Construction Defect Damages May Exceed Cost To Repair

Peter Selvin | Ervin Cohen & Jessup

Construction defect cases often involve damage claims beyond simply the cost to repair the allegedly defective unit or component. These consequential damages may include damages for loss of use, expenses for mitigation and even attorney fees. For this reason, builders, suppliers, contractors and subcontractors who are faced with such claims should carefully review their insurance coverages, especially their CGL policies.

At the threshold, a defendant seeking coverage under its CGL policy in connection with a construction defect claim must satisfy the policy’s “occurrence” requirement. Although there is a split of authority on this point nationally, California law is settled that inadvertent property damage caused by intended construction activity constitutes an “occurrence.” See, e.g., Geddes & Smith v. St. Paul Mercury Indemnity Co., 51 Cal. 2d 558, 563 (1959); Anthem Electronics v. Pacific  Employers Insurance, 302 F.3d 1049 (9th Cir. 2002). See also Scott C. Turner, “Insurance Coverage of Construction Disputes,” Sections 6:56, 6:62 (2nd Ed.).

The next step is to establish that there has been “property damage.” This is because the basic coverage grant typically provides that the CGL insurer is responsible for paying “those sums that the insured becomes legally obligated to pay because of … property damage to which this insurance applies.” In turn, “property damage” is typically defined as either “physical injury to or destruction of tangible property … including the loss of use … resulting therefrom” or “loss of use of tangible property which has not been physically injured or destroyed [that has been] caused by an occurrence.”

It has been generally held that incorporation of defective components or faulty workmanship into a project constitutes “physical injury to tangible property,” thereby allowing coverage for damages from the loss, including damages measured by resulting decrease in the property’s value. See, e.g., United States Fid. & Guar. Co. v. Wilken Insulation Co., 550 N.E. 2d 1032 (Ill.App. 1989). The theory behind this rationale is that typical a coverage grant requires the CGL carrier to pay “those sums that insured becomes legally obligated to pay because of … property damage” (emphasis added). In other words, carrier responsibility includes not only damages that arise directly from the “property damage,” but also all sums arising because of the property damage. See, e.g., AIU Ins. Co. v. Superior Court, 51 Cal. 3d. 807 (1990) (reimbursement of response costs and the costs of injunctive relief under CERCLA and related statutes are insured “because of” property damage). While not exhaustive, the following examples illustrate some of the categories of consequential damages for which a CGL carrier may have responsibility.

Damage to the Larger Structure Caused by the Construction Defect

It is well established that damage to a physical structure, including the structure’s non-defective units or components, arising from the incorporation of the defective work should be covered under a CGL policy. See e.g., Economy Lumber v. Insurance Company of North America, 157 Cal. App. 3d 641 (1984). In some cases, damages are expressed as the diminution in value of the larger structure caused by the construction defect. See Franco Belli Plumbing & Heating v. Liberty Mut. Ins. Co., 2012 WL 2830247, *8 (E.D.N.Y. 2012) (“when one product is integrated into a larger entity, and the component product proves defective, the harm is considered harm to the entity to the extent that the market value of the entity is reduced in excess of the value of the defective component”); see also Anthem Electronics 302 F.3d at 1056-57 (“we decline to hold that coverage was precluded simply because the extent of such damage is expressed as an economic loss”).

So-Called “Rip and Tear” Damages

Where an owner must undertake repair work to existing conditions in order to access and remediate the defective work, the damages resulting therefrom may be covered. Thus, costs and expenses relating to this activity are considered part of consequential damages for which there should be coverage. Turner, supra, Section 6.29 (coverage for the damage to other, non-defective work necessarily caused in the course of removing or repairing the defective work).

Coverage for Costs Arising from Mitigation Efforts

In some cases, an owner may be obliged to take actions and incur expenses in order to protect the project from further damage caused by the alleged defect. Although the courts are split on this issue, the majority say these expenses are also considered as part of consequential damages for which there should be coverage. Turner, supra, Section 6.14, 6.22 (“costs incurred for mitigation or prevention of further property damage” are recoverable against CGL carrier).

