Construction Defect Claims

Construction Defect Claims: An Update

Thomas F. Segalla, Esq.
Matthew S. Lerner, Esq.
Goldberg Segalla LLP
Construction Defect Group

No one will dispute that construction defect litigation, whether raised in the liability or insurance coverage setting, can be complex, time consuming and fraught with pitfalls for the unwary. Whether involving claims of Chinese drywall, mold, plumbing leaks, toxic gases or carbon monoxide, builders, construction managers, homeowners and their counsel and insurers must keep abreast of current case law which can differ from jurisdiction to jurisdiction. As the construction industry rebounds, a clear understanding of the relevant issues is critically important. This article provides a current compendium of cases that consider various liability and/or coverage issues faced by participants in this growing area of litigation. The following questions are asked and answered by these cases:
• Coverage
~ Whether there is "property damage" within the definition of the policy
~ Whether there is an "occurrence" that triggers coverage
~ Personal injury not covered under a wrap up or OCIP policy
~ Application of exclusion j
~ Lack of notice provided to the insurer
~ What is an "insured contract"
~ "your work exclusion and the subcontractor exception"
• Liability
~ The enforceability of an arbitration clause in a purchase contract
~ Application of a statue of repose to a construction defect claim
~ The lack of privity defense asserted by a builder regarding a designer's faulty design plans
~ The economic loss doctrine and an exception to the doctrine
~ Expert testimony regarding a contractor's standard of care
~ Transfer of venue motion regarding out-of-state construction project

COVERAGE CASES:
California
Coverage Afforded - No Agreement to Guarantee Performances
S.J. Amoroso Construction Company. Inc. v. Executive Risk Indemnity, Inc.. 2009 U.S.
Dist. LEXIS 116080 (N.D. Cal. Dec. 14, 2009)
The underlying action involved claims against various developers for faulty construction after an assignment of the contract from one developer to another. The original developer who contracted with the owner was an insured under a D&O policy issued by Executive Risk. Executive Risk denied coverage under its policy contending, among other things, that coverage was excluded under Exclusion III(C)(2) which excludes coverage for claims "based on, arising from, or a consequence of any actual or alleged liability of insured organization under any written or oral contract." After reviewing a series of correspondence between the insured/developer, the other developers and owner, the Court concluded that the exclusion was inapplicable because an "agreement" within
the exclusion was not entered into by the insured. (i.e., an agreement to guarantee performance of the construction contract).

Practice Note: The Court dismissed the insured's bad faith claim because it was not damaged. Specifically, the insured was being defended by its other insurance carrier and therefore, was not damaged because its bad faith claim was predicated on a failure to defend a claim not a failure
to indemnify.

Florida
No "Property Damage" Found.
Amerisure Mut. Ins. Co. v. Auchter Co.. 2010 U.S. Dist. LEXIS 9670 (M.D. Fla., Jacksonville Div. Feb. 4, 2010).
The owner of an inn and conference center made allegations against Auchter that falling roof tiles which were constructed by Auchter caused damage to the roof. There were no allegations made that the falling roof tiles damaged any other property or that any other components of the building were damaged. The owner did allege that it suffered lost profits because the building would be unstable during the course of roof repair and replacement. Previous to the motions before the court, an arbitration award had been issued in favor of the owner against Auchter. Amerisure instituted this declaratory judgment action and moved for summary judgment contending that the claim against Auchter was not covered by its CGL policy. It is Amerisure's position that the claims were not covered "property damage" under the policy because the damaged property was limited to the roof itself, as opposed to damage to some other property which would be covered (barring some other policy exclusion). The Court framed the question as
follows: Is the cost for the removal and replacement of the entire roof including the non-defective roof tiles "property damage" when the faulty installation has caused physical damage to some of the individual roof tiles, and can only be remedied by replacing the entire roof?

In this case, the owner purchased the tiles which were installed by the subcontractor under the supervision of Auchter as general contractor. Applying the holdings of the Florida Supreme Court, the Court granted Amerisure's motion for summary judgment and concluded that because the faulty installation did not cause damage to some other component of the project that there was no covered "property damage."

Practice Note: In reaching its decision, the Court notes that Florida is not alone in holding that "property damage" simply does not occur when the only damage is to the product itself and cites cases in W.A., M.O., S.D. and T.N.

