Construction Claims

Limitations & Repose Periods

Statutes of Limitations

Tennessee has a one-year statute of limitation for personal injury actions (T.C.A. §28-3-104(a)(1)) and a three-year statute of limitations for property damage claims (T.C.A. §28-3-105(1)).

Both the personal injury and property damage statutes begin to run when the cause of action accrues. Under Tennessee law, a cause of action accrues when a plaintiff knew or reasonably should have known that a cause of action existed. Stone v. Hinds, 541 S.W.2d 598 (1976).

Although Tennessee has a general six (6) year statute of limitations for breach of contract actions, it is clear that under Tennessee law an action for defective construction is subject to the three (3) year statute of limitations as opposed to the six (6) year breach of contract statute (T.C.A. §28-3-109(a)(3). In addition, Tennessee courts consistently look to the “gravamen” of the complaint and not to what the plaintiff calls its cause of action (i.e. either “contract” or “tort”) in determining the applicable statute of limitations. Keller v. Colgems-EMI Music, Inc., 924 S.W.2d 357 (1996).

Statute of Repose:

T.C.A. §28-3-202 provides:

All actions to recover damages for any deficiency in the design, planning, supervision, observation of construction, or construction of an improvement to real property, for injury to property, real or personal, arising out of any such deficiency, or for injury to the person or for wrongful death arising out of any such deficiency, shall be brought against any person performing or furnishing the design, planning, supervision, observation of construction, construction of, or land surveying in connection with, such an improvement within four (4) years after substantial completion of such an improvement.

The term “substantial completion” is defined by statute to mean “that degree of completion of a project, improvement or a specified improvement, or a specified area or portion thereof (in accordance with the contract documents, as modified by any change orders agreed to by the parties) upon attainment of which the owner can use the same for the purpose for which it was intended; the date of substantial completion may be established by written agreement between the contractor and the owner.” T.C.A. §28-3-201(2).

Notwithstanding the above, T.C.A. §28-3-203 provides that if the injury to property or person occurs during the fourth (4th) year after substantial completion, then the action may be brought within one (1) year after the date on which such injury occurred, but in no event may it be brought more than five (5) years after the substantial completion of any such improvement.

It is clear that under Tennessee law, the above statute of limitation does not extend either the one (1) or three (3) year periods for filing actions based upon personal injuries and property damages. In other words, if a person is injured as the result of a construction deficiency, then that suit must still be brought within one (1) year of the date of injury. If that personal injury occurs outside of the time period set forth in the statute of repose, then the claim is barred. The same result holds for property damage claims.

There are a couple of exceptions to the above statute of repose, however. First, if the alleged negligent party is in actual possession or control of the improvement (as owner, tenant, or otherwise) at the time the deficiency causes the injury in question, then that party cannot rely upon the statute of repose. For example, this would prevent a developer who maintains control and operation of an apartment complex from relying upon the four (4) year statute of repose if a tenant is injured as the result of a construction defect.

In addition, T.C.A. §28-3-205(b) provides that the statute of repose cannot be used as a shield by a person who has “been guilty of fraud in performing or furnishing the design, planning, supervision, observation of construction, construction of, or land surveying, in connection with any such improvement, or to any person who shall wrongfully conceal any such cause of action.” This is obviously a public policy exception to the running of the statute of repose.

Not unexpectedly, plaintiffs’ attorneys have sought innovative ways to get around the statute of repose. For example, in construction defect cases involving homeowners, claims are often raised under the Tennessee Consumer Protection Act, which like most states’ consumer statutes, offers a broad range of remedies for various acts and omissions.

In a recent decision of the Tennessee Eastern Section Court of Appeals, it was held that the statute of repose did in fact bar a Tennessee Consumer Protection Act claim relating to alleged defective construction. In Cunha v. Cecil, 2007 WL 273753 (Tenn. Ct. App.), the plaintiffs claimed that the statute of repose should not apply because the defendant made a series of promises to correct the deficiency but never followed through with those repairs. Plaintiffs argued that as such, their claims were proper under the Tennessee Consumer Protection Act and did not fall within the scope of the statute of repose. The Trial Court had disagreed and granted summary judgment based upon the statute of limitations, and the Court of Appeals affirmed.

