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Brief Summary
This appellate decision has caused a tremendous amount of upheaval in the building industry and rightfully so. The Liberty Mutual decision stands for the following legal principal: individual homeowners and potentially homeowners associations are generally not required to comply with the Right to Repair Act, commonly referred to as SB800, when the construction defect is patent, meaning that the defect results in actual damage to the property.
A patent defect is distinguished from a latent defect in which there is a defect in construction based on the applicable construction standards of SB800, but no actual damage has occurred. Under this decision, latent defects are still subject to SB800 pre-litigation procedures but patent defects causing actual damage are not.
As one can imagine, this decision creates more questions than answers. For example: how does this decision affect current construction defect claims, statutes of limitation set forth in SB800 and drafting CC&Rs and purchase and sale agreements?
The Case
The Fourth District Court of Appeal in Orange County in a recent published decision has ruled that the Right To Repair Act (“Act”), which for over 10 years has been consistently held to be the exclusive remedial basis for residential construction defect claims, has mandatory application only in cases involving latent defects where no actual property damage has occurred. The court, in the case of Liberty Mutual Ins. Co. v. Brookfield Crystal Cove LLC (— Cal.Rptr.3d —, Cal.App. 4 Dist., August 28, 2013), stated:
“We hold the Act does not eliminate the property owner’s common-law rights and remedies, otherwise recognized by law, where, as here, actual damage has occurred.”
Though the only issue before the court was the application of the statute of limitations under the Act in an insurance subrogation action, the breadth of the court’s ruling calls into question for the first time whether the Act has mandatory application to claims in which property damage recovery is sought. As such, it raises significant questions and concerns regarding the scope and effect of the Act.
Factual Background
A homebuyer purchased from a builder a single-family residence in 2004, after the effective date of the Act. Several years later, a sprinkler pipe in the residence burst causing significant damage. The builder agreed to pay for the cost of repairs to the residence but refused to pay for temporary relocation costs (the homeowner was out of the residence for approximately 4 months while repairs were performed). The homeowner successfully pursued a claim for recovery of such costs from his first party insurance carrier.
That carrier, in turn, stepping into the shoes of the homeowner, filed a subrogation action against the builder for recovery of those costs including tort claims for strict liability and negligence. The carrier did not seek to comply with the pre-litigation dispute resolution procedures provided in the Act.
The builder challenged the complaint on the ground, among others, that the four-year statute of limitations under the Act for plumbing system claims had already expired. The trial court agreed with the builder and entered a judgment dismissing the claim which the insurer appealed.
Court of Appeal Decision
The Court of Appeal reversed the trial court and ruled that the four-year statute of limitations under the Act did not apply because the Act has mandatory application only in cases involving latent defects in which no property damage has occurred and not in cases involving actual property damages such as the one at issue. In cases where such property damage has occurred, the court stated that the claimant, i.e., either the homeowner or the homeowner’s subrogated insurance carrier, may pursue common-law tort claims such as strict liability and negligence which are subject to the statutes of limitations applicable to such common-law claims and which in this case would not bar recovery.
The court began its analysis not with the customary review of the statutory language of the Act, but its legislative history. In that legislative history, the court found that the Act was a direct response by the Legislature to the decision of the California Supreme Court in the case of Aas v. Superior Court (2000) 24 Cal. 4th 627 which confirmed that a homeowner in a construction defect claim cannot recover damages with respect to deficiencies which have not resulted in property damage. The court found that the legislative intent was to abrogate this ruling and, therefore, the scope of the Act was intended to be limited to claims arising from such latent defects and was not intended to make the Act the sole remedy in cases of patent defects in which property damage has occurred.
In reaching this conclusion, the court was not persuaded by arguments that the Act makes no distinction between latent and patent, for example, Civil Code, section 896, which states that the Act applies: “In an action seeking recovery of damages arising out of, or related to deficiencies in… residential construction”.
Similarly, the court apparently ignored language in the Act which expressly provides for the recovery of the cost of repairing damage resulting from a failure to meet the building standards set forth in the Act (Civil Code, section 944).
Impact of Decision
Since this decision has been certified for publication, until and unless it is decertified, reversed or abrogated by future legislative action, its holding will be binding on the trial courts of California and particularly those courts in the Fourth District which include Orange, Riverside and San Diego Counties. Up until now, California trial courts have uniformly held that the Act constitutes the exclusive basis for claims for residential construction defects and preempts common-law tort claims such as those for strict liability and negligence. To the extent holding of this case is broadly applied, that uniformity with respect to the scope of the Act can no longer be assumed.
Furthermore, the decision raises a number of new questions:
- For example, do the construction standards set forth in the Act apply only to cases involving latent defects or do they continue to apply uniformly with respect to all construction defect claims?
- And even if the standards continue to apply to all claims, since the applicable statutes of limitations (including the one applicable to plumbing systems at issue in this case) are embedded in those standards, how can the standards be separated from the statutes of limitations?
HechtSolberg is working to provide practical approaches specific to each client that will minimize the risk created by this decision.
For information, or if you have questions, please call: Jerold H. Goldberg or Amanda A. Allen at (619) 239-3444.