Florida
Voluntary Payments Provision Denies Coverage as Does Other Exclusions
Rolyn Companies. Inc. v. R&J Sales of Texas. Inc.. 2009 U.S. Dist. LEXIS 106881 (S.D. Fla., Miami Div. Nov. 16, 2009)
Two condominium associations retained Rolyn to repair damage caused by Hurricane Wilma. Rolyn retained a subcontractor Precision to conduct the repair. During the course of repair, it rained heavily which resulted in water intrusion causing significant damage. It was asserted that Precision's faulty workmanship permitted the water intrusion. Rolyn was sued and instituted this action against Crum & Forster (its insurer) and Admiral (Precision's insurer). The Court granted Crum & Forster's motion for summary judgment holding that the "voluntary payment provision" presents recovery of the costs incurred by Rolyn in repairing the interior of the premises. The Court also applied the "absolute asbestos exclusion" and held that property that was replaced
because of asbestos is excluded from coverage. The Court also held that to the extent that any property damage would not have occurred but for "mold," it is excluded. With respect to the Admiral policy issued to Precision, the issue presented was whether Rolyn qualified as an "additional insured." The Court held that Rolyn did not qualify as an additional insured because Rolyn and Precision had not entered into an "insured contract" requiring Rolyn to assume the liability of Precision. The Court also analyzed the "Roofing Operators Exclusion" and held that it was clear and unambiguous and excluded coverage.

Practice Note: Courts will first examine whether there is coverage under the insuring agreement and if there is, the court will analyze the application of any exclusion.

Georgia
"Property Damage" Caused by an "Occurrence" Found
Hathaway Dev. Co. v. American Empire Surplus Liner Ins. Co., 301 Ga. App. 65, 686 S.E.2d 855 (C.A. Ga. 1st Div. 2009)
The issue on this appeal was whether a general contractor can recover a judgment against its plumbing subcontractor's CGL insurance policy. The general contractor had sued the subcontractor for negligent construction and a default judgment was secured against the subcontractor. In reaching its decision, the Court defined the general contractor's rights under the subcontractor's policy as follows: "'one who obtains a judgment against the insured and then seeks to enforce it against the insurer ... derives his rights under the policy through the insured' ..., and he is entitled to recover under the policy only if it appears that all conditions precedent have been complied with ...." It is generally recognized that general liability policies do not cover the costs of fixing the faulty workmanship of a contractor or subcontractor because poor workmanship does not constitute an "accident." Similarly, the Courts in Georgia have held that negligently
performed faulty workmanship that damages other property may constitute an "occurrence" under a CGL policy. The Court noted that because it had been decided in the underlying action, the incidents constituted an "occurrence," the Exclusion (n)(sister ship exclusion) did not apply. Similarly, Exclusion 0)(5) and 0)(6) were inapplicable.

Practice Note: The Court in its decision made this interesting comment: "'what constitutes property damage and an occurrence in the realm of construction defect claims against an insured general contractor for the acts and/or omissions of its subcontractors are perhaps the most
litigated insurance issues over the last several years.'"

Illinois
No Damage to Property of Others
CMK Dev. v. West Bend Mut. Ins. Co., 917 N.E.2d 1155. (Ill. App., 1st Dist. 2009)
CMK, a developer got into a dispute with the owner of a home who presented a long list of defects. West Bend, CMK's insurer, refused to represent CMK in an arbitration. Thereafter, CMK and the homeowner agreed to settle their dispute and CMK sued West Bend for failure to represent and pay any damages. Both CMK and West Bend agreed that under the CGL policy damage caused by defective workmanship, if the damage is to the property of others, it is covered. West Bend argues that the damage to the home did not qualify as damage to property of others. CMK contended that 3 of the 58 defects triggered coverage. The Court rejected CMK's argument that these 3 defects qualified as damage to other property. The Court in reaching its decision noted that the policy requires both "occurrence" and "property damage" to trigger coverage. The 3 defects were a scratched tub and toilet bowl, concrete work and cork flooring. The Court held
that none of these defects was, even potentially, damage to the property of others. Therefore, there was no coverage or duty to defend under the CGL policy.

Practice Note: The Court outlined the rules of construction for insurance contracts in the State of Illinois and determined that the policy was not ambiguous.

Kentucky (applying Indiana Law)
No "Occurrence" for Subcontractor's Faulty Workmanship and "No Property Damage."
The Cincinnati Insurance Co. v. Beazer Homes Invs., LLC, 2010 U.S. App. LEXIS 2351 (6th Cir. Feb. 4, 2010).
Cincinnati instituted this action seeking a declaration that it was not obligated to cover costs that Beazer incurred in repairing water damage to several homes that Beazer built as a general contractor. The damage sought was not for the repair of the allegedly faulty workmanship of one of Beazer's subcontractors, but for damage to other components of the house caused by water intrusion that resulted from the allegedly faulty workmanship. The Court held that the damage at issue was not "property damage" caused by an "occurrence" under the Cincinnati policy. In reaching its decision, the Court rejected the "collateral estoppel" argument asserted by Beazer even though the language of the Cincinnati policy had been litigated under the laws of another jurisdiction. In applying Indiana Law to the dispute, the Court concluded that each completed house in its entirety is the work of Beazer and that damage to the contractor's own work is not property damage under the policy. The Court further concluded that the damage to the house was not caused by an "occurrence." Specifically, the Court followed the majority of jurisdictions that have held that defective workmanship that results in damage only to the work product itself is not an "occurrence" and that the act of hiring a subcontractor is an intentional act and therefore not an "accident."

