California's Right to Repair Act: What teeth does it have when its requirements are not followed?

Imagine Mr. and Mrs. Johnson are recent first-time homeowners in California. Last year, they purchased a new home built by Lemon Construction. Shortly after moving into the home, the Johnsons went on a short vacation. To their dismay, they returned the following week to find the entire upstairs of their new house completely flooded.

Investigation revealed that Lemon Construction built the home with a poorly constructed roof, which did not hold up in the first major rainfall of the year. After discovering the flood, the Johnsons immediately hired a friend who was a roof installer to repair and finish their roof. The Johnsons also promptly notified their insurance carrier, which agreed to cover the cost of the roof repair. The Johnsons' insurer also immediately hired a company to restore the second floor of the home. Two months later, when repairs were almost complete, the Johnsons and their insurance carrier decided to file suit against Lemon Construction.

In the above hypothetical, did the Johnsons and/or their insurer create a legal obstacle in the planned action against Lemon Construction?

Unfortunately for the Johnsons, California's "Right to Repair Act" will likely be used as a defense by Lemon Construction because they were not given the opportunity to inspect and offer to repair the home prior to commencing repairs.
 

California is one of many states that has enacted laws requiring a homeowner to follow certain procedures prior to filing suit against a builder based upon construction defects. California's "Right to Repair Act" applies to residential units sold on or after January 1, 2003. The Act governs cases "seeking recovery of damages arising out of, or related to deficiencies in, the residential construction, design, specifications, surveying, supervision, testing, or observation of construction..." Regarding the hypothetical above, the Act applies to alleged violations of the following standard: "[r]oofs, roofing systems...shall not allow water to enter the structure..."

The Act sets forth various pre-litigation requirements which center upon the homeowner (1) giving the builder sufficient notice of a potential claim which states the alleged violation of the Act, and (2) allowing the builder the opportunity to inspect and repair the alleged violation prior to commencing suit.

The main difficulty in following the Act's pre-litigation procedures is best illustrated by the Act's requirements in Civ. Code Sections 916 & 917. Section 916 allows a builder 14 days after receipt of a homeowner's notice of a claim to complete an "initial inspection" of the residence. Section 917 provides that "[w]ithin 30 days of the initial or, if requested, second inspection or testing, the builder may offer in writing to repair the violation." Read together, a builder could easily wait two months before even deciding whether to undertake repairs. Strict adherence to these rules could leave homeowners like the Johnsons in limbo.

In the Johnsons' situation, Lemon Construction will argue a failure to adhere to the Act's pre-suit requirements. The remedy provided in the Act, however, does not lend Lemon Construction any support. Per Civ. Code Section 930(b), if a claimant "does not conform with the requirements of [the Act], the builder may bring a motion to stay any subsequent court action or other proceeding until the requirements of this chapter have been satisfied." In another words, Section 930(b) gives a builder the opportunity to stop a lawsuit to inspect and then choose to repair a home.

But what if the repairs have already been started or even completed? In these situations, the Act is silent, and there has yet to be any guidance from the California courts on this issue. If Lemon Construction asserts a defense based upon the Act, the Act's lack of any remedy for those who have started repairs may be a viable response.

Nonetheless, if possible, the Act's pre-litigation procedures should be followed to avoid the Lemon Construction defense. The builder should be given (1) notice of the alleged violation and (2) the opportunity to inspect and repair. If, however, repairs are already underway or completed, nothing in the Act or any related case law technically prevents the homeowner or their carrier from pursuing the builder.

 

Failure To Warn: Read The Fine Print

When someone is injured or property is destroyed because a manufacturer did not warn about known dangers you may think your case is a slam dunk. But before you start your victory dance, make sure you can prove that the warning would have been read. Recently, the California Court of Appeal for the Fifth District overturned a jury verdict in excess of $12 million because the plaintiffs did not prove that the failure to warn caused their injuries.   Huitt v. Southern California Gas Company (2010) 188 Cal.App.4th 1586.   In Huitt, two plumbers were injured in a gas explosion due to a phenomenon called "odor fade" whereby the odorant added to natural gas was absorbed into new piping. Without the odorant the plumbers were unaware of the presence of natural gas. The plaintiffs argued that the gas company had a duty to warn that new pipes absorb the odorant. 

