Building On a Rebound | PropertyCasualty360

The following article discusses a resurgent construction industry and the nuances which create more liability for injuries on job sites and defect centered litigation. It seems natural that an increase in construction might lead to an increase in litigation, although this article discusses those not so obvious factors which serve as catalysts for litigation. Building On a Rebound | PropertyCasualty360.

Modified Comparative Fault and Construction Defect Litigation – The End of Joint and Several Liability?

As many readers already know, South Carolina adopted a modified comparative fault theory as an approach to apportioning damages in which more than one party has contributed to the damages beng sought by a claimant.   A plaintiff in South Carolina may recover only if his/her negligence does not exceed that of the defendant’s and amount of plaintiff’s recovery shall be reduced in proportion to amount of his or her negligence; if there is more than one defendant, plaintiff’s negligence shall be compared to combined negligence of all defendants. Nelson v. Concrete Supply Co., 303 S.C. 243, 399 S.E.2d 783 (1991).

In 2005, the South Carolina legislature took matters further when joint and several liability was addressed in the context of the comparative fault logic set forth in Nelson. For all construction projects reaching substantial completion before July 1, 2005, a pro-rata theory of liability with the possibility of joint and several treatment of any defendant named. 

The South Carolina legislature included the language affecting joint and several liability in an overal “Tort Reform” act which became affective in 2005.  In the multiple party, construction defect scenario we are all used to seeing, the South Carolina Construction Defense Blog asks the question, “when, if ever, will a situation arise in which a party is found jointly and severally liable?”  In short, joint and several treatment is unlikely in most case scenarios due to a party having to be more than 50% of the aggregate fault leading to or causing damages.  Specifically, in an action to recover damages resulting from personal injury, wrongful death, or damage to property………….  if indivisible damages are determined to be proximately caused by more than one defendant, joint and several liability does not apply to any defendant whose conduct is determined to be less than 50% of the total fault for the indivisible damages as compared with the total of: (i) the fault of all the defendants; and (ii) the fault (comparative negligence), if any, of the plaintiff. A defendant whose conduct is determined to be less than 50% of the total fault shall only be liable for that percentage of the indivisible damages determined by the jury or trier of fact. A defendant shall retain the right to assert that another potential tortfeasor, whether or not a party, contributed to the alleged injury or damages and/or may be liable for any or all of the damages alleged by any other party.

Significantly, these provisions do not apply to a defendant whose conduct is determined to be wilful, wanton, reckless, grossly negligent, or intentional.  In the context of construction defect claims, most settlements are funded via CGL policies of insurance that include exclusions for such reckless or intentional conduct.

Take the following scenario in which Mr. and Mrs. Abraham file suit against Birmingham Builders (GC), Conneticut Composite Siding (Exterior Siding Sub), Washington Window and Truss (Window Installation and Framer), as well as the manufacturers of both products installed by subs Connecticut and Washington.

Assume that Birmingham Builders took full control of all site supervision while altering the architectural plans to incorporate a less expensive truss system.  Further, it is shown that Birmingham failed to purchase the specified window product, opting for a cheaper model which has been deemed incongruent with the siding material.  At all times subcontractors followed explicit instructions of Birmingham Builders which were typically provided in the form of field directives from a rookie superintendent. 

Three years after construction, suit is filed for latent defects including water intrusion caused by Birmingham’s improper sequencing of trades, purchase of non-conforming materials, and improper supervision.  As the subcontractors are bound by an implied warranty of service, these parties are not able to secure a release or dismissal as there are issues of fact which limit the power derived from summary judgment.

In the situation described above, a well-founded argument could be made supporting the fact that the general contractor was the cause in fact of all injuries to property which are the subject of this claim.  After all, the materials suffered due to cost cutting, instructions and supervision were either lacking or provided incorrectly, and these issues were part and parcel of each of the Plaintiffs’ causes of action.

A jury instruction on the issue would ask fault to be assigned on a proportionate basis so long as the causes of action seek damages which are “indivisible” such as a concentration of water intrusion which has manifested around the intersection of window units and composite siding.  An argument would be made that, despite the general contractor’s clear disregard for the plans and standard procedure, Conneticut Composite Siding (Exterior Siding Sub), Washington Window and Truss (Window Installation and Framer), as well as the manufacturers of both products would be considered with the general contractor as “indivisible units” which contributed to the damage.

As we have five tortfeasors in the situation described, a jury need only find the two subcontractors to have each contributed 15% of the indivisible damage.  Further, the manufacturers specifications might be remotely criticised, along with the architect’s failure to set forth specific instructions regarding installation sequencing (even though the design professional did not contract to provide more than was provided, nor was his architectural firm allowed onsite) which is determined to have contributed to another 15% of the indivisible damages.  At this point, we have 45% allocated to the subs and architect, thus having yet considered any fault in the manufacture or sale of the windows and siding materials.