Loss of Use

Damage resulting from the loss of use of the premises is a key item within the larger category of consequential damages. Am. Home Assurance v. Libbey-Owens-Ford, 786 F. 2d 22,  25 (1st Cir. 1986); Federated Mutual Insurance Co. v. Concrete Units, 363 N. W. 2d 751 (Minn. 1985); Gibraltar Casualty Co. v. Sargent & Lundy, 214 Ill. App. 3d 768 (1990); Lucker Manufacturing Co. v. The Home Insurance Co., 23 F. 3d 808 (3rd Cir. 1994); M. Mooney Corp. v. United States Fidelity & Guaranty Co., 618 A.2d 793, 796 (N. H. 1992); Thee Sombrero v. Scottsdale Ins. Co., 28 Cal. App. 5th 729 (2018); Turner, supra, Section 6:33.

Attorney Fees Awards

Some courts have held that attorney fees awards against the negligent contractor, subcontractor or supplier qualify as an element of consequential damages recoverable under a CGL policy. For example, in APL Co. v. Valley Forge Ins. Co., 754 F.2d 1084 (N.D. Cal. 2010), reversed on other grounds, 541 Fed. Appx. 770 (2013), the court concluded that the attorney fees award against the insured was covered under the insurance policy at issue. The court cited the policy provision there that coverage was provided for “those sums that the insured becomes legally obligated to pay as damages because of …’property damage.’” The court noted that inasmuch as the insured became obligated to pay attorneys’ fees to the claimant arising out of the underlying property damage claim, the award was properly recoverable against the insurer. 754 F.2d at 1094.

Other cases have reached the same result. See, e.g., American Family Mutual Ins. Co. v. Spectre West Building Corp., 2011 WL 488891 (D. Az. Feb. 4, 2011) (in the context of a construction defect case, the Court found that attorneys’ fees that were assessed against the insured were covered under the insurance policy, noting that “the issue before the court is not whether attorneys’ fees and costs can be characterized as ‘property damage’, but whether they can be characterized as damages that [the defendant construction company] became legally obligated to pay because of property damage”).

When Construction Defects Appear, Don’t Choose Between Rebuilding and Building Your Case

Curtis Martin | ConsensusDocs

When construction defects occur during construction, they intensify pressure from a schedule that may already be tight.  Defects must be analyzed, confirmed, removed, and replaced and this can be time consuming.   Or course, a construction schedule rarely anticipates defects, demolition, and rework and the owner will still expect the project to be completed on time; however, pressing forward with immediate remediation may have unintended consequences.

Before starting demolition, consider the evidentiary doctrine of spoliation. Spoilation occurs when a party destroys or unreasonably deprives another party of evidence and courts have imposed sanctions on a party that deprives an opponent of evidence.   The doctrine has historically concerned documents, but its application has extended to electronic data, and courts also apply it to building conditions in construction defects cases.  So, before tearing out or fixing defective work, consider the need to allow the opposing party to inspect, test and document it. 

Imagine this scenario. The concrete in a slab placed by your subcontractor shows low compressive strength results in the 28-day cylinder tests.   Tearing out the slab and replacing it will put you at least a month behind schedule and you don’t want to waste any time before removing and replacing it.  Nevertheless, while you’re rebuilding the defective slab, be mindful that you are also building a case.  If you plan to recover the costs you incur because of the defective concrete from the responsible parties, you should allow the subcontractor (and possibly the concrete supplier and other implicated parties) to examine, preserve, and/or test the work in question.  Failure to do so may subject you to spoliation sanctions and jeopardize your right to recover damages. 

Fast forward to the litigation over the defect.  The concrete subcontractor may make a case that the concrete wasn’t defective at all.  Its expert may argue that cylinder tests aren’t always accurate, and that some may not represent the actual strength of the concrete – for example, some concrete cylinders may break early due to anomalous concentration of aggregate in the cylinder.   The expert may argue that if given the opportunity to review later tests, or conduct alternate testing of the slab’s compressive strength, it might be shown that the cylinder test results do not represent the actual concrete strength – that the slab was strong enough, met specifications and should not have been replaced.   

