Construction Claims

Limitations & Repose Periods

Statutes of Limitations

1. Torts.

   In Kentucky, the statute of limitations for tort claims is one (1) year. See KRS 413.140. Kentucky has adopted the “discovery rule” in some circumstances whereby the applicable statute of limitations may be tolled until the point in time when the complaining party knows, or reasonably should have known, of the injury. See Perkins v. Northeastern Log Homes, 808 S.W.2d 809, 819 (Ky. 1991). This is applied in cases of fraud when the harm is concealed or under specific claims referenced by statute.

   Normally, of course, the statute of limitations begins to run on the date the cause of action “accrues,” unless there is justification for tolling. See Fluke Corp. v. LeMaster, 306 S.W.3d 55 (Ky. 2010). Under the aforementioned “discovery rule,” a cause of action will not “accrue” until the plaintiff discovers, or in the exercise of reasonable diligence should have discovered, not only that he has been injured but also that this injury may have been caused by the defendant’s conduct. See Perkins, supra, 808 S.W.2d at 819.

2. Written and Oral Contracts.

   An action upon a written contract executed after July 15, 2014 (unless otherwise provided by statute), must be commenced within 10 years after the cause of action accrued. See KRS 413.160. Written contracts executed before July 15, 2014, have a 15-year statute of limitations per KRS 413.090(2). An action upon an oral contract, express or implied, must be brought within five (5) years. See KRS 413.120.

3. Construction Defects.

   In any action alleging defective building design, construction, materials, or supplies in which the injury, death, or property damage occurs more than five (5) years after the date of completion of construction or incorporation of materials or supplies into the building, there is a presumption that the building was not defective in design, construction, materials, or supplies. This presumption may be overcome by a preponderance of the evidence to the contrary. See KRS 198B.135. An action to recover damages, whether based upon contract or sounding in tort, resulting from or arising out of any deficiency in the construction components, design, planning, supervision, inspection, or construction of any improvement to real property, or for any injury to property, either real or personal, arising out of such deficiency, or for injury to the person or for wrongful death arising out of any such deficiency, can be brought within seven (7) years following the substantial completion of such improvement. See KRS 413.135. However, if the injury occurs in the seventh year, then no action shall be brought after eight (8) years. Id.

   The limitations period for construction defect actions by homeowners against builders may be tolled if a homeowner properly serves a written notice of claim to the builder, the effect of which is to toll the period for 75 days after the last date of the timetable or 14 days after inspection. See KRS 411.264. Also, Kentucky has adopted the “discovery rule” in construction defect cases. This rule tolls the statute of limitations in cases involving construction defects to the date that the plaintiff knew, or should have known of the injury, and that the injury was caused by the defendant’s conduct. See Perkins, supra, 808 S.W.2d at 819.

4. Kentucky’s Consumer Protection Act.

   A private action under Kentucky’s Consumer Protection Act must be brought within two (2) years of the violation or one (1) year after an action by the Attorney General has been terminated, whichever is later. See KRS 367.220.

5. Breach of Implied Warranty of Habitability and Reasonable Workmanship.

   There is a five (5)-year statute of limitations for actions based “upon a contract not in writing, express or implied,” and actions “created by statute when no other time is fixed by the statute creating liability.” KRS 413.120.

6. Breach of Express Warranty.

   The pertinent statute of limitations for breach of express warranty claims mirrors the statute governing written or oral contracts. See I(A)(1)(b), supra.

7. Fraud.

   The statute of limitations for a claim based upon fraud is five (5) years from accrual. See KRS 413.120(1). The statute of limitations begins to run when the victim “discovers” the fraud, or should have discovered the fraud through the exercise of ordinary diligence. See KRS 413.130(3).

