Subrogation & Recovery Law Blog : Insurance Subrogation Lawyer & Attorney : Cozen O'Connor Law Firm : Property Damage & Insurance Commentary

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.
 

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In March, we discussed the importance of pleading common law duties separate and distinct from a builder’s contractual duties in order to preserve tort-based construction defect actions under Michigan law. In its opinion released June 6, 2011, the Michigan Supreme Court recently reinforced but fine-tuned this advice in Loweke v. Ann Arbor Ceiling & Partition Co., L.L.C., 2011 WL 2184294 (Mich. 2011).

The court recognized that under Fultz v. Union Commerce & Assocs., 470 Mich. 460 (2004), Michigan courts had mistakenly created a form of tort immunity against claims raised by noncontracting third parties. This immunity has grossly limited recoveries in both residential and commercial claims, because the policyholder typically contracts with only one entity, either the builder or general contractor, but the subcontracting tortfeasor has been previously ruled by trial courts to be immune due to lack of privity with the homeowner. The Supreme Court commented that Michigan courts had been allowing contract terms to obscure the inquiry as to whether a contracting defendant owed a noncontracting third party any legal duty. Rather, the court explained, any duty owed should be discerned “without regard to the obligations contained within the contract.” The focus of the inquiry is not whether a defendant’s conduct was separate and distinct from the defendant’s contractual obligations but whether a defendant owes any duty at all to a particular plaintiff.

While Loweke will be greeted with sighs of relief by those seeking to advance construction defect claims, the “separate and distinct” analysis is not dead letter. The failure to plead a duty independent of a contractor’s obligations will limit recovery to contractual avenues, to which third parties cannot generally avail themselves. Evaluation of what duties may exist relative the damage suffered, and careful crafting of the Complaint, is critical.

This facet of Michigan law has been dynamic and Cozen O’Connor will keep a watchful eye open for the latest changes.

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Residential construction defects are common occurrences in Illinois where numerous homes and condominiums quickly went up before the housing bubble burst.  Illinois' expansion of the economic loss doctrine has made alleging tort theories against builders and vendors (those that sell) of houses very difficult.  Nonetheless, there may be express or contractual warranties from the builder providing an avenue of recovery.  In the event those express warranties have expired, Illinois implied warranty of habitability can play a pivotal role in pursuing recovery from builders and vendors of homes. 

The implied warranty of habitability is a consumer protection warranty of public policy.  The rationale behind the warranty is that home buyers do not have the ability to detect latent defects in the homes they are purchasing.  They rely on builders and vendors to properly construct the home and, for that reason, builders and vendors should be liable for the repair costs for a defective home.  The warranty continues to expand and is actionable against a builder or a vendor of a home or a landlord in a rental situation.  The warranty can be used as a remedy for tenants, home buyers and successive purchasers. 

Another benefit of the implied warranty of habitability is that it is very difficult to disclaim.  The builder or vendor has the burden to prove that the warranty was disclaimed specifically by name, that the disclaimer was conspicuous and fully discloses the consequences of its inclusion, and that an agreement regarding the disclaimer was actually reached with the buyer.  Because of the strict disclaimer rules, many Illinois courts invalidate purported disclaimers.

Even with the expansion of economic loss in Illinois, an implied warranty of habitability cause of action allows subrogated insurers to avoid the economic loss pitfalls.  It has increasingly become one of the prime means in Illinois to pursue builders and/or vendors for latent defects.

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In the multi-district litigation arising out of Chinese manufactured drywall, Judge Fallon of the United States District Court for the Eastern District of Louisiana issued an Opinion on April 8, 2010 finding in favor of plaintiff homeowners and awarding in excess of $2.6 million in damages against Taishan Gypsum Company. 

Additionally, Judge Fallon found that based upon the Findings of Fact and Conclusions of Law, that “scientific, economic, and practicality concerns dictate that the proper remediation for the Plaintiff-intervenors is to remove all drywall in their homes, all items which have suffered corrosion as a result of the Chinese drywall, and all items which will be materially damaged in the process of removal.”

In the written Opinion, Judge Fallon cites to the Cozen O'Connor's Chinese Drywall Litigation: Subrogation White Paper (2009) as an authoritative text in numerous places in his findings of fact.

For more information on the multi-district litigation arising out of the Chinese manufactured drywall, or to get a copy of the Cozen O’Connor Chinese Drywall Litigation Subrogation White Paper, please feel free to contact one of our offices.

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In Georgia, it is well known that actions for injury to real and personal property caused by any person furnishing the design or construction of an improvement to the property must be filed within eight (8) years after the substantial completion of the improvement. O.C.G.A. §9-3-51(a).  Further, an improvement to real property has been defined as a fixed alteration to the real property. Mullis v. Southern Co. Services, Inc., 250 Ga. App. 90, 296 S.E.2d 579 (1982). The Courts have held that if a component is an essential and integral part of the improvement to which it belongs, then it is itself an improvement to real property.  Therefore, in the event a claimant files an action against a contractor, architect, or subcontractor to recover damages to its real property, for example, one would surmise that he or she has eight (8) years from the date the work was substantially completed to file the claim. That is not the case insomuch as in 1994, the Georgia Court of Appeals, in effect, shortened the time period to file a claim against a contractor to recover damages to real property to four (4) years.