Courts may be sympathetic to a party claiming spoliation.  You should expect that a trial judge’s analysis of a spoliation claim will begin from the presumption that the parties have a duty to preserve evidence.  At least one court said that “the burden of prejudicial effects” falls upon the spoliating party.  

If spoliation is proven, courts in most jurisdictions allow a variety of sanctions against the spoliator.  The harshest sanction for spoliation is fatal: the dismissal of a defect claim or the rejection of a defense because courts may treat the alteration or destruction of evidence as a form of admission by conduct.  Other sanctions can be less harsh but still damaging – for example, a judge may presume or instruct a jury to presume that missing evidence would have been detrimental to the party that altered or destroyed it.

Does the spoliation doctrine mean that you must halt construction or repairs that could damage or destroy defective work?   Unless there is an emergency or unsafe condition, the answer is usually yes; a pause should be made to put the parties responsible for the defective work on notice and provide an opportunity for them to inspect and evaluate it.   The goal then becomes to limit the length of the pause, so that repairs can get underway as quickly as possible.    With proper planning and swift communication and action, the pause may not unduly delay remediation.   And that pause will pay dividends in building your case and avoiding claims of spoliation. 

Every construction defect case is unique, but a few practical steps may guide you through the tension between preserving evidence and moving forward with repairs. 

  1. Thoroughly document the defect. 
  2. Give all potentially responsible parties written notice of the problem and an opportunity to inspect the site and document their findings if this can be done safely. 
  3. Notify the affected parties in writing of what steps will be taken to remediate the problem and when this will be done.   Solicit and consider any suggestions from affected parties about preserving evidence or allowing testing.  
  4. Consider whether an expert should be retained to assess, document, and report on the problem.  If testing is done, invite other parties to observe the testing and/or preserve other sections of the work to allow other parties to conduct their own testing. 
  5. Preserve all documents showing the original condition, corrections made, and all costs associated with remediation.   When possible, preserve samples of defective work for later inspection and/or testing. 

Owners, General Contractors, and subcontractors, when faced with defective construction, should work to preserve evidence that may be critical in a later legal battle. If they approach the problem prudently, they may be able to build their case while they rebuild the defective work.    

Change to the Statute of Limitations for Construction Defect Cases – How It Affects You

Samantha Carmickle and John Holper | Winthrop & Weinstine

Under Minnesota Statutes § 541.051, an action arising out of the construction or improvement of real property must be commenced within two years after the cause of action accrues.[1] But when does the cause of action accrue? The Minnesota Supreme Court answered this question on February 3, 2021, when it decided Moore v. Robinson Environmental[2]

In Moore, a homeowner, Moore, sued Robinson Environmental for damages caused by Robinson’s improper removal of asbestos in his home.[3] Moore brought his cause of action four years after the asbestos removal.[4] Robinson moved to dismiss the claim and argued that the 2-year statute of limitations in Minnesota Statutes § 541.051, subdivision 1(a) had expired.[5] Moore, on the other hand, argued that the 2-year statute of limitations did not apply because the removal was not an improvement to real property.[6] Moore argued that the statute of limitations did not begin to run upon the commencement of demolition work, but rather on the commencement of work which added to real property.[7]  The Court, assisted by amicus curiae Construction Law Section of the Minnesota State Bar Association, rejected this argument on the basis that “virtually every construction project involves both types of work[,]” and construction projects should be viewed as a whole.[8] Therefore, the Court held that if demolition is necessary prior to making additions to real property, then a cause of action under § 541.051 accrues when demolition begins.[9]

Following Moore, both contractors and owners need to be aware that a construction project is viewed as a whole even if multiple contractors are working on the project. Therefore, if a project is completed by two contractors and the first contractor does defective work, regardless of whether such work is demolition or addition, the cause of action accrues and the statute of limitations begins to run. As a practical matter, this means that owners must be vigilant in their detection of construction defects throughout the course of the project and must ensure to bring a cause of action within two years of the defective work, not two years of the project completion. Contractors, on the other hand, should recognize that the Moore decision affords them greater protection from construction defect claims through the use of a statute of limitations defense.