Practice Note: General contractors are not left without any protection against risks of this nature because they can require performance bonds, professional liability insurance or subcontractors default insurance from their subcontractors or can seek breach of contract claims against their subcontractors.

Louisiana
"Property Damage" Caused by an "Occurrence" Exists
Martco Ltd. Partnership v. Wellons, Inc., 558 F.3d 864 (5th Cir. 2009)
Martco sued Wellons for six separate contractual claims resulting from various failures to a system designed by Wellons for Martco that resulted in unplanned downtime at the facility causing lost production, profits and business opportunities. A jury awarded a verdict in favor of Martco. Previous to the trial of action, Wellons had tendered its defense and indemnification under Admiral's commercial general liability policy. Admiral refused the defense and indemnity on the basis that the Martco complaint did not allege "property damage" caused by an "occurrence" and based on various exclusions. The question the Court asked and answered was whether the allegations against Wellons do not unambiguously prevent a conclusion that coverage could exist. The Court held that the allegations contained in the complaint state claims that may be covered by the insuring clause and therefore, there was a duty to defend. The Court separately considered whether Admiral had a duty to indemnify. The Court held that "loss of use" falls within "property damage" as defined by the policy and that "property damage" was caused by an "occurrence." Specifically, the Court noted that the clear weight of authority in more recent cases considers defects in construction that result in damage subsequent to completion to be "accidents" and "occurrences" when they manifest themselves. The Court also rejected the application of "products" completed operation hazards within the context of exclusion 0)(6), exclusion (m)(exception), and the "work product" exclusion.

Practice Note: This case provides an analysis of the rules of construction applicable to the interpretation of an insurance contract and the burdens of proof of the insured and insurer.

Louisiana
Personal Injury Not Covered
Zeitoun v. Orleans Parish Sch. Bd.. Westport Ins. Corp.. 2010 La. App. LEXIS 296 (La. Ct. App. Mar. 3,2010)
The infant plaintiff was injured while playing kick ball at school when he struck his head against the wall of the school building. At issue on this appeal was whether there was coverage afforded to the infant plaintiff under the traditional wrap up or OCIP policy issued to the owner of the school building. The plaintiff contended that the OCIP policy is a commercial liability policy and therefore provides coverage of the claims asserted. The Court, applying the traditional rules of construction in Louisiana, found that there was not any ambiguity in the policy. Further, the Court held that the policy applied solely to liability arising from construction activity and did not afford coverage for personal injuries sustained in a schoolyard.

Practice Note: In reaching its decision, the Court noted that the injuries sustained were unrelated to the construction on the premises and no repair or renovation work was being performed at the time of the accident.

Massachusetts (Applying New Hampshire Law)
Exclusion j and Lack of Notice - No Coverage
Acadia Ins. Co. v. Peerless Ins. Co.. 2010 U.S. Dist. LEXIS 4642 (Jan. 21, 2010)
The underlying action involved claims by a homeowner against Blackdog Builders, Inc. ("Blackdog") for damages to woodwork (i.e., shrinking, cracking and separation) installed in the home by Blackdog. Acadia issued a CGL policy to Blackdog which policy was succeeded by a policy issued by Peerless. Acadia instituted this action against Peerless to recover damages arising from an alleged breach of the duty to defend or indemnify Blackdog by Peerless for the claims asserted by the owner for faulty work in the rehabilitation of the owner's home. Both the Acadia and Peerless policies had identical terms. Acadia assumed the defense of Blackdog because nearly all the damages occurred prior to the termination of the Acadia policy. The parties did not dispute that the damage to the original woodwork, as opposed to the new woodwork installed, and the damage to the plumbing pipe constitutes "property damage" from an "occurrence" within the meaning of the policy. The dispute in this case involved whether "exclusion 0)" precluded coverage for these damages. The Court analyzed the application of exclusions j(4)("care, custody and control"); j(5)("performing operations') and j6("product completed operation hazards") in the Peerless policy and found that they excluded coverage for the damages alleged in the underlying action.

