Construction Claims

Limitations & Repose Periods

Statute of Limitations

An action for breach of contract other than the recovery of real property must be brought within four (4) years after the day the cause of action accrues. California Code of Civil Procedure §337, see also Brisbane Lodging L.P. v. Webcor Builders, Inc. 216 Cal App 4th 1249 (2013). An action founded upon latent defects in the development of or improvement to real property is subject to two limitations. The action must be filed within three years of discovery if the action rests on negligent injury to the property California Code of Civil Procedure §338(2), or four years if the action is a breach of prospective warranty of work or materials furnished California Code of Civil Procedure §337(1).

Statute of Repose

California law imposes a strict statute of repose against prospective plaintiffs for construction defect claims. Statutes of repose differ from statutes of limitations in that they focus on immunizing the defendant from long-term liability and are much more strictly enforced. California Code of Civil Procedure §337.15 grants a 10-year statute of repose for bringing claims for “latent” construction defects. An action for such claim defects can be filed in court up to ten (10) years of the date of “substantial completion of such development or improvement.”. Liptal v. Diane Apartments, Inc., Cal. App. 2d 109 (1980). Similarly, there is a 4-year statute for bringing claims for patent construction defects. A “patent” deficiency is one which is apparent by reasonable inspection. An action for such patent defects can be filed in court up to 4 years after the project has been completed.

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

In 2003, California codified its Right to Repair legislation into California Civil Code §§895 – 945.5. The statutes define which defects are actionable and provides for prelitigation procedures that need to be followed prior to filing suit for single family homes. The procedures outlined in the code include providing written notice to the builder of the defect, allowing the builder to inspect the alleged defect, and an absolute right of repair with a set time frame. If the defect still exists once all the requirements of the statute are met, then Plaintiffs are permitted to file a lawsuit.

California Civil Code §6000, similar to §§895 to 945.5, provides for the prelitigation procedures that need to be followed prior to filing suit for multifamily construction.

Indemnity and Contribution

Indemnity

California law allows for a common law cause of action that provides a party can be indemnified if it is being held vicariously, constructively, or technically liable for the wrong doing of another party. California Civil Code §2772 provides for contractual indemnity whereby a party engages to save another from a legal consequence of the conduct of one of the parties, or of some other person. Indemnity agreements in California are construed under the same rules which govern the interpretation of contracts. Continental Heller corp. v. Amtech Mechanical Services (1997) 53 Cal. App. 4th 500, 504. See also Centex Golden Const. Co. v. Dale Tile Co. (2000) 78 Cal. App. 4th 992.

California Code §2782(c) limits the extent a builder or contractor in a construction contract can seek indemnification by providing that an indemnity provision is “unenforceable to the extent the claims arise out of, pertain to, or relate to the negligence of the builder or the contractor.” Although this section prevents indemnification for the builder’s sole negligence, it does not prevent indemnification where there is concurrent negligence. Armco Steel Corp. v. Roy H. Cox. Co., 103 Cal. App. 3d 929 (1980).

Contribution

Where a money judgment has been rendered jointly against two or more defendants in an action, there shall be a right of contribution among them. Such right of contribution shall be administered in accordance with the principles of equity. A liability insurer who by payment has discharged the liability of a judgment debtor shall be subrogated to his right of contribution. California Code of Civil Procedure §875.

Contractual Indemnity

Indemnity agreements are construed under the same rules which govern the interpretation of other contracts. Often, in construction contracts, there contains an indemnity clause whereby the subcontractor agrees to indemnity the general contractor or builder for damages caused by the subcontractor’s negligence. California Civil Code §2772.

Anti-Indemnity Statures

California Code §2782(c) limits the extent a builder or contractor in a construction contract can seek indemnification by providing that an indemnity provision is “unenforceable to the extent the claims arise out of, pertain to, or relate to the negligence of the builder or the contractor.” Although this section prevents indemnification for the builder’s sole negligence, it does not prevent indemnification where there is concurrent negligence. Armco Steel Corp. v. Roy H. Cox. Co., 103 Cal. App. 3d 929 (1980).

