Category Archives: Construction Defects

Insurer Has No Obligation to Cover Arbitration Award in Construction Defect Case

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Tred R. Eyerly | Insurance Law Hawaii

    The court determined there was no coverage for an adverse arbitration decision suffered by the insured in a construction defect case. Am. Fire and Cas. Co. v. Unforgettable Coatings, Inc., 2023 U.S. Dist. LEXIS 64846 (D. Nev. April 13, 2023). 

    Unforgettable contracted with Muirfield Village Homeowner’s Association for painting and related services. Following completion of the project, Muirfield alleged that Unforgettable’s work was defective and filed suit. The parties agreed to arbitration. The arbitrator found that Unforgettable breached the contract and its implied warranty. Damages were awarded to Muirfield. 

    American Fire and Casualty Company (AFCC) was Unforgettable’s insurer and defended Unforgettable at the arbitration. AFCC sued for a declaration that it had no obligation to indemnify Unforgettable for the damages awarded. Unforgettable and Murifiled counterclaimed, alleging that AFCC breached the policy by not covering the award, as well as a variety of extracontractual claims related to the investigation process. AFCC moved for judgment on the pleadings. The motion was granted with leave to amend.

    After the counterclaims were amended, AFCC again moved for judgment on the pleadings. The court first found that Unforgettable had assigned all of its rights under the policy to Muirfield. Therefore, Unforgettable had no standing and its counterclaims were dismissed. 

    In the second amended counterclaims, Muirfield provided no allegations that persuaded the court to reconsider its initial analysis. “Occurrence” did not apply to faulty workmanship. Muirfield argued that the word “accident” within the definition of “occurrence” was ambiguous. The court rejected the argument. Regardless of what “accident” meant precisely, the court had already excluded the relevant conduct from the definition. The damage was the poor workmanship itself. 

    The argument for breach of the implied covenant of good faith and fair dealing also failed. The denial of coverage was proper and there was nothing to trigger coverage.

    Muirfield’s request for leave to amend was also rejected. Muirfield already had two opportinities to cure its pleading and failed to do so. 

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Liability in Washington: Who Pays for Construction Defects that Pose Safety Risks?

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Matthew Mues | Davis Wright Tremaine

The rule of thumb in Washington state has been that contractors and developers cannot be held liable in negligence for construction defects.[1] However, an unpublished decision filed December 12, 2022, by the Washington Court of Appeals in SOP, LLC v. DWP General Contracting, Inc. casts new light on this line of thought.[2]

In SOP, a subsequent owner of an apartment complex brought claims for breach of contract and negligence against a number of entities involved in the original development and construction of the complex for construction defects in the apartments. The subsequent owner’s claims were dismissed on summary judgment by the trial court. The Court of Appeals upheld the ruling.

Regarding the breach of contract claim, the Court of Appeals determined that although the addendum to the purchase and sale agreement (“PSA”) assigned “all construction warranties” to the subsequent owner, the PSA itself stated that the seller of the complex made no warranties regarding the building and, thus, there were no warranties to assign.[3]

As for the negligence claim, the Court of Appeals did not reject it outright on the grounds that there are no negligence claims against developers or contractors in Washington for construction defects. Rather, it started its analysis by stating that the “economic loss rule is no longer the correct analysis” for determining whether a negligence claim can be brought in a construction defect case. It clarified that “[w]here a court must determine whether a plaintiff is limited to contract remedies or whether they may recover in tort, ‘the court’s task is not to superficially classify the plaintiff’s injury as economic or noneconomic.'”[4] Instead, the “court must apply the independent duty doctrine.”[5]

The Court of Appeals then stated as follows:

In the construction context, a party owes a duty in tort independent of the contract where it creates a defect that causes a significant safety risk and its professional role puts it ‘in the best position to prevent harm.’[6]

It then went on to cite to cases where plaintiffs were able to maintain negligence claims against engineers for causing harm involving safety risks (e.g., fire on the Seattle monorail; structural engineering errors that led to defects that rendered a building dangerously unsafe in a large seismic event), due to the duty of those engineers to exercise reasonable skill and judgment in performing engineering services to avoid safety risks.[7] However, in SOP, the Court of Appeals did not limit the duty to prevent safety risks to engineers.

