Construction Claims

Limitations & Repose Periods

Statute of Limitations for Breach of Construction Contract:

Action for breach of contract must be brought within four (4) years after the day the cause of action accrues. Tex Rev. Civ. Stat. Ann. § 16.004 (2015).

Action for breach of implied warranty of good and workmanlike performance must be brought within four (4) years after the day the cause of action accrues. See Certain-Teed Prods. Corp. v. Bell, 422 S.W.2d 719, 720–721 (Tex. 1968).

Claims for Negligent Construction

Action must be brought within two (2) years. See Tex Rev. Civ. Stat. Ann. § 16.003 (2015).

An action for negligence accrues when a wrongful act causes an injury, regardless of when the plaintiff learns of that injury or whether all resulting damages have already occurred. See Childs v. Haussecker, 974 S.W.2d 31, 36, Prod. Liab. Rep. (CCH) P 15376 (Tex. 1998).

The action accrues even if the injury is not immediately apparent and the plaintiff is unaware of the breach. Zidell v. Bird, 692 S.W.2d 550, 554 (Tex. App. Austin 1985).

Statute of Repose

Residential Construction Liability Act, Tex. Prop. Code Ann. § 27.001 et seq.

1.Governs claims of homeowners and subsequent purchasers against contractors for damages or other relief arising from construction defects solely related to residential construction. Tex. Prop. Code Ann. § 27.002 (2015).

2.defines a “construction defect” as “a matter concerning the design, construction, or repair of a new residence, of an alteration of or repair or addition to an existing residence, or of an appurtenance to a residence, on which a person has a complaint against a contractor. Tex. Prop. Code Ann. § 27.001(2) (2015).

3.Requires mediation of any claim in excess of $7,500.00. Tex. Prop. Code Ann. § 27.0041 (2015).

4.A contractor may be permitted to buy back a home from an owner instead of paying damages. Tex. Prop. Code Ann. § 27.0042 (2015) (although the contractor may still be liable for attorney's fees, improvements, and moving costs)

5.All contracts subject to the RCLA—except those between the developer and contractor for a condominium project—must include a statutory disclosure informing the consumer of the mandatory provisions of RCLA (required notice and opportunity for inspection) before suit can be filed for a construction defect. Tex. Prop. Code Ann. § 27.007 (2015) (containing required form of notice).

6.Procedures: Notice and Offer of Settlement, Tex. Prop. Code Ann. § 27.004 (2015)

a.60 days before suit: written notice to contractor by certified mail, specifying in reasonable detail the construction defects that are the subject of the complaint.

b.35 days after contractor receives notice, upon written request, contractor shall be given reasonable opportunity to inspect the property in question, and to document the defects.

c.No later than 45 days after filing suit, contractor may make a written offer of settlement, which may include repairs.

Repairs must be made no later than 45 days after contractor receives notice of acceptance of offer, subject to limited exceptions.

1.Texas may still apply the express negligence doctrine: a party seeking indemnification for its own negligence must express that intent in specific terms within the four corners of the contract. See Ethyl Corp. v. Daniel Const. Co., 725 S.W.2d 705, 708 (Tex. 1987). However, such application may be inappropriate in light of indemnity statute passed in 2011.

2.Indemnity drafting requirements do not apply to provisions in a construction contract that requires a person to indemnify, hold harmless, or defend another party to the construction contract or a third party against a claim for the bodily injury or death of an employee of the indemnitor, its agent, or its subcontractor of any tier. See Tex. Ins. Code Ann. § 105.103 (2015).

Residential Construction Liability Act, Tex. Prop. Code Ann. § 27.001 et seq.

1.A contractor is not liable for construction defect damages caused by the negligence of another person or entity or the failure of another person or entity to mitigate damages or take reasonable action to maintain the residence. See Tex. Prop. Code Ann. § 27.003 (a)(1)(A), (B) (2015).

2.If the contractor provides written notice of a claim for damages arising from a construction defect to a subcontractor, the contractor retains all rights of contribution from the subcontractor if the contractor settles the claim with the claimant. See Tex. Prop. Code Ann. § 27.003(p) (2015).