[1] Minn. Stat. 541.051, subd.1(a).

[2] 954 N.W.2d 277 (Minn. 2021).

[3] Id. at 279.

[4] Id.

[5] Id.

[6] Id. at 281.

[7] Id. at 284.

[8] Id.

[9] Id.

Caution To Contractors – How Your Subcontractor’s Defective Work Can Cost You In The Eleventh Circuit

Hannah-Kate Gosch | Freeman Mathis & Gary

Are general contractors covered when the cost of repairing or removing a subcontractor’s defective work results in the loss of use of the tangible property which is not itself physically damaged? 

The United States Court of Appeals for the Eleventh Circuit recently addressed this issue in Tricon Development of Brevard, Inc. v. Nautilus Insurance Company, No. 21-11199, 2021 U.S. App. LEXIS 27317 (Sept. 10, 2021). The insurance coverage dispute arose in Florida, where previous case law established that damage caused by faulty workmanship constitutes “property damage,” but the cost of removing or repairing faulty work does not. Amerisure Mutual Insurance Company v. Auchter Company, 673 F.3d 1294, 1306-07 (11th Cir. 2012) (“Amerisure“).  

In Tricon, Tricon Development of Brevard (“Tricon”) was hired to serve as general contractor for a condominium project in Florida. Id. at *1. In turn, Tricon hired a subcontractor to fabricate and install metal railings for the condo project. The subcontractor was insured by Nautilus through two commercial general liability (“CGL”) insurance policies, which covered “property damage” as defined under the policy. Id. at *1-2. 

The railings fabricated and installed by the subcontractor were later revealed to have defects and damage, were improperly installed, and did not meet the project’s specifications. Id. at *3. After Tricon hired and paid a new subcontractor to remove the original subcontractor’s railings and fabricate and install new railings that met the project’s specifications, Tricon filed an insurance claim with Nautilus to cover those costs. Id. Nautilus denied the claim, and Tricon sued for breach of contract in Florida state court. The district court granted Nautilus’s motion for summary judgment, and Tricon appealed. Id.  

In its decision, the Eleventh Circuit Court of Appeals relied heavily upon Amerisure, which involved a GCL policy with a products-completed operations hazard coverage provision, like the policy at issue in TriconId. at *4. In American Mutual, the court applied Florida law and held that “there [was] no coverage if there [was] no damage beyond the faulty workmanship, i.e., unless the faulty workmanship has damaged some otherwise non-defective component of the project.” Id. at 1306.  

Based on American Mutual and prior Florida case law, the Tricon court ruled that because Tricon did not allege that the subcontractor’s faulty work damaged otherwise non-defective components of the project, the costs incurred to remove the original subcontractor’s railings and the fabrication and installation of new railings did not constitute “property damage” covered under the GCL policy’s definition of “property damage.” Tricon,  at *5-6. While this ruling is based on Florida case law regarding GCL policies and is limited in scope to Florida contracts, the underlying analysis and the implications may be far-reaching, especially in the Eleventh Circuit. 

Washington State Supreme Court Issues Landmark Decision on Spearin Doctrine

Cameron Sheldon | Ahlers Cressman & Sleight

The Washington State Supreme Court’s recent decision in Lake Hills Invs., LLC v. Rushforth Constr. Co. No. 99119-7, slip op. at 1 (Wash. Sept. 2, 2021) marks the first time in over 50 years that it has ruled on the Spearin doctrine. The Court’s opinion clarified the contractor’s burden when asserting a Spearin defense and affirmed the jury’s verdict in favor of contractor AP Rushforth Construction Company (AP).  The decision is a major win for Ahlers Cressman & Sleight PLLC attorneys Scott Sleight, Brett Hill, and Nick Korst, who represented AP throughout its long-running dispute with Lake Hills Investments, LLC (LH), including the two-month jury trial and the appeal. Leonard Feldman of Peterson | Wampold | Rosato | Feldman | Luna and Stephanie Messplay of Van Siclen Stocks & Firkins also represented AP on appeal.  