Statute of Repose

KRS 413.135. This provision operates as a statute of repose for construction defect claims. The statute provides in pertinent part as follows:

1. No action to recover damages, whether based upon contract or sounding in tort, resulting from or arising out of any deficiency in the construction components, design, planning, supervision, inspection, or construction of any improvement to real property, or for any injury to property, either real or personal, arising out of such deficiency, shall be brought against any person after the expiration of seven years following the substantial completion of such improvement.
2. Notwithstanding the provisions of subsection (1) of this section, in the case of an injury to property or the person or wrongful death resulting from such injury which injury occurred during the seventh year following substantial completion of such improvement, an action to recover damages for such injury or wrongful death may only be brought within one year from the date upon which such injury occurred (irrespective of the date of death), but in no event may such an action be brought more than eight years after the substantial completion of construction of such improvement.
3. Nothing in this section shall be construed as extending the period prescribed by statute for the bringing of any action for damages.
4. As used in this section, the term “person” shall mean an individual, corporation, partnership, business trust, unincorporated association, or joint stock company; the term “substantial completion” shall be construed to mean the date upon which the owner of the structure, project or facility first entered upon the occupancy or commenced the use thereof. [Id.]

This statute operates to extinguish construction defect claims (sometimes even before any knowledge of the claim exists) by setting an outer limit from the time of “substantial completion,” after which no construction defect claim may be brought. Therefore, in many instances, the Kentucky construction defect statute of repose will operate to shorten the 10-year statute of limitations provided for actions based upon written contracts (those executed after July 15, 2014) or the 15-year statute (those contracts executed before July 15, 2014). See I(A)(1)(b), supra.

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

The Notice and Opportunity to Repair Act

KRS 411.250-.260. Under the Act, a construction professional entering into a contract to build a residence is required to give a notice to the homeowner about how claims of defect are to be handled. See KRS 411.260. Said notice must be conspicuous (e.g., the statute uses all capital letters) and can be included in the contract or be a separate document. The notice must include certain matters:

1. That if any construction defects are found, the contractor has the right to offer to cure the defects before the homeowner can sue;
2. Before the homeowner can sue, he must deliver to the builder a written notice, setting out the alleged defects and giving the builder the opportunity to make an offer to repair or pay for the defects; and
3. Advise the homeowner that he does not have to accept any offer the builder makes (within 21 days after service of the homeowner’s notice), but state law imposes certain time limits and procedures for suing. Failure to follow those time limits and procedures may affect said homeowner’s rights.

KRS 411.256. This particular provision of the Act sets out defenses the contractor may have. While the construction profession is liable for his acts or omissions, or the acts or omissions of his or her agents, employees, or subcontractors, he is not liable for any damages caused by someone else, or someone else’s failure to reduce the damage or maintain the property. Normal wear, tear, deterioration, shrinkage, swelling, expansion, or settlements are also excluded. The contractor can also protect himself by noting any preexisting condition(s) on the property and getting a signed statement from the owner acknowledging that the contractor is not responsible for preexisting condition(s).

Indemnity and Contribution

Indemnity

1. Joint and several liability. With the advent of apportionment of fault (see KRS 411.182; KRS 454.040), liability in Kentucky amongst multiple defendants can only be several, not joint. Apportionment can be had against settling parties dismissed before trial but not against individuals or entities that have never been a party to the subject proceedings.
2. Contractual and common law. Both contractual and common-law indemnity is recognized in Kentucky. See Blue Grass Restaurant v. Franklin, 424 S.W.2d 594, 599 (Ky. 1968) (contractual); Degener v. Hall Contracting Corp., 27 S.W. 2d 775, 780 (Ky. 2000) (common law).

   Worthy of note, however, is KRS 371.180, which provides that, for contracts entered into on or after June 20, 2005, “[a]ny provision contained in any construction services contract purporting to indemnify or hold harmless a contractor from that contractor’s own negligence or from the negligence of his or her agents, or employees is void and wholly unenforceable.”

   A claim for indemnity must be brought within five (5) years of having been required to pay monies on behalf of the actual wrongful party. See KRS 413.120.