Indemnity Clauses: Architect or Engineer

Contract provisions in a construction contract that require a contractor to indemnify or hold harmless a licensed architect or registered engineer or their employees from liability for damage from defects in the design documents prepared by the architect or the engineer or from the negligence of the architect or engineer in the performance of their professional duties in connection with the construction contract and that arises from property or personal injury or death, are void and unenforceable. See Tex. Civ. Prac. & Rem. Code Ann. § 130.002(a).

Certificate of Merit – Experts

In “any action or arbitration proceeding for damages arising out of the provision of professional services by a licensed or registered professional,” Texas requires that a plaintiff file along with the complaint a “certificate of merit” signed by a licensed professional engineer or registered architect licensed in this state and actively engaged in the practice of architecture or engineering. See Tex. Civ. Prac. & Rem. Code Ann. § 150.002 (2015).

The certificate of merit must be in affidavit form and “[t]he affidavit shall set forth specifically for each theory of recovery for which damages are sought, the negligence, if any, or other action, error, or omission of the licensed or registered professional in providing the professional service, including any error or omission in providing advice, judgment, opinion, or a similar professional skill claimed to exist and the factual basis for each such claim.” See Tex. Civ. Prac. & Rem. Code Ann. § 150.002(b) (2015).

Failure to file the certificate of merit contemporaneous with the complaint, with limited exceptions related to the statute of limitations, may result in dismissal of the complaint with prejudice. See Tex. Civ. Prac. & Rem. Code Ann. § 150.002(d) (2015).

Economic Loss Doctrine

In Texas, the economic loss rule generally provides that a contracting party who suffers purely economic losses must seek his remedy in contract and not tort. See Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617 (Tex. 1986). Accordingly, the nature of the injury most often determines whether the action arises under contract or tort law.

With respect to contractors' liability, the economic loss rule does not preclude a negligence claim against the contractors for defective work. See Sharyland Water Supply Corp. v. City of Alton, 354 S.W.3d 407, 409, 411 (Tex. 2011).

Contractor Licensing Requirements

Common Law & Statutory Claims

Breach of Contract: under Texas law, the elements of a breach of contract action are “(1) the existence of a valid contract; (2) performance or tendered performance by the plaintiff; (3) breach of the contract by the defendant; and (4) damages sustained by the plaintiff as a result of the breach.” Am. Gen. Life Ins. Co. v. Kirsch, 378 F. App'x 379, 383 (5th Cir. 2010).

Warranty

1.Express: a contractor may provide his or her own express warranty concerning the work. Usually, a builder agrees to repair defective or deficient work that appears within a certain period of time, typically one year.

2.Implied: There is implied in every construction contract a duty to perform the work skillfully carefully and diligently and in a workmanlike manner. Other warranties are recognized under the Uniform Commercial Code. See Tex. Bus. & Com. Code Ann. § 2.314 (implied warranty of merchantability); Tex. Bus. & Com. Code Ann. § 2.315 (implied warranty of fitness for a particular purpose).

Negligence: Defective construction may be based upon negligence of the designer or contractor. The elements of a negligence cause of action are the existence of a legal duty, a breach of that duty, and damages proximately caused by the breach. See D. Houston, Inc. v. Love, 92 S.W.3d 450, 454 (Tex. 2002).

Fraud/Misrepresentation: A latent defect may create actionable fraud where the contractor makes false representations concerning the construction or intentionally conceals a material fact.

Nuisance: Nuisance is defined as a condition that substantially interferes with the use and enjoyment of land by causing unreasonable discomfort or annoyance to a person of ordinary sensibilities. See Schneider Nat. Carriers, Inc. v. Bates, 147 S.W.3d 264, 269 (Tex. 2004).

Statutory Liability

1.Building Code Violations: violation of a building code could constitute negligence per se. See Osti v. Saylors, 991 S.W.2d 322 (Tex. App. Houston 1st Dist. 1999).

2.Deceptive Trade Practices Act: prohibits false, misleading, or deceptive acts or practices in the conduct of any trade or commerce. See Tex. Bus. & Com. Code Ann. § 17.46 (a).

Construction Damages:

Cost of Repair:

i.If repair is feasible and does not cause economic waste, then the plaintiff may recover the cost of repair. See Coastal Transp. Co., Inc. v. Crown Cent. Petroleum Corp., 136 S.W.3d 227, 235 (Tex. 2004).

ii.Residential Construction Liability Act, Tex. Prop. Code Ann. § 27.001 et seq.