This decision is even broader because the defendant was the seller of the home that had partnered with a builder in the housing development. Plaintiffs argued that since the defendant was merely a “vendor”, it did not come within the scope of the statute of repose to begin with.

The Court, finding that the seller was involved in a joint venture with the builder, held that it was entitled to protection under the statute of repose.

Plaintiffs further argued that the defendant should be estopped from claiming the benefit of the statute of repose because of its alleged repeated promises to make repairs that were not completed. The Trial Court held that there was insufficient evidence to establish an estoppel, and the Appellate Court did not disturb that finding.

In sum, the Tennessee statute of repose provides a clear outer limit for liability to all parties to the construction process save and except for an owner that maintains control and possession of the property. This is true regardless of whether or not the injury is one for property damage, personal injury or even wrongful death.

Right to Repair Laws and/or Pre-Suit Statutory Procedures

In 2004, Tennessee enacted legislation requiring commercial property owners to give pre-suit notice of a construction defect, and to allow any notified and allegedly responsible parties access to the project to inspect the alleged conditions and an opportunity to cure the defects. The Act applies to all claims for construction defects accruing on or after May 24, 2004. T.C.A. §66-36-101 et seq. For the unacquainted, the Act can be easily miscomprehended without careful review of the definitions section, T.C.A. §66-36-101, and the procedural steps for giving notice and responding set out in T.C.A. §66-36-103. For example, the limitation of the Act to commercial projects arises from the definition of “action”:

Under the Act, a "construction defect" is defined as “a deficiency in, or a deficiency arising out of, the design, specifications, surveying, planning, supervision, observation of construction, or construction or remodeling of a structure resulting from:

(A)       Defective material, products, or components used in the construction or remodeling;

(B)       A violation of the applicable codes in effect at the time of construction or remodeling;

(C)       A failure of the design of a structure to meet the applicable professional standards of care at the time of governmental approval, construction or remodeling; or

(D)       A failure to construct or remodel a structure in accordance with accepted trade standards for good and workmanlike construction at the time of construction or remodeling; T.C.A. §66-36-101(1).

T.C.A. §66-36-103 sets forth the pre-suit notice procedure, and response duties and timeline for responding to the notice. In brief, the Act generally provides that a commercial property owner must forward written notice of the defect to the last known address of the contractor, subcontractor, supplier or design professional within 15 days of discovery, but failure to give notice within 15 days does not bar the action.

The Act contemplates that all potentially responsible parties will receive notice and have an opportunity to inspect the conditions. By way of example, upon the contractor’s receipt of the notice, the contractor must, within 10 days of receipt of the notice, notify all subcontractors, suppliers, or designers that may be responsible for the defects. Those parties are then afforded 10 days from that notice to likewise inspect the defects. Within 30 days of receipt of notice, every notified party must provide the claimant with a written response in which the responding party may: (1) offer to cure the defect, including a timetable for completing the work; (2) settle the claim by monetary payment; or (3), dispute the claim.

Importantly, any offer to cure or settle a claim must be rejected in writing, and must specifically state “rejected” on the rejection. T.C.A. §66-36-103(h). While no Tennessee case has so held, it would seem plausible under this provision of the Act that a contractor’s offer to cure or settle, if not properly rejected, constitutes a claimant’s acceptance.

Finally, T.C.A. §66-36-103(l) provides that a claimant’s written notice tolls the applicable statute of limitations until the later of:

(1)       One hundred eighty (180) days after the contractor, subcontractor, supplier, or design professional receives the notice; or

(2)       Ninety (90) days after the end of the correction or repair period stated in the offer, if the claimant has accepted the offer. By stipulation of the parties, the period may be extended and the statute of limitations is tolled during the extension.