Contribution

The status of “contribution” under Kentucky law is unclear. Because defendants in a lawsuit are severally liable only for the specific percentage of fault assigned to each by a jury, there is an open debate under Kentucky law whether an individual or entity assigned fault by a jury can seek to recoup monies via contribution from other parties assigned their own percentage of fault by a jury. In Brown Hotel Co. v. Pittsburgh Fuel Co., 224 S.W.2d 165 (Ky. 1949), which remains good law, the then Kentucky Court of Appeals adopted an “active passive” rubric, permitting a party only “passively” negligent to obtain contribution for its assessed fault from an “actively” negligent party.

Certificate of Merit – Experts

Certificates Not Required

The Commonwealth of Kentucky has no statutory requirements dictating Certificates or Affidavits of Merit for experts in the construction industry.

Economic Loss Doctrine

Doctrine Adopted

Contractor Licensing Requirement.

Local Licensing Only

Kentucky does not require a general contractor license to operate as such within the Commonwealth. Instead, licensing is handled at the local city or county level, meaning that what is required licensing-wise will vary depending on where services are rendered. For example, in Jefferson County (the county seat is Louisville; largest county by population in Kentucky), contractor licensing is required by city ordinance. See Louisville Metro Code of Ordinances §§ 150.083-.084.

Common Law & Statutory Claims

Common Law Claims

1. Breach of contract. Not surprisingly, this is the most common claim in Kentucky construction cases. A contract can be written or oral; as to the latter, it can be express or implied. This cause of action also includes claims for breach of express and implied warranties.
2. Negligence. Kentucky courts recognize a claim for “negligent construction” only when damages suffered arise from a “destructive occurrence” or a “damaging event.” See Real Estate Marketing v. Franz, 885 S.W.2d 921, 926 (Ky. 1994). Mere diminution in value due to a defect is not enough to support this claim (e.g., when water leaks and warping of flooring and mold and mildew follow as a result of a structural defect). See id.
3. Fraud & Misrepresentation. The elements of a fraud claim in Kentucky are as follows: (1) defendant makes a material misrepresentation; (2) the misrepresentation is false; (3) defendant knows at the time of making the misrepresentation that it is false, or defendant makes the misrepresentation recklessly, without any knowledge of its truth and as a positive assertion; (4) defendant makes the misrepresentation with the intention of inducing plaintiff to act, or that it should be acted upon by plaintiff; (5) plaintiff acts in reliance upon the misrepresentation; and (6) plaintiff suffers injury. See Flegles, Inc. v. TruServ Corp., 289 S.W.3d 544, 549 (Ky. 2009).

A “fraud by omission” claim in Kentucky the following four elements: (1) that defendant had a duty to disclose a fact or facts, (2) that defendant failed to disclose such fact or facts, (3) that the failure to disclose induced plaintiff to act, and (4) that plaintiff suffered actual damages therefrom. See Rivermont Inn, Inc. v. Bass Hotels & Resorts, Inc., 113 S.W.3d 636, 641 (Ky. App. 2003).

Kentucky also has recognized a claim for “negligent misrepresentation.” In Presnell Construction Managers, Inc. v. EH Constr., LLC, 134 S.W.3d 575 (Ky. 2004), the Kentucky Supreme Court adopted the standard for “negligent misrepresentation” set out in Restatement (Second) of Torts § 552. This cause of action arises when a party supplies false information for the guidance of others and fails to exercise reasonable care or competence in obtaining or communicating the information to parties who reasonably rely on the information.

Statutory Claims

1. The Kentucky Fairness in Construction Act. Passed in 2007 and now found at KRS 371.400-.425, the Act was the product of public policy aimed at protecting contractors, suppliers, and other construction participants against unfair and unjust waivers and unjust waiver practices. The provisions of the Act apply to both private and public construction projects, but not to residential construction projects. Further, the Act applies only to contracts entered into after its effective date of July 1, 2007.
2. Strict Liability. Kentucky has a cause of action that can be pursued by any party (in an individual capacity or on behalf of a class of persons or parties) damaged as a result of a violation of the building code. See KRS 198B.130. An award may include damages and the cost of litigation, including a grant of reasonable attorney’s fees. Such an action must be brought within one (1) year of when the damage is discovered or should have been discovered, but no more than 10 years after the date of first occupation or settlement.

