California Court of Appeal Addresses Right to Repair Statute

Blake Robinson | Davis Wright Tremaine

The California Court of Appeal recently issued a decision analyzing the application of the Right to Repair Act1 as applied to a company that provided an allegedly defective product in a residential construction project. In State Farm General Insurance Co. v. Oetiker, Inc., 58 Cal.App.5th 940 (2020), the court concluded that the Act’s statute of repose barred the plaintiff’s negligence claim but not its strict liability and breach of implied warranty claims because those claims were not subject to the Act.

Summary of the Act

The Act, which was enacted in 2002, “codifies a comprehensive reform to construction defect litigation applicable to residential dwellings in California.”2 The Act establishes certain standards a dwelling’s components must satisfy, requires pre-litigation notices of defect with an opportunity to cure, allows for homeowners to file lawsuits even absent property damage or personal injury, and establishes a 10-year statute of repose for latent construction defect claims.

The Facts

The plaintiff sued the manufacturer of a plumbing product used in a new home’s construction. The plaintiff claimed the product caused a leak that damaged the home.

The plaintiff filed claims for negligence, strict liability, and breach of implied warranty. The trial court granted the manufacturer’s motion for summary judgment as to all claims on the ground that they were barred by the Act’s statute of repose.

The Court of Appeal’s Decision

The Court of Appeal agreed that the negligence claim was barred but disagreed as to the strict liability and implied warranty claims because those claims were not subject to the Act. To determine whether a claim is subject to the Act, the court stated it must first look to see whether the alleged defect would violate the building standards in Section 896 of the Act. The court readily concluded that it did, as the alleged defect was to a component of the plumbing system.

Next, the court addressed the plaintiff’s argument that the “manufactured product” exception in Section 896(g)(3)(E) applied and excluded its claims from the Act. That section excludes “any action seeking recovery solely for a defect in a manufactured product located within or adjacent to a structure.” The court rejected the plaintiff’s argument, concluding that the exception only applies if a plaintiff’s claim alleges that a product is defective but that the defect does not violate a Section 896 standard. Because the plaintiff alleged a Section 896 violation, the Act applied.

Finally, the court analyzed to which claims the Act applied. The court held that the Act applies to product manufacturers only to the extent the plaintiff alleges the manufacturer’s negligence or breach of contract caused a violation of the Section 896 standards. Thus, the Act applied to the plaintiff’s negligence claim, and it was barred by the 10-year statute of repose. The Act did not apply to the strict liability and breach of implied warranty claims, however, so they were not barred by the statute of repose.

Takeaways

The Right to Repair Act is very broad and provides exclusive remedies for many actions relating to residential new construction, so anyone involved in residential construction should familiarize themselves with the Act.

However, at least as to claims against product manufacturers (whether by the homeowner or by the contractor that used the part in the construction), the Act covers only negligence and breach of contract claims and does not cover strict liability and implied warranty claims. This can be significant where, like in Oetiker, the latent defects were not discovered until after the 10-year statute of repose in the Act had already passed.


FOOTNOTES

1  Cal. Civ. Code, § 895, et seq.
2  Id. at 944.

Florida’s Products Liability Economic Loss Rule Bars Claims Where Only Damage Sustained is to the Building Itself

Catherine Delorey | Forum on Constrution Law

Can a products liability claim survive the economic loss rule (“ELR”) where the only claimed damage to “other property” is to the finished building itself? If your state takes an “integrated” approach to the ELR, the answer to this question should be “no.”

In 2711 Hollywood Beach Condominium Association, Inc. v. TRG Holliday, Ltd., Florida’s Third District Court of Appeal provided clarity on the issue of whether the ELR bars a products liability claim where the only damages sought are repairs and replacement to a building system in which the product is a component part. 307 So.3d 869 (Fla. 3d DCA 2020). 2711 Hollywood was decided against the backdrop of the Florida Supreme Court’s decision in Tiara Condo. Ass’n, Inc. v. Marsh & McLennan Companies, Inc., where the Court limited the ELR to products liability cases. 110 So. 3d 399, 400 (Fla. 2013). The Tiara court reviewed and seemingly cited with approval its prior 1993 decision in Casa Clara Condominium Ass’n., Inc. v. Charley Toppino and Sons, Inc., 620 So.2d 1244 (Fla. 1993) in reaching this decision. Id., 401, 405-406. There, the Court held that the ELR barred a homeowner’s claims against a supplier of allegedly defective concrete, where the only alleged damages were rusting and spalling to the structure of the completed condominium units. Casa Clara Condominium Ass’n., Inc., 620 So.2d at 1245. Despite Tiara’s apparent reliance on Casa Clara, Westlaw’s “KeyCite” system continues to apply a “red flag” warning to the Casa Clara decision.

