Massachusetts Clarifies When the Statute of Repose is Triggered For a Multi-Phase or Multi-Building Project

Jeffrey J. Vita and Anna M. Perry | SDV Insights

Lennar Hingham Holdings, LLC (“Lennar”) built a twenty-eight-building, 150-unit condominium project containing twenty-four discrete phases over a seven-year span. The condominium association subsequently brought an action against Lennar and others alleging design and construction defects to four main components of the common elements: “decks and columns,” “roofing/flashing,” “exterior walls/flashing/building envelope,” and “irrigation system.” In response, the defendants argued that the plaintiff’s claims with respect to six of the twenty- eight buildings were barred by Massachusetts’s six-year statute of repose, G. L. c. 206 § 2B.

The United States District Court for the District of Massachusetts previously held that all twenty-eight of the condominium’s buildings should be treated as a single improvement for purposes of application of the statute of repose. Subsequently, the court certified the following question to the Massachusetts Supreme Judicial Court: Where the factual record supports the conclusion that a builder or developer was engaged in the continuous construction of a single condominium development comprising multiple buildings or phases, when does the six-year period for an action of tort relating to the construction of the condominium’s common or limited common elements start running?

The plaintiff association argued that the meaning of the term “improvement,” as used in the statute, was crucial to determining when the six-year statute of repose is triggered. Plaintiff claimed the entire condominium project was a single “improvement” based on factors such as the terms of the master deed, which created a single legal entity, the pace and continuity of the construction, and the fact that the defendants were involved in the project from beginning to end. Thus, adopting the plaintiff’s view, the entire project would be considered a single “improvement” as opposed to 28 separate improvements. Opposing this argument, the defendants argued that the statute of repose was triggered as each building in the project was opened for use based on the various certificates of occupancy issued by the town.

The Massachusetts Supreme Court disagreed with the plaintiff’s arguments and found each building constituted a separate improvement for purposes of the statute of repose. As each building was issued its certificate of occupancy, the Court found “improvement” to mean each individual building. Additionally, the Court found that “where a particular improvement is integral to and intended to serve multiple buildings within a single phase, or buildings across multiple phases, or even the condominium development as a whole, the statute of repose begins to run when that discrete improvement is substantially complete and open to its intended use.” The Court reasoned that the legislature’s intent, when enacting the statute, was to strike a reasonable balance between the right to a remedy for owners such as the plaintiff and the need to have an outer limit on the tort liability of those involved in the construction process.

This case is a win for contractors, owners, developers, and architects as their potential liability is further limited under Massachusetts’s statute of repose for multi-phase or multi-building projects. Despite this ruling, contractors of all tiers will still want to ensure they have adequate insurance coverage during the entirety of the applicable statute of repose period for any and all work they complete. As a result, it is critical to review your products-completed operations coverage within your commercial general liability policy to ensure it will cover you for the entirety of the statute of repose applicable in the jurisdiction in which you perform the construction activities.

Illinois Appellate Court Clarifies What Is and Is Not an “Occurrence” in the Construction Defect Context

Marianne Bradley and Anthony Miscioscia |White and Williams

On December 31, 2019, the First District Illinois Appellate Court issued its decision in Owners Insurance Company v. Precision Painting & Decorating Corporation, clarifying what does and does not constitute “property damage” caused by an “occurrence” in the construction defect context. 2019 IL App. (1st) 190926-U, 2019 Ill. App. Unpub. Lexis 2425.

The underlying case involved allegations of negligence, consumer fraud and breach of contract. In particular, the underlying homeowner claimants alleged that Precision Painting & Decorating Corporation (Precision), whom the homeowners had hired to perform certain exterior paintwork at their home, failed to conform to U.S. Environmental Protection Agency (EPA) regulations with respect to the presence of lead-based paint. In its contract, Precision had agreed to take special care with respect to containing lead dust while working on the homeowners’ property. Despite having agreed to do so, Precision (allegedly) took almost no precautions, resulting in significant contamination to the interior of the home.

Owners Insurance Company (Owners) had issued Precision a CGL policy, providing coverage for “property damage” caused by an “occurrence,” defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

Precision tendered its defense to Owners. Owners filed a DJ Action arguing that it owed no duty to defend as the homeowners had failed to allege any “property damage” caused by an “occurrence.” Specifically, Owners argued that, under Illinois law, damages resulting from an insured’s breach of contract are not recoverable under a CGL policy.

The trial court agreed, finding that no “accident” or “occurrence” was alleged. The trial court observed that the homeowners’ contract with Precision had specifically provided for various EPA-required precautions with respect to the use of lead-based paint. The trial court concluded that Precision’s failure to implement those precautions was not an “accident,” which in the trial court’s view, referred to something “unforeseen or untoward or disastrous.” Instead, the trial court characterized Precision’s conduct as nothing more than a foreseeable breach of contract.