In Hanna, et al. v. McWilliams, et al., 213 Ga. App. 648, 446 S.E.2d 741 (1994), a homeowner brought an action against a general contractor and subcontractor to recover damages to real and personal property caused by the negligent installation of a fireplace. The Hanna Court held that the fireplace constituted an integral part of the home and an improvement. As a result, the statute of repose applied. The Hanna Court also examined whether the homeowner had eight (8) years after the substantial completion of the fireplace to bring an action against the contractors, as outlined in the statute of repose, or whether the four (4) year statute of limitations barred the claim.  The Court held, as it pertains to damages to real property, that the Plaintiff’s claims were subject to the four (4) year statute of limitations set forth in O.C.G.A. §9-3-30 and the action accrued at the time of the substantial completion of the project.  

The holdings in Hannah provide that in cases involving damages to real property, the statute of repose and statute of limitations will run concurrently after the date of substantial completion. When the four (4) year limitation for tort actions has been reached, the claimant is barred from pursuing a claim to recover damages to its real property as a result of the defect in an improvement to its land. Keep in mind that the application of Hannah is different for damages to personal property as the discovery exception to the statute of limitations applies. 

Claimant beware! Make sure you examine the dates when the repair and/or improvement was made to determine if you have a viable claim.

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On June 15, 2009, a special panel on multidistrict litigation ordered 10 federal cases involving liability for allegedly defective Chinese manufactured drywall consolidated in the U.S. District Court of the Eastern District of Louisiana with Judge Eldon E. Fallon. It was also ordered that another 67 liability actions involving allegedly defective Chinese manufactured drywall pending in other federal districts, and any other related state or federal action, be treated as potential tag-along actions and consolidated in the same court.

This procedure, referred to as multidistrict litigation, is utilized in the federal court system to consolidate pending federal and state civil cases filed throughout the United States with common questions of fact. The consolidation allows one federal judge to manage, among other things, pretrial procedures, discovery, and dispositive motions. However, after all discovery and pretrial rulings, if issues remain to be tried, the case will be remanded back to the court where it was originally filed for trial.

Judge Fallon has entered a number of orders in the Chinese drywall multi-district litigation. One of interest was entered on October 9, 2009, as Pretrial Order No. 1(B). In that order, Judge Fallon sets forth the duties and obligations for the preservation of physical evidence that must be followed by all individuals in all jurisdictions.

In summary, all individuals and entities who have or intend to pursue claims relating to allegedly defective Chinese manufactured drywall must preserve certain portions of the defective drywall and the damaged property at their own expense. Parties are required to preserve multiple samples of the drywall, drywall end tape, HVAC coil material samples, plumbing component samples, electrical component samples, and other damaged property. All evidence must be photographed or videotaped. Photographs of the evidence should be taken before and after it is removed from the property and documented on a floor plan. Thereafter, all preserved evidence must be individually stored in double-bagged polyethylene zip-lock bags. The samples must be clearly labeled on the outside of one plastic bag and then placed inside the second plastic bag. The label should include the name and address of the property, the date the samples were taken, the type of evidence, and the location where the item was taken from within the property. Finally, the evidence must be stored in a reasonably climate controlled location and free of water or moisture. 

The preservation of evidence is key to any claim involving damage to property. As such, anyone pursuing or intending to pursue a claim for damage caused by allegedly defective drywall should read and strictly comply with Pretrial Order No. 1(B).

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From 2004 through 2006, the housing boom and rebuilding efforts necessitated by various hurricanes led to a shortage of construction materials.  As a result, U.S. builders and suppliers imported significant amounts of Chinese drywall, estimated to be enough to construct approximately 100,000 homes.  A number of putative class action complaints and approximately 100 other state and federal complaints including counts for negligence, strict liability, breach of warranty, and violations of consumer protection acts have been filed alleging that the Chinese drywall emits gaseous emissions or “off-gassing” that creates a noxious “rotten egg-like” odor and causes damage and corrosion to home structural and mechanical systems such as air conditioner and refrigerator coils, copper tubing, faucets, metal surfaces, and electrical wiring. Additionally, the “off-gassing” is alleged to cause health problems, including allergic reactions, coughing, respiratory problems, sinus problems, throat infection, eye irritation, and nosebleeds.

Various federal, state, and independent agencies have done testing to determine the cause of the “off-gassing” but none have reached a final conclusion.  On May 7, 2009, the U.S. Environmental Protection Agency’s Environmental Response Team published a drywall analysis comparing a limited number of Chinese drywall samples from Florida homes to U.S. made drywall samples purchased from a Home Depot in New Jersey.

The EPA found significant differences between the Chinese drywall and the U.S. made drywall:

• Sulfur was detected in the Chinese drywall but not in the U.S. drywall.
• Strontium in the Chinese drywall was anywhere from twice to ten times the amount found in the U.S. made drywall.
• Iron concentrations in the Chinese drywall were also significantly higher.
• Notably, there was no evidence of fly ash found in the Chinese drywall samples or the U.S. samples.

However, the EPA has not issued a final report on the cause of the “off-gassing” and whether it causes property damage and personal injury.

On June 15, 2009, a special panel on multi-district litigation ordered cases involving Chinese drywall consolidated in the U.S. District Court of the Eastern District of Louisiana with Judge Eldon E. Fallon.  The matters are also being closely followed by Florida Congressman Robert Wexler, an advocate for families adversely impacted by homes built with Chinese drywall.

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