The Discovery Rule and Tolling Statute of Limitations

In a 2014 unpublished opinion, the SC Court of Appeals discussed the threshold for “notice” as it pertains to statute(s) of limitations in construction defect cases. At the root of this action was a 2003 forensic report obtained by the HOA which was not acted upon until 2009.

As most of you are aware, construction defect litigation is often rooted in negligence, contract, warranty and other causes of action which are subject to three year statutes of limitations. Because defects are often latent, however, it is not uncommon for questions to arise as to when a Plaintiff knew, or should have known that a cause of action existed.

BACKGROUND

3 Chisolm Street Homeowners Association, Inc. (the “HOA”) brought suit in 2009 against several defendants that completed construction work on three condominium buildings in 2002. Genoa Construction Services, Inc., the general contractor, Masterpiece Millwork, Inc., the manufacturer of the windows used in the buildings, and Brock Green Architects and Planners, LLC, were each alleged contributors to defective conditions.

In determining when the statute of limitations began to run, the circuit court applied the “discovery rule,” which provides that the time to file a claim “begins to run when a cause of action reasonably ought to have been discovered.” Dean v. Ruscon Corp., 321 S.C. 360, 363, 468 S.E.2d 645, 647 (1996). The HOA argued that they were not on notice of the defective conditions and, alternatively, if found to be on notice such notice was limited to certain areas of the property but not all.

The HOA asserted that there were material issues of fact as to when the HOA discovered, or should have discovered, that a cause of action existed for original construction defects in all three condominium buildings—the main building, the gym building, and the cottage building.

HOLDING

The lower court ruled that a 2003 forensic report put the Plaintiff HOA on notice of defects in the main building. The appellate ruling upheld that finding and reasoned that the 2003 report also evidence that if the HOA had exercised reasonable diligence and investigated the other buildings in 2003, it would have discovered the defects before the statute of limitations ran. Barr, 330 S.C. at 645-46, 500 S.E.2d at 160 (holding had the plaintiffs “exercised reasonable diligence and investigated the problems noted in the . . . inspection reports, they could have realized the magnitude of the problem and brought suit before the statute of limitations ran”). An inspection report issued in 2007 that concerned the gym and cottage buildings alerted the HOA to defects that existed in 2003 and would have been discoverable. Moreover, according to an architect who inspected the buildings, the deterioration of the wooden windows in the gym building resulted, in part, from condensation buildup on the windows, which would “have been occurring prior to [his] observations” in 2007 because it was caused by installation of single-pane windows. Thus, the defect causing the condensation—the single-pane windows— existed at the time construction was completed in 2002. began to run, the circuit court applied the “discovery rule,” which provides that the time to file a claim “begins to run when a cause of action reasonably ought to have been discovered.” Dean v. Ruscon Corp., 321 S.C. 360, 363, 468 S.E.2d 645, 647 (1996). The HOA argues there are material issues of fact as to when the HOA discovered, or should have discovered, that a cause of action existed for original construction defects in all three condominium buildings—the main building, the gym building, and the cottage building.
As to the main building, we find the circuit court properly determined the statute of limitations began to run in 2003 because the Glick report, issued in April 2003, put the HOA on inquiry notice of defects that would have been discoverable through additional inspections and destructive testing, which both the report and the HOA president recommended. See Republic Contracting Corp. v. S.C. Dep’t of Highways & Pub. Transp., 332 S.C. 197, 207, 503 S.E.2d 761, 766 (Ct. App. 1998) (stating the statute of limitations begins to run “from the date the injury is discoverable by the exercise of reasonable diligence”); 332 S.C. at 208, 503 S.E.2d at 767 (holding the plaintiff “had sufficient information . . . to put it on inquiry notice, which, if developed, would have revealed the defects”). The Glick report also triggered the statute of limitations for claims against all three respondents because the report listed specific defects that put the HOA on inquiry notice to discover whether those defects were attributable to design, construction, or manufacturing errors. See Barr v. City of Rock Hill, 330 S.C. 640, 645, 500 S.E.2d 157, 160 (Ct. App. 1998) (stating a party has notice of claims when the facts and circumstances “would put a person of common knowledge and experience on notice that . . . some claim against another party might exist” (internal quotation marks and citation omitted) (emphasis in original)); Wiggins v. Edwards, 314 S.C. 126, 128, 442 S.E.2d 169, 170 (1994) (“The focus is upon the date of discovery of the injury, not the date of discovery of the wrongdoer.”); id. (“If, on the date of injury, a plaintiff knows or should know that she had some claim against someone else, the statute of limitations begins to run for all claims based on that injury.” (citation omitted)).

