sued. However, when the lawsuit involves a latent or hidden defect, the four-year time period runs from the day the defect is discovered or should have been discovered “with the exercise of due diligence.” Most importantly, the statute of repose provides that “in any event” the lawsuit must be filed within 10 years following the latest of these four thresholds.

Simply put, the owner has 10 years to discover defects, but once discovered, the owner has only four years (up to the 10-year mark) to take legal action for them. The purpose of the statute of repose is to avoid an unlimited time period in which claims can be made for latent defects that may not be discovered or cause damage until decades after the project’s completion.

The statute of repose timeframe is critical to guide a construction or design firm in forming its internal document retention policies. In general, many construction and design firms hang on to project documents for seven years before destroying their project file. Enforcing such a policy inconsistent with the Statute of Repose is risky, especially considering that there is a window of an additional three years under the statute of repose when construction defect claims can still be made. With this consideration, the primary reason for revising a document retention policy becomes clear: if a construction defect lawsuit can still be filed against your company, why destroy the project file and undermine your ability to defend against a claim?

After closing out a construction project, paper files can accumulate. While burdensome, it is still necessary to retain the documents because it is extremely difficult to predict alleged claims in a future lawsuit and which documents will be relevant to those claims. Sensible document retention, for the allotted time under the statute of repose, is the best way to minimize the potential for costly surprises.

However, the decision boils down to an analysis of retaining physical documents for the required period of time versus the potential strategic risks of not retaining records that may be beneficial in the future. If limited physical storage space is an issue, scanning systems and document storage services can help reduce the need for physical space and document retention costs. If it becomes necessary to limit the documents that can be retained, the documents that should be kept are those reflecting what was required per contract, what occurred during the planning and construction phases of the project, and any documents reflecting changes or problems that arose during those time periods.

Policy Checklist

To help establish a policy, these firms should take the following steps:

• Communicate the written policy to all employees and clients.

• Hold a live seminar with key supervisors to review the policy and answer questions.

• Be explicit about which documents should be retained.

• Establish a procedure for preparing and collecting documents both in the field and in all offices.

• Prohibit any business-related communication between employees on private cell phones.

• Prohibit archiving of records at nonbusiness sites.

• Clearly label and organize retained files to assist with searches.

• Keep a backup of files stored at a site outside of the business premises if retaining documents digitally without any physical copies being kept.

• Suspend all destruction of records for a particular project upon receiving verbal or written notice of potential claims being asserted. Destruction of files after receiving notice of a potential claim can be interpreted by a judge or jury as an attempt to improperly destroy evidence, known as spoliation, which can result in evidentiary sanctions being imposed.

The document retention policy should be implemented uniformly in all projects. One individual, most likely the lead risk management employee, should be responsible for implementing and managing the firm’s policy. This approach greatly enhances the appearance of corporate responsibility and offers the best response to construction or design defect claims. Construction and design professionals should turn to an experienced construction attorney to better understand the statute of repose and help ensure their retention policy is clear and lawful.

Statute of Limitations Can Bar Indemnification Claims If Brought Too Soon

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Timothy W. Gordon | Holland & Hart LLP | October 21, 2016

Piecemeal appellate-court decisions have put developers and contractors in a catch-22 with respect to the timing of indemnification claims against their subcontractors. Their indemnification claims against subcontractors might be barred by the two-year statute of limitations unless they wait until after the underlying construction defects litigation is resolved in order to take advantage of the 90-day tolling period. But waiting until the underlying construction defects litigation is resolved might result in their indemnification claims being barred by the six-year statute of repose.

Colorado law, at Section 13-80-104(1)(a), C.R.S., provides a two-year statute of limitations and a six-year statute of repose for construction defects actions:

Notwithstanding any statutory provision to the contrary, all actions against any architect, contractor, builder or builder vendor, engineer, or inspector performing or furnishing the design, planning, supervision, inspection, construction, or observation of construction of any improvement to real property shall be brought within the [two-year limitations period] provided in section 13-80-102 after the claim for relief arises, and not thereafter, but in no case shall such an action be brought more than six years after the substantial completion of the improvement to the real property, except as provided in subsection (2) of this section.