Instead, it first acknowledged that the entities involved in the original development and construction had “no independent tort duty to avoid construction defects.” But then, in response to the subsequent owner’s position that the defects have caused it to face extensive repairs to various parts of the structure, it went on to state that the subsequent owner “presented no evidence that the defects in Phase 2 caused or could cause significant safety risks to a large number of people” and that “none of the defendants here were responsible for the design of Phase 2 such that they were in the best position to prevent major safety risks.”[8]

Takeaways

The Court of Appeals’ reasoning in SOP raises the question of whether a developer or contractor could be held liable in negligence for construction defects. That is, if (1) a developer or general contractor arguably causes or contributes to construction defects, (2) those defects cause or “could cause” safety risks, and (3) the developer or general contractor was arguably in a position to prevent such risks, could they be liable in negligence to an owner of a building, structure, or home? We shall see how this plays out at the trial court level and whether we will gain clarity on this issue from the Washington Court of Appeals or Supreme Court in the years to come.

[1] See, e.g., Stuart v. Coldwell Banker Commercial Group, Inc., 109 Wn. 2d 406, 411, 745 P.2d 1284 (1987).

[2] 24 Wn. App. 2d 1046 (2022), 2022 WL 17590865.

[3] The subsequent owner made another argument that the warranties for a different phase of the project (Phase 1) applied to the phase at issue (Phase 2) due to option language, which stated that the sale of Phase 2 would occur on the same terms as the sale of Phase 1, which had construction warranties. The Court of Appeals disagreed, citing to the express language in the PSA itself stating that seller “makes no representations or warranties” regarding the Phase 2 property and that the addendum assigned warranties for just the Phase 2 property. 2022 WL 17590865, *3 – *4.

[4] Id. at *4, citing Affiliated FM Ins. Co. v. LTK Consulting Servs., Inc., 170 Wn. 2d 442, 449, 243 P.3d 521 (2010).

[5] Id.

[6] Id. at *5, citing to Affiliated,170 Wn. 2d at 453.

[7] Id., citing to Affiliated,170 Wn. 2d at 456-57, and Pointe at Westport Harbor Homeowners’ Ass’n v. Engineers Northwest, Inc., P.S., 193 Wn. App. 695, 700, 704-05, 376 P.3d 1158 (2016).

[8] Id.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Contractor’s Overstatements of Amounts Owed Were a Simple Failure to Abide By Contract Terms, Requiring Reversal of Statutory Fraud Judgment

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W. Matthew Bryant and Bethany Beaver | Saul Ewing

The Illinois Appellate Court reversed a trial court’s statutory fraud judgment against a contractor in a defective construction case. The Appellate Court held that as a matter of law: (1) a contractor’s misstatement of amounts due for work did not support a statutory fraud claim even when the contractor appeared to have billed for work not actually performed; (2) the contractor’s mischaracterizing the status of payments to subcontractors (at least in the absence of subcontractor lien claims) was similarly not fraudulent; and (3) “puffing” of work in conjunction with the incorrect invoicing was not sufficient to elevate conduct in breach of the parties’ contract to the level of statutory fraud. In the Appellate Court’s opinion, the owner failed to prove fraud distinct from the breach of contract claim. Nitekman v. Fifield Construction and Realty, LLC, 2023 IL App (1st) 211319-U.

In Nitekman, the plaintiff property owner contracted with the defendant contractor to build a third-floor addition to the owner’s two-story home and a “breezeway” connecting the house to a detached garage. During construction, the owner and the contractor had a dispute over a leak in the owner’s bedrooms and other defects with the construction, after which the contractor announced he would do no further work on the project under the contract. The owner filed suit against the contractor for breach of contract and violation of Illinois Consumer Fraud and Deceptive Business Practices Act. After a bench trial, the trial court entered judgment in favor of the owner on both counts and awarded the owner $334,551, including punitive damages and attorneys’ fees.