Construction Damages

Cost of Repair

Recoverable in Kentucky

Recently, in Muncie v. Wiesemann, No. 2017-SC-000235-DG (June 14, 2018), the Kentucky Supreme Court confirmed that “cost of repair” damages are recoverable, along with “stigma damages” (see II(B)(1), infra), but the total of repair costs and “stigma damages” together cannot exceed the diminution in the fair market value of the property at issue.

Diminution in Value/”Stigma” Damages

Recoverable in Kentucky

Recoverable in Kentucky

Kentucky law permits the recovery of delay and disruption damages. See Ford Contracting, Inc. v. Kentucky Transportation Cabinet, 429 S.W.3d 397, 410 (Ky. App. 2014). Also, the Kentucky Fairness in Construction Act (see I(G)(2)(a), supra) prohibits as against public policy any provision in a construction contract that “purports to waive, release, or extinguish the right of a contractor or subcontractor to recover costs, additional time, or damages, or obtain an equitable adjustment of the contract, for delays in performing the contract that are, in whole or in part, within the control of the contracting entity.” KRS 371.405(2)(c).

Punitive Damages

Common Law

Kentucky courts routinely continue to discuss punitive-damages standards in terms of old common law, despite the passage of KRS 411.184 in 1988 (see II(C)(2), infra). For example, in Nissan Motor Co., LTD v. Maddox, 486 S.W.3d 838, 840 (Ky. 2015), the Kentucky Supreme Court returned to discussing liability for punitive damages in terms of “gross negligence,” which, in turn, is defined as negligence accompanied by “wanton or reckless disregard for the lives, safety or property of others.”

Statutory Basis

KRS 411.184. Put in place by the General Assembly in 1988, this statute is usually viewed in terms of personal-injury actions alone. Just the same, the terms “Plaintiff” and “Defendant” are broadly defined to include “any party claiming punitive damages.”

The statute as passed required a showing of “oppression,” “fraud,” or “malice” by “clear and convincing evidence” to recover punitive damages. Ten years after the statute’s passage, the definition of “malice” contained in KRS 411.184(1)(c) was struck down as unconstitutional by the Kentucky Supreme Court in Williams v. Wilson, 972 S.W.2d 260 (Ky. 1998).

The remainder of the statute is still in place. Importantly, KRS 411.184(4) thereof states that “[i]n no case shall punitive damages be awarded for breach of contract.” This would prevent punitive damages from being recovered in many construction claims because they are so often premised on a breach of contract.

KRS 411.186. This companion statute spells out how punitive damages are to be assessed by a jury (or a judge, if the jury is waived). The trier of facts is to consider the following: (1) the likelihood at the relevant time that serious harm would arise from defendant’s misconduct; (2) the degree of defendant’s awareness of that likelihood; (3) the profitability of the misconduct to defendant; (4) the duration of the misconduct and any concealment of it by defendant; and (5) any actions by defendant to remedy the misconduct once it became known to defendant.

Attorney’s Fees

Limited Recovery

Kentucky courts have long held that “in the absence of a statute or contract expressly providing therefore, attorneys’ fees are not allowable as costs…nor recoverable as an item of damages.” Dulworth & Burress Tobacco Warehouse Co. v. Burress, 369 S.W.2d 129, 133 (Ky. 1963).

Joint and Several Liability (specific to construction)

No Special Rules for Construction Cases

As explained above, Kentucky no longer allows for “joint” liability following the advent of apportionment of fault. See I(C)(1)(a), supra. Liability is “several” only.

Actual/Direct Damages

Recoverable in Kentucky

Actual (or “direct”) are the most basic form of damages flowing from a party’s breach of contract. These damages are for the purpose of restoring the non-breaching party to the same financial position in which he or she would have been had the breach not occurred.

