November 22, 2010 Volume 14 Issue 2
Sponsored by Featured Articles
A New Law May Change Insurance Coverage for Construction Defect Claims in Colorado
by David M. McLain
On April 21, 2010, HB 10-1394, an Act "Concerning Commercial Liability Insurance Policies Issued to Construction Professionals," was
introduced into the Colorado Legislature. To say that politics makes strange bedfellows is an understatement. The main proponents of
the bill were the Colorado Association of Home Builders and the plaintiffs' attorneys that sue Colorado home builders. The driving force
behind the bill was to cure the perceived evils of the Colorado Court of Appeals' decision in General Security Indemnity Company of
Arizona v. Mountain States Mutual Casualty Company, 205 P.3d 529 (Colo. App. 2009). The main opponents of the bill were the
Property Casualty Insurers Association of America and the American Subcontractors Association of Colorado.
Nelson Architectural Engineers, Inc. is a full service forensic
investigation and consulting firm, with special expertise in
Engineering, Architecture, Fire/Arson, and Industrial Hygiene & Prior to its final amendment, the Bill Summary stated:
DRI Resources In General Security Indemnity Company of Arizona v. Mountain States Mutual Casualty Company, 205 P.3d 529 (Colo.
App. 2009), the court excluded claims for certain construction defects claims and imposed no obligation to defend in a
contractor's professional liability insurance policy. Section 1of the bill imposes the following rules of contract construction
to guide a court in such cases:
• A court should presume that: Compliance with a construction professional's objective, reasonable expectations
is intended; the entire policy is to be effective and read as a whole; a just and reasonable result is intended;
ambiguity in a policy is to be construed in favor of coverage; a result that renders a part of coverage illusory is not
intended; and the work of a construction professional that results in property damage is an accident unless the
Join the DRI Community property damage is intended and expected by the insured.
• When weighing conflicting provisions, the court should construe the contract to favor coverage.
• The insurer bears the burden of proving that a policy provision limits or bars coverage.
Section 2prohibits a commercial general liability insurer from excluding or limiting coverage of acts arising before the
policy was issued unless the insured knows of defects that have a likelihood to subject the insurer to damages and fails
to disclose this to the insurer. A policy that conflicts with section 2 is unenforceable.
In Critical Path After passing third reading in the Senate on May 4th, HB 10-1394 went to the Governor's office for the first time. Because of pressure
A New Law May Change Insurance Coverage for from insurance companies, the Governor's office urged the stakeholders to continue working on compromise language and threatened
Construction Defect Claims in Colorado
that the bill would be vetoed if the parties could not reach an agreement. Shortly thereafter, Senator Scheffel recalled the bill to the
Conflicts With Interest - A Novel by Michael Ruddy
Senate. The bill received a strike-below amendment on its second third reading in the Senate.
Construction Defect Claims: An Update
Colorado HB 10-1394 passed on its second third reading in the Senate on May 10th. On May 11th, the House voted to concur with the
Senate amendments and to repass the bill. The bill has now gone back to Governor Ritter for his signature. The conventional wisdom
is that because the parties were able to agree on compromise language, the Governor will now sign the bill into law.
Christopher J. Belter The full text of the bill can be found here:
Goldberg Segalla http://www.leg.state.co.us/CLICS/CLICS2010A/csl.nsf/fsbillcont3/C56C7FB9CB7882B8872576E2005F17CE?Open&file=1394_enr.pdf.
To obtain a full recap of the history of the bill's passage through the Colorado Legislature, please visit HHMR's blog, here:
Committee Vice Chair
David V. Wilson, II
Hays McConn David M. McLain
Higgins, Hopkins, McLain & Roswell, LLC
100 Garfield Street, Suite 300
J. Matthew Haynes, Jr.
Denver, CO 80206
Tiller Law Group Office: (303) 987-9813
(804) 644-8688 Facsimile: (303) 987-9100
Mobile: (303) 929-0625
Click to view entire Leadership
Conflicts With Interest - A Novel by Michael Ruddy
by David M. McLain
Recently, Robert August suggested that I pick up a copy of Conflicts With Interest, a novel by Michael Ruddy. Having now read the
book, I understand why he made the suggestion. Michael Ruddy is not just an author, he is a Colorado homebuilder who wrote a book
about residential construction defect litigation. The biographical information from the book states: "Michael Ruddy is a graduate of the
University of Denver with a degree in engineering administration. He has spent the last forty years associated with both the commercial
and residential disciplines of the construction industry, which inspired many events of this story. Currently, he resides in Boulder, CO
with his wife, five children, dog and cutting horses." Being an attorney that has devoted my career to litigating claims on behalf
builders and developers throughout Colorado, the book naturally resonated with me.
The novel itself follows the travails of father and son homebuilders, T.R. and Ryan Morgan, as they journey through the world of
construction defect litigation. After spending my legal career defending cases not unlike that recounted in Conflicts With Interest, I can
say that the book is a fairly accurate depiction of the construction defect world.
Although, I am sure that "any similarity to any person or persons living or dead is purely coincidental," I think I recognized some of the
characters in the novel. If not, I certainly know the archetypes. I have since had the opportunity to take Michael Ruddy to lunch and I
am happy to report that I was able to accurately guess three out of three characters from the book. Later, I had some of those I
Civil Rights and accurately identified tell me who the others characters were based on.
