by

Robert J. Marshburn, CRM, CIC, ARM, CRIS, CISC

Founder & CEO | Certified Risk Managers LLC

CertifiedRiskManagers.com 

California's "Right to Repair" Construction Defect law, SB 800, was effective January 1^st, 2003 for close of escrow on sale of new homes, or with respect to claims by an association, the date of "substantial completion", or turn over to the Homeowner's Association by the developer.  In the past, California has provided much of the case law on Construction Defect matters to the other states and how they relate to the insurance industry.  As such, the law will no doubt be significant in it’s impact on the entire industry. 

The law contains a number of interesting items.  Please note:  The following material is for educational purposes only.  The information is to be understood from an insurance risk management perspective only.  It is not intended as a substitute for competent legal advice.  You should check with your legal adviser to determine suitability, if any, to your specific circumstances.  The following is our analysis:

The bill purports to establish "clear standards and mechanisms for the prompt resolution of claims" and states it is “the intent of the Legislature that this act improve the procedures for the administration of civil justice, including standards and procedures for early disposition of construction defects.”  Whether or not it does so remains to be seen.

Among other things, the bill provides the following:

1.     Establish specific definitions and liability standards of Construction Defects for the first time.

2.     Provide 1, 2, 4, 5, and 10 year periods of time for filing actions.

3.     Require claimants alleging a defect give builders notice of the claim prior to litigation.

4.     Give builders the right to repair before the homeowner could sue for violation of standards.

5.     Provide immunity from liability for third party inspectors.

6.     Overturn the decision of the California Supreme Court in the Aas case.

7.     Preserve homeowner rights to sue if still unhappy after the repair.

As always, the devil is in the details.  In this bill there are plenty of details, to be followed by the inevitable lawsuits and resulting case law “clarifications”.  Very brief comments involving the 7 items above follow…  

1. Establish specific definitions and liability standards of construction defects for the first time. 

The bill  provides for "action seeking recovery of damages arising out of, or related to deficiencies in, the residential construction, design, specifications, surveying, planning, supervision, testing, or observation of construction" against "a builder, subcontractor, material supplier, individual product manufacturer, or design professional" and states that they "shall be liable for" violation of the standards as set forth in the law.

After defining various terms, the bill contains a list of “actionable defects” naming various systems grouped under specific headings such as (this list is not complete) doors, windows, roofs, heating, ventilation, air conditioning, decks, stairs, foundations and slabs, hardscape, stucco, siding, exterior walls, retaining walls, plumbing systems, sewers, showers and baths, ceramic tile, countertops, load bearing components, foundations, soils, fire protection, electrical, mechanical, manufactured products, irrigations systems, drainage, landscaping, wood posts, fences, paint and stains, noise standards, and more. 

The defects are divided into 8 areas, although many systems and their standards appear in more than one of these 8 areas.  They are grouped as: water issues--18 items; structural issues--4 items, including undefined "significant cracks"; soil issues--3 items; fire protection issues--3 items; plumbing and sewer issues--1 item; electrical issues--1 item; "other" areas of construction--15 items, including undefined "excessive cracks"; and finally, as always, an "other" area that is not defined as to function or component--only that “To the extent that a function or component of a structure is not addressed by these standards, it shall be actionable if it causes damage.”  

Depending on the system, this is followed by standards of performance such as that the system shall not allow water or vapor or condensation to flow, enter, or in some cases even come in contact with the building so as to damage another component. 

In some cases, no damage to another component is required to be classified as a defect.  If the system does not meet the standard, it is considered a defect and liability is incurred under the act.  Other performance standards deal with other systems.

2. Provide 1, 2, 4, 5, and 10 year periods of time for filing actions.

Obligations under the act constitute express warranties that are mandated for certain periods of time depending on the product or system involved.  For example, "fit and finish" of certain items are mandated to last at least 1 year; wood posts, landscaping, and dryer ducts for 2 years; electrical systems, plumbing and sewer systems, driveways, sidewalks, and steel fences for 4 years; paint and stains for 5 years, etc.  As you might expect, most issues are still under the 10 year requirement.