However, Section 13-80-104(1)(b)(II), C.R.S., provides the following 90-day tolling provision for indemnification claims related to construction defects actions:

[A]ll claims, including, but not limited to indemnity or contribution, by a claimant against a person who is or may be liable to the claimant for all or part of the claimant’s liability to a third person . . . [a]rise at the time the third person’s claim against the claimant is settled or at the time final judgment is entered on the third person’s claim against the claimant, whichever comes first; and . . . [s]hall be brought within ninety days after the claims arise, and not thereafter.

This “tolling” provision is supposed to allow general contractors and developers to defend against construction-defects claims without having to bring third-party claims against every subcontractor and supplier. Instead, the general contractor can, within 90 days after judgment or settlement of the defects lawsuit, bring an indemnification action against the proper subcontractors responsible. As acknowledged by the Court of Appeals, “[t]he purpose of section 13-80-104(1)(b)(II) was to streamline construction defect litigation by . . . defer[ring] the running of the statute of limitations on indemnity and contribution claims that construction professionals who are defendants in construction defect lawsuits might have against another person.” Thermo Dev., Inc. v. Cent. Masonry Corp., 195 P.3d 1166, 1168 (Colo. App. 2008).

Based on these statutes, an October 20, 2016, decision by a division of the Colorado Court of Appeals created an odd situation where indemnification claims, if brought too early, can actually be barred by the statute of limitations. In Sopris Lodging, LLC v. Schofield Excavation, Inc., 2016COA158, owner Sopris Lodging filed a construction defects action against general contractor TDC in 2013. In 2014, while the owner’s claims against it were pending, TDC filed third-party indemnification claims in the same action against several subcontractors, including Schofield Excavation. The claims all accrued in 2011. So the owner’s claims against TDC were timely filed in 2013. But TDC’s indemnification claims against Schofield Excavation filed in 2014 where technically untimely under the two-year statute of limitations.

Schofield Excavation filed a motion for summary judgment based on the statute of limitations. In response, TDC argued that the 90-day tolling provision in Section 13-80-104(1)(b)(II), C.R.S., applied to toll the statute of limitations on its indemnification claims. But the trial court and the Court of Appeals disagreed, and the Court of Appeals held that the tolling provision only applied in instances where the indemnification claims were brought after the underlying defects action was either settled or resolved by final judgment.

TDC did not wait to file claims against subcontractors in a separate lawsuit. Instead, it chose to assert third-party claims in the original construction defect litigation. Therefore, section 13-80-104(1)(b)(II) did not apply to TDC’s third-party claims. But had TDC waited until after Sopris Lodging’s underlying claims against it were resolved to file its indemnity or contribution claims against its subcontractors, then section 13-80-104(1)(b)(II) would have applied, and its indemnification claims would not have been time barred. Id. at ¶ 19. So TDC essentially brought its indemnification claims too late and too soon.

So under the Schofield Excavation opinion, section 13-80-104(1)(b)(II), C.R.S., basically can resurrect dead indemnification claims that otherwise would be barred by the statute of limitations. But there is a catch: The statute of repose may still apply.

In Sierra Pacific Industries, Inc. v. Jason Bradbury, d/b/a Bradbury Construction, Inc., 2016COA132, a division of the Colorado Court of Appeals held that the “substantial completion” date under the statute of repose is different for each contractor. Specifically, “a subcontractor has substantially completed its role in the improvement at issue when it finishes working on the improvement.” Id. at ¶ 28. Moreover, the statute allowing the maintenance of an indemnification action within 90 days of settling an underlying construction defects lawsuit does not toll the six-year statute of repose. See Bradbury at ¶ 16. So Section 13-80-104(1)(b)(II), C.R.S., will be of no use if a construction defects lawsuit is not resolved within six years of substantial completion of the work performed by the subcontractor at fault.

The Court in Schofield Excavation acknowledged in a footnote the fact that the statute of repose may bar an indemnification claim if the underlying defects action is not resolved within that six-year time period. But that did not change the Court’s opinion. Developers and general contractors will have to closely monitor the timing of claims, carefully decide when to bring indemnification claims, and take into consideration these statutory deadlines when deciding when to settle defects claims brought against them.