1.A contractor is not liable for normal wear, tear, or deterioration of the residence, normal shrinkage due to drying or settlement of construction components within allowable building tolerances, or written official government documentation upon which the contractor relied. See Tex. Prop. Code Ann. § 27.003(a)(1)(C), (D), (E) (2015).

2.If claimant rejects settlement offer, claimant cannot recover in excess of: (a) the fair market value of the contractor’s last offer of settlement; or (b) the amount of a reasonable monetary settlement or purchase offer. See Tex. Prop. Code Ann. § 27.004(e)(1)(A)-(B) (limitation not applicable if contractor does not make a reasonable settlement offer).

iii.Doctrine of substantial completion generally controls the measure of damages for failure to make repairs or complete construction. See Ashford Partners, Ltd. v. ECO Res., Inc., 401 S.W.3d 35, 40 (Tex. 2012).

Diminution in Value:

i.If repair is not feasible and would cause economic waste, then the plaintiff is entitled to the diminution in value caused by the breach. See Coastal Transp. Co., Inc. v. Crown Cent. Petroleum Corp., 136 S.W.3d 227, 235 (Tex. 2004).

ii.Doctrine of substantial completion generally controls the measure of damages for failure to make repairs or complete construction. See Ashford Partners, Ltd. v. ECO Res., Inc., 401 S.W.3d 35, 40 (Tex. 2012).

Punitive Damages

i.Generally, recovery of punitive damages in construction disputes is rare as punitive damages are not permitted for contract claims. See Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299 (Tex. 2006).

ii.However, punitive damages may be available where there are claims of fraud or other common law torts so long as the traditional prerequisites are met: a finding of actual damages and outrageous, malicious, or otherwise reprehensible conduct. See Safeshred, Inc. v. Martinez, 365 S.W.3d 655 (Tex. 2012), as corrected, (June 8, 2012), but see Formosa Plastics Corp. USA v. Presidio Engineers & Contractors, Inc., 960 S.W.2d 41, 45 (Tex. 1998) (reversing award for punitive damages when fraud claim was simply “a re-packaged breach of contract claim.”).

Attorney’s Fees

i.A party who files a frivolous suit under the RCLA is liable to the defendant for reasonable and necessary attorney's fees and court costs. See Tex. Prop. Code Ann. § 27.0031 (2015).

ii.If claimant rejects settlement offer, claimant can recover only the amount of reasonable and necessary costs and attorney’s fees, incurred before the offer was rejected. See Tex. Prop. Code Ann. § 27.004(e)(2) (limitation not applicable if contractor does not make a reasonable settlement offer).

Joint and Several Liability (specific to construction)

i.The general rule is that a defendant is only responsible to a claimant for that percentage of damages equal to its percent of fault. See Tex. Civ. Prac. & Rem. Code Ann. § 33.013(a).

ii.Defendants determined to be fifty percent (50%) or less at fault will be liable only for the proportionate amount of the judgment that corresponds to their percentage of negligence. See Tex. Civ. Prac. & Rem. Code Ann. § 33.013(b).

iii.Defendants found to be in excess of fifty percent (50%) negligent may be held jointly and severally liable for the entire judgment. See Tex. Civ. Prac. & Rem. Code Ann. § 33.013(b) (1).

Cost Incurred to Access Repair Areas

Residential Construction Liability Act, Tex. Prop. Code Ann. § 27.001 et seq.

Where a settlement offer is not made: a claimant may recover only the following economic damages proximately caused by a construction defect: (1) the reasonable cost of repairs necessary to cure any construction defect; (2) the reasonable and necessary cost for the replacement or repair of any damaged goods in the residence; (3) reasonable and necessary engineering and consulting fees; (4) the reasonable expenses of temporary housing reasonably necessary during the repair period; (5) the reduction in current market value, if any, after the construction defect is repaired if the construction defect is a structural failure; and (6) reasonable and necessary attorney's fees.