Practice Note: The Court also considered whether the insured properly tendered the defense to the insurer or provided proper notice of the claim. Also, the Court considered an insurer's "right" to tender an insured's defense to another insurer.

Massachusetts
No Property Damage and No Accidental Occurrence
Friel Luxury Homes Constr.! Inc. v. Probuilders Specialty Co. RRG, 2009 U.S. Dist. LEXIS 121775 (Dec. 22, 2009)
Friel sued the homeowner in the underlying action for funds claimed to be owed and the homeowner counterclaimed against Friel alleging that Friel and its subcontractors failed to perform its renovation work consistent with even minimum industry standards and misrepresented aspects of the nature and scope of the work. Friel tendered the defense of the counterclaim to its insurer Specialty under a CGL policy. Specialty refused to defend Friel and contended that there was no "occurrence" that resulted in "property damage" under the Policy. The Court held that the homeowner's counterclaim does not allege that Friel's faulty work constitutes "physical injury" to the home such that there was "property damage." The Court noted that in order for coverage to be triggered there must be physical damage to tangible property which does not include costs associated with repairing or replacing the insured's defective work or product. The Court further held that under Massachusetts law faulty workmanship fails to constitute an "accidental occurrence" in a CGL policy.

Practice Note: The Court also considered the "business risk exclusions" (i.e., damage to property, damage to your product, damage to your work and damage to impaired property).

Minnesota
Exclusion 2(j)(5)(Business Risk Doctrine) Applicable
Grinnell Mut. Reinsurance Co. v. Steven Ripley, 2009 Minn. App. Unpub. LEXIS 1349 (Minn. Dec. 29, 2009)
Ripley, the developer of a home, was sued by the homeowner when water seeped into the home causing damage. The homeowner alleged that the home was negligently constructed, Ripley breached the contract and the statutory new housing warranty. Grinnell defended Ripley under a reservation of rights and instituted this declaratory judgment action. The homeowner sought damages for repair costs, replacement costs, improvement costs and diminished value of the home. The Court held that the damages sought by the homeowner were arguably "property damages" under the policy; therefore, the Court reviewed the applicable policy exclusions. The court held that exclusion 2G)(5) squarely applied to the defects attributable to Ripley and his subcontractors. In reaching its decision the Court noted that under the "business risk doctrine" (i.e., exclusion 2G)(5)) a contractor's liability to make good on products or work which is defective or to completely replace or rebuild the deficient product or work is not what a CGL policy
covers.

Practice Note: The court also discussed the "your work" exclusion and the subcontractor's exception and held that it was inapplicable.

Mississippi
"Occurrence" for Subcontractors Actions or Inactions
Architex Ass 'no Inc. v. Scottsdale Ins. Co.. 2010 Miss. LEXIS 71 (Miss. Feb. 10,2010)
Architex, the insured, notified Scottsdale, its insurer, of a purported "occurrence" of faulty work performed. Specifically, it was claimed that there was not any rebar placed in the foundation and building which was constructed by subcontractor hired by Architex and that the building was a total loss. Scottsdale denied Architex's demand for a defense and indemnification of the underlying litigation and contended that "there was not any occurrence which would trigger coverage under the Scottsdale Commercial Lines policies which included a Commercial General Liability Part." The Court considered the issue of: Whether the Circuit Court erred in concluding, as a matter of law, that the intentional act of hiring subcontractors by the insured general contractor precludes the possibility of coverage. In reversing the holding of the Circuit Court, this Court noted that the subject "'coverage litigation often boils down to a dispute first over the meaning of the word 'accident' within the definition of 'occurrence' and then the scope and application of the 'your work exclusion. ,,, The Court recognized that there is a clear split of authority regarding whether defective subcontractor construction constitutes an occurrence under a CGL policy. After reviewing the holdings of various jurisdictions, the Court found coverage
under the Scottsdale policy and noted that "an interpretation of the policy which views the term occurrence categorically to preclude coverage for the simple negligence of a subcontractor subverts the plain language and purpose of the CGL part of these policies." Consequently, the Court held that the policy unambiguously extends coverage to Architex for unexpected or unintended "property damage" resulting from negligent acts or conduct of a subcontractor.

Practice Note: For a discussion of the opposing views, see the discussions of the Supreme Court of Kansas in Lee Builders, Inc. v. Farm Bureau Mut. Ins. Co., 381 Kan. 844,
137 P.3d 486,491 (2006).