Oregon Court of Appeals Rules That Negligent Construction (Construction Defect) Claims Are Subject to a Two-Year Statute of Limitations

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John P. Ahlers | Ahlers & Cressman | October 13, 2016

Statutes of limitations are distinct from statutes of repose.  There is a lot of confusion between the two.

Generally, a statute of limitations is a law which sets the maximum period of time which one can wait before filing a lawsuit, depending on the type of case or claim.  The periods vary by state and by type of claim.  Most states also employ a “discovery rule,” which provides that the statute of limitations does not “accrue” until such time as the plaintiff knew or should have reasonably known that the injury or property damage has occurred.

A statute of repose provides a date upon which the action no longer exists, whether it has accrued by a date or not.  It entirely cuts off an injured person’s right of action even before it accrues.  The statute of repose is not a limitation of an injured person’s remedy, but rather defines the right involved in terms of the time allowed to bring the suit.  Statutes of repose are generally more strictly enforced.  Simply put, the difference is that a statute of limitations is triggered by an injury or property damage, while a statute of repose is triggered by the completion of an act (generally substantial completion in construction cases).  The fundamental purpose of statutes of limitations / repose is to give defendants reasonable commercial certainty that there will be an end to liability arising out of a contract and to protect parties from defending against stale claims.

The Oregon Supreme Court recently issued an opinion holding that a two-year statute of limitations applies to negligent construction defect claims subject to a discovery rule.  Therefore, negligent construction defect claims in Oregon must be brought within two years of when the plaintiff (injured party) knew or should have known of the defect, and per the statute of repose, no later than ten (10) years after construction was substantially complete.[i]  In Kingsmen,[ii] the plaintiff homeowners filed a construction defect lawsuit against a stucco contractor nearly ten years after construction was completed, and, according to the contractor, over two years after the alleged defects were discovered.  The homeowners argued that the six-year statutory period applicable to actions for “interference with injury to any interest of another in real property” controlled.  The contractor asserted that the two-year statute of limitations generally applicable to negligence claims controlled, because that statute applied to “any injury to the person or rights of another, not arising out of contract, and not especially enumerated in this chapter.”  The Oregon Supreme Court, after an extensive analysis of the competing statutes of limitations, concluded that the catch-all two-year tort statute controlled.

Comment:  Most construction cases involve breaches of contract which are subject to a six-year statute of limitations, and a ten-year statute of repose in Oregon.  Since the statute of limitations is subject to the discovery rule; that is, the statute does not begin to run until the injured party knows or should have known of the injury, generally the statute of repose operates the outside limit by which plaintiffs can bring causes of action for construction defects.

Do All Insurance Policies Require a Total Collapse to Trigger Collapse Coverage?

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Kevin Pollack | Property Insurance Coverage Law Blog | October 22, 2016

In California, if a property insurance policy does not specifically require a collapse to be complete or actual falling down to trigger coverage, then an imminent (i.e., impending) collapse will probably trigger coverage.1

However, on the flipside, if a policy does specifically require a collapse to be “complete” or “actual” falling down, then an imminent collapse is not sufficient.2

Not all property insurance policies contain the exact same language. So whether an insurance policy requires a complete collapse, or whether an imminent collapse will be sufficient to trigger coverage cannot be answered without a careful analysis of the insurance policy and an investigation of the facts and circumstances.

Recently, I have seen claims where some insurers have denied collapse claims by taking the position that their insurance policies require complete collapse to trigger coverage, even though the policies do not specifically spell out that a “complete” collapse is required.

Importantly, in California if a policy provision is determined to be ambiguous because it is susceptible to more than one reasonable interpretation, courts will generally construe the ambiguous provision from the perspective of the insured’s objectively reasonable expectations.3 In other words, when a policy’s collapse provision is ambiguous, courts will generally read the provision in favor of the insured and in favor of coverage.

Therefore, if a property policy’s collapse coverage does not specifically spell out that a complete collapse is required, insureds and public adjusters should not simply take the carrier’s word that the policy requires a complete collapse, and that because a complete collapse has not happened, there is no coverage.

Instead, the entire insurance policy should be reviewed to evaluate whether the collapse provision is susceptible to a reasonable interpretation that something less than a complete collapse is sufficient to trigger coverage.