Precision appealed, and the Appellate Court reversed and remanded. The Appellate Court found that the trial court’s focus on foreseeability was misplaced. It observed that: “[i]nstead of focusing on the foreseeability of the event itself (the release of lead-based particles), or even generally the damages (lead contamination),” Illinois case law instructs courts “to focus on what, specifically, was damaged, and whether the remediation of that damage fits within the general purpose of a CGL policy.” Id. at *12 (emphasis added). The Appellate Court emphasized that: “when the underlying lawsuit against the insured contractor alleges damages beyond repair and replacement, and beyond damage to other parts of the same project over which that contractor was responsible, those additional damages are deemed to be the result of an ‘accident.’” Id. at *14.

The Appellate Court was careful to contrast these so-called “beyond” damages with damages arising out of faulty workmanship, alone. It reiterated that it is well-settled under Illinois law that “there is no occurrence when a [contractor’s] defective workmanship necessitates removing and repairing work.” Id. at *14. This is true even when a contractor’s faulty workmanship results in consequential damages to any other part of the project for which the contractor has responsibility, as it remains part of the contractor’s work product. However, where damages extend beyond the scope of a contractor’s work product, the court concluded that those damages are more properly classified as unforeseeable accidents, and thus “occurrences.”

The Appellate Court found that Precision’s “work product” was limited to the exterior of plaintiffs’ house. Thus, any damage to the interior of the home, as well as to the surrounding land, was outside the scope of Precision’s project. Because plaintiffs had alleged damages “beyond repair and replacement, and beyond damage to other parts of the same project over which [Precision] was responsible,” plaintiffs had satisfactorily alleged “property damage” caused by an “occurrence.” The Appellate Court reversed and remanded in accordance with those findings.

Guessing as to your Construction Damages is not the Best Approach

David Adelstein | Florida Construction Legal Updates | August 24, 2019

Arbitrarily guessing as to your construction damages is NOT the best approach.  Sure, experts can be costly.  No doubt about it.  Having an expert versus guessing as to your construction damages caused by another party’s breach of contract is a no brainer.  Engage an expert or, at a minimum, be in a position to competently testify as to your damages caused by another party’s breach of contract.  Otherwise, the guessing is not going to get you very far as a concrete subcontractor found out in Patrick Concrete Constructors, Inc. v. Layne Christensen Co., 2018 WL 6528485 (W.D. New York 2018) where the subcontractor could not competently support its delay-related damages or change orders and, equally important, could not support that the damages were proximately caused by the general contractor’s breach of the subcontract.

In this case, the concrete subcontractor entered into a subcontract to perform concrete work for a public project. The project was delayed and the general contractor was required to pay liquidated damages to the owner.  Not surprisingly, the subcontractor disputed liability for delays and sued the general contractor for all of its delay-related damages “in the form of labor and materials escalation, loss of productivity, procurement and impact costs, field and home office overhead, idle equipment, inability to take on other work, lost profits, and interest.”  Patrick Concrete Constructors, 2018 WL at *1.

The general contractor moved for summary judgment as to the plaintiff’s delay-related damages – the subcontractor’s damages were nothing but guesses and the subcontractor could not prove the general contractor was the cause of the subcontractor’s damages.

The portion of the deposition transcript of the subcontractor’s president that may have also been its corporate representative as to damages is telling:

Q: After today’s exercise, do you believe you’re entitled to [$]681,740 under those items [regarding change orders]?

A: No.

Q: What amount [are] you entitled to?

A: I don’t know. I’d have to work it up.

Q: So as of right now, with my one chance to depose you, the person on damages, you can’t give me a figure that you’re actually entitled to?

A: No. We just ripped all these figures apart, so now I got to go back and refigure.

With regard to the amount of damages sought for “extra costs,” Bell [the President of subcontractor] testified as follows:

Q: Okay. Then you have – you total everything here, total of everything except for the Amount Due on Contract and Outstanding Change Order heading. So that [$]915[,000] basically added up everything under Extra Costs Not Submitted all the way down to Extra Equipment?

A: Yes.

Q: You’re asking for [$]915[,000] in this. Do you believe that’s actually what you’re entitled to today?

A: Well, like I said, we were – like you said, we have to do some adjustments here.

Q: Okay. Adjustments downward, correct, sir?

A: Yes.

Q: Can you tell me today what you think you’re actually entitled to?

A: No.

