How to Contest a Defect Claim

Because purchasing a home is typically the largest purchase a person makes in their lifetime, it quickly becomes a roller-coaster ride of excitement and emotions, encompassing hours of research, projections, and financial analysis. So it should be no surprise that the thrill can quickly disappear and turn to anger if a homeowner discovers any problem with his or her substantial investment. All of a sudden, happiness turns to recrimination where a contractor is sure to be on the receiving end of what may be unwarranted accusations. But there are a few things a contractor should keep in mind in order to properly defend against any alleged defect claim.

Remaining calm and level headed so that you can properly evaluate the situation is a good start. Since the homeowner is so emotionally invested and because the sudden discovery of any abnormality or other defect is such a let down, there is a likely tendency for the unhappy buyer to begin finger pointing. Rather than responding out of hand, make clear to the homeowner that you are equally surprised and concerned, and that you are willing to inspect the problem and are surely prepared to address what in fact may be your fault.
This will allow you the opportunity to appraise the true extent of the alleged defect, analyze the expected cost for a resolution, and propose an effective solution while avoiding what might be a costly lawsuit. If your efforts prove fruitless or if litigation appears inevitable, there are still certain rights afforded to a contractor by law, rights with which the homeowner must comply in order to effectuate a proper defect claim. For example, it is imperative to ascertain whether the homeowner is even within the proper time frame for filing suit.

For example, in Florida, the statute of limitations on a discovered defect requires that a lawsuit must be brought within four years of actual possession. Be aware this time period becomes a bit sketchy when the defect is considered “latent”, a defect which is not discoverable even by the exercise of ordinary and reasonable care. When dealing with a latent defect, the statute of limitations allows four years from the discovery of the defect or when the defect should have been discovered through reasonable due diligence.

The Buyers Home has a Defect, Now What?

In most jurisdictions, it is not acceptable to simply allow a defect to sit idle without attempting to prevent the problem from worsening. This concept, known as mitigation, requires the injured party to exercise reasonable diligence and ordinary care to avoid aggravating the injury or increasing the damages. In fact, the failure to mitigate is commonly used as a defense to a defect claim by reducing the amount of damages awarded. Therefore, it is important to discover how much time has passed from when the homeowner noticed the defect to when action was actually taken.

What is important for every Contractor to know is that, in many jurisdictions, the homeowner is not allowed to actually repair the defect without first complying with certain notice requirements. Statutes have been implemented in an attempt to reduce the ever growing litigation surrounding construction defects. Certain legislatures around the country have imposed a mandatory notice provision to give the parties an opportunity to resolve any alleged defect issues without immediately resorting to litigation. By providing this stop-gap, the contractor is afforded the chance to conduct inspections and voluntarily correct the issue or offer a settlement before the relationship with the homeowner deteriorates into legal action.

Although the various notice statutes may differ between jurisdictions, the themes remain the same and all are designed to help expedite defect disputes. If and when you are contacted by a homeowner who claims to have discovered a defect with your work, do not panic – stay calm and review the situation; the law may just be on your side.

Reasons to Contest a Defect Claim

Whether a project is big or small, it seems inevitable that construction defect claims will surface. While the nature of these claims many vary, common patterns are generally present and construction professionals would do well to understand the distinctions.

Construction defect claims often fall into one of four categories: design defects, material defects, workmanship defects and subsurface defects.

Design professionals (such as architects and engineers) sometimes cause design defects. Building design can lead to issues in a structure’s performance, even if the design plans are followed precisely by everyone building the project. For example, complicated roof structures can lead to cracks, water intrusion or increased susceptibility to wind damage.

There can be material defects resulting from inferior or defective building materials. Using inadequate materials in a project can result in issues. For example, even though a window is properly installed, if it was manufactured and delivered with a defective seal, it may still become the source of future problems.

Workmanship defects are most often the leading cause of defect claims, leading to all types of construction problems. Even when plans are properly drawn and only the highest quality materials are delivered to the work site, careless installation can turn a project into a nightmare.

Of course, subsurface defects sometimes exist. They result from problems with the actual construction site, such as expansive soil conditions, subsidence issues or contaminated soils.

Several avenues are available to challenge all of these types of construction defect claims:

Procedural Prerequisites: Several states have enacted laws requiring a claimant to provide notice of the alleged construction defects and to provide those that may have caused them an opportunity to fix them. In most instances, this is a prerequisite to begin litigation. If the claimant fails to do this, then the defect claim may be (at least temporarily) barred.

Statutes of Limitation:

Once a claimant discovers or should have discovered the construction defect, most states have a time period (often four years) within which the claim must be brought to court. If the claimant fails to bring the claim during the allotted time period, then the claim may be time-barred.

Statutes of Repose:

Similarly, most states have set a time period (often 10 to 12 years) within which a claim can exist. Under such a statute of repose, if a claim is not brought within the stated time period, it will not be allowed at all, whether the defect was actually discovered or not. This is particularly important for hidden defects that are not obvious upon a reasonable inspection. If the repose period passes without a claim being made, the claim may be time-barred.