Governmental Tort Liability
January 26-28 2011 The one thing that did strike me about the book, and something on which I will have to spend more time reflecting, is the relationship
New Orleans, Louisiana between the Morgans and the attorney retained to represent them by their insurance carrier. As a defense attorney that is hired by
insurance companies to represent homebuilders from time to time, I would like to think that none of my clients have ever had the same
skepticism or distrust of me as the Morgans did of their attorney because of the fact that I happen to have been paid by their carriers. I
know that this is something that I will address at the outset of all of my future insurance defense assignments. There can be no
DRI Publications question that my loyalties run 100% toward my client, the builder. While it may be that I am being paid by an insurance carrier, and I
have certain obligations to the carrier, my client is the builder and I will do everything possible to provide a vigorous defense of any
construction defect claim and to obtain the best possible outcome, whether that be through settlement, arbitration, or trial.
Insurance and If you are employed in any industry or profession that deals with residential construction defect litigation, I recommend that you read
Construction Law this book. It provides great insights from the homebuilders' prospective.
If you have any questions regarding construction defect litigation in Colorado, or if you find yourself in the position of the Morgans,
please contact David M. McLain by phone at (303) 987-9813 or by e-mail at firstname.lastname@example.org. For a more full explanation of
construction law in Colorado please visit our website (www.hhmrlaw.com) or request a copy of our Overview of Construction Defect
Litigation in Colorado.
Construction Defect Claims: An Update
by Thomas F. Segalla and Matthew S. Lerner
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:
• 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"
• 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
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.
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
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.
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.
"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)(sistership exclusion) did not apply. Similarly, Exclusion (j)(5) and (j)(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.'"
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.
"Property Damage" Caused by an "Occurrence" Exists
Martco Ltd. Partnership v. Wellons, Inc., 558 F.3d 864 (5th Cir. 2009)
Marto 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 (j)(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.
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 (j)" 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
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
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).
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 2(j)(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 2(j)(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.
"Occurrence" for Subcontractors Actions or Inactions
Architex Ass'n, 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 rebars 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).
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,
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.
"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 consequential 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
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
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.
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 firm, 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 plaintiff's firm.
The defendant 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 plaintiff's 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 plaintiff's 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.
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
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
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.
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 estop 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 estopped 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.
Builder's Defense of Lack of Privity with House Design Fails
Hardesty v. Scot-Bilt Homes, Inc., 2010 Ky. App. Unpub. LEXIS 201 (Ct. of App. Mar. 5, 2010)
The plaintiffs undertook construction of a house on a lot that they owned in Jefferson County, Kentucky. The plaintiffs' contract with
Burns provided that he would construct the house in accordance with the local building code. They also contracted with the defendant
Kenneth Burns, owner of Scot-Bilt Homes, Inc. The plaintiffs provided Burns with a floor plan sketch along with a picture of a house
from a magazine. Burns recommended a designer, Joe Dowdle, who prepared the site plan and billed Burns 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 Burns's installation of defective coils.
After the close of both parties' evidence at trial, a jury returned a unanimous verdict in favor of Burns. 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 Burns. In denying the motion, the trial
court stated that while the jury heard evidence regarding the code violations and the design of the house, Burns 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 Burns 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
Architect Can Testify As To General Contractor's Standard of Care
Wheeler Peak, LLC v. L.C.I., 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.
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
plaintiff's 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.
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 non-commercial 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 at email@example.com. You can also contact
Matthew S. Lerner at 8 Southwoods Boulevard, Suite 300, Albany, New York 12211-2364; by phone at (518) 935-4230 or by email at
And The Defense Wins
by Thomas Byron
DRI Construction Law Committee member Thomas W. Byron, of Byron & Edwards, APC, and an associate, in San Diego,
California, obtained dismissal of a cross-complaint with prejudice filed by Defendant Upper Deck, LLC against their mechanical
engineer/contractor client, Xnergy the day before trial call. In addition to dismissal of its cross-complaint, Upper Deck, LLC agreed to
settle Xnergy's affirmative claim against it for approximately double the damages demanded in Xnergy's complaint.
In that action, Xnergy sued Upper Deck, LLC for unpaid fees for services rendered in the amount approximately $47,000.00. Upper
Deck, LLC in response to Xnergy's Complaint, counter-sued for (1) breach of contract; (2) negligence; (3) fraud; (4) breach of the
implied covenant of good faith and fair dealing; (5) breach of the warranty of fitness; (6) declaratory relief; and (7) unfair business
practices pursuant to Bus. & Proc. C. § 17200 and claimed damages in excess of $2,000,000.00. The substance of Upper Deck's
allegations was that Xnergy had improperly designed, installed and maintained its HVAC system and failed to advise Upper Deck of
energy savings and rebates associated with Xnergy's various recommendations. Xnergy denied all liability.
Shortly before trial, Xnergy filed multiple motions in limine, including a motion to exclude all evidence as to the cross-complaint based
on, among other things, a statute of limitations defense. The day before trial call, Upper Deck, LLC agreed to pay Xnergy $95,000.00
as settlement of Xnergy's affirmative claim against it and to dismiss its cross-complaint with prejudice.
Please feel free to contact Thomas Byron at 619-400-5880 with any questions.
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