The 2711 Hollywood decision makes clear that Casa Clara’s holding still applies to product manufacturers and suppliers in Florida. In 2711 Hollywood, the condominium association sued the maker of the component fittings of the condominium’s fire suppression system (“FSS”), claiming that these fittings caused the fire suppression system to leak. 307 So.3d at 870. The association sought damages for future repairs and replacement of the FSS under negligent and strict products liability theories against the fittings maker. Id.

On appeal, the Court affirmed summary judgment entered in favor of the manufacturer based upon Casa Clara. Id. In doing so, it recognized that when a products liability claim arises in the context of real estate, courts are to apply the “object of the bargain” rule. Id. The focus of this rule is on “the product purchased by plaintiff,” rather than “the product sold by the defendant.” Id. Where a product is an “integral part of the finished product,” (i.e., the building), and the only alleged damages are to the building itself, such damage is not considered injury to “other property.” Id. The FSS fittings were an integral part of the FSS, and the completed building. As such, the ELR applied to bar the Association’s products liability claims, because the only alleged damages were the cost to replace the FSS and resulting repair damages to the building. Id.

The 2711 Hollywood decision also reinforces the applicability of the ELR in circumstances where a purchaser or installer attempts to bring a tort-based products liability claim against a downstream manufacturer or supplier. In 1995, the United States Court of Appeals for the Eleventh Circuit applied the ELR to a homebuilder’s claim against the manufacturer of chemicals applied by the homebuilder to its roof sheathing, which allegedly caused the roofs to deteriorate. Pulte Home Corp. v. Osmose Wood Preserving, Inc., 60 F.3d 734, 736 (11th Cir. 1995). It reasoned that while the homebuilder was required to remove roof components (shingles and untreated plywood) due to defective treated plywood, these components were not “damaged,” but rather, removed “as a consequence of replacing” damaged, treated plywood. Id. at 742 (citing Casa Clara Condominium Ass’n., Inc., 620 So.2d at 1246).

2711 Hollywood provides needed clarification on the scope of cognizable tort-based products liability claims against building products manufacturers and suppliers in the Florida. Absent a showing of personal injury, or damage to property wholly unconnected with the completed building, such claims should be barred. The 2711 Hollywood decision ensures that products liability claims involving only “economic losses” will be dealt with in the manner which best suits them: “[c]ontract law, and the law of warranty in particular.” See Tiara Condo. Ass’n, Inc., 110 So. 3d at 404.

Economic Loss Rule Bars Claims Against Manufacturer

David Adelstein | Florida Construction Legal Updates

The economic loss rule lives to bar a claim against a product manufacturer in a real estate transaction.  In a products liability action, there needs to be personal injury or property damage, other than to the property itself, in order to recover economic damages.  Otherwise, the economic loss rule will bar the recovery of such economic losses when the economic losses deal to the product itself.  This is important to keep in mind in any product liability action against a manufacturer.

In a recent case, 2711 Hollywood Beach Condominium Ass’n, Inc., v. TRG Holiday, Ltd., 45 Fla. L. Weekly D2179a (Fla. 3d DCA 2020), a condominium association purchased the condominium from the developer.  Subsequently, it noticed leaks with the fire suppression system in the condominium and sued multiple parties for damages for repairs due to the leaks and the replacement of the fire suppression system.  One of the parties sued in negligence and strict liability was a manufacturer of pipe fittings used in the fire suppression system.  The manufacturer moved for summary judgment based on the economic loss rule and relying on the 1993 Florida Supreme Court opinion in Casa Clara Condominium Ass’n v. Charley Toppino & Sons, Inc., 620 So.2d 1244 (Fla. 1993), holding “the economic loss rule limited a defendant’s tort liability for allegedly defective products to injuries caused to persons or damage caused to property other than the defective product itself.”  2711 Hollywood Beach Conominium Ass’n, supra.  The trial court agreed with the manufacturer and granted summary judgment.  On appeal, the Third District affirmed based on the economic loss rule:

The Association bargained for, purchased and received a building; [the manufactuer’s] fittings were only a component of the FSS [fire suppression system], incorporated into the building. Applying the rule set forth in Casa Clara, the Association purchased a completed building from the developer. [The manufactuer’s] fittings were “an integral part of the finished product and, thus, did not injure ‘other’ property.”  Injury to the building itself is not injury to “other” property because the product purchased by the Association was the buildingSee Casa Clara, 620 So. 2d at 1247. The economic loss rule therefore bars the Association’s recovery as to [the manufacturer] to the extent that it sought damages to replace the FSS [fire suppression system] and repair damage to the building.

2711 Hollywood Beach Conominium Ass’n, supra (internal citations omitted).

Notably, in Casa Clara, homeowners sued a concrete supplier for supplying defective concrete that caused the reinforcing steel in the concrete in their homes to rust.  The concrete supplier, in an action that went up to the Florida Supreme Court, prevailed based on the economic loss rule because there was no personal injury or damage to property other than the property itself, which was the completed building.  As the Florida Supreme Court held:

The homeowners also argue that [the supplier’s] concrete damaged “other” property because the individual components and items of building material, not the homes themselves, are the products they purchased. We disagree. The character of a loss determines the appropriate remedies, and, to determine the character of a loss, one must look to the product purchased by the plaintiff, not the product sold by the defendant.  Generally, house buyers have little or no interest in how or where the individual components of a house are obtained. They are content to let the builder produce the finished product, i.e., a house. These homeowners bought finished products—dwellings—not the individual components of those dwellings. They bargained for the finished products, not their various components. The concrete became an integral part of the finished product and, thus, did not injure “other” property.