The appellate court found that even if the gas company had issued a warning, there was no evidence that the plumbers would have become aware of the warning. The court distinguished this case from those dealing with products such as cigarettes, where a warning can be placed directly on the product. In contrast, natural gas cannot be seen and has no packaging. The court found that the plaintiffs did not prove how the gas company could have delivered an effective warning. Examples offered at trial were a notice included in the customers' bill or a posting on the company website. However, in these hypotheticals there is no evidence that the plumbers would have received the warnings.   The court reasoned that even if there had been a warning there is no evidence that the accident would have been avoided. Therefore, it does not make sense that a lack of warning caused the plaintiffs' injuries. The court ultimately held that recovery was precluded because the plaintiffs failed to establish that a timely warning issued by the gas company would have prevented the accident. 

In conclusion, it is not enough to prove that the manufacturer knew of a dangerous condition and did not warn of it. A plaintiff must also prove that the lack of warning actually caused the harm.

CALIFORNIA BUILDERS DO NOT GET TWO BITES AT THE CONSTRUCTION DEFECT NOTIFICATION APPLE

Many states have enacted laws requiring homeowners, with claims of construction defects, to follow certain procedures prior to filing a lawsuit against a builder. The procedures generally require that before a homeowner initiates construction defect litigation, it must notify the builder of the claims, allow the builder an opportunity to remedy the defects, pay the homeowner for the cost of repairs, and/or participate in some form of dispute resolution. If the builder fails to respond to the notice, or the process does not resolve the claims, then the homeowner may proceed with the lawsuit.

If the notification laws are not complied with by the homeowner, a lawsuit filed by the homeowner against the builder may be stayed, or possibly dismissed, with the possibility of the expiration of the applicable statute of limitations or statute of repose. 

In a recent California Court of Appeal decision, Nancy Anders, et al. v. Superior Court/Meritage Homes of California, homeowners filed a construction defect complaint against the builder without first following the California notification laws set out in California Civil Code Sections 895-945.5 (entitled “Requirements for Actions for Construction Defects” hereinafter “RACD”). After the homeowners filed the lawsuit, the builder filed a motion to compel the homeowners to comply with the notification and remediation procedures contained in the sales contracts it entered into with the homeowners, which required binding arbitration, and requested that the court stay the litigation until the procedures in the sales agreement were followed. The trial court ruled the contract provisions were unconscionable and unenforceable, and instead required the homeowners to comply with the provisions of the RACD. The homeowners appealed, claiming that because the builder had elected to set out its own procedures, which were found to be unenforceable, the homeowners were under no obligation to comply with the RACD. 

The Court of Appeal ruled that under the specific language of the RACD, a builder may, as an alternative to the RACD, elect to set out its own notice and resolution procedures. However, the court held that if those alternative procedures are found to be unenforceable, the homeowner is not required to comply with the RACD provisions. In other words, the builder does not get two bites at the apple. If it elects to set out its own procedures, it does so at its own risk, and cannot thereafter claim that the RACD provisions apply if the builders’ alternative provisions are unsuccessful or unenforceable. 

California Superior Courts Now Offer Expedited Jury Trial Options

The Expedited Jury Trials Act (ETA) Assembly Bill 2284 became effective in California state trial courts.  Additional rules implementing the program are being prepared by the California Judicial Council.  AB 2284 provides for expedited jury trials in civil cases where both parties agree.   The trials scheduled pursuant to the ETA will be heard on a date certain.  Only eight jurors are required.  Both parties will only have three peremptory challenges each against those jurors.  Each party will have three hours to present their testimony and arguments.  The goal of the program is to conclude a civil trial as close to one day as possible.

The rationale behind the bill is to address the ever increasing delays in getting a civil case to trial.  Limiting the length of trial testimony and argument should make the trial less costly.  Further, shortening the trial to roughly one day will be less burdensome on jurors time away from work.  However, the bill provides that the parties waive all rights to appeal  except as provided for in the ETA.

In the right situation, where the parties cannot agree to resolve a disputed matter, certain simplified cases should be considered for ETA.  Of course the other party must agree to participate to trigger the ETA program. 