As to the gym and cottage, the circuit court decision was upheld, reasoning that Glick’s report provided the HOA sufficient information to put it on inquiry notice of construction defects existing in these buildings. See Dean, 321 S.C. at 364, 468 S.E.2d

The appellate court took significant notice of the fact that:

(1) each of the three buildings was constructed at the same time, by the same general contractor, and in accordance with the same plans developed by the same architect;

(2) the minutes from the board of directors meeting in May 2003 provide that after receiving Glick’s report, the board discussed “steps that should be followed,” including “[i]nspection of the cottage and gym building[s]”;

(3) the minutes from the board of directors meeting in June 2003 demonstrate the HOA solicited proposals from companies for “additional investigation” into the defects highlighted in Glick’s report, although it ultimately decided not to pursue this course of action due to the cost;

(4) the HOA was urged to conduct further investigations by Glick, who warned of “significant and pervasive construction defect problems”; and

(5) an inspection report shows the HOA undertook remedial measures on the gym building some time before 2007 “in an effort to inhibit water intrusion at windows.”

There was also evidence that if the HOA had exercised reasonable diligence and investigated the other buildings in 2003, it would have discovered the defects before the statute of limitations ran. Barr, 330 S.C. at 645-46, 500 S.E.2d at 160 (holding had the plaintiffs “exercised reasonable diligence and investigated the problems noted in the . . . inspection reports, they could have realized the magnitude of the problem and brought suit before the statute of limitations ran”). An inspection report issued in 2007 that concerned the gym and cottage buildings alerted the HOA to defects that existed in 2003 and would have been discoverable. Moreover, according to an architect who inspected the buildings, the deterioration of the wooden windows in the gym building resulted, in part, from condensation buildup on the windows, which would “have been occurring prior to [his] observations” in 2007 because it was caused by installation of single-pane windows. Thus, the defect causing the condensation—the single-pane windows— existed at the time construction was completed in 2002.

COMMENT

It is well settled that an expert’s findings, when presented to a claimant, trigger the statute of limitations as to the specific defective conditions and locale where defects are present. This case is interesting in its treatment of the initial report as a trigger of all defects in not only the main building which was subject of the 2003 report, but additional structures.

The additional buildings create further intrigue due to their lack of similarity in use as the main building. A gym and cottage are certainly much different than a multi-story condominium tower. The court seems to rationalize the decision to include these buildings due to the fact similar contractors and materials were used which should have been significant to the HOA. Had these two structures been erected with different materials by distinguishable contracting entities it is a safe assumption that the court might very well have excluded these structures from the 2003 trigger.

Construction Arbitration Is Too Lengthy & Costly. The AAA Hopes to Fix That.

Originally posted on N.C. Construction Law, Policy & News:

As I noted last November, there’s a growing concern among construction industry stakeholders and others that arbitration too often fails to serve its intended purpose as a speedy, less costly and more streamlined alternative to civil litigation.  This rising chorus has complained that pre-hearing discovery is too extensive and drawn out, the hearings themselves take too long, and at the end of the day, no meaningful cost savings are actually achieved.

The American Arbitration Association (“AAA”) is taking those concerns seriously.  Last June, it rolled out its shiny new Supplementary Rules for Fixed Time and Cost Construction Arbitration, intended “to provide an arbitration process that will be predictable in terms of total time and cost,” particularly for cases “with discrete issues that would benefit from limited document exchange and discovery.”

Here are five key features of the new rules:

1.  They only apply to two-party disputes, although this limitation does…

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Construction Defect Lawsuits Are On The Rise After The Recent Storms

Originally posted on Crumbling House:

Following the recent rains and floods in Arizona, several homeowners have experienced flooding and water damage. Homes are now uninhabitable, and Home Owners Associations remain in a state of disrepair.

Most homeowners do not have flood insurance. However, this should not be the end of the inquiry. For instance, the home builder may also have liability if it cut corners during the construction a community and failed to allow for adequate drainage.

Thus, if the builder did not properly grade the community to allow for water to drain properly, then it may be liable for damages to the HOA and to the individual homeowners.

Want to know more?

David Degnan is the owner of Degnan Law, PLLC. David focuses his practice on real estate matters and currently listed as a Top Real Estate attorney on the lawyer rating service, AVVO. David may be reached at d.degnan@degnanlawaz.com or at 602-818-4813. This may be…

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Settlement of Construction Defect Claim Without Involvement and Participation of Insurance Carrier is a poor idea

The Fourth Circuit has provided a reminder for lawyers to obtain consent from its insurers when settling construction defect claims. Otherwise, you risk losing coverage for the claim, which will prevent recovery from the insurer of any settlement amount that you paid.