3. Require claimants alleging a defect give builders notice of the claim prior to litigation.

4. Give builders the right to repair before the homeowner could sue for violation of standards.

This is one of the most discussed areas of the law.  It provides what we in the past have called a “first right to cure”.  What follows is a rather lengthy and explicit procedure and timeline that must be strictly adhered to in order to have the protections of the provision, as well as tolling provisions.  There are many stipulations and provisions too numerous to mention here, but builders would be wise to become familiar with what applies to their particular trade and how to best be pro-active in their response and comply with all the requirements to gain the maximum protection from this provision.

Good news for subs:  If a builder intends to hold a subcontractor or product manufacturer responsible for its contribution to the "unmet standard", the sub must be notified to allow them (as well as their insurance carrier) to attend inspection(s) and participate in the repair process.

5. Provide immunity from liability for third party inspectors.

The hope here is to provide better quality construction by making this provision for immunity from liability for third party inspectors.  Standards are set as to who can qualify to be one, as well as the need for $2,000,000 of liability coverage to function as such.  Why would they need liability coverage if they are immune from liability?   The bill has one glaring exception:  the Builder who hires the third party inspectors can sue them.  Can you see builders trying to transfer liability to the inspector who “did not do his job correctly”?  Since the homeowner can not sue the inspector, this would provide protection to the Builders if they can convince a court that it was the inspector’s fault, not theirs.

6. Overturn the decision of the California Supreme Court in the Aas case.

This is a significant change.  The  California Supreme Court decided in the Aas v. Superior Court case that defects must cause actual damage or injury prior to being actionable in tort liability.  This new law changes all of that.  In addition to Construction Defects being actionable as always under contract, implied warranty, and fraud provisions, the new bill provides liability before any actual damage or injury has been done if the product or system does not meet the definition of the standards.  Additionally, many of the previous implied warranties are now express warranties by definition such as how long certain products and systems should last and function.

In general, the insurance industry is reacting to this provision with specific endorsements excluding coverage for SB800 related issues.

7. Preserve homeowner rights to sue if still unhappy after the repair.

A builder may not obtain a release or waiver of any kind in exchange for the repair work mandated by this process under the law!  After all of this, the homeowner can still sue for violation of standards with either the original problem(s), or the attempted repairs, or both.  

On the other hand, a builder/developer can negotiate to include contractual pre-litigation procedures and/or binding alternative dispute resolution procedures in purchase contracts as a means of resolving disputes out of court and outside of the operation of The Right to Repair Act.

There are a number of ways we feel that Builders can and should protect themselves with a carefully devised set of Construction Defect Risk Management protocols.  Careful design and integration of these protocols can result in a good measure of valuable protections under both the new law, as well as protections of the old law that have not been altered:

• A thorough understanding and application of the law both pro-actively, and re-actively.  
• How the new law fits with prior law and subsequent case law.
• Understanding the obligations of the homeowner and the protections it gives the Builder.
• Using Warranties, Contracts, and Alternative Dispute Resolution structured in a way to provide maximum protection.
• Utilizing affirmative defenses to avoid, prevent, or mitigate liability.  
• Carefully integrating Wraps (OCIPs, CCIPS, etc) with standard CGL policies to address the gaps and exposures that are not covered.
• Managing the Risks associated with Additional Insured Endorsements.

As Nationally recognized Experts, Consultants, and Educators specializing in solving Construction Defect related issues, we are happy to help you with a personalized program to protect your bottom line in this rapidly changing area.  We also provide workshops on SB800 and Construction Defect Liability.

Our Proprietary Automated Insurance Verification^® Risk Management System has Enhanced Verification Provisions that helps Automatically Develop, Verify, Expose, Correct, and Activate Coverage Compliance with your Contract Insurance Coverage Requirements.

If you would like information on how our consulting services can benefit your business, please contact us. 

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