South Carolina
Endorsement Eliminated Subcontractors Exception to the "Your Work" Exclusion
Builders Mut. Ins. Co. v. Kevin G. Kalman d/b/a Kalman Constr. Corp., 2009 U.S. Dist. LEXIS 114363 (D. S.C., Charleston Div. Dec. 8, 2009)
The owners of a single family dwelling sued Kalman for various construction defects arising from Kalman's faulty workmanship (i.e., various violation of construction codes; improper and faulty framing; and improper and faulty installation of doors, etc.). Builders Mutual had issued a CGL policy to Kalman and the Kalmans tendered its defense and indemnification of the homeowner's claims to Builders Mutual. The issue presented in this declaratory judgment action is whether there was coverage for "property damage" caused by an "occurrence" and then whether any exclusions are applicable. The Court held that because the defective construction resulted in substantial water intrusion resulting in wood rot, staining and an unhealthy microbial growth in the home which is property damage beyond that of the defective work product itself, the homeowner alleged "property damage" caused by an occurrence which is covered under the Policy. The Court, however, found that the "your work" exclusion was applicable and there was no
coverage afforded under the policy. The Court also noted that an endorsement to the policy removed the subcontractor's exception to the "your work" exclusion. With respect to the homeowner's claim that the water intrusion resulted in microbial growth the Court noted that portion of their claim may fall within the "fungus," "mold," etc. exclusion.

Practice Note: The Court made it clear that property damage to the defective work product itself was not covered.

Utah
"Occurrence" No Occurrence for Reasonably Foreseeable Consequences
Cincinnati Ins. Co. v. Linford Bros. Glass Co. & Arrowood Indem. Co.. 2010 U.S. Dist. LEXIS 11226 (D. Utah, Cent. Div. Feb. 9,2010).
Both Cincinnati and Arrowood issued CGL policies to Linford which supplied windows, doors, and frames to a developer that was sued in the underlying litigation for construction defects and on sequential damages. Cincinnati instituted this declaratory judgment action alleging that it did not have a duty to defend or indemnify Linford in the underlying action nor did it have a duty to indemnify or contribute to Arrowood for any defense costs or indemnity paid by Arrowood on behalf of Linford in the underlying litigation. Arrowood seeks a determination that Utah law applies, and that it does not have a duty to defend or indemnify Linford in the underlying actions. The Court held that Utah law applied to the interpretation of the Cincinnati policies and in doing so held that because the reasonably foreseeable consequences of negligently manufacturing
windows and doors include damage to property in which the defective products are installed, there can be no "occurrence." Therefore, Cincinnati did not owe a duty to defend or indemnify Linford nor did it have an obligation to indemnify Arrowood for defense costs or fees paid by Arrowood. With respect to Arrowood's position that Utah law applied to the interpretation of the Arrowood policy, the Court held that there was not enough information in the record to determine Arrowood's obligations to provide coverage to Linford.

Practice Note: It is important that a complete choice of law analysis be conducted in advance of any relevant motion.

LIABILITY CASES:
Arizona
The Scope of the Economic Loss Doctrine and Whether It Extends to Architects
Flagstaff Affordable Hous. Ltd. Partnership v. Design Alliance, 2010 Ariz. LEXIS 11 (Az. Feb. 12,2010)
The plaintiff building owner contracted with the defendant architect for the design of eight apartment buildings and a community center to qualify as a low income housing project. The apartments had to comply with the federal Fair Housing Act's accessibility guidelines. The owner separately contracted with the defendant contractor to construct the apartments. The apartments were completed in 1996.

Nine years after the contract, the U.S. Department of Housing and Urban Development filed a complaint against the plaintiff owner, alleging that the apartment violated the accessibility guidelines. After settling with HUD, the owner sued the architect and contractor, alleging that they had breached their respective contracts and acted negligently. The contractor was later dismissed from the action.

The trial court dismissed the complaint against the defendant architect on the ground that the economic loss doctrine barred the claim, even though the allegation at issue involved a negligent design claim (not a construction defect) and that the defendant was an architect. The court of appeals reversed, holding that the economic loss doctrine does not bar negligence claims against design professionals.

The Supreme Court granted the defendant architect's petition for review to address an issue of first impression for Arizona - i.e., the scope of the economic loss doctrine and whether it encompasses claims against architects and other design professionals. The Supreme Court adopted a version of the economic loss doctrine and held that "a plaintiff who contracts for construction cannot recover in tort for purely economic loss, unless the contract otherwise provides." The Court also recognized that the doctrine does not bar tort recovery when economic loss is accompanied by physical injury to persons or other property. The Court also held that the economic loss doctrine applied to architects (and other design professionals) and applied in the instant case.

Practice Note: The Court was careful to note that its extension of the economic loss doctrine to architects was not based on the fact that architects were considered "professionals". The basis of the Court's holding was the public policy goals underlying the doctrine - leaving the parties to their commercial remedies when a contracting party has incurred only "economic loss," in the form of
repair costs, diminished value, or lost profits.