On appeal, the Appellate Court reversed the judgment in favor of the owner on the consumer fraud claim because the owner failed to allege facts outside the breach of contract claim. The court held “a breach of contractual promise, without more is not actionable under the Consumer Fraud Act.” Instead, the contractor’s statements in invoices that overstated the amount of work done, and the contractor charging plaintiff for uncompleted work were merely “a matter of the payment terms in the contract” and “a simple failure to abide by the contractual payment terms, not a consumer fraud.” The contractor’s statement that “his work would ‘end water issues forever’” was a description relating to the quality of his work and therefore a nonactionable “subjective characterization.” And the contractor’s misrepresentations that he was “about $30,000 out of pocket in paying subcontractors and vendors, when in fact there should have been a positive balance of approximately $23,000” was another instance of a matter concerning the payment terms of the parties’ contract. Consequently, the Appellate Court reversed the judgment in favor of the owner on the statutory fraud claim and remanded the case to the trial court with directions to vacate the consumer fraud judgment including the award of punitive damages and attorney fees.

Owners and contractors in Illinois should be aware that owners will have to allege more than just contractor misrepresentations about contract amounts due and defective construction in order to plead and prove an Illinois statutory fraud claim. And even if successful in the trial court, the Appellate Court will review closely “misrepresentations” supporting claims of statutory fraud.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

How Technology Reduces the Risk of Façade Defects

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Ori Aphek | Construction Executive

The shell of the building is an onlooker’s first impression and crafts the architectural aesthetic, but it also plays a crucial role in enabling energy efficiency and protecting against the elements. Because façades are in direct contact with the elements, issues with water intrusion are the most common problem and the costliest to remedy, with anywhere from 30% to 70% of lawsuits related to water intrusion, half of it through the façade. Additionally, improperly installed façades pose significant safety risks because unsecured parts can fall and hit people below.

All these factors contribute to the façade being one of the most complex and costly aspects of a building to construct and inspect, making up 205 of the total project cost. Installing these systems correctly the first time is the most effective way to mitigate these threats. Teams should utilize data-informed technology that ensures plan adherence, reducing risk and avoiding errors during installation. 

THE CHALLENGES OF FAÇADE INSTALLATION

Façade installation and subsequent inspection are inherently challenging, particularly for high-rise buildings. When performing post-installation verification manually, inspectors must review every element, joint by joint, window by window, stone by stone and brick by brick, which can take months to complete. Inspections of the entire building system are limited by this process, as inspectors can only access one portion of the building façade at a time and often have to inspect from indoors, on balconies or at the ground level, which doesn’t paint a complete picture. As a result, teams typically only perform spot checks on the façade and are rarely inspected to their fullest. This leaves many installation errors and defects, which serve as ticking bombs for future water intrusion or safety hazards. 

As buildings in many metropolitan and suburban areas grow in height, the façade installation process has become increasingly difficult. Digital construction verification tools shave months off inspections, are more accurate than projects using only manual inspection and circumvent safety concerns during the construction process without disrupting trade production. Verification technology confirms every square inch of the exterior without inspectors having to do it from the ground level or balconies manually. Additionally, if there are any insurance disputes down the line, it’s simple to go back to the digital footprint and refer to objective details.

THE IMPACT OF AVOIDABLE REWORK

The costs associated with rework on the façade typically encompass two key construction phases. The first is installing the substrate layer of the façade, which comprises the framing, sheathing, waterproofing, flashing and expansion and control joints. The next is the finish materials application, which involves masonry, metal panels and curtain wall systems. In the case of curtain wall façades, rework usually stems from improperly installed panels or insufficient waterproofing around the panels. When teams don’t discover these defects until months or years after project completion, remediation will involve mitigating the effects of water leaks or thermal leakage. Rework at this stage is the worst-case scenario, as it impacts building occupants and can trigger legal action.

Not only is façade installation challenging, but any mistake leads to massive setbacks or requires extensive maintenance later. Rather than relying on regular maintenance down the road, construction teams must ensure a long-lasting façade by implementing solutions during construction. Remediating shoddy installation once the building is complete will be expensive and time-consuming. While some renovations to the façade are unavoidable over time due to natural deterioration and corrosion, fixing previous mistakes leaks and displacement is frustrating and can lead to warranty headaches for the building owners.