Damages

Cost of Repair

The measure of damages for construction defects is either the diminution in value or the likely cost of repair, whichever is less. However, the Court has found that when the reason to repair and the costs of repair are not unreasonable in light of the damage to the property and the value of the property after repair, the costs of repair which exceed the diminution in value may be awarded. Orndorff v. Christiana Community Builders, 217 Cal. App 3d 683.

Diminution in Value

Damages for a breach of contract are measured from the time of the breach. Diminution in value is the difference between the fair market value of the subject property as is and the fair market value if Defendant had constructed the property in conformance with the contract at the time of the breach.

Punitive Damages

California does not permit the awarding of punitive damages for most construction-related cases, particularly if fraud is not involved in the claim.

Attorney’s Fees

California law provides that each party bears their own attorney’s fees unless provided by statute or contract. One such statute is CA Code of Civil Procedure §998, which states that no less than 10 days prior to commencement of trial or arbitration, any party may serve a settlement offer in writing upon any other party. The written offer shall include a statement of the offer, terms and conditions, and provision that allows for acceptance of the offer by signing a statement that the offer is accepted. If the offer is not accepted, and the offeree fails to obtain a more favorable judgment, than the court may award post-offer costs and fees to the offering party.

Joint and Several Liability

California recognizes the rule that if two or more parties are at fault, their liability is said to be both joint and several and each party is independently liable for its share of the fault as well as 100% liable for the damages resulting from their joint negligence. California Civil Code §§1430-1432.

Investigative Fees and Costs Recovery

Plaintiffs are entitled to investigative fees and costs used to evaluate the defect and formulate a repair plan as damages under California Civil Code §3333. Stearman v. Centex Homes, 78 Cal. App. 4th 611.

Consequential Damages

California recognizes two main types of damages of breach of contract: consequential and incidental damages. Consequential damages are the natural and foreseeable results of a breach. CACI No. 3243 Jury Instruction. Incidental damages are dependent on specific circumstances and can include losses that occur after a breach. Incident Damages are only recoverable if Plaintiff can establish that the defendant as aware of the special circumstance at the time the contract was created. CACI No. 3242 Instruction.

Coverage Issues

Definition of an Occurrence

A single event that causes both property damage and personal injury over a period of several years constitutes a single occurrence, even where the insurance policy provides for a different definition of occurrence for each type of injury. Safeco Ins. Co. of America v. Fireman’s Fund Ins. Co., 148 Cal. App. 4th 620 (2007).

Duty to Defend

The California Court has held that the duty to defend arises immediately upon proper tender of defense with respect to all claims embraced by the indemnity, including those which allege facts that would give rise to a duty to indemnify. Crawford v. Weather Shield Manufacturing Inc., 79 Cal. Rptr. 3d, 721 (2008).

Additional Insureds

An additional insured is a person or entity that is covered as an insured under another party’s insurance policy. Typically, additional insured coverage is provided because it is required by a contract. When an additional insured is covered for its liability arising out of the name insured’s operations, it is covered for its own negligence so long as the loss was connected in some way with the named insured’s operations.

The California court has held that an insurer is required to provide a defense to a general contractor in a construction defect lawsuit because additional insured endorsements in comprehensive general liability policies issued to subcontractors created ambiguities as to the potential for complete operations coverage. Pulte Home Corp. v. American Safety Indemnity Co., 14 Cal. App 5th 1086 (2017).

Insured’s Right to Independent Counsel and Consequences of Rejecting a Defense

An insurer may, by the terms of the construction contract, have the right to appoint counsel for the insured and control the defense. In such circumstances, counsel owes both the insured and the insurer a high duty of care and allegiance. However, if interests diverge between the two parties, the insured is entitled to independent counsel. If conflict arises due to the insurer’s reservation of rights based on possible non-coverage, the insurer must pay the reasonable cost of hiring independent counsel by the insured. California Civil Code §2680; San Diego Federal Credit Union v. Cumis Inc. Society, 162 Cal. App. 3d 358 (1984).

