Construction Claims

Limitations & Repose Periods

Statute of Limitations

Construction cases can implicate different statutes of limitations depending on the legal theories being pursued. The statute of limitations for construction contracts is six years. ORS 12.080(1). The statute of limitations begins when the breach occurred, even if the breach was not discovered until a later date. Waxman v. Waxman & Associates, Inc., 224 Or. App. 499 (2008). The statute of limitations for negligence is two years. ORS 12.110(1). Claims under Oregon’s Unlawful Trade Practices Act have a one year statute of limitations. ORS 646.638(6). Claims against architects and engineers to recover damages for injury to person, property, or other interest in property must be brought in two years. ORS 12.135.

Statute of Repose

Oregon has a ten year statute of repose for the construction, alteration, or repair of a residence or small commercial structure. ORS 12.135. The statute applies to construction contracts and begins to run from the date of substantial completion. Shell v. Schollander Constr., 358 Or 552 (2016). If there is no construction contract, then the statute of repose runs from the date of the act or omission complained of, which can be earlier than the date of substantial completion. Id.; ORS 12.115. A six year statute of repose applies to the construction, alteration or repair of a large commercial structure. Id. The ten year statute of limitations, however, applies to large commercial structures owned or maintained by a homeowner’s association. Id.

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

ORS 701.565 governs pre-suit claims processes for construction defect claims involving the construction, alteration, or repair of a residence. The owner must provide written notice of defects to all contractors, subcontractors, or suppliers who they intend to pursue direct claims against. Id. A party receiving such a notice has a right to request a visual examination or inspection of the residence, but the request must be made within fourteen days of receiving the notice. ORS 701.570. The party must send the owner a written response within ninety days of the notice addressing the alleged defects and either denying responsibility, agree to remediate the problem, or pay for it. Id. The owner then has thirty days to accept the offer, and if the owner does not respond, then the offer is deemed rejected. ORS 701.580.

Indemnity and Contribution

Indemnity

ORS 30.140 prohibits a subcontractor from indemnifying a general contractor for that general contractor’s sole or partial negligence. The statute also prohibits additional insured coverage for the additional insured’s sole or partial negligence. Walsh Construction Co. v. Mutual of Enumclaw, 388 Or 1 (2005); Cont'l Cas. Ins. Co. v. Zurich Am. Ins. Co., 2009 WL 231462 (D. Or.).

Contribution

Oregon’s contributory fault statute has effectively abolished the common law rights to contribution and indemnity. ORS 31.610. Claims for common law indemnity and contribution is not available in cases where the court allocates fault to the defendants under Oregon’s contributory fault statute. Electric Investment, LLC v. Patterson, 357 Or. 25 (2015).

Certificate of Merit / Experts

Oregon follows the Economic Loss Doctrine, and prohibits a plaintiff from recovering in tort for claims that constitute a pure economic loss. Personal injury or property damage are not economic losses. See e.g. Harris v. Suniga, 344 Or. 301 (2008) (Holding that damage to a building because of defective construction was not an economic loss); Russell v. Ford Motor Co., 575 P.2d 1383 (Or. 1978) (Holding that purely defective work absent damage to person and property is an economic loss).

Contractor Licensing Requirements

Builders are required to comply with licensing, insurance, and bonding requirements set forth in ORS chapters 701 and 812. Subject to some limited exceptions, an unlicensed contractor is barred from filing a lien, or bringing an arbitration or suit. ORS 701.131(1); see McKinstry Co. v. Smith, 85 Or App 607 (1987). One important exception to this bar is that it does not apply to an unlicensed contractor’s claim against an architect, engineer, or other contractor for construction defects. ORS 701.131(2)(c). An owner may also bring a claim against an unlicensed contractor for misrepresentation. ORS 701.128

Common Law & Statutory Claims

Breach of Contract

Most construction disputes in Oregon are based on breach of contract claims. Oregon courts will also imply contract terms if they are necessary to effectuate the intent of the parties. Upper Columbia River Towing Co. v. Glen Falls Ins. Co., 179 F.Supp. 705 (D.Or. 1959).

Breach of Express or Implied Warranties

Breach of warranty claims in Oregon can involve: (a) breach of express warranties set out in the construction contract; (b) breach of implied warranties for the fitness of the plans and specifications – aka the Spearin Doctrine, see for example, A.H. Barbour & Son, Inc. v. State Highway Com., 248 Or 247 (1967); (c) breach of the implied warranty that construction will be performed in a workmanlike manner, see for example, Yepsen v. Burgess, 269 Or. 635 (1974); and (d) the implied warranty of habitability, which applies to new residential construction, see for example, Beri, Inc. v. Salishan Properties, Inc., 282 Or 569 (1978). Oregon imposes strict liability for breaches of warranty. Chandler v. Bunick, 279 Or 353 (1977). It is therefore not necessary to prove that the contractor was negligent in breaching the warranty.