With $273 billion of construction errors made yearly, rework is more than tolerated in commercial construction—it is built in to project budgets and timelines. Avoiding rework effectively mitigates the risk of façade defects by preventing errors before they happen. When teams make essential installation mistakes, such as when a project has unseated gaskets or missing coupling bars, the façade becomes exposed. If unattended, these costly mistakes would lead to waterproofing deficiencies and warranty concerns down the line.

With the challenges of façade installation and inspection and the potentially devastating outcomes resulting from errors, technology that streamlines projects, improves coordination and eliminates costly and time-consuming rework is essential to minimizing risk factors. Digital verification platforms automatically generate element-level observations of the façade for project teams to perform work that’s out of sequence and rectify mistakes in real time—before subsequent layers conceal them.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

New Florida Bill Shortens Time for Construction Defect Lawsuits

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Jessica Zelitt | Adams and Reese

On Thursday, April 13, 2023, Florida Governor Ron DeSantis signed Senate Bill 360 into law. This legislation alters the time period for bringing forward construction defect lawsuits, as well as modifies the current private right of action against a contractor for violation of the Florida Building Code.

First, SB 360 amends § 95.11(3)(c), Florida Statutes, to reduce the statute of repose from ten years to seven years for actions founded on latent construction defects. The legislation also changes the manner in which this time period is calculated under both the seven-year statute of repose and four-year statute of limitations for construction defect cases.

Under the prior statute, the time to commence an action began with the later of (i) the date of actual possession by the owner, (ii) the date of the issuance of a certificate of occupancy (CO) (iii) the date of abandonment of construction if not completed, or (iv) the date of completion or termination of the contract.

Under the revised statute, the time to commence an action begins with the earlier of (i) the date of issuance of a temporary certificate of occupancy (TCO), a CO, or a certificate of completion (CC), or (ii) the date of abandonment if construction is not completed.

This change provides a concrete point in time from which to measure the limitations or repose period where CC, TCO, or CC are issued by allowing owners, design professionals, and contractors alike to know exactly when time for filing suit will expire. In turn, courts will require fewer resources in determining whether a defect claim is barred.

On the other hand, this amendment creates room for uncertainty in situations where a TCO, CO, or CC is not generally issued and the project is not abandoned by the contractor.

For example, projects such as window replacement, roof replacement, air conditioning or heating system replacement, pool installation, interior remodeling, and installation of security or technology systems are typically completed without issuing a TCO, CO, or CC. Certainly, there are to be situations where defects arise from this type of work, and it will now be difficult to pinpoint how long an owner has to bring a claim.

With the prior statute, at least the date of completion of the contract was provided to serve as the trigger. The passage of another recent statute HB 837, which reduced the time to bring negligence actions from four years to two years, may also create complications in projects where there is not a CO, TCO or a CC. Unfortunately, future court decisions or statutory amendment may be needed to resolve those uncertainties.

Also as part of the amendments to § 95.11(3)(c), Florida Statutes, SB 360 adds a specific time of commencement for newly constructed single family homes that are first used as a model home. Under these circumstances, the time to bring an action begins to run when the deed transferring title from the developer to the purchaser is recorded. This addition offsets the effect of the change in when the limitations or repose period begins to run on purchasers of former model homes, as it prevents the limitations or repose period from running before the purchaser actually obtains title to the home.

Additionally, the legislation clarifies that if a project consists of “the design, planning, or construction of multiple buildings,” each building will be considered separate for determining the limitations period, based upon when that building receives a TCO, CO, or certificate of completion.

The final substantive change established by SB 360 is a modification of the standard for bringing a private action for violation of the Florida Building Code under § 553.84, Florida Statutes. Now, for such a violation to be actionable, it must be a material violation.

Material is subsequently defined as a violation within a completed structure “which may reasonably result, or has resulted, in physical harm to a person or significant damage to the performance of a building or its systems.”

This amendment serves to eliminate actions based upon merely technical violations of the Building Code that pose no measurable risk to life or property.

The changes imposed by SB 360 became effective immediately upon the bill being signed into law, on April 13, 2023. Importantly, the changes to the limitations and repose period apply to any action commenced after the effective date, regardless of when the claim accrued. However, the new law does contain a grace period for claims that would not have been barred under the previous version of § 95.11(3)(c), but are now barred under the new version. For these actions, a claimant has until July 1, 2024 to bring the claim.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.