And, there was more.  The subcontractor could not locate its original estimate for the job, which is important for any loss of productivity or inefficiency claim – or any claim dealing with added labor and equipment usage. The subcontractor could not identify payroll records, time cards, vendor invoices, or anything to justify the damages it sought.  The subcontractor guessed as to labor hours without the back-up substantiating the labor hours and, equally important, could not establish it incurred the guesstimated labor hours caused by the general contractor.

In essence, Plaintiff [subcontractor] concedes that it cannot provide the Court with an “intelligent estimate without speculation or conjecture,” for either category of damages. Because Plaintiff has failed to make a factual showing sufficient to establish that the “extra costs” and “change orders” damages are capable of being proved with reasonable certainty, summary judgment dismissing these claims is appropriate.

***

Here, Plaintiff asserts that Defendant [general contractor] breached the Subcontract by delaying the Project, and that Defendant’s delay caused it to sustain damages. However, Plaintiff has admitted that Defendant was not responsible for all of the delay, and that Plaintiff and its reinforcing bar subcontractor contributed to the delay as well. Because, by Plaintiff’s own admission, it contributed to the damage-causing delays, it is required to allocate the amount of delay and resultant damages between, at a minimum, itself and Defendant.

Patrick Concrete Constructors, 2018 WL at *4.

Insurer Not Entitled to Summary Judgment on Construction Defect, Bad Faith Claims

Tred R. Eyerly | Insurance Law Hawaii | August 12, 2019

    The federal district court denied the insurer’s motion for summary judgment seeking to establish there was no coverage for construction defect claims and for bad faith. Country Mut. Ins. Co. v. AAA Constr. LLC, 2019 U.S. Dist. LEXIS 115935 (W.D. Okla. July 12, 2019).

    Jeffrey and Tammy Shaver entered two contracts with AAA Construction for the construction of a garage and of a barn on their property. After construction was completed, the Shavers sued AAA Construction for building the garage over two high-pressure gas pipelines and the utility easements associated with them. They alleged AAA Construction was negligent for constructing over a working utility line. AAA Construction’s insurer, Country Mutual Insurance Company (CMIC) denied coverage because the alleged faulty workmanship of AAA Construction did not constitute an “occurrence” under the policy. 

    CMIC sued AAA Construction for a declaratory judgment that it had no duty to defend or indemnify. CMIC moved for summary judgment. 

    The court denied the motion. A jury could find AAA Construction was negligent or engaged in other nonintentional conduct by failing to ascertain the location of the easement, meaning the possibility of coverage existed. Therefore, CMIC had a duty to defend.

    CMIC also argued that numerous exclusions were applicable to deny coverage. The court disagreed and found none of the raised exclusions applied. 

    Finally, the motion was denied regarding AAA Construction’s counterclaim for bad faith. Among other arguments, CMIC submitted it had not acted in bad faith by failing to to an adequate investigation. The court found the factual record on this issue was sparse. The record contained sufficient facts, however, upon which a reasonable juror could find the investigation conducted by CMIC was not reasonable. 

Utah Appellate Court: Homeowners’ Claim for Defective Construction Against Geotechnical Engineer Dismissed Due to Lack of Contract and the Economic Loss Rule

Patrick Johnson | Construction Industry Counselor | July 8, 2019

A recent Utah Appellate Court upheld the dismissal of a homeowners’ claims against a geotechnical engineer because the homeowners did not have a contract with the geotechnical engineer and therefore their claims were barred by the economic loss rule. See Hayes v. Intermountain Geoenvironmental Services, Inc., 2019 UT App 112, 2019 WL 2621931.  In Utah, the economic loss rule only allows lawsuits for defective design or construction to be based on a breach of contract.  Such a claim cannot be brought under a general negligence or tort theory where there is no contract.  Many states have a similar, but often not identical, economic loss rule.

In this case, the plaintiff homeowners purchased land from a developer and constructed a home.   The defendant geotechnical engineer prepared a report for the developer  concluding that the parcel of land was stable and suitable for development.  Fourteen months after construction had concluded, cracks were observed in the foundation of the home and the home began to settle rendering it unlivable.  Because the homeowners did not have a contract with the geotechnical engineer, they could not file a breach of contract claim against the geotechnical engineer. As a result, the homeowners tried to bring a claim under a general negligence theory against the geotechnical engineer for their damages.  The trial court and appellate court agreed that the homeowners were barred from asserting a negligence claim due to the economic loss rule. 

This case serves as a reminder that, in many states, recovery of purely economic losses based on theories of tort are generally not recoverable. Developers and parties to a construction project should  document their agreements in writing.  Likewise, a purchaser of a construction project should receive assignments of the developer’s and/or seller’s written contracts with third-parties involved in the development.