Highlights and Warning Signals
Legal Trends in Construction Defects Lawsuits
by Ned Barnett

The laws on construction defects are being written – and rewritten – but more than that, they are being interpreted and reinterpreted, sometimes dramatically reinterpreted, by the courts.  This was one of the core messages coming out of West Coast Casualty’s 12^th Annual Construction Defects Seminar, held in May in Anaheim. 

This article is one of several in this issue of the ZONE on the subject of Construction defects -- see the "Special Report" for more.

While each state has their own legal structure, there are times when precedents in one state have impact in others – and in that situation, no state is more powerful a bellwether influence than California .  As a result, several new legal-ruling trends in California may come home to roost in Nevada , Utah and Arizona .  “Runaway Train” and “Scorched Earth” were descriptions often heard from the distinguished panels of judges, attorneys, insurance company execs and contractors who attempted to detangle the skein of sometimes conflicting rulings coming from courts in the Southwest.

Some of the highlights of this Construction Defects Seminar include:

Sub-Microscopic Liability:  There is a growing body of case law (some of it already contradicted – see below) governing an area of liability known as “Sub-Microscopic Defects.”  These defects may not be visible to the naked eye – some are hard to identify with any but the most sophisticated scientific tests – but they can still create contractor liability. In some cases, the presence of a sub-microscopic defect is enough – even when no “material” damage has manifest itself – to create liability and damages.  In response to this growing trend, “expert” testimony and a raft of unproven “scientific” tests are being used in courts to document – or, on the side of the defense, to dispute –so-called damages that may never impact building owners in any negative fashion.

Greed and Hubris in Construction Defect “Future Damage” Claims: In addressing this issue at the conference, attorneys Theodore L. Senet and Victor F. Luke began by quoting Einstein: “Two things are infinite: the universe, and human stupidity – and I’m not sure about the universe.”  That was a useful springboard into a comprehensive review of the fallacy that is “future damage” liability and awards, and on the remarkable greed among attorneys seeking dramatic damage claims from merely potential problems.  These claims include prospective damages for replacement of concrete foundations, structural elements and piping based solely upon expert testimony that these building components are in the process of future physical failure and resultant prospective property damages.

“While some predictions may turn out to be true,” the attorneys noted, “many do not.  Courts have traditionally been cautious and required manifestation of damages before granting relief.  More recently, however, some courts have allowed recovery for prospective damages, in an attempt to compensate parties for potential future malfunctions of presently functional items.”

This shift, the attorneys noted, is due in part to technology, and in part to the expanding theories of tort liability.  Cutting-edge scientific instrumentation can now detect flaws so tiny as to be almost beyond comprehension – and some “experts” claim that these, in fact, predict future product-failure on a real-world scale, even though the “damage” looks perfectly fine, even under the gaze of the most sophisticated microscopes.  However, the cause-and-effect has yet to be documented – most of these tests are far too recent to have been tested against real-time product failures – so the courts have been left to extrapolate from sub-microscopic damage to real-world product failure.  Some judges are rightly reluctant to grant damages on a product that seems, to all human senses, perfectly sound.  Others, however, are zealous in awarding on any defect, no matter how small or insignificant – or unrelated to any known physical manifestation of real economic damage.

Senet and Luke warned that the construction industry must be ready to face these challenges in court, knowing that it is the courts themselves that will be drawing and redrawing the lines between what is actionable and what is mere speculation, little better than science fiction.  So far, there is no legal consensus – courts have come to different opinions and conclusions based upon various legal theories, and perhaps based on the relative credibility of various “expert” witnesses.

Future Damage Awards: As noted above, a troubling component of sub-microscopic defect suits involves claims being paid against potential future damage (this is still evolving as a point of law – see immediately below), as opposed to paying for actual damages.  For instance, if some of the homes in a given development have sufficient specific damage from sub-microscopic defects, some courts are ruling that liability – and payments – may extend to all of the homes in the development – even before damages (if any) manifest themselves.  This may not apply in Nevada , where courts are making it much more difficult for homeowners to form classes for class-action suits (see above) – the law here seems contradictory, and it is very much in a state of flux.  Courts, in awarding “future damages,” are looking at several factors, including:  The seriousness of potential future harm, the risk of false claims, ensuring adequate compensation for those seriously and presently damaged, and inhibiting the development of new construction products, materials and techniques.

Serious Potential Harm: Courts have proven more likely to award damages for future damage in cases where such damage would be serious – even life-threatening – while setting aside cases where future damage would be a mere annoyance, without serious life-safety or repair issues.

Risk of False Claims: Courts recognize the temptation to seek windfall damage awards, and are setting high thresholds of liability to help avoid these cases, especially where homeowners would be tempted to use awards for purposes other than preventing or forestalling those future risks. 

Adequate Compensation:  Courts are so far more interested in providing adequate – even ample – compensation for those already damaged; and if there are limits on resources available to pay off damages, those suffering now are winning out against claimants suggesting future damage.

Inhibiting Development of New Products, Materials and Techniques: Courts are so far recognizing that awards for potential damages may have a serious chilling impact on innovation, and are holding back on awarding future damages citing this factor.

Nevada Case Law on Sub-Microscopic Damage:  In Calloway vs. City of Reno (2000), the court applied an expansive interpretation of the economic loss rule to include the entire home, not just a component part analysis.

Court reverses itself on Sub-Microscopic Future Damage:  In August of last year, the Second District Court of Appeal “depublished” it’s own previous ruling that had held that the Economic Loss Rule will not bar recovery where submicroscopic damage is present, and reasonable damage is reasonably certain.  This is good news for contractors facing “future damages” issues, especially in the highly-controversial area of sub-microscopic damages.

Mediation is a dead-letter in California : A review of recent case law by attorney Ross w. Feinberg made it clear that – at least in California – “mediation is dead.”  Judges in California have thrown out virtually all of the leverage previously used by mediators to force decisions upon the disputing parties.  Now, under this new interpretation of governing statutes, either party can walk away from the table at any time – right up until the moment a decision is announced. 

Jury Trials Now Preferred: Another, related new California trend has judges opting for jury trials.  Panelists agreed that judges know they can reverse a jury’s decision – if it goes against what the judge things proper – however, because jury trials are more thoroughly documented and transcribed than “in chambers” decisions, these judges know that they are far less likely to be overturned on appeal and forced to re-try the cases in question.

Sunset Provisions vs. Construction Defect Statute of Limitations:  An increasing trend, among insurance companies protecting contractors and subcontractors, is to include a clause protecting against claims “reported in writing within four years after the Policy Period.”  However, in Nevada and California , the statute of limitations “for latent construction defects remains ten years.”  Clearly, before a contractor buys that next insurance policy, a careful review should be made to ensure that the coverage period covers the entire statute of limitations period. Otherwise, on the 1,462^nd day post-completion, the contractor reverts to full liability in the case of construction defects.  

Find About the ZONE's Ad Packages

From The Construction Zone

Back to Main Page

Call (702) 615-7644