Consequential Damages

Recoverable in Kentucky

Consequential damages are the next most basic form of damages flowing from a party’s breach of contract, and Kentucky courts generally permit recovery of same. See Lawson v. Menefee, 132 S.W.3d 890 (Ky. App. 2004). These are damages that were “a foreseeable consequence” of said breach when the contract was formed. In the construction context, an award of consequential damages may be more likely because the participants may be both experienced in the industry and aware of the damages that a breach of contract can cause.

Insurance Coverage Issues

Definition of an “Occurrence”

Trigger of Coverage

Generally in construction contexts, insurance coverage is triggered by an “occurrence” that takes place during the coverage period and leads to damages for which coverage is sought. While an “occurrence” can be defined differently in insurance policies, it is most frequently defined as “‘an accident, including continuous or repeated exposure to substantially the same general harmful conditions.’” Cincinnati Ins. Co. v. Motorists Mut. Ins. Co., 306 S.W.3d 69, 72 (Ky. 2010).

Under this same Kentucky decision, however, a claim for faulty workmanship, in and of itself, is not an “occurrence” under a commercial general liability policy because a failure of workmanship does not involve the fortuity required to constitute an accident. See id.

There are also “claims-made policies” in which coverage is triggered by a claim made against the policy during the coverage period no matter when the incident leading to the claim actually occurred. Many professional errors and omissions policies are “claims-made policies.”

Duty to Defend

Additional Insureds

If an additional insured (or insureds) appears unambiguously on the face of an insurance policy, Kentucky law will dictate, under general contract interpretation principles, that the insurer provide a defense to said insured (or insureds).

Also, if an additional insured (or insureds) gives notice of a claim to an insurer, the duty to defend said insured (or insureds) is triggered. See LM Ins. Corp. v. Canal Ins. Co., 523 F. App’x 329, 338 (6th Circ. 2013) (applying Kentucky law).

Insureds’ Right to Independent Counsel / Consequences of Rejecting a Defense

In order to make a successful bid to obtain independent counsel (expenses for which the insurer can be held liable), an insured is ultimately required to identify and establish a conflict of interest between the insured and the insurer per the guiding principles and provisions of Kentucky’s Rules of Professional Responsibility. (Of course, counsel retained by an insurer needs to keep Kentucky’s Rules of Professional Responsibility in mind at all times; if he or she perceives a conflict, he or she is under an obligation to bring that to an insured’s attention.)

Importantly, though, an insured is relieved of any duty to accept a defense offered by an insurer when the insurer does so pursuant to a reservation of rights. See Med. Protective Co. of Fort Wayne, Indiana v. Davis, 581 S.W.2d 25, 26 (Ky. App. 1979). This theory here is that, “when the insurer reserves a right to assert its non-liability for payment there is little or no reason to require the insured to surrender defense of the claim to a company which asserts that it has no obligation to satisfy the claim.” Id. In such a situation, the insured may refuse the proffered defense and conduct his or her own defense at his or her own expense. Id. However, the insurer will be bound by the results of the insured’s defense (good or bad) absent a finding that the insured acted fraudulently or collusively in defending (or failing to defend) the claim. Id. at 25–27.

Reservation of Rights

When an insurer has information on which it will base any form of disclaimer under the applicable policy, said insurer must notify the insured of its intentions as soon as possible via a reservation of rights. See Farm Bureau Mut. Ins. Co. v. Danville Constr. Co., Inc., 463 S.W.2d 125, 128 (Ky. App. 1971). When defending under a reservation of rights, the insurer must clearly notify the insured that the defense it is offering to the insured is subject to its reservation of rights to later disclaim coverage. See James v. Kentucky Farm Bureau Mut. Ins. Co., 2003 Ky. App. LEXIS 312, at *10 *11 (Ky. App. Dec. 12, 2003).