Delaware
Narrow Exception to Economic Loss Doctrine Does Not Apply
Palma, Inc. v. Claymont Fire Co., No.1, 2009 Del. Super. LEXIS 426 (Del. Super. Ct. Nov. 18, 2009)
The general contractor on a construction project commenced an action against an architectural finn, alleging a claim of negligent misrepresentation. The case arose from the installation of an epoxy floor in a firehouse in Delaware. The plaintiff general contractor alleged that the defendant architectural firm provided "Drawings, plans, specifications, and other architectural engineering and technical information" that were "false, contained numerous errors, omissions, discrepancies, and ambiguities, and were not otherwise in compliance with the building and design requirements." At oral argument the general contractor's counsel suggested that its claim extended to the defendant architectural firm's negligent misrepresentations to the defendant company regarding the quality of the work performed on the project by other firms, including the
plaintiffs firm.

The defendants architectural firm moved to dismiss the complaint on the ground
that it does not allege a viable cause of action against the architectural firm based on the "economic loss doctrine" interpreted in Delaware common law. The court concluded that the doctrine barred the plaintiff general contractor's claim, stating that the economic loss doctrine "is alive and well in Delaware". The court reasoned that the complaint alleged that the negligent misrepresentation resulted in damage only to the epoxy floor itself, and the costs to repair that damage. Based on this allegation, the court determined that the economic loss doctrine applied.

The court also held that the exception to the economic loss doctrine established in section 552 of the Restatement (Second) of Torts did not apply. For the § 552 exception to apply, (1) "the plaintiff must show that the defendant supplied the information to the plaintiff for use in business transactions with third parties," and (2) the plaintiff must" show that the defendant is in the business of supplying information." The court noted that the complaint failed to plead any fact that implicated the exception. According to the allegations, the false information that the architectural firm provided was not provided to the plaintiff.

At oral argument, the plaintiffs counsel represented that he could allege facts that might implicate the § 552 exception. As such, the court granted the architectural firm's motion to dismiss, with leave to amend the plaintiffs complaint.

Practice Note: The court cited a long list of Delaware case law applying the economic loss doctrine to prevent recovery for negligent misrepresentations and other tort claims where only economic damages are alleged.

Florida
Enforceability of Arbitration Clause in Purchase Contract
Rodriguez v. Builders Firstsource-Florida LLC, 2010 Fla. App. LEXIS 535 (Dist. Ct. App., 4th Dist Jan. 27, 2010)
The plaintiffs purchased a luxury home in Boyton Beach that the GL Associates, GL Corp. and GL Florida designed. The defendant Builders Firstsource-Florida, LLC was the window contractor. The plaintiffs commenced a personal-injury action against these defendants, claiming injuries from mold exposure caused by the negligent design and construction of the luxury home. The plaintiffs claimed property damages and personal injury damages regarding substantial adverse health consequences allegedly caused by the mold infestation. The plaintiffs entered into a "Purchase Contract" with the design defendants upon buying the luxury home. The "Purchase Contract" contained a mandatory arbitration provision that applied to any claims associated with alleged design and construction defects. The design defendants moved to compel arbitration based on the applicable provision of the "Purchase Contract". The plaintiffs opposed the motion, arguing that the matter did not come within the mandatory arbitration provision because their personal injury claims for mold exposure were based on duties of care imposed by common law, not on the purchase agreement contained the arbitration clause.

The appellate court affirmed the trial court's order granting the design defendants' motion to compel arbitration, rejecting the plaintiffs' argument that the matter was not arbitrable. In affirming the trial court's holding, the appellate court compared two other cases in which the arbitration provisions were non-specifically worded to include "[a]ny controversy, claim or dispute arising out of or relating to this Contract or the purchase of the Unit" to a case in which the arbitration provision specifically related to problems with the actual construction. The court noted that the "Purchase Agreement" in this case was
similar to the one case in which the arbitration provision specifically related to problems with the actual construction. The court's focused was on the terms the parties actually agreed on in the
"Purchase Contract". The court reasoned that "[t]he language of the Purchase Contract clearly and unambiguously require[d] submission to binding arbitration for the claims stated in the amended complaint." The court enforced the arbitration clause based on the principle that it would not interfere with the agreement that the parties freely entered into.

Practice Note: A mandatory arbitration provision should be clear and expressly state that it related to issues concerning the actual construction. Courts will hesitate to interfere with the parties' clear intent to arbitrate alleged claims regarding construction defects.