However, a conflict of interest does not exist whenever an insurer reserves rights. There must also be evidence that the outcome of the coverage issue can be controlled by counsel first retained by the insurer for defense of the underlying claim. Centex Homes v. St. Paul Fire and Marines Ins. Co., 19 Cal App. 5th 789 (2018).

A conflict of interest exists “only when the basis for the reservation of rights is such as to cause assertion of factual or legal theories which undermine or are contrary to the positions to be asserted in the liability case. Gafcon, Inc. v. Ponsor & Associates, 98 Cal. App. 4th 1388.

Coverage Defenses

Reservation of Rights

Reservation of rights letters set forth a company’s assumption of defense, subject to coverage reservations. The letters inform the insured of coverage and policy defenses, thereby preserving the insurer’s right to assert such defenses in litigation. A coverage defense is one that allows the liability insurer to assert that a given claim may or may not be covered by its policy. Johansen v. California State Auto. Assn. Inter-Ins. Bureau, 15 Cal. 3d 9 (1975).

Other Issues

Certificate of Merit – Experts

California Civil Procedure Code §411.35 requires that in every action arising out of the professional negligence of a person holding a valid architect’s certificate, a valid registration as a professional engineer, or a valid land surveyor’s license, a certificate of merit be sent before or with service of the plaintiff’s lawsuit on the defendant.

Economic Loss Doctrine

The Economic Loss Doctrine prohibits certain tort claims by barring recovery of damages for the repair and replacement of a defective product. In California, the Supreme Court held that plaintiffs may not recover the cost of repairing construction defects due to builder negligence unless those defects have produced actual injury to property or person. AAS v. Superior Court, 24 Cal 4th 627 (2000).

Contractor Licensing Requirements

The state of California has statewide licensing requirements which are outlined in the CA Business and Professions Code, Division 3, Chapter 9. The Department of Consumer Affairs Contractor’s State License Board is the entity charged with licensing and regulating the construction industry. See cslb.ca.gov for more information.

Common Law & Statutory Claims

A common law claim for negligence requires duty, a breach of that duty, causation, and damages. Construction defects that have not ripened into property damage or at least into involuntary out-of-pocket losses, do not satisfy the essential element of damages required for negligence. AAS v. Superior Court, 24 Cal 4th 627, 646 (2000). A claim for breach of contract requires a valid and enforceable contract, breach of the contract, and resulting damages from the breach. Please note that indemnity provisions are subject to statutory limitations under CA Civil Code §2772.

Choice of Law (Forum Selection Clauses)

California Civil Code §1646 establishes a general choice of law rule for contracts. §1646.5 provides for an exception to §1646 allowing parties to a contract relating to a transaction involving at least $250,000 may agree that California law governs their rights and duties in whole or in part, whether or not the contract or transaction bears a reasonable relation to California.

Targeted Tenders

California does not follow the targeted tender, or selective tender, doctrine which allows an insured with multiple policies to select which insurer should defend. The rule is inconsistent with California law that “the right to equitable contribution exists independently of the rights of the insured… and where multiple insurers… share equal contractual liability for the primary indemnification of a loss or the discharge of an obligation, the selection of which indemnitor is to bear the loss should not be left to the often arbitrary choice of the loss claimant.” Fireman’s Fund Ins. Co. v. Maryland Casulaty Co., 65 Cal. App. 4th 1279 (1998).

Consent Judgments

In California, an insured may not bind its insurer to a settlement of judgment in violation of the policy without prior written consent, unless there is an economic necessity, insurer breach, or extraordinary circumstance. One West Bank, FSB v. Houston Cas. Co., 2015 U.S. Dist. LEXIS 191435 (2015).