Chapter 16 - Third Party Claims
Summary:
Death or injury to construction workers on the job result in civil lawsuits and claims for Workers’ Compensation. In addition, third-party claims, indemnity and insurance issues for the general contractor or owner are explained. Equipment and product failure as a form of strict liability are also discussed, in addition to claims for construction defects. A list of typically claimed defects is provided. Also included in this chapter are the issues of liability for grading and subsurface defects and allegations of nuisance and trespass, as well as insurance coverage and reservation of rights.
A construction site is tragically the most dangerous workplace in the United States. More than 1,200 U.S. construction workers die each year on the job. Another 900 workers die in construction zone accidents. These deaths and injuries have an horrendous impact on workers’ families. Yet, they are almost always preventable. They result in soaring industry workers’ compensation premiums that drive small subcontractors out of the trades. These accidents are a huge tragedy and exact a sad toll on the workers in the industry and their families. These accidents ultimately cause delays and drive up the cost of construction.
Furthermore, death, injury and property damage claims result in often catastrophic third party lawsuits brought by the owner's or subcontractors’ employees or even members of the general public. Third-party injury and property claims must be properly handled or they can be financially lethal to long existing firms and their principals.
§ 16.1 Construction Accidents
Injury or death of construction workers is a serious problem in the industry. Due to the young age and relatively high pay of these workers, injury and death claims can be financially devastating. The severity of this problem in California has been uniquely threatening, as described below.
§ 16.1.1 Workers’ Compensation
Under the California Labor Code, the injured worker is entitled to workers’ compensation benefits associated with any workplace injury, so long as it was incurred during the course of employment. Labor Code § 3700, et seq. In addition, this remedy, which is required by law to be afforded by employers, is intended to be the exclusive remedy against the employer, except in extreme circumstances (physical attack by a supervisor, etc.).
§ 16.1.2 Third-Party Lawsuits
However, due to the multi-employer nature of the construction industry, there are almost always other employers, such as the general contractor, subcontractors, vendors, and, of course, the owner, that the injured employee is free to sue. Generally, the employee will argue that those other companies, and their employees, caused or contributed to his or her injury. Claims of negligence or strict liability against these entities result in numerous parties being brought into the lawsuit.
A few property damage claims are of the nuisance variety. One example is the classic “paint over spray” cases that involve third-party commuter cars parked adjacent to the jobsite. One case reportedly resulted in more alleged claims than spaces in the parking lot. Even without fraud, dust, paint and rock cases can be expensive on prolonged jobs.
§ 16.1.3 Indemnity and Insurance Issues
Once the owner, general contractor or other defendants are brought into the suit, they will typically tender defense and indemnity of the suit to the employer of the injured worker. Generally, that will be a lower-tier subcontractor, since most workers are so employed. Those lower-tier employers generally have indemnified the owner and general contractor, as well as the architect and others, against just this type of suit. In addition, their insurance companies often are required to add the owner, general contractor, and others to their insurance policies as additional insureds.
As a result, the lower-tier subcontractor is often denied the benefit of the workers’ compensation exclusive remedy statute. When the liability insurance and umbrella of the subcontractor is exhausted, the other parties must respond in damages and the subcontractor may be forced to find refuge in the bankruptcy courts. It is a risky situation for these subcontractors, and yet another reason to assure jobsite safety at all costs. In general, an indemnitee’s right to contractual indemnity is an issue for the trial court.
§ 16.1.4 Products Liability Issues
Other jobsite accidents may involve construction equipment or manufactured products. These cases are very much affected by the fact that products liability is considered a form of strict liability. There need not be fault. Under current law, a product may be defective in manufacture or in design. There are two tests for design defects: the first is that a design that is simply defective in that it does not work, and the second is that once some aspect of the design is found to be contributory to the accident, the burden of proof shifts to the manufacturer to prove that the design was reasonable. In addition, the failure to warn can be found to be a design defect. Thus, the lack of a simple warning can result in strict liability.
§ 16.2 Construction Defects
§ 16.2.1 Prevalence in Residential Construction
As mentioned previously, construction defects litigation is a growth industry in California. The legal theory used against each defendant will depend on the nature of the defendant’s involvement in the project. It is mentioned here because: 1) there are many construction defect lawsuits including public works and 2) virtually all of the legislation and published decisions deal with residential defects. This is partly due to the fact that many public works cases are arbitrated and there is no readily available published record of those decisions.
The architect/engineer and contractor will most often be sued for professional negligence and ordinary negligence, respectively. In addition, the general contractor and subcontractors will be sued for breach of warranty, express and implied, and for breach of contract, as well as the occasional fraud or misrepresentation allegation.