Georgia
Application of Statute of Repose in Construction Defect Claim
Rosenberg v. Falling Water. Inc., 2009 Ga. App. LEXIS 1447 (Ct. of Appeals, 2d Div. Dec. 28, 2009)
The plaintiff homeowner commenced a claim against the successor-in-interest to the company that constructed his home. His claim was grounded on allegations of negligent construction and fraud arising from the collapse of a deck. The plaintiff homeowner commenced the action three years after the applicable eight-year statute of repose expired. The trial court granted summary judgment to the successor-in-interest, holding that the statute of repose barred the claim. The court held implicitly that, even if the builder committed fraud in the year of construction, it did not stop the builder from asserting the statute of repose defense in connection with injuries the homeowner sustained 11 years later.

The appellate court agreed, affirming the trial court's dismissal of the action. In applying the statute of repose, it discussed the difference between a statute of limitations (which can be tolled) and a statute of repose. The court also rejected the plaintiff homeowner's argument that the successor-in-interest should be equitably stopped from
asserting the statute of repose defense because the builder allegedly covered up his negligence when he built the deck. He alleged that the builder used certain bolts that made it appear that the deck was properly attached to the house. The appellate court rejected this argument, pointing out that the cases upon which the plaintiff homeowner relied concerned instances where the plaintiffs' injury occurred before the statute of repose expired. The appellate court reasoned that those cases were distinguishable because the accident in this case occurred three years after the statute of repose had expired.

Practice Note: Statutes of repose can be an efficient method to dispose of a matter. Check the respective jurisdiction's statutes, procedure, and common law for . applicable statutes of repose. Additionally, confirm whether a statute of repose must be affirmatively asserted in
a responsive pleading.

Georgia
Builder's Defense of Lack of Privity with House Design Fails
Hardesty v. Scot-Bitt Homes. Inc., 2010 Ky. App. Unpub. LEXIS 201 (Ct. ofApp. Mar. 5,2010)
The plaintiffs undertook construction of a house on a lot that they owned in Jefferson County, Kentucky. The plaintiffs' contract with Bums provided that he would construct the house in accordance with the local building code. They also contracted with the defendant Kenneth Bums, owner of Scot-Bilt Homes, Inc. The plaintiffs provided Bums with a floor plan sketch along with a picture of a house from a magazine. Bums recommended a designer, Joe Dowdle, who prepared the site plan and billed Bums for his work. However, the plaintiffs contracted with Dowdle to prepare plans and specifications for the house.

After the plaintiffs moved into the completed house, they began to notice construction defects. The defects included (1) the floor joists were inadequate to support the weight of the house in violation of the building code; (2) the foundation moved approximately two inches, which was evidenced by cracking in the walls and brick veneer and a large crack in the basement floor; (3) there was a chimney leak in the master bedroom and a second leak in the rear of the house; (4) the porch, railing, and balusters began rotting within one year and completely rotted away within four years of construction; (5) the rear deck had sunk approximately three inches; (6) they discovered a break in the main water line entering the house due to a large rock over the water line; and (7) the HVAC system had problems, which were attributed to Bums's installation of defective coils.

After the close of both parties' evidence at trial, a jury returned a unanimous verdict in favor of Bums. The plaintiffs then moved the court for a judgment notwithstanding the verdict based on their claims that Burns violated the Kentucky building code with respect to the floor joists and chimney leak and that there was insufficient evidence to sustain a verdict for Bums. In denying the motion, the trial court stated that while the jury heard evidence regarding the code violations and the design of the house, Bums did not design the house, nor did he hire and pay the designer.

Based on the strong Kentucky public policy of the "sacrosanct duty of a home builder to construct a house in a workmanlike fashion," the Court of Appeals reversed the judgment in favor of Bums and remanded the case for a trial on damages. The Court concluded that law, contract, and the building code coalesced to compel a different outcome in the construction of the plaintiffs' house. The Court recognized Kentucky common law that provides a heightened protection for homeowners that, in some instances, superseded privity of contract. The Court relied on this case law, as well as Kentucky's implied warranty of habitability regarding home building.

One judge dissented, noting that, although the plaintiffs' house was fraught with problems, the appellate court's review of a trial court's denial of a JNOV is limited to a determination of whether the verdict of the jury was so palpably or flagrantly against the evidence as to indicate the passion or prejudice influenced the jury. The dissenting judge concluded that a review of the record revealed no passion or prejudice that could have influenced the jury to render an improper verdict.

Practice Note: The public policy entrenched in a state's common law can sometimes trump defenses such as privity. Research a jurisdiction's common law to determine whether there is a heightened standard protecting homeowners.