In McClain, the Court imposed upon a contractor a duty to give its subcontractor notice and an opportunity to cure alleged defects prior to terminating a contract for a commercial construction project. Id. at 198-99. The rule requiring giving notice and an opportunity to cure has also been extended to cases involving residential construction. E.g., Greeter Const. Co. v. Tice, 11 S.W.3d 907, 910-11 (Tenn. Ct. App. 1999); Lavy v. Carroll, No. M2006-00805-COAR3-CV, 2007 Tenn. App. LEXIS 809, at 9-10 (Tenn. Ct. App. Dec. 26, 2007), Rule 11 appl. perm. appeal denied May 27, 2008; and Custom Built Homes by Ed Harris v. McNamara, No. M2004-02703-COA-R3-CV, 2006 Tenn. App. LEXIS 781, at 14-15 (Tenn. Ct. App. Dec. 11, 2006), no appl. perm. appeal filed.

Indemnity and Contribution

Tennessee law does not permit contractual provisions in connection with or collateral to an agreement to improve a structure or real estate which indemnify the promisee for negligence caused solely by such promisee. T.C.A. § 62-6-123 states that:

The scope of this statute, however, is not limited to construction contracts per se. T.C.A. § 62-6-123 broadly covers agreements and contracts between all parties regarding the construction or improvement to real property. Elliot Crane Servs., Inc. v. H.G. Hill Stores, Inc., 840 S.W.2d 376, 379 (Tenn. Ct. App. 1992). In Elliot Crane, the plaintiff insisted that Elliot Crane Service was not a “contractor” under the language of § 62-6-123 because it was merely in the business of furnishing cranes to further construction. This argument did not persuade the Tennessee Court of Appeals which held that a company operating a crane designed to be used in constructing a building cannot logically claim that the company was unaware of the construction use of the crane. Elliot Crane, 840 S.W.2d at 379-80 (citing Am. Pecco Corp. v. Concrete Building Sys[s]., Co., 392 F.Supp. 789, 793 (N.D. Ill. 1975). The Court of Appeals of Tennessee also dealt with the scope of § 62-6-123 in Corroum v. Dover Elevator Co., when it stated that “there is no language limiting [ T.C.A. § 62-6-123 ]’s applicability solely to construction contracts.” Corroum v. Dover Elevator Co., 806 S.W.2d 777, 779 (Tenn. Ct. App. 1990). The Corroum court interpreted the statute to “include any agreement relative to the construction of a building.” Id. at 780. Thus, the Court of Appeals held, “a contract to provide certain services relative to a building under construction under a separate contract would be included under [the statute] and any provision purporting to indemnify . . . the promisee . . . is void and unenforceable.” Id. at 780.

Certificate of Merit – Experts

In cases other than for medical malpractice, there is no requirement that an expert be licensed in order to testify in Tennessee. Doochin v. United States Fidelity & Guarantee Co. 854 S.W.2d 109, 115 (Tenn.App. 1993)

Economic Loss Doctrine

The “economic loss doctrine” mandates that when there is only an economic loss underlying an action the proper action is not one for negligence. Ritter v. Custom Chemicides, Inc., 912 S.W.2d 128, 133 (Tenn. 1955). Moreover, when dealing only with economic loss, the rights of the parties are governed exclusively by the contract. Messer Griesheim v. Eastman Chem., 194 S.W.3d 466 (Tenn. Ct. App. 2005).

Contractor Licensing Requirements

“A Tennessee contractor's license is required BEFORE bidding or offering a price, for projects $25,000 and up (includes materials and labor), as a prime (general) contractor; and also subcontractors performing electrical, mechanical, plumbing, HVAC, roofing and masonry are also required to be licensed as a contractor, when the total portion on the project is $25,000 or more; masonry, when $100,000 or more.” Tennessee Department of Commerce and Insurance website. Tenn. Code Ann. §§ 62-6-102, 62-6-103

Common Law & Statutory Claims

Multiple theories of liability are provided for in suits against construction contractors. The most common appear to be including breach of contract, breach of warranty, misrepresentation, and negligence (although a negligence action is limited by the economic loss doctrine addressed above).