Don't Get Nailed-Clearly Identify Your Insured and Payment!

On July 29, 2010, the California Court of Appeals, Fifth District, held that an insurer waived its right to equitable subrogation when it entered into a settlement without identifying its insured or apportioning payment.  The case arose from a complicated personal injury action, causing the trial court to comment that "this is one of the most screwed up cases I've ever seen."  The court of appeals responded that  "we heartily agree."

Essex Insurance Company had defended a personal injury action on behalf of the individual who had hired the plaintiff.  That plaintiff was injured when he stepped on a nail while moving a refrigeration unit in a restaurant.  After making payment to the plaintiff, Essex sought recovery from a doctor whose alleged malpractice had resulted in plaintiff suffering two amputations.  The court of appeal denied Essex equitable subrogation, explaining that it only had the right to assert claims for monies paid out on behalf of its insured.  Since Essex failed to spell out the amounts paid on behalf of its insured, as opposed to payments on related claims, the court found that neither equitable subrogation nor indemnification were available.

The lesson of the Essex case is simple.  In order to preserve equitable subrogation and/or indemnity rights, the insurer must carefully craft all settlement documents and releases.  The court will not attempt to glean what amounts are made on behalf of the insured, as opposed to bad faith or fraud claims.  The Essex case reiterates the most basic tenet of subrogation-you can only stand in the shoes of your insured for payments made on its behalf.   

Subrogation for a Personal Injury Claim Under a Liability Policy? Yes!

The recent California Appellate Court decision of Interstate Fire & Casualty Insurance Company v. Cleveland Wrecking Company (2010) 182 Cal.App.4th 23, illustrates that under the right circumstances, a liability insurer can subrogate against a third party to recover amounts paid to resolve a first party personal injury claim. The case involved a construction site personal injury claim by an employee of Subcontractor A. The employee filed a personal injury claim against General Contractor and Subcontractor B. Both Subcontractor A and Subcontractor B had contracts with General Contractor, requiring each subcontractor to defend and indemnify General Contractor for any claims arising out of the subcontractor’s operations, and required each subcontractor to name General Contractor as an additional insured under their general liability insurance policy. Subcontractor A procured the liability insurance and named General Contractor as an additional insured. Subcontractor B did not. General Contractor tendered its defense to both subcontractors. Subcontractor A and its insurer, Interstate, accepted the tender. Subcontractor B rejected the tender. Ultimately, General Contractor, through Interstate, as well as Subcontractor B, resolved their claims with the injured employee and filed good faith settlement motions approving the settlements which, under California law, barred any claims for equitable contribution. Thereafter, Interstate filed a subrogation action against Subcontractor B, claiming Subcontractor B breached its contract with Interstate’s additional insured, (General Contractor), by failing to defend and indemnify General Contractor for the claims brought by Subcontractor A’s employee. The trial court dismissed Interstate’s complaint determining Interstate had no rights of subrogation against Subcontractor B, as Subcontractor B’s alleged breach of the contract did not cause any damage to the General Contractor, and the good faith settlement barred any claims of negligence against Subcontractor B for causing the loss. 

The California Court of Appeal reversed the trial court’s ruling, holding that Interstate had a right of subrogation against Subcontractor B, based on Subcontractor B’s alleged breach of the indemnity provisions in the contract with General Contractor. The court acknowledged that the good faith settlement determination did, under California law, bar any equitable contribution claim based on the comparative negligence of Subcontractor B in causing the injury. However, the court held the contractual claim for indemnity survived the good faith settlement determination, and that Interstate, as the insurer, could step in the shoes of its insured, General Contractor, to pursue the claim. The court extensively reviewed and discussed many of California’s subrogation cases spanning the past 40 years and concluded that the equities of the insurer were superior to that of Subcontractor B, and that there was no basis to prevent the insurer from pursuing its claim for breach of the indemnity provisions within the contract. 