Negligent Misrepresentation and Fraud

Oregon recognizes claims for negligent misrepresentation and fraud against a builder. For example, a builder can be held liable for knowingly making a false statement to a purchaser, which is then relied on by that purchaser to their detriment. See e.g. Or. Pub. Employees Ret. Bd. V. Simat, Hilliesen & Eichner, 191 Or. App. 408 (2004).

Negligent Construction

Oregon recognizes a claim for negligent construction. A contractor has a duty to exercise reasonable care in performing under the construction contract. See Newman v. Tualatin Development Co., 287 Or. 47 (1979). A subsequent purchaser of a property can sue the developer even though there may be no contractual privity between the two. See Harris v. Suniga, 344 Or. 301 (2008).

Unlawful Trade Practices

There may be a claim for violation of Oregon’s Unlawful Trade Practices Act (“UTPA”) with respect to residential construction. ORS 646.605–646.656. A person who successfully pursues a UTPA claim can be entitled to an injunction, return of money or property, actual damages, punitive damages, attorney fees, and other legal or equitable relief. See ORS 646.632, ORS 646/636, and ORS 646.638.

Construction Damages

Cost of Repair

The cost of repair is typically the measure of damages in a construction defect case. Turner v. Jackson, 139 Or. 539 (1932).

Diminution in Value

Diminution in value is the appropriate measure of damages if the repair would cause undue economic waste. Newlee v. Heyting, 167 Or. 288 (1941). In determining whether the repairs would cause economic waste, the court will consider such factors as the contract price in relation to the cost of repair, whether the contractor saved money as a result of their breach of contract, the nature of the repairs, the usefulness of the structure as it was constructed in relation to its usefulness if it had been constructed as designed, and a comparison between the cost of repair versus the diminution in value to assess what the appropriate remedy is. See Schmauch v. Johnson, 274 Or. 441 (1976).

Punitive Damages

Punitive damages may be available where a party has brought a tort claim, ie. fraud. It is not sufficient to allege punitive damages in the original complaint. Rather, a party must file a motion to amend and include an affidavit of facts as to why they are entitled to punitive damages. ORS 31.725. A party must then prove by clear and convincing evidence that the other party “acted with malice or has shown reckless and outrageous indifference to a highly unreasonable risk of harm and has acted with a conscious indifference to the health, safety and welfare of others.” ORS 31.730(1). Punitive damages are not available for breach of contract claims. Farris v. United State Fidelity & Guaranty Co., 284 Or. 453 (1978).

Attorney’s Fees

Generally speaking, attorney fees are only recoverable if authorized by statute or breach of contract. Brookshire v. Johnson, 274 Or 19 (1976). Attorney fees are authorized by statute for breach of warranties in the sale of “consumer goods or services.” ORS 20.098. Multiple other statutes provide for attorney fee awards and should be consulted accordingly.

Joint and Several Liability (specific to construction)

The liability of each defendant is several not joint. ORS 31.610. The statute, however, provides an exception and allows joint and several liability for pollution claims. Id. Moreover, if part of a judgment is not collectible against one defendant, then it may be reallocated to other defendants who are more than 25% at fault. Id.

Cost Incurred to Access Repair Areas

See “Cost of Repair,” supra.

Consequential Damages

Consequential damage are recoverable if such damages were actually contemplated by the parties at the time of contracting. Smith v. Pallay, 130 Or. 282 (1929).

Coverage / Trigger of Coverage

There is no “occurrence” where construction defects are merely the result of a breach of contract. Oak Crest Const. Co. v. Austin Mut. Ins. Co., 329 Or. 620 (2000). But negligent construction that causes damage generally does constitute an “occurrence” and “property damage” under Oregon law. Willmar Development, LLC v. Illinois Union Ins. Co., 464 Fed. Appx. 594 (9th Cir. 2011).

Duty to Defend

Contractual Indemnity

An insured is typically entitled to commercial general liability coverage for contractual indemnity to the extent that the indemnification agreement is an “insured contract,” as defined by the insurance policy.

Anti-Indemnity Statutes

ORS 30.140 prohibits additional insured coverage for the additional insured’s sole or partial negligence. Walsh Construction Co. v. Mutual of Enumclaw, 388 Or 1 (2005); Cont'l Cas. Ins. Co. v. Zurich Am. Ins. Co., 2009 WL 231462 (D. Or.).

Additional Insureds

As discussed supra, Oregon’s anti-indemnity statute has placed limitations on the scope of additional insured coverage. But with respect to the duty to defend, the Oregon courts have broadly construed the additional insurer’s duty to defend. The Oregon Supreme Court construed ambiguous allegations in favor of the additional insured requiring a defense even though there were no specific allegations that the named insured’s work was defective. West Hills Development Co. v. Chartis Claims, Inc., 360 Or. 650 (2016).

