Construction Defect Claims
Subrogation vs. Right to Repair in Defective Construction Claims
Thomas F. Olsen and Rose Hall
The ace subrogation adjustor for ABC Insurance Company received another toilet water valve failure claim. “$140,000? — a big one. Better send this one to defense counsel,” she thought. $15,000 in defense costs later, she closed the file with no recovery. Why?
The problem was that ABC had already lost the case, before she even got the file. That’s because the subrogation took place in one of the many states with a “Right to Repair” or “Notice and Opportunity to Repair” statute. The original claims adjustor arranged for an emergency service to clean up the water and a trustworthy contractor to make repairs at a reasonable price, all to the insured’s satisfaction. However, no one had put the builder of the house on notice of the defect or damages, or allowed them the opportunity to repair it themselves.
Doing It Right
Over the past 14 years, the majority of states have enacted Right to Repair statutes. Although they vary from state to state, in general they require claimants to provide written notice to builders of alleged defects, and an opportunity to repair the defects and associated damages before pursuing litigation against the builders. Some statutes apply to commercial or multifamily dwellings, some do not. The statute of limitations and time periods to respond to the notice given by the claimant also vary from state to state.
Because state laws generally allow an insurer to “step into the shoes” of its insured to subrogate, insurers appear to be subject to the benefits and requirements of these Right to Repair statutes to the same extent as their insureds. The issue is clear in very few states. For example, New Hampshire specifically exempts subrogation claims, while Texas clearly makes such claims subject to its Right to Repair statute. Most Right to Repair statutes do not address subrogation specifically, and, because these statutes have not been on the books long, there are often a dearth of court decisions interpreting their provisions and resolving ambiguities.
Most Right to Repair statutes also do not address emergency repair situations, yet allow a builder from 10 to 90 days to respond to a notice of claim. Waiting up to 90 days for a responsefrom the builder is likely unreasonable where an emergency repair is necessary, especially if the homeowner is unable to stay in their home or operate their business. Twelve states do have express emergency repair provisions. In those instances, claimants are permitted to make emergency repairs without statutory notice, often to prevent unsafe conditions or protect the health, safety and welfare of the occupant.
What To Do?
What should an insurer do to avoid forfeiting their rights under exigent circumstances? The claims adjuster should ensure that notice of the need for emergency repairs is sent to the builder immediately, and allow the builder the opportunity to inspect the property and/or observe the repairs. Some builders have 24-hour hotlines, which can make such contact simple. Other smaller builders may be much harder to contact. In states where emergency procedures are not clearly set forth in the Right to Repair statute, a court is more likely to look favorably on a claimant who has made reasonable efforts to give notice under the circumstances. In exigent situations, both oral and written notice is advisable. In some circumstances, a builder may respond after the time has passed for necessary emergency clean-up, but before subsequent structural repairs are made. A prudent insurer might therefore arrange for emergency cleanup itself, but allow the builder to perform the subsequent structural repairs.
To get around builder notice problems, some insurers have resorted to pursuing only the relevant manufacturer or installer, and not pursuing the original builder. While this strategy can work, by eliminating the builder from the equation, the insurer is likewise eliminating a party with potential legal liability and financial wherewithal, which the remaining manufacturer or installer may not have. In addition, a manufacturer or installer could successfully argue that the Right to Repair statute of their particular state should not so easily be circumvented and may be intended for their benefit as well.
Right to Repair statutes can be of great value to those who know how to use the statutes to their advantage. Education and adherence by the insurer will allow for smooth sailing toward resolution of defect claims. With a clear understanding of the proper procedures, builders will benefit from fewer cases to defend against in court and insurers will benefit from preserving their subrogation rights.
The content of this article is intended to provide general information and as a guide to the subject matter only. Please contact an Advise & Consult, Inc. expert for advice on your specific circumstances.