Consequential damages include lost profits, if the party can reasonably prove them with some degree of certainty and exactness. If profits are uncertain or speculative, they are not recoverable. See Texas Power & Light Co. v. Barnhill, 639 S.W.2d 331, 336 (Tex. App. Texarkana 1982).

Consequential damages can also include the cost of redoing the work where necessitated by nonconforming material or when the supplier should reasonably have foreseen that the defective product would be worthless. See Lanphier Const. Co. v. Fowco Const. Co., 523 S.W.2d 29, 42, 17 U.C.C. Rep. Serv. 713 (Tex. Civ. App. Corpus Christi 1975), writ refused n.r.e., (July 23, 1975) (supplier of asphalt required to pay the cost of tearing out and repaving a parking lot when the original material failed).

Coverage Trigger of Coverage

Absent specific policy language to the contrary, “property damage” under a CGL policy occurs when actual physical damage to the property occurs. See Don's Bldg. Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20 (Tex. 2008).

“In the common law, the definition of an accident in the context of an insurance policy has been held to include negligent acts of the insured causing damage which is undesigned and unexpected.” See Archon Invs., Inc. v. Great American Lloyds Ins. Co., 174 S.W.3d 334 (Tex. App. Houston 1st Dist. 2005).

Duty to Defend

Under Texas law, a provision in a construction contract, or in an agreement collateral to or affecting a construction contract, is void and unenforceable to the extent that it requires an indemnitor to indemnify, hold harmless, or defend a party, including a third party, against a claim caused by the negligence or fault, the breach or violation of a statute, ordinance, governmental regulation, standard, or rule, or the breach of contract of the indemnitee, its agent or employee, or any third party under the control or supervision of the indemnitee, other than the indemnitor or its agent, employee, or subcontractor of any tier. See Tex. Ins. Code Ann. § 105.101(2015).

Anti-Indemnity Statutes (see above)

Additional Insureds

Coverage for AI’s own negligence vs. vicarious liability for Named Insured

a.In determining liability for additional insureds, parties should look first to the underlying contractual agreements, and then to the policies themselves. See Evanston Ins. Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660, 664 (Tex. 2008) (holding that insurance policies can incorporate limitations on coverage encompassed in extrinsic documents by reference to those documents); see also In re Deepwater Horizon, 470 S.W.3d 452, 460–61 (Tex. 2015), reh'g withdrawn (May 29, 2015) (“an insurance policy may incorporate an external limit on additional-insured coverage”).

b.Texas courts imposes liability from an event “arising out of” or “respect[ing]” to an operation if a “causal connection or relation” between the event and the operations exist. Evanston Ins. Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660, 666 (Tex. 2008).

c.Texas courts do not “require proximate cause or legal causation.... The particular attribution of fault between insured and additional insured does not change the outcome.” Evanston Ins. Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660, 666 (Tex. 2008).

Determining Primary and Non-Contributory vs. Excess Position

“‘Where the insured maintains both primary and excess policies, ... the excess liability insurer is not obligated to participate in the defense until the primary policy limits are exhausted.’”

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

a.Must first look to contracts and policies to see if contribution or indemnity is discussed. When two or more policies of insurance cover the same risk, parties should look for an “other insurance clause.”

b.Although there are many types of “other insurance” clauses, they can be generally categorized as "equal shares," "pro rata," "excess" or "escape."

c.Where two or more competing clauses are involved, the Texas Supreme Court concluded that conflicting clauses should be ignored and the liability prorated. See Hardware Dealers Mut. Fire Ins. Co. v. Farmers Ins. Exch., 444 S.W.2d 583 (Tex. 1969).

d.Each of the “several insurers on concurrently triggered policies [are] obligated to provide a full defense to the insured.” Texas Prop. & Cas. Ins. Guar. Ass'n/Sw. Aggregates, Inc. v. Sw. Aggregates, Inc., 982 S.W.2d 600, 605 (Tex. App. 1998).

e.An insurer's duty to indemnify its insured is not reduced when there is concurrent coverage among consecutive insurers. See CNA Lloyds of Tex. v. St. Paul Ins. Co., 902 S.W.2d 657, 661 (Tex. App.—Austin 1995, writ dism'd by agr.).