The lesson learned from the case is where a defendant or cross-defendant is not willing to contribute its fair share or acknowledge responsibility under a contractual indemnity agreement, a subsequent subrogation action against the non participating defendant may be a viable option. As the Interstate case illustrates, even if one of the defendants participates in the settlement, but fails to live up to all of its contractual responsibilities, a viable subrogation claim may exist, pending the provisions in the parties’ contracts, and the specific facts of the case.

The Malfunction Theory

Have you ever experienced the following all-too-common frustrating subrogation scenario:  Your cause and origin expert determines that a fire started from a particular product but, after destructive examination of the product, your engineer is unable to identify the defect which caused the product to fail.  Even though you cannot identify the specific defect, you are not necessarily out of luck. 

Courts in a number of states have long recognized that fires destroy direct physical evidence of a defect and therefore allow the product defect case to be presented with circumstantial evidence via a Malfunction Theory.  Under the Malfunction Theory, if one can prove the following elements then a  product liability claim still may exist:

1) The product is only a few years old;

2) The fire started inside the product;

3) Alternative ignition sources have been eliminated as a potential cause of the fire;

4) Your expert can explain how the product "could" have caused the fire even though the exact cause is unknown; and

5) The product was not misused. Often you can prove that the product was not misused if the fire started in an area where the insured did not have access to misuse it, i.e., the motor area of a microwave, the compressor area of a refrigerator, etc.  However, even if the insured had access to the area of the product where the fire occurred, you can still circumvent the misuse element by showing that the insured actually did not access this area or the insured's access of the area of origin was unrelated to the fire. 

The next time a product causes a fire, but the specific defect cannot be identified, do not rush to close the file.  Instead, check to see if your jurisdiction recognizes the Malfunction Theory.  If so, it could turn your dead-end products claim into a functional theory of liability. 

AN INSURANCE CARRIER'S RIGHT TO SUBROGATE NEED NOT WAIT ON THE INSURED

The United States Court of Appeals for the Ninth Circuit recently explained the limited applicability of California’s “made-whole” rule which may preclude an insurer from recovering any third party funds unless and until the insured has been made whole for the loss. 

In Chandler v. State Farm Mutual, the court opined that “an insurer is permitted to recoup a payout from a third-party tortfeasor’s insurance company before the insured has sued the third-party tortfeasor, and without first making the insured whole.” A two-party automobile accident provided the factual background for the court’s decision. The subrogating carrier's insured’s car sustained damages after another driver rear-ended the vehicle. As a result of the accident, the insured incurred $317.45 in rental car expenses while his car underwent repairs. The subrogating carrier paid 80% of these rental car expenses as required by the insurance policy, leaving its insured with $63.49 in out-of-pocket expenses.

After its payment, the carrier exercised its subrogation rights and settled with the third-party tortfeasor’s insurer. Subsequently, the insured requested reimbursement from the tortfeasor’s insurer for his $63.49 in out-of-pocket expenses, which that insurer rejected. Then, the insured sought to recover his out-of-pocket expenses from his own insurance (subrogating) carrier, which was also denied because the carrier had paid the full amount due under the policy.  After additional benefits were denied, the insured initiated an action against his insurance carrier claiming violations of California’s Unfair Competition Law, conversion, unjust enrichment, and declaratory relief. As the court noted, all of the claims essentially hinged on the applicability of the "made-whole" rule.

The court rejected each of the insured’s arguments and dismissed all claims against the insurance carrier because the "made-whole" rule did not apply. The court’s reasoning supported the policy considerations for both subrogation and the made-whole rule. First, where the insured has not yet sought to recover from the third-party tortfeasor, nothing indicates that the insured will not be made whole if he decides to initiate a suit. Moreover, allowing the insurer to subrogate furthers the fundamental purpose of subrogation: to hold third-party tortfeasors accountable for the injuries they inflict. If a carrier could not immediately subrogate, as the court explained, this purpose would be frustrated and the risk of loss would be placed on the insurer whenever the insured does not attempt to recover from the third-party tortfeasor. Finally, if an insurer was required to make its insured whole before subrogating against potentially responsible third-parties, it would remove the insured's incentive to pursue its claims and would obligate the insurer to pay for more than the express terms of the insurance policy require.