Determining Primary and Non-Contributory vs. Excess Position

There is no published Oregon decision addressing how to determine the priority of coverage where one insurance carrier’s policy is primary and non-contributory. Oregon’s Supreme Court has held, however, that if the terms of two policies conflict with one another then they are mutually repugnant and will be disregarded. Lamb-Weston, Inc. v. Oregon Auto. Ins. Co., 219 Or 110 (1959).

AI carrier’s rights to reimbursement for defense expenses from other, co-primary carriers

Oregon recognizes a right to contribution between co-carriers. Lamb-Weston, Inc. v. Oregon Auto. Ins. Co., 219 Or 110 (1959). The duty to defend arises from the tender of the claim, and so an insurer is not obligated to reimburse another insurer for pre-tender defense expenses. Oregon Ins. Guar. Ass'n v. Thompson, 93 Or. App. 5 (1988).

Insureds Right to Independent Counsel and Consequences of Rejecting a Defense

Insured’s Right to Independent Counsel

There is no direct legal authority requiring an insurer to pay for independent counsel for its insured in instances where a conflict of interest arises between the insured and insurer.

Consequences of Rejecting a Defense

A denial of a defense is a breach of contract and does not give rise to bad faith liability. Farris v. United States Fidelity & Guaranty Co., 284 Or. 453 (1978). An insurer’s obligations of good faith and fair dealing only give rise in the duty to defend context once an insurer has agreed to undertake the defense of the insured. Strader v. Grange Ins. Co., 179 Or. App. 329 (2002).

Coverage Issues / Defenses

“Ongoing Operations” Exclusions

These are typically found at subparts j(5) and j(6) of the exclusions section to the standard ISO commercial general liability policy form. Exclusion j(5) excludes damage to real property on which the insured is performing operations. Exclusion j(6) excludes damage to that particular part of any property that must be repaired or replaced because the insured’s work was incorrectly performed on it. The Oregon courts have applied these exclusions to bar coverage for damage to all areas where ongoing operations are underway. See e.g. Ohio Cas. Ins. Co. v. Ferrell Developments, LLC, 2011 WL 5358620 (D.Or.).

The “Your Work” and “Your Product” Exclusions, and “Rip and Tear” Damages

The “Your Work” and “Your Product” exclusions are standard exclusions in the standard ISO commercial general liability policy form. These exclusions bar coverage for damage arising out of an insured’s work or product. Oregon courts have narrowly interpreted the “Your Work” and “Your Product” exclusions to apply just to damage to the work or product. Fred Sherer & Sons, Inc. v. Gemini Ins. Co., 237 Or. App. 468 (2010). The exclusions do not bar coverage for damage to third-party property that is not the insured’s work or product. Id. (Holding that there would be coverage to the extent that there was “damage to the house” beneath the insured’s work); MW Builders, Inc. v. Safeco Ins. Co. of Am., 267 Fed. Appx. 552 (9th Cir. 2008) (Holding that damage to the insured’s defective siding was not covered but that there was coverage for resultant damage to other property). The Oregon Supreme Court has also held that there is coverage for “rip and tear” to other contractor’s non-defective work or products if that damage it is necessary to correct the insured’s defective work. Wyoming Sawmills, Inc. v. Transportation Ins. Co., 282 Or. 401, 578 P.2d 1253, 1257 (1978).

Choice of Law (Forum Selection Clauses)

ORS 742.018 provides: “No policy of insurance shall contain any condition, stipulation or agreement requiring such policy to be construed according to the laws of any other state or country. Any such condition, stipulation or agreement shall be invalid.” This statute means that parties to an insurance contract cannot choose what law governs the contract. However, the statute leaves open the question of what state’s law applies to the contract based on Oregon’s choice of law statute. Oregon’s choice of law statute is ORS 81.130. The statute is a modified-version of the most-significant-relationship test set forth in Restatement (Second) Conflict of Laws §188 (1971).

Targeted Tenders

Oregon courts have not addressed whether an insured can make a “targeted tender.”

Consent Judgments

The case of Brownstone Homes Condo Assn. v. Brownstone Forest Hts., 358 Or. 223 (2015) and ORS 31.825 set out when an insured may agree to a consent judgment (aka a “covenant judgment”) and assign its rights. In the Brownstone case, the Court commented that by passing ORS 31.825 that the legislature: “intended to allow insured defendants to assign a specific type of claim against their insurer – claims that the insurer’s negligent or bad faith failure to settle within the policy limits had resulted in an ‘excess judgment’ – to the plaintiff, in exchange for a covenant not to execute against the defendant, without extinguishing the underlying liability. And it intended to permit that outcome only when the excess judgment is in place before the assignment is given.”