No Standing:

If a condominium association, for example, initiates litigation, questions may arise if the association has been granted the right under applicable covenants or governing documents to proceed on behalf of the members or to carry on litigation in its own name. Alternatively, claims involving multi-unit developments (i.e., condominiums, high-rises and townhome projects) often proceed as a class action. Class actions require that the class representatives be members of the class. Also, if the defects vary from unit to unit (as no claim is ever “typical”), this may be a reason to challenge the legitimacy of class treatment.

Negligence:

Most defect claim defendants will attempt to assign at least partial or shared responsibility for defects to some other participant in the construction process (often expressed in a counterclaim, cross-claim or third-party claim). Inadequate performance by others in the construction process may provide a basis for shifting blame. Indemnification clauses in prime contracts and subcontracts are customary and also provide justification for such defenses or claims.

Economic Loss Rule:

Construction defect claims are often presented as a mix of contract and tort remedies. When there is a contract between the parties, the claimant may be restricted to contract remedies and be legally prohibited from recovering economic losses in tort. However, even when parties do not have a contract with one another, the economic loss rule may prevent recovery if a defective product causes damages to itself but no damage to other property. For example, both aspects of the economic loss rule have been applied in litigation related to Chinese drywall claims. Be aware that the claim restrictions imposed by the economic loss rule do not extend to personal injury claims.

Strict Liability:

Claimants may assert claims for strict liability in cases involving the use of defective products. This means the manufacturer and all those in the distribution chain are liable for the ill-effects of a defective product. If the targets of the claim can demonstrate they neither manufactured nor distributed the product, then the claim may be defeated. This was recently the case in a Chinese drywall action pending in Florida. The trial court found that the homebuilder did not manufacture the defective drywall, and the homebuilder was not in the distribution chain for the defective drywall. However, the question that remains is whether the homebuilder’s general contractor or drywall subcontractors were themselves in the distribution chain.

Even the simplest construction project presents opportunities for defect claims to arise. Construction professionals must therefore be ever mindful of such potential claims, crafting their contracts and running their business operations with that thought in mind.

An Insurer’s Duty to Defend a Defect Claim

In today’s post-boom construction environment, claims by project owners of construction defects, wrongful or otherwise, are all too common. Because the potential for damages and litigation expense associated with such claims can be substantial, a contractor would do well to have a working knowledge of his rights and responsibilities under a commercial general liability (“CGL”) insurance policy, especially the carrier’s “duty to defend”.

Under a standard form CGL policy, an insurer will typically exercise two separate and distinct duties to the insured-contractor. First, the standard policy will typically provide a “duty to defend” the contractor when a lawsuit is filed, to the extent the suit raises claims potentially within the coverage afforded under the policy. The duty to defend is generally what it sounds like: the insurance company pays an attorney to defend the contractor, subject to the terms and conditions of the CGL policy. This coverage is critical considering the potential cost of defending a defect claim to completion. Second, the standard policy provides a “duty to indemnify” or to pay sums, to a third party, which the contractor may become “legally obligated to pay”. Again, this would be subject to the policy’s coverage and limits.

Construction Defect Claim Filed; Now What?

The first step after a claim is lodged is for both insurer and insured to determine whether the allegations against the contractor state a claim which potentially falls within defined coverage (e.g. the policy’s insuring agreement, endorsements, exclusions, and exceptions to the exclusions). The CGL insurer’s duty to defend is triggered by the allegations contained within the four corners of the complaint – not by the facts as may be later proved in court, nor the contractor’s version of the facts, or even the parties’ initial defenses. Where there is any doubt about whether the duty to defend applies, the issue must be resolved by a court in favor of the insured-contractor. Florida courts, for example, have held that the duty to defend is broader than the duty to indemnify because the insurer must defend the case even if the facts alleged are actually untrue or the legal theories presented are flawed.

At this point, you may be asking yourself, what are those magic words which cause the duty to defend to kick in? The short answer is an allegation that will “fairly and potentially” bring a claim within the coverage of the policy. The long answer is that, subject to the policy’s terms, exclusions and exceptions to exclusions, a standard CGL policy will provide coverage for an “occurrence” that has caused “property damage” (or bodily injury) within the policy’s coverage period. There is a lot to unpack in this sentence. Luckily, one state’s Supreme Court did just that in a 2007 case.

The matter involved a general contractor who hired a subcontractor to perform soil compaction and testing for a project. The soil compaction was performed in a defective manner which, in turn, caused structural damage to the building being built. The Court cited cases which generally held that the costs to properly fix the soil compaction itself would generally not be covered. However, the Court found that the structural damages to the building caused by the faulty soil compaction were covered as “physical injury” to “tangible property”. Therefore, generally speaking, the costs to repair property damage caused by a contactor’s (or its subcontractor’s) defective work are often covered where the costs to repair a contractor’s defective work are generally not.