We also disagree with the homeowners that the mere possibility that the exploding concrete will cause physical injury is sufficient reason to abrogate the economic loss rule. This argument goes completely against the principle that injury must occur before a negligence action exists. Because an injury has not occurred, its extent and the identity of injured persons is completely speculative. Thus, the degree of risk is indeterminate, with no guarantee that damages will be reasonably related to the risk of injury, and with no possibility for the producer of a product to structure its business behavior to cover that risk. Agreeing with the homeowners’ argument would make it difficult “to maintain a realistic limitation on damages.”

Casa Clara, supra, at 1247 (internal citations omitted)

Carrier Has Duty to Defend Claim for Active Malfunction of Product

Tred R. Eyerly | Insurance Law Hawaii

   Rejecting that the underlying claim was based solely on faulty workmanship, the Third Circuit held the insurer had a duty to defend allegations of a malfunctioning product. Nautilus Ins. Co. v. 200 Christina Street Partners LLC, 2020 U.S. App. LEXIS 22118 (3d Cir. July 16, 2020).

    The insureds were sued by homeowners in two separate suits alleging defects in the construction of their homes. Nautilus defended under a reservation of rights. Nautilus filed suit in District Court and moved for judgment on the pleadings. The District Court denied the motion, finding Nautilus had a duty to defend because the underlying claims sufficiently alleged product–related tort clams that could fall within the scope of coverage under the relevant policies.

    The Third Circuit affirmed. There was a distinction between a claim of faulty workmanship, for which the insurer did not have a duty to defend, and a claim of “active malfunction” of a product, for which an insurer did have such a duty. An active malfunction was sufficiently fortuitous as to constitute an “occurrence.”  

    Nautilus argued that the underlying claims stemmed from the insureds’ alleged faulty workmanship, so the defects alleged were not “occurrences.” Liberally construing the underlying complaints in favor of the insureds, however, the complaints alleged the use of faulty materials, and the active malfunction of products, such as windows and moisture barriers. These active product malfunctions constituted “occurrences” under the policies. Thus, the District Court properly held that Nautilus had a duty to defend the underlying cases. 

Product Defect Allegations Trigger Duty To Defend in Pennsylvania

Stacy M. Manobianca | Saxe Doernberger & Vita

The Third Circuit Court of Appeals recently concluded, in Nautilus Insurance Co. v. 200 Christian Street Partners, LLC., that a duty to defend is triggered when product-related allegations are pled in connection with a claim for defective construction.

In Nautilus, the coverage dispute arose out of two independent underlying lawsuits in which homeowners alleged that the homes built by 200 Christian Street Partners (“Christian Street”) were defectively constructed. Christian Street tendered the claim to its insurer, Nautilus Insurance Co. (“Nautilus”), for defense and indemnity.1

Nautilus filed a lawsuit in the United States District Court for the Eastern District of Pennsylvania, seeking a declaration that it was not obligated to defend Christian Street in the underlying actions.Specifically, Nautilus asserted that it was not required to provide a defense in the underlying actions because Pennsylvania law does not consider faulty workmanship to constitute an “occurrence” and, therefore, to trigger the policy’s insuring agreement and the insurer’s duty to defend.3

The District Court disagreed with Nautilus, finding that, even when faulty workmanship is alleged, there are two circumstances where a duty to defend can be triggered: (1) where faulty workmanship caused bodily injury or property damage to other property; and (2) when an insured’s product “actively malfunctions.”In evaluating the underlying complaints, the District Court concluded that both bodily injury and products-related claims were sufficiently alleged to trigger a duty to defend. Specifically, the complaints alleged that the homes were “negligently constructed” in a manner that presented a danger to the Owners and that the hazards were “life-threatening.”In addition, the complaints outlined specific concerns with certain products, including the windows, a door, the air conditioning system, and the moisture barrier.Based on these allegations, the District Court concluded that it could not “foreclose the possibility that Defendants used a third party’s product that actively malfunctioned in an ‘occurrence.’” 7

Nautilus appealed to the Third Circuit Court of Appeals, which affirmed the decision of the District Court. The Third Circuit stated, “there is a distinction between a claim of faulty workmanship, for which an insurer does not have a duty to defend, and a claim of an ‘active malfunction’ of a product, for which an insurer does have such duty, since an active malfunction is sufficiently fortuitous as to constitute an occurrence.”8

While this decision is not precedential, it is instructive to insureds seeking defense in construction defect matters. When a Complaint asserts products-related allegations, the duty to defend may be triggered.