New Mexico
Architect Can Testify As To General Contractor's Standard of Care
Wheeler Peak. LLC v. L.CI, 2. Inc., 2010 U.S. Dist. LEXIS 13369 (D. N.M. 2010)
The district court addressed whether an architect who is not a general contractor can provide expert testimony regarding whether a general contractor's conduct fell below the standard of care required of general contractors. The plaintiff owner commenced an action against the defendant contractor regarding certain damages that occurred based on alleged construction defects. As relevant to the general contractor's partial summary judgment, the general contractor argued that the plaintiff owner could not establish that it did not fall below the standard of care required of a general contractor under New Mexico law. The general contractor designated a general contractor expert to opine that it did not fall below the standard; the plaintiff did not designate a general contractor expert prior to the deadline but, instead, designated an architect "to provide opinion
testimony regarding the standard of care of a general contractor in New Mexico, and whether [the general contractor's] construction of the project met that standard." The general contractor argued that the plaintiff could not prove that it fell below the standard because the plaintiff needed a certified general contractor as an expert, not an architect. The district court disagreed, noting that a general contractor is not a professional such that an expert is required to testify.

Practice Note: The district court analyzed the requirements to be certified as a general contractor in New Mexico and compared them to the requirements of a professional, such as an architect. The district court also noted that the matter was evidentiary, but substantive in nature. Therefore, it applied state substantive law in this case.

Ohio
Motion to Transfer Venue Regarding Out-Of-State Construction Project
Shook, Inc. Heavy & Envtl. Div. v. City of Moundsville, Water Bd., 2010 U.S. Dist. LEXIS 18499 (S.D. Ohio 2010)
The plaintiff claimed that the defendant municipal utility breached the terms of the parties' multi-million dollar contract concerning the plaintiffs' construction of a water treatment facility in Moundsville, West Virginia. In a separate claim venued in the United States District Court for the Northern District of West Virginia, the defendant municipal utility had named the plaintiff builder as one of several defendants concerning the same contract. The defendant municipal utility claimed that the plaintiff breached the parties' contract by failing to construct certain filters in the manner the contract required.

The action in the instant case was venued in the United States District Court for the Southern District of Ohio, Western Division. The plaintiff builder's principal place of business is in Dayton, Ohio. The defendant municipal utility is located within the City of Moundsville, West Virginia. The district court granted the defendant municipal utility's motion to transfer venue under 28 U.S.C. § 1404(a), weighing a number of factors. The court concluded that, at its core, the case concerned a specific structure located in West Virginia that allegedly had specific construction defects. As such, the court concluded that the nature of the suit and the subject matter of the suit strongly
favored a transfer to West Virginia.

Practice Note: The court also noted the following factors were important considerations: (1) the jury might need to view the water treatment facility to see the defective equipment; and (2) a large number of West Virginia witnesses, including five operators who work at the facility, were going to testify.

Ohio
Jury Instruction Error on Measurement of Damages for Non-Commercial Temporary Damage
Booth v. Duffy Homes. Inc., 2009 Ohio 6767 (Ohio Ct. App. 2009)
The plaintiff owners asserted a claim against the defendant for breach of warranty "against inadequate lot drainage." They sought money damages for injury to their home resulting from that breach. Specifically, they sought to recover the costs to restore the property to the warranted condition. They presented evidence that the cost to restore the property to the warranted condition was $300,000. It was undisputed that the Booths purchased the home for $410,000.

On a prior appeal, the court remanded the case to the trial court for further proceedings to determine the amount of compensation the plaintiffs should receive for the breach of warranty. In the instant appeal, the trial court again erred by failing to instruct the jury as to the proper measure of damage for temporary injury to noncommercial real property. In Martin v. Design Constr. Servs., 902 N.E.2d 10 (Ohio 2009), the Court held that the measure of damage is the reasonable cost of restoration. The trier of fact may consider a variety of factors, including evidence of the change in market value attributable to the temporary injury, in determining whether the damages sought are reasonable.

The court held that the trial court properly instructed the jury that it could only award damages that were reasonably certain and reasonably foreseeable, but failed to include the critical concept articulated in Martin - "the reasonableness of the cost of restoration."

Practice Note: The court noted that its case law held that the diminution in value is not necessarily an absolute limit on the recovery of damages for injury to real property. A damages award that exceeds the diminution in value, however, cannot be grossly disproportionate to the value of the real property.

If you have any questions about any cases reported in this Update, please contact Tom Segalla at 665 Main Street, Suite 400, Buffalo, New York 14203-1425; by phone at (716) 566-5480; or email attsegalla@goldbergsegalla.com. You can also contact Matthew S. Lerner at 8 Southwoods Boulevard, Suite 300, Albany, New York 122112364; by phone at (518) 935-4230 or by email atmlerner@goldbergsegalla.com.

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