1 Doheny West Homeowners’ Assn. v. American Guarantee & Liability Ins. Co. (1997) 60 Cal.App.4th 400.
2 Rosen v. State Farm General Ins. Co. (2003) 30 Cal.4th 1070; Jordan v. Allstate Ins. Co.(2004) 116 Cal.App.4th 1206.
3 Jordan v. Allstate Ins. Co. (2004) 116 Cal.App.4th 1206.

 

Economic Loss Doctrine Bars Negligence Claim Against Building Company Owner, Individually

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Michael L. DeBong | The Subrogation Strategist | October 20, 2016

In Beaufort Builders, Inc. v. White Plains Church Ministries, Inc., 783 S.E.2d 35 (N.C. Ct. App. 2016), the Court of Appeals of North Carolina addressed whether the economic loss rule barred the negligence claim of White Plains Church Ministries, Inc. (White Plains) against Charles F. Cherry (Cherry), the owner of Beaufort Builders, Inc. (Beaufort Builders). The court held that, because the economic loss rule would bar White Plains’ negligence claims against Beaufort Builders, White Plains could not pursue a third-party negligence claim against Cherry, individually.

In Beaufort Builders, White Plains entered into a contract pursuant to which Beaufort Builders agreed to construct a church for White Plains. Federal Emergency Management Agency regulations mandated that the church foundation be built above the seven foot base flood elevation (BFE). White Plains hired Ralph Jarvis (Jarvis), a surveyor, to determine the elevation at the building site. Jarvis surveyed the property, set a pole at the building site and marked it at an elevation of eight feet, which was one foot higher than the seven foot BFE.

During construction, Cherry, co-owner and president of Beaufort Builders, removed some soil from the foundation and transported it for use on the parking lot prior to laying the foundation. Although Cherry thought the foundation pad Beaufort Building eventually laid was at the proper level, a final survey revealed that, through a combination of Jarvis mismeasuring the initial BFE and Cherry removing soil from the foundation, the foundation pad was below the BFE. Thus, the county would not issue a certificate of occupancy to White Plains. Because it could not obtain a certificate of occupancy, White Plains refused to pay Beaufort Builders the remainder of the contract price.

Thereafter, Beaufort Builders instituted a lawsuit against White Plains for breach of contract. In response, White Plains filed a counterclaim against Beaufort Builders asserting breach of contract and negligence, and a third-party complaint against Cherry asserting negligence based on his removal of foundation soil. The jury found that: (1) White Plains breached the contract, (2) Beaufort Builders did not breach the contract, and (3) Cherry was negligent. The jury awarded Beaufort Builders $70,090.00 in damages for White Plains’ breach of contract claim. The jury also awarded White Plains $57,500.00 in damages for Cherry’s negligence. Cherry moved for a judgment notwithstanding the verdict (JNOV), which the trial court granted. White Plains appealed the entry of JNOV in favor of Cherry.

On appeal, the Court of Appeals of North Carolina discussed North Carolina’s economic loss rule and stated that, under the rule, where all rights and remedies are set forth in a contractual relationship between the parties, no negligence claim exists. In North Carolina, the rule applies to building contracts where the only injury claimed is to the building that is the subject matter of the contract between the parties.

Although White Plains argued that the economic loss rule did not apply to its negligence claim against Cherry because it was not in privity with Cherry and it did not authorize Cherry to move dirt from the foundation to the parking lot, the court rejected White Plains’ argument. Because Cherry was the president and co-owner of Beaufort Builders, he was on the construction site because of his company’s contract with White Plains and all of the actions he undertook at the site were related to Beaufort Builder’s contractual obligations. In addition, the only injury White Plains alleged was that it did not receive the benefit of its bargain: a properly constructed church building. Thus, the court held that White Plains could not do an “end run” around the economic loss rule to pursue a negligence claim against Cherry, individually. Consequently, the Court of Appeals of North Carolina affirmed the trial court’s entry of JNOV in favor of Cherry.

In light of Beaufort Builders, if the economic loss rule bars claims against a building company, it should also bar claims against the building company’s officers. Thus, if a subrogating insurer in North Carolina wants to pursue negligence claims against a company officer under a participation theory, the insurer should analyze, initially, whether it can state a negligence claim against the building company.