Based on the court’s conclusion and reasoning, an insured’s failure to bring its own action does not prevent the insurer from subrogating to the insured’s claim before the insured has been made whole. The court’s holding bolsters a subrogating carrier’s argument that subrogation rights may be exercised immediately upon payment and cannot be prejudiced by an insured’s inaction.

California's Attorney-Client Privilege Upheld

The California Supreme Court in the case of Randall v. Costco Wholesale Corporation, 2009 DJD 16727 upheld the attorney-client privilege set forth in Evidence Code §954. The privilege attaches to any legal advice given in the course of an attorney-client relationship, regardless if the communication contains unprivileged material.See full size image

Costco Wholesale Corporation (“Costco”), retained counsel to provide legal advice regarding whether certain Costco warehouse managers in California were exempt from California’s wage and overtime laws. Counsel undertook this assignment and provided an opinion letter to Costco on the issue.

Several years later, Costco employees filed a class action against Costco, claiming that from 1999 through 2001, Costco had misclassified some of its managers as “exempt” employees and therefore had failed to pay them the overtime wages they were due as non-exempt employees. During the course of the litigation, plaintiffs sought to compel discovery of the opinion letter prepared by Costco’s counsel. Costco objected on the grounds that the letter was subject to the attorney-client privilege and attorney work product doctrine. Plaintiffs disagreed, arguing that the letter contained unprivileged matter and that Costco had placed the contents of the letter in issue, thereby waiving the privilege.

The Supreme Court held that the attorney-client privilege attached to the letter in its entirety, irrespective of the letter’s content. Further, Evidence Code §915 prohibits disclosure of the information claimed to be privileged as a confidential communication between attorney and client “in order to rule on the claim of privilege.” In addition, the Court found that a party seeking relief from a discovery order that wrongfully invades the attorney-client relationship need not also establish that its case will be harmed by disclosure of the evidence.

The holding bolsters a subrogating carrier's argument that correspondence from its counsel which includes facts and opinions about a loss, recovery potential, site inspections and conversations with witnesses are protected by the attorney-client privilege. 

California's "Made Whole Rule"

People in queueWhere the subrogating insurer and insured both have recovery claims and are competing for a limited amount of available money from a defendant, issues arise as to who is entitled to recovery, and/or how the recovery should be divided. These issues fall within the realm of the “made whole rule”, which generally provides, that under certain circumstances (i.e. limited assets of a wrongdoing defendant, non participation of the subrogating insurer in recovery lawsuit), the insured is entitled to be “made whole” for uninsured damages from the wrongdoing defendant, before the subrogating carrier can recover from the insured (via a lien or policy provisions) or from the defendant who caused the injury.

In a recent California Supreme Court decision involving med pay reimbursement, 21st Century Insurance Company v. Superior Court (2009) 47 Cal. 4th 511, 213 P. 3d 972, an insured attempted to expand the scope of the made whole rule by including the insured’s attorney’s fees as part of her uninsured loss, thereby eliminating the recovery of the subrogating carrier.   

21st Century’s insured was injured in an automobile accident. 21st Century paid the insured $1,000 under the med pay provisions of its automobile policy. The insured hired an attorney and pursed a personal injury claim against the third party who caused the accident. The case settled for $6,000, which comprised her total damages. The insured’s attorney received a fee approximating $2,000, leaving a net recovery of $4,000. 21st Century requested reimbursement of $1,000.  The insured argued that because her damages, including attorney’s fees, were $8,000, and her recovery was only $6,000, no reimbursement to 21st Century was required. Thus, the question before the court was whether “made whole” included the attorney’s fees incurred by the insured.

After reviewing cases in other states and noting states are divided on the issue, the Court ruled in favor of 21st Century, concluding that attorney’s fees should not be included as part of the insured’s damages for purposes of determining whether the insured has been made whole in med pay reimbursement cases.  Instead, the “common fund doctrine” allows the insured to reduce the amount of reimbursement to the insurer by a pro rata share of the insured’s costs and attorney’s fees. In that manner, both the insured and insurer share in the cost of recovery in proportion to their respective recoveries. The end result of the court’s decision allowed reimbursement to the insurer of $600, representing the insurer’s $1,000 payment, less its 1/6th pro rata share of attorney’s fees and costs.