Insureds Right to Independent Counsel and Consequences of Rejecting a Defense

1.The presence of a conflict of interest may enable the insured to retain independent counsel, at the expense of the insurer. See e.g. N. Cnty. Mut. Ins. Co. v. Davalos, 140 S.W.3d 685 (Tex. 2004).

2.When an insurer issues a reservation of rights letter, and “the facts to be adjudicated in the [underlying] lawsuit are the same facts upon which [the reservation of rights letter] depends,” a conflict of interest arises, and the insured has a right to independent counsel. N. Cnty. Mut. Ins. Co. v. Davalos, 140 S.W.3d 685, 689 (Tex. 2004).

Coverage Defenses:

In order to assert a coverage defense, Texas requires an insurer to provide a timely notice of its reservation of rights which fairly informs the insured of the insurer's position. See Ulico Cas. Co. v. Allied Pilots Ass'n, 262 S.W.3d 773, 781 (Tex. 2008).

“[I]f an insurer assumes the insured's defense without obtaining a reservation of rights or a non-waiver agreement and with knowledge of the facts indicating noncoverage, all policy defenses, including those of noncoverage, are waived, or the insurer may be estopped from raising them.” Ulico Cas. Co. v. Allied Pilots Ass'n, 262 S.W.3d 773, 781 (Tex. 2008) (quoting Farmers Texas County Mutual Insurance Co. v. Wilkinson, 601 S.W.2d 520, 521-22 (Tex. Civ. App. Austin 1980, writ ref'd n.r.e.)) (emphasis in original).

Texas courts have held that an insured has several duties, and that failure of such duties can relieve an insurance company of its obligations under the policy:

1.An insured is required to promptly notify its insurance carrier of a claim or an event which may result in a claim or suit. The policy may contain specific time periods. See Lowe v. Emp’rs Cas. Co., 479 S.W.2d 383, 385 (Tex. Civ. App. Fort Worth 1972).

2.When a suit is initiated, an insured must forward all pleadings to the insurance company immediately in order to allow the carrier time to employ counsel to timely file an answer. See Harwell v. State Farm Mut. Auto. Ins. Co., 876 S.W.2d 494 (Tex. App. Fort Worth 1994), writ granted, (Oct. 6, 1994) and judgment aff'd, 896 S.W.2d 170 (Tex. 1995).

Mere failure to comply with the policy notice requirements does not automatically relieve an insurance carrier from policy obligations. A primary insurance carrier must ordinarily be prejudiced by the failure to receive prompt notice before it can be relieved of its obligations to defend or pay a loss. See Shelton v. Ray, 570 S.W.2d 419, 421 (Tex. Civ. App. El Paso 1978).

Choice of Law (Forum Selection Clauses)

Texas recognizes and enforces contractual choice of law/forum selection clauses. See CMS Partners, Ltd. v. Plumrose USA, Inc., 101 S.W.3d 730, 732 (Tex. App. Texarkana 2003).

To successful oppose a forum selection clause, the opposing party must show: (1) enforcement would be unreasonable and unjust; (2) the clause itself was procured by fraud or overreaching; (3) it contravenes a strong public policy of the forum; or (4) the forum is so inconvenient that a party would effectively be deprived of its day in court. See M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15–20, 92 S. Ct. 1907, 32 L. Ed. 2d 513, 1972 A.M.C. 1407 (1972); In re AIU Ins. Co., 148 S.W.3d 109 (Tex. 2004).

Targeted Tenders

In Texas, the insured's selection does not preclude the selected insurers from seeking contribution from those insurers on the risk but not targeted by the insured.

Consent Judgments

An insured may not make agreements for the granting of a judgment in exchange for an agreement not to seek collection from the insured. See State Farm Fire and Cas. Co. v. Gandy, 925 S.W.2d 696 (Tex. 1996).

In Texas, “a defendant's assignment of his claims against his insurer to a plaintiff is invalid if (1) it is made prior to an adjudication of the plaintiff's claim against defendant in a fully adversarial trial, (2) the defendant's insurer has tendered a defense, and (3) either (a) the defendant's insurer has accepted coverage, or (b) defendant's insurer has made a good faith effort to adjudicate coverage issues prior to the adjudication of the plaintiff's claim.” State Farm Fire and Cas. Co. v. Gandy, 925 S.W.2d 696, 714 (Tex. 1996).