Gaylord National, LLC hired Perini/Tompkins Joint Venture (PT) in 2005 to serve as the construction manager for a $900 million hotel and convention center project at the National Harbor along the Potomac River in Maryland. Gaylord purchased WRAP insurance from ACE American Insurance Co. (ACE), which included commercial general liability (CGL) and excess liability policies which named PT as additional insured. The project also was insured by a builder’s risk policy.

During construction, a portion of an 18-story, 2,400 ton glass atrium collapsed, causing damage and delaying final completion. Shortly after completion, PT sued Gaylord to establish and enforce a mechanic’s lien and for breach of contract, claiming that Gaylord still owed it $79,656,098. PT reasoned that it’s damages stemmed from delays in furnishing design documents and changes to the original scope of work. Gaylord filed a counterclaim for negligence, warranty breaches and breach of contract.

The parties ultimately settled the dispute in November 2008, with Gaylord paying PT an additional $42,301,875, which was set off in favor of Gaylord in the amount of 26,157,912.

PT did not seek ACE’s consent prior to entering into the settlement agreement with Gaylord. Nevertheless, six months later, PT sent a letter to ACE, advising that, to the extent the builder’s risk policy did not cover the claim related to the glass atrium collapse, PT intended to seek reimbursement under the CGL and excess liability policies. The letter failed to mention the Gaylord counterclaim and set off, which was a large piece of the settlement.

Ten months later, ACE issued a reservation of rights letter, citing business risk exclusions, late notice, and voluntary payments made without ACE’s consent as possible grounds for coverage being denied.

PT thereafter sued in the U.S. District Court of Maryland for breach of contract, bad faith, and a declaratory judgment. After limited discovery, ACE filed a motion for summary judgment, arguing that PT had failed to obtain ACE’s consent prior to entering into the settlement with Gaylord, and that this failure breached the following clauses in the CGL policy:
Voluntary payment clause: “No insured will, except at that insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.”

— and —

No-action clause: “No person or organization has a right under this Coverage Part: … [t]o sue us on this Coverage Part unless all of its terms have been fully complied with. A person or organization may sue us to recover on an agreed settlement. … An agreed settlement means a settlement and release of liability signed by us, the insured and the claimant or the claimant’s legal representative.”

Such clauses are standard in CGL and excess liability policies and, from the perspective of an insurer, designed to protect it from indemnifying an insured for a collusive, overly generous, or unnecessary settlement. According to ACE, because PTJV failed to satisfy the “prior consent” conditions, it could not seek reimbursement for the monies paid to Gaylord.

PT countered that ACE could not deny liability coverage under Maryland law unless it established that the lack of notice resulted in actual prejudice to ACE.

The District Court agreed with ACE and granted its motion for summary judgment. On appeal, the Fourth Circuit affirmed that decision, analyzing the coverage issue under the laws of Maryland (where the project was built) and Tennessee (where the liability policies were made). Under Maryland law, the Fourth Circuit rejected PT’s prejudice argument, finding that prior consent conditions in the policy are a condition precedent. The no-action clause served to bar ACE from recovery due to failure to follow all terms of the CGL and excess liability policies and, moreover, that PT could not sue unless the settlement agreement was signed by ACE. The voluntary payment clause, in turn, required PT to get ACE’s consent.

CONCLUSION

The Fourth Circuit concluded that the prior consent provisions in the no-action and voluntary payment clauses were conditions precedent to coverage. Because PT did not obtain ACE’s consent prior to settling with Gaylord, Ace was excused from having to demonstrate prejudice.

The Court then took the opportunity to discuss prejudice. In particular, the Fourth Circuit found that an insurer is prejudiced if its insured unilaterally settles a claim without obtaining prior consent because (1) the insurer loses its right to investigate, defend, control, or settle the claim, and (2) the insurer would always have the nearly impossible burden of proving collusion or demonstrating, after the fact, the true value of the settled claim.

What strikes me as odd is the behavior of the insured. With such large sums involved it would seem logical that a policyholder would not gamble on its insurer indemnifying it on such a large claim. There might have been circumstances which would explain the seemingly careless behavior of the insured although the opinion does not cite any facts or testimony.

Best Practices and Construction Defect

Best Practices in Construction– What are Yours?