Construction Damages

Cost of Repair

Generally, in Tennessee, the measure of damages in a construction case will be the cost of repair unless the repairs are not practicable, or unless cost of the repairs is disproportionate to the diminished value of the property. GSB Contractors, Inc. v. Hess, 179 S.W.3d 535, 543 (Tenn.App. 2008).

Diminution in Value

Damages awarded in construction cases are generally for the cost of repair. However, if a defendant is able to show that the cost of repairs is unreasonable when compared to the diminution in value, then a court may choose to award damages for diminution in value instead. GSB Contractors, Inc. v. Hess, 179 S.W.3d 535, 543-544 (Tenn.App. 2008). Therefore, in order to avoid being taxed with the entire cost of the repair, the defendant is required to produce proof regarding the diminution in value, which can then be compared against the cost of repair. Id.

Punitive Damages

Tennessee does not normally allow punitive damages when there is a breach of contract. Hodges v. S.C. Toof & Co., 833 S.W.2d 896 (Tenn. 1992). However, this is not always true; and thus, there is a two-step process for awarding punitive damages. In the first step, the fact finder must determine whether punitive damages should even be awarded. Id. at 901. The fact finder must find by “clear and convincing evidence” that a party acted (1) intentionally, (2) fraudulently, (3) maliciously, or (4) in a reckless manner. Id. at 900-01.

If there is a determination that punitive damages are proper, then there is a second step where the fact finder determines the necessary amount to award. Id. at 901. In reaching a determination, the fact finder considers many factors which essentially amount to a standard of “totality of the circumstances”. Id. at 901-02. Use of such a standard allows the consideration of all factors and the assignment of a value to each factor or consideration.

Attorney’s Fees

Tennessee does not permit the collection of attorneys’ fees unless there is a statute or the parties have contracted for attorneys’ fees in the event of litigation. Elec. Controls v. Ponderosa Fibres of Am., 19 S.W.3d 222 (Tenn. Ct. App. 1999). However, the Tennessee Supreme Court has found attorneys’ fees recoverable without statute when the dispute involves indemnity. Pullman Standard, Inc. v. Abex Corp., 693 S.W.2d 336 (Tenn. 1985). Resultantly, the indemnitee may recover attorneys’ fees in an indemnity relationship.

Joint and Several Liability (specific to construction)

Tennessee has abolished joint and several liability. In 1992, the Tennessee Supreme Court adopted the doctrine of comparative fault. McIntyre v. Ballentine, 833 S.W.2d 52 (Tenn. 1992). The Tennessee Legislature has now codified the abolishment:

“If multiple defendants are found liable in a civil action governed by comparative fault, a defendant shall only be severally liable for the percentage of damages for which fault is attributed to such defendant by the trier of fact, and no defendant shall be held jointly liable for any damages.” Tenn. Code Ann. § 29-11-107.        

Cost Incurred to Access Repair Areas

No Tennessee cases were found involving damages for the cost incurred to access repair areas.

Consequential Damages

Consequential damages are damages a court awards to put the injured party in the position they would have been had a breached contract been performed fully. However, such damages must be reasonable and necessary for a court to award. In Custom Built Homes by Ed Harris v. McNamara, 2006 WL 3613583 *7 (Tenn. Ct. App. 2006), the court would not award the plaintiff’s entire damage request as the plaintiff could not show that the repairs they made on their home were needed. Even though a homeowner may make repairs, repairs that are beyond the scope of the original contract, such as upgrades, are not consequential as they are not foreseeable. Id.