As a rule of thumb, to trigger the insurer’s duty to defend, the allegations of the complaint should set forth a defect caused by the contractor or its subcontractor(s), (e.g. “occurrence”) which in turn caused damage to property other than the contractor’s (or its subcontractor’s) own work and which damages are within the coverage timeframe and terms and conditions of the policy. Know also that a construction defect caused by a subcontractor, not intended or expected by the general contractor, could constitute an “occurrence” under the language of the general contractor’s CGL policy.

Although the insurer typically assigns defense counsel, an insured may request a particular lawyer, possibly its own attorney, as long as he/she is experienced with the particular claims being alleged and he/she is willing to handle the matter in accordance with the insurer’s guidelines.

One thing is certain – a contractor’s ability to trigger coverage under an applicable policy is absolutely critical. Just one significant uninsured defect claim could easily bankrupt most contractors.

How To Handle Construction Disputes

It’s unlikely to be in the construction industry for very long and not run into a dispute. Disagreements between the parties – owners and contractors, contractors and subcontractors, subcontractors and supply houses – can crop up when one party fails to meet its obligations, contractual or otherwise. Sometimes these controversies result from a clear breach of a contract provision; other times they are simply the consequence of a party’s reaction to or disregard of a particular issue.

Maybe it is associated with timing – the job is off track and not moving as quickly as it should. Maybe it is a payment matter – change orders not being paid or payment applications far out pacing the actual progress on the job. Whatever it may be, real or not, a dispute is a serious event on a construction project, often causing progress to screech to a halt. What should you do? Start with a good contract. Negotiate the best terms possible to suit your needs and make sure you understand what you are getting yourself into before you start a job. Then document everything – keep good records as to performance, communication and payment. Corroboration will be needed to either prosecute your position or defend against any claim.

Unfortunately, all too often, dispute resolution alternatives are generally an afterthought for contractors whose attention is generally more focused on scope and price. But it will only take one bad experience with the legal system to bring home the fact that how disputes are addressed is as important as anything else found within one’s contract.

There are essentially four avenues to take when a dispute arises – direct negotiation between the parties, mediation before an impartial intermediary, arbitration before one or three arbitrators, or litigation before a judge or jury in state or federal court. Each comes with benefits and disadvantages, and contractors would be smart to understand the distinctions.

Meeting of the parties

The easiest, and what should absolutely be the first step when any dispute occurs, is a meeting of the parties to discuss their respective positions. It is by far the least expensive and could be the most immediately productive. And if it accomplishes nothing, it at least sets out the actual points of disagreement so the parties know, going forward, where they each stand.

Mediation

The next, and often the required first step to any eventual arbitration or litigation, is mediation. Often misunderstood as just another form of arbitration, mediation is quite different. It is a private and confidential process where the parties voluntarily agree to meet and, with the assistance of a neutral third-party mediator (jointly selected by the parties), try to work through their disagreement. The process does not involve the evidentiary and testimonial aspects associated with a trial or arbitration, but is rather a mediator’s shuttle diplomacy to seek an acceptable middle ground that both parties might accept. If a settlement is reached, it may be enforceable by law. Many states now require that mediation take place after suit is filed and before trial. It is a very worthwhile step in any dispute resolution procedure and is highly recommended.

Arbitration

Arbitration has historically been the preferred method for contractors and their lawyers to resolve a dispute. It is often noted in their contracts as the way an unresolved claim or controversy is to be addressed. Believed to be a simpler, faster and cheaper option than litigation, this has not always proven to be the case. Depending on the dollars involved in the misunderstanding, an arbitration would be before one, or a panel of three, disinterested and jointly selected arbitrators (generally experts in the field). The process is much like a trial, with discovery being taken and evidence presented. While both may be more limited in arbitration, the fact that construction issues these days may be difficult or intricate could result in any arbitration actually taking more time. The coordination of multiple parties, witnesses, lawyers and arbitrators could easily cause any presentation to be spread out over a number of months versus one continuous hearing. But most importantly, and not often understood by contractors, arbitration decisions are rarely appealable, even if based on an incorrect interpretation of the law. You would need to show fraud or bias to have a good chance of winning at overturning an arbitration.

Litigation

Then, there is the tried and true method of litigation – suing in state or federal court before either a judge or a jury. This approach has one clear advantage – any decision, judge or jury, can be presented for further appellate review. While costly, it remains an effective way to move a controversy to a resolution. The complexity of the issues can dictate whether a judge or jury would be the appropriate forum. But frankly, more and more cases reach a settled resolution before ever going to trial.

Finally, there is the matter of legal fees and costs. Are they recoverable? Absent a statutory provision and a corresponding claim, the attorney’s fees and costs you incur will not be recoverable, even if you win, unless you have a contractual provision which calls for the prevailing party to recoup his/her incurred legal expenses. Be sure to add such a provision along with your choice of dispute resolution alternatives when finalizing your contract. You’ll be glad you did.