The following is reprinted from Craig Martin, Construction Attorney, Lamson Dugan & Murray, LLP. Best practices in construction management remain a key to eliminating subsequent CD liability.
Risks on Construction Projects

The latest Engineering News Record had an interesting article on Best Practices in Construction written by Deron Cowan of Zurich Services Corporation. In the articles, Mr. Cowan emphasizes the importance of best practices and the methodology to develop them.
As Mr. Cowan notes, best practices are intended to eliminate, reduce and manage risks and all construction companies should be fully engaged in correctly executing and accomplishing risk analysis to meet the demands of their practices.
Mr. Cowan sets forth the process to assess and implement risk management:
The problem situation must be identified and then analyzed.
When the analysis is complete, it leads to determining a potential solution.
The solution is then communicated and implemented to the workforce.
Follow-up on the best practice to determine whether it was beneficial.
By following a protocol to identify risks and best practices to avoid them, construction companies can reduce the probability and severity of accidents in the workplace.

OSHA changes injury, death reporting deadlines

WASHINGTON – The U.S. Department of Labor’s Occupational Safety and Health Administration today announced a final rule requiring employers to notify OSHA when an employee is killed on the job or suffers a work-related hospitalization, amputation or loss of an eye. The rule, which also updates the list of employers partially exempt from OSHA record-keeping requirements, will go into effect on Jan. 1, 2015, for workplaces under federal OSHA jurisdiction.

The announcement follows preliminary results from the Bureau of Labor Statistics’ 2013 National Census of Fatal Occupational Injuries*.

“Today, the Bureau of Labor Statistics reported that 4,405 workers were killed on the job in 2013. We can and must do more to keep America’s workers safe and healthy,” said U.S. Secretary of Labor Thomas E. Perez. “Workplace injuries and fatalities are absolutely preventable, and these new requirements will help OSHA focus its resources and hold employers accountable for preventing them.”

Under the revised rule, employers will be required to notify OSHA of work-related fatalities within eight hours, and work-related in-patient hospitalizations, amputations or losses of an eye within 24 hours. Previously, OSHA’s regulations required an employer to report only work-related fatalities and in-patient hospitalizations of three or more employees. Reporting single hospitalizations, amputations or loss of an eye was not required under the previous rule.

All employers covered by the Occupational Safety and Health Act, even those who are exempt from maintaining injury and illness records, are required to comply with OSHA’s new severe injury and illness reporting requirements. To assist employers in fulfilling these requirements, OSHA is developing a Web portal for employers to report incidents electronically, in addition to the phone reporting options.

“Hospitalizations and amputations are sentinel events, indicating that serious hazards are likely to be present at a workplace and that an intervention is warranted to protect the other workers at the establishment,” said Dr. David Michaels, assistant secretary of labor for occupational safety and health.

In addition to the new reporting requirements, OSHA has also updated the list of industries that, due to relatively low occupational injury and illness rates, are exempt from the requirement to routinely keep injury and illness records. The previous list of exempt industries was based on the old Standard Industrial Classification system and the new rule uses the North American Industry Classification System to classify establishments by industry. The new list is based on updated injury and illness data from the Bureau of Labor Statistics. The new rule maintains the exemption for any employer with 10 or fewer employees, regardless of their industry classification, from the requirement to routinely keep records of worker injuries and illnesses.

For more information about the new rule, visit OSHA’s website at http://www.osha.gov/recordkeeping2014.

South Carolina Supreme Court Upholds Court of Appeals Bar Using “Your Work” and Product Replacement Exclusions to Deny Subcontractor Recovery

In Precision Walls, Inc. v. Liberty Mutual Fire Insurance Co., No. 2013-000787 (S.C. Ct. App. July 23, 2014), the general contractor contracted with Precision for the installation of exterior insulation board. Precision, being an approved applicator sold the installation board in question. After Precision completed its work, a masonry subcontractor began construction of the brick veneer wall which came into contact with the Precision product. The joint sealing tape installed by Precision began to come loose due to contact with the masonry contractor’s work product. Full repair could only be accomplished via the removal of brick as it now obstructed Precision’s work. The general contractor deducted the cost of tearing down and rebuilding the brick veneer wall from Precision’s contract. Precision sought reimbursement for this amount from its CGL policy issued by Liberty Mutual. Liberty Mutual denied coverage and Precision filed a declaratory judgment action. The trial court entered judgment for Liberty Mutual determining that the amount sought by Precision failed the “occurrence” requirement of the initial two pronged coverage analysis. The trial court also cited the “your work” exclusion. The Court of Appeals affirmed.

The opinion at issue today is the Supreme Court’s ruling, which affirmed and held that all of the damages fell within the “your work” exclusion. The court largely ignores the “occurrence” aspect of the case, yet ruled further “the defective tape, and all costs associated with its replacement, fall squarely within the exclusion.” The exclusion referenced is “your work”, and I have attached the opinion for further review.

Link http://sccourts.org/opinions/HTMLFiles/COA/5250.pdf