Coverage Trigger of Coverage

Definition of an Occurrence

The Tennessee Supreme Court looks to the definition of “occurrence” in the individual policy. Travelers Indem. Co. of America v. Moore & Assocs, 216 S.W.3d 302, 308 (Tenn. 2007). A construction defect can be considered an “occurrence.” Id.

Liability insurance policies are generally considered to be either “occurrence policies” or “claims-made policies” in Tennessee. Tennessee Courts have held that occurrence policies “protect policyholders against incidents that occur while the policy is in force, even if the claim that arises from that incident is not filed until after the policy expires or is terminated.” Pope v. Leuty& Heath, PLLC, 87 S.W.3d 89, 93 (Tenn.App. 2002).

In contrast, a “claims-made policy” covers against claims that are filed during the period in which the policy is in force, regardless of when the incident giving rise to the claim occurred. Id.

Duty to Defend

Contractual Indemnity

Anti-Indemnity Statutes

See Tenn. Code Ann. § 62-6-123, addressed above.

Additional Insureds

Coverage for AI’s own negligence vs. vicarious liability for Named Insured: Tennessee law allows for the coverage of an additional insured to be limited to instances where the additional insured is vicariously liable for the wrongs of the named insured. Lancaster v. Ferrell Paving, Inc. 397 S.W.3d 606, 614 (Tenn.App. 2011) However, absent such limiting language in an endorsement, Tennessee courts have held that it is not necessary for negligence to be alleged against the named insured for the additional insured to be covered. Id, 617.

Determining Primary and Non-Contributory vs. Excess Position

AI carrier’s rights to reimbursement for defense expenses from other, co-primary carriers: Tennessee courts adhere to what is sometimes referred to as the “anti-subrogation” rule, and have held that “no right of subrogation exists where the wrongdoer is also an insured under the same policy.” Phoenix Ins. Co. v. Estate of Ganier, 212 S.W.3d 270, 274 (Tenn.App. 2006).

Insureds Right to Independent Counsel and Consequences of Rejecting a Defense

The Tennessee Supreme Court has not held that an insured has a right to independent counsel. This is presumably because the Court has held that counsel hired by an insurer must “exercise professional judgment and devote complete loyalty to the insured regardless of the circumstances. Petition of Youngblood, 895 S.w.2d 322, 328 (Tenn. 1995). The Tennessee Supreme Court has also held that the insurer is not allowed to “control the methods or means chosen by an attorney to defend the insured.” Givens v. Mullikin ex rel Estate of McElwaney, 75 S.W.3d 383, 394 (Tenn. 2002).

An insured is not entitled to compensation for attorneys fees incurred when the insured choses to retain independent counsel. Town of Bell Buckle v. Home Ins. Co, No. 85-256-II, 1986 Tenn.App. LEXIS 2815 *9.

1. Coverage Defenses

A frequent area of dispute involves circumstances involving damages caused by faulty workmanship. As in most states, many disputes arise over the issue of what is or is not covered by “faulty workmanship”. Generally, damage to the insured’s property caused by faulty workmanship is an insured risk under a general liability policy unless expressly eliminated by an exclusion provision. The defective work itself, however, is not covered. In 2007, with its decision in Travelers Indem. Co. of America v. Moore & Associates, Inc., 216 S.W.3d 302 (Tenn. 2007), the Tennessee Supreme Court joined with a growing minority of states in finding that defective workmanship may constitute an “occurrence” and that damage caused by faulty workmanship is “property damage.”

2. Choice of Law (Forum Selection Clauses)

Tennessee Courts allow forum selection clauses to be included in contracts, and will enforce the clauses as binding on the parties as long as they are fair and reasonable in light of all the surrounding circumstances. Lamb v. Megaflight, Inc. 26 jS.W.3d 627, 631 (Tenn.App. 2000). Obviously, courts will refuse to enforce forum selection clauses if it can be shown that the clause results from misrepresentation, duress, abuse of economic power, or other unconscionable means. Id.

3. Targeted Tenders

Tennessee Courts have not addressed “targeted tender” situations.