Drawing the logical conclusion that it will be difficult to show a tired and understandibly bored jury that the product manufacturers were not negligent, the final allocation is provided as follows:

Jury Verdict for the Plaintiff ($400,000)

Framing Sub:  (15%) or $60,000

Siding Sub:  (15%) or $60,000

Architect (15%) although not a party to suit.

Window Manufacturer (5%) or $20,000

Siding Manufacturer (5%) or $20,000

This allocation leaves only 45% allocated to the general contractor, which results in a $180,000 verdict against the general contractor.  While this amount is larger than any other defendant, the contribution is less than the combined sum of all other defendants who, arguably, acted as reasonably prudent and similarly situated actors would under the circumstances.

Is this fair and equitable?  Maybe not.  Does it ensure that a claimant will receive some relief regardless of the solvency or insurance status of the general contractor?  Absolutely.  Was the pro-rata system one which resulted in a more just result?  Absolutely not as a general contractor in such circumstances could be treated as a percentage contributor equal to each of the defendants which the general contractor, arguably, caused to be involved in the suit.

Homeowner’s Insurance Does Not Cover Defective Construction

The Sixth Circuit Court of Appeals ruled that an insurer was not obligated to pay for water damages to a condominium building because the insurance policy specifically excluded coverage for damages caused or resulting from building construction and design defects. TMW Enterprises, Inc. v. Federal Ins. Co., No. 09-1542, (6th Cir. Aug, 25, 2010). Substandard construction on an exterior wall allowed the water intrusion which resulted in damages of $4 million.

“In no case will we entertain any loss or claim that occurred or was in progress prior to the policy period inceptiondate or after the policy period expiry date shown on the Declarations.” This, and other similar language is common in policies as it implies that defective construction occurs prior to completion. While this language is in the insuring agreement, the clause discussed in the TMW case was a specific exclusion which related to substandard construction.

Lender Liability for Construction Defects after the Sale of a Bank Owned, Foreclosed Property.

Distressed assets are certainly not uncommon to lending institutions during this turbulent economic climate. Lenders are in a very precarious position when selling “new” homes that have become bank owned assets after the foreclosing bank takes title to new homes built by defaulting contractors. At the South Carolina Construction Defect Blog we are going to examine lender liability in light of South Carolina’s Warranty of Habitability laws which place a responsibility on the seller of a new home.
While a foreclosing lender is not a developer or contractor, South Carolina treats banks in the same fashion as there is no distinction as a bank that sells a lender-owned home is still potentially liable to the home’s eventual buyer. In Kirkman v. Parex, Inc., 632 S.E.2d 854 (S.C. 2006), the lender took title to a recently constructed “spec” home after the builder defaulted. The lender took title and retained a finish contractor to perform about $40,000 worth of touch up work while the home was in its REO portfolio. The lender sold the home for $232,900 to the homeowner Plaintiffs who later sued the bank and others as the home was negligently constructed.
Even though the lender sold the home pursuant to an “as-is” provision in the deed, the lender was not able to escape liability. The homeowners sued the lenders several years later for breach of the implied warranty of habitability due to defects which were the result of the stucco application. The Supreme Court reversed lower courts and stated that the implied warranty of habitability arises upon the sale of a new home, irrespective of fault on the part of the seller of the home. Under the doctrine of caveat venditor, the seller of a new house impliedly warrants the habitability of the house. Arvai v. Shaw, 289 S.C. 161, 345 S.E.2d 715 (1986) (holding that the warranty is implied only in the initial sale, not in a resale); Lane v. Trenholm Bldg. Co., 267 S.C. 497, 503, 229 S.E.2d 728, 730-31 (1976) (holding that, generally, the warranty is made by the seller even if he did not build the house); …. The seller’s “liability is not founded upon fault, but because it has profited by receiving a fair price and, as between it and an innocent purchaser, the innocent purchaser should be protected from latent defects.” Lane, 267 S.C. at 503, 229 S.E.2d at 731. “[T]he warranty springs from the sale. The determining factor is not whether the defendant actually builds the defective house, but that he places it, by the initial sale, into the stream of commerce.” Kirkland at 482-483. Persistent, the lender claimed that it should not have any liability because it effectively disclaimed liability by including an “as-is” clause in the deed. The Supreme Court ruled that an “as-is” clause is not valid unless the seller meets strict standards including specifically negotiating with the buyer to accept the home without a warranty. Kirkland at 485.
Lenders do have a source of protection which might be the real nugget which can be gleaned from the Kirkman case. The opinion, while finding for the owner despite an “as-is” clause found that the implied warranty can be disclaimed and all banking institutions need to heed the case’s impromptu instructions which are buried at the end of the opinion. A disclaimer is only permitted if it is “(1) conspicuous, (2) known to the buyer, and (3) specifically bargained for.”
While providing a high threshold of protection to the homeowner, Kirkman also provides a road map for risk management to lenders. My assessment is that a bank can steer clear of liability so long as it reduces the price, or possibly provides other concessions in exchange for the buyer making a knowing waiver of its rights to the warranty.