Coverage Defenses

Late Notice

Pursuant to Kentucky law, “an insurer may not deny coverage because the insured failed to provide prompt notice of loss unless the insurer can prove that it is reasonably probable that it suffered substantial prejudice from the delay in notice.” Jones v. Bituminous Cas. Corp., 821 S.W.2d 798, 802–03 (Ky. 1991). In Kentucky, the insurer must establish that the outcome would have been different had it received timely notice. Old Republic Ins. Co. v. Underwriters Safety and Claims, Inc., 306 F. App’x 250 (6th Cir. 2009). In Old Republic, though, the Sixth Circuit opined that if an insurer establishes that it might have achieved “a more favorable result” if it had been given notice of the claim, then sufficient prejudice is established to deny coverage. Id.

Lack of “Occurrence”

Under Kentucky law, an insurer “has a duty to defend if there is any allegation which potentially, possibly or might come within coverage of the [subject] policy.” See James Graham Brown Foundation, Inc. v. St. Paul Fire & Marine Ins. Co., 814 S.W.2d 273, 279 (Ky. 1991). In doing so, the an insurer must compare the allegations in any complaint with the terms of the policy itself, including such definitions as “occurrence.” See id.

Further, Kentucky courts apply a rule of interpretation known as “the reasonable expectations doctrine”; this doctrine resolves any insurance policy ambiguity in favor of the insured’s reasonable expectations of what coverage he/she/it was obtaining when paying policy premiums. See True v. Raines, 99 S.W.3d 439, 443 (Ky. 2003).

The foregoing said, if an insurer has reviewed the subject complaint, reviewed the subject policy’s definition of “occurrence,” and concludes that an event for which an insured has provided notice and demands coverage does not fit the policy’s definition of “occurrence,” it can disclaim coverage or provide a defense subject to a reservations of rights.

Choice of Law and Forum-Selection Clauses

Choice of Law

In any contract action (and an insurance policy is viewed as a contract), the law of the state with the greatest interest in the outcome of the litigation should be applied. See Bonnlander v. Leader Nat’l Ins. Co., 949 S.W.2d 618, 620 (Ky. App. 1996). Kentucky applies its own laws when there are sufficient contacts and no overwhelming interests to the contrary, even if the parties have voluntarily agreed to apply the law of a different state. See Breeding v. Massachusetts Indem. & Life Ins. Co., 633 S.W.2d 717, 719 (Ky. 1982).

Forum-Selection Clauses

In Prudential Resources Corp. v. Plunkett, 583 S.W.2d 97 (Ky. App. 1979), the Kentucky Court of Appeals adopted Section 80 of the Restatement (Second) of Conflict of Laws, holding that a written agreement containing a forum-selection clause will be given full effect unless application would prove to be “unfair or unreasonable.” The Kentucky Supreme Court has since confirmed this to be the law of the Commonwealth. See Prezocki v. Bullock Garages, Inc., 938 S.W.2d 888 (Ky. 1997). The same test is applied to venue-selection clauses. See id.

Targeted Tenders

Rule Not Followed

Kentucky, like the vast majority of the 50 states, has not adopted use of the “targeted tender” doctrine. Illinois was the first state to embrace the doctrine and remains the only one applying it on a regular bases; the states of Washington and Montana have applied it selectively to resolve certain insurance-coverage disputes.

Consent Judgments

Unsettled Law

The enforceability and impact of consent judgments foisted onto insurers who refuse to defend and indemnify an insured in an active lawsuit have been lightly litigated in Kentucky.

In all likelihood, Kentucky state courts would look favorably on consent judgments but still police the same. In one particular federal decision intuiting the status of Kentucky law on the subject, the federal court set out three important propositions relevant to enforcing consent judgments: first, an insurer can be held financially liable only in so far as it wrongfully denies liability and is thus not a party to any settlements conducted by an insured on its own behalf; second, any settlements reached between an insured and a plaintiff must represent a “reasonable assessment” of said plaintiff’s damages; and, third, any settlements must not be the product of collusion. See Ayers v. C&D General Contractors, 269 F. Supp. 2d 911, 915 (2003).