At trial, the owner—Lake Hills Investments, LLC (LH)—asserted it was entitled to $3 million in liquidated damages and $12.3 million for defects it alleged were caused by AP’s deficient workmanship. AP denied responsibility for the delays and most of the defects and requested payment of $5 million. Regarding LH’s defect claims, AP argued as an affirmative defense that the defects were caused by deficiencies in the plans and specifications provided by LH. This affirmative defense was rooted in the Spearin doctrine, which states that when the contractor follows plans and specifications provided by the owner, the contractor is not responsible for defects caused by the plans and specifications.  

After much back and forth over how to instruct the jury on the defect claims, the trial court instructed the jury as follows: 

For its affirmative defenses, AP has the burden to prove that LH provided the plans and specifications for an area of work at issue, that AP followed those plans and specifications, and that the [construction] defect resulted from defects in the plans and specifications.  

The jury returned a verdict in favor of AP.  The jury awarded AP $5 million on its payment claim, rejected LH’s liquidated damages claim, and awarded LH $1.5 million for defects (some of which were conceded by AP), finding that AP had performed defective work on six of the eight areas of claimed defects. But the jury awarded no damages for certain defects, indicating that it may have agreed with AP that the cause of the defect was LH’s defective plans and specifications. Ultimately, the court awarded AP a net judgment of over $9 million, including nearly $6 million in attorneys’ fees, expert fees, and costs.  

LH appealed, claiming the trial court issued incorrect jury instructions regarding AP’s affirmative defense. The Court of Appeals agreed, holding:  

[P]roof of any defect in the plans and specifications for that area contributing to a construction defect would let AP avoid all liability for that area even if Lake Hills proved AP’s deficient performance caused some of the damage. This instruction incorrectly understated AP’s burden of proof. 

According to the Court of Appeals, the instruction as given “clearly misstated the law,” and the instruction would have adequately stated the law had it included the word “solely” as LH requested. The court reasoned that the instruction provided to the jury allowed the jury to absolve AP of all liability for an area, even if only part of the defective work resulted from defective plans and specifications.  

AP petitioned the Washington State Supreme Court for review. On June 24, 2021, the Supreme Court heard oral arguments. A recording of the parties’ oral arguments can be found here: https://www.tvw.org/archives/.  

The Supreme Court reversed the Court of Appeals and ruled that although the wording of the trial court’s Spearin instruction was “potentially misleading,” it was not prejudicial to LH because it allowed the jury to apportion fault between LH and AP and “the jury had every opportunity to award LH damages based on claims for each breach of contract.” No. 99119-7, slip op. at 18. The Court explained that a Spearin affirmative defense can be used to absolve the contractor of all liability or only a portion of liability: 

An affirmative design defect defense is a complete defense if the damage is solely due to the design. However, if the defects were caused by a combination of deficient performance and deficient design, then it is not a complete defense.  

Id. at 16.  The Supreme Court recognized that the Spearin defense may be used by a contractor to reduce liability rather than totally escape it. The Supreme Court rejected the all-or-nothing reasoning of the Court of Appeals. While the Court of Appeals viewed the Spearin defense instruction as improperly allowing the jury to absolve AP of fault so long as deficiencies in LH’s plans and specifications contributed in some way to the defects, the Supreme Court understood that the instructions as a whole intended for the jury to apportion liability appropriately between AP and LH based on whether the defects were caused by the work AP performed or the plans and specifications LH provided.  

The Supreme Court’s reversal means the jury verdict stands and the case will not be retried. However, the Supreme Court remanded the case to the Court of Appeals to consider LH’s arguments on to the trial court’s award of attorneys’ fees, which the Court of Appeals did not reach in its earlier decision.   

Commentary 

The Supreme Court’s opinion is the first time the Court has considered Spearin in 50 years, and it provides an essential clarification of the contractor’s burden when asserting a Spearin defense. In particular, the Court’s decision reaffirms clear precedent limiting a contractor’s liability for defects when the contractor follows the owner’s plans and specifications, as well as Washington’s public policy allocating risk and liability between contractors, owners, and architects (among others) on construction projects. Importantly, the opinion indicates that a contractor can still use a Spearin defense to reduce its liability even if some defects were caused in part by its own deficient work.