§ 16.2.2 Typical Defects Claims
One industry source cites the following as typical types of defects claims on residential, commercial and public improvements:
• The action of consolidating or expanding soils
• Inadequate soils testing
• Failure to meet code requirements
• Inadequate ADA Compliance
• Extreme topographic conditions
• Inadequate site preparation
• Improper foundation design for soils or topography
• Unsatisfactory placement of backfill
• Poor finish grade and drainage
• Poor landscaping techniques
• Improper tree and plant selection
• Incorrectly designed and installed water protection
• Poor moisture barriers and flashing
• Framing errors, especially seismic bracing
• Improper nailing patterns
• Inappropriate or inferior materials
• Failure to follow manufacturer installation requirements
• Poor workmanship - inexperienced tradesmen
• Insufficient monitoring by superintendent
• Lack of adequate testing or quality assurance
• Lack of risk management effort
• Failure to properly document condition of property
• Poor punch list and repair responsiveness
§ 16.2.3 Strict Liability for Mass Graded Lots & Tract Housing
The developer of mass graded lots can also be sued for strict liability. Kriegler v. Eichler Homes, Inc. (1969) 269 Cal.App.2d 224. In addition, that liability extends to strict liability for defective subsurface conditions resulting from improper filling and grading. Avner v. Longridge Estates (1969) 272 Cal.App.2d 607. Where the problem is continuing, allegations of nuisance and trespass are regularly pursued.
§ 16.2.4 Insurance Coverage Issues
As discussed in Chapter 10, construction defects claims raise very technical and difficult coverage issues. The existence or lack of insurance coverage, or even a defense, is often referred to as the life’s blood of the litigation process. The classic insurance policy language regarding coverage is along these lines: “We (the insurance company) will pay those sums that the insured becomes legally obligated to pay as damages because of ... ‘property damage’ ... which occurs during the policy period ... caused by an occurrence.”
Insurance carriers often attempt to deny construction defects claims stating there was not personal injury or property damage, that there was no “occurrence,” or that there is no coverage for purely economic losses.
In addition, the carriers generally allege that the policies do not cover purely contractual or warranty issues, or the product or workmanship of the insured. Each policy and each claim is unique. A thorough policy analysis can often persuade an insurance carrier that, in fact, the loss is covered. Also, the duty to defend is broader than the duty to pay the claim.
Beware of the insurance company that provides a defense, under a reservation of rights, then asks for reimbursement after the fact for defense costs. Always press the insurance company for a commitment not to seek reimbursement, even if you must agree that the issue of coverage of the ultimate claim is not yet resolved. Otherwise, the insured and insurance company will be adversarial, and highly distrustful of each other through the entire proceeding. Construction insurance coverage for defects is a highly technical area. These are just a few of the issues that are regularly litigated in the so-called “case within a case” of insurance coverage litigation.
§ 16.2.5 Residential Construction Defects
Construction defect litigation has been a cottage industry in California for many decades. A controversial Supreme Court decision, abruptly halted much of that litigation by stating that a defect must cause actual damage to be actionable, Aas v. Superior Court (2000) 24 Cal.4th 627. In response, the legislature attempted to fashion a compromise where building standards were made statutory and specific types of defects would be subject to special procedures. it is often referred to as a “right to repair” law, also discussed supra. A central purpose of these procedures is to allow an orderly process for repair of know defects and avoid prolonged litigation.
After January 1, 2003, California residential homebuilders and owners have been subject to legislation contained in Senate Bill 800 (Burton), as well as subsequent legislation regarding construction defects. These provisions are now part of Civil Code § 43.99 (Immunity of Plan Checkers and Building Inspectors), §§ 895 to 945.5, § 6000 (common interest developments), and other statutory provisions.
There is nothing that indicates these complex rules would not apply to public private partnerships (P3) or mixed use developments where private owners will purchase residences after a public/private project. In general, these rules will affect these aspects of the sale of housing and the repair of construction defects.
The Right to Repair Act highlights the following:
• Any action against a builder, subcontractor, individual product manufacturer, or design professional, seeking recovery of damages arising out of, or related to deficiencies in, residential construction, design, specifications, surveying, planning, supervision, testing, or observation of construction shall be governed by detailed standards set forth in the bill relating to the various functions and components of the building;
• Provide for a ten-year outside statute of limitations for construction defect actions, with certain limited exceptions;
• Provides for shorter limitations periods for specific systems (e.g. electrical, hardscape, noise, irrigation, posts, fences, and paint; See Civil Code § 896);
• Require builders to provide homeowners with a minimum one year express warranty covering the fit and finish of certain building components;
• The bill also allows builders to provide homeowners with express warranties that offer greater protections than the standards set forth in the bill; and
• Establish a mandatory procedure prior to the filing of a construction defects lawsuit. This procedure would provide the builder with a right to attempt a repair of the defect prior to litigation, inspections and exchanges of documentation under certain circumstances, and mediation at various points, all pursuant to various timeframes set forth in the bill. The bill also provides that if the builder fails to follow any of the procedures, the homeowner is entitled to proceed with the filing of an action.
• Set forth statutory affirmative defenses, under the principles of comparative fault, for:
a. Unforeseen acts of nature in excess of the design criteria expressed by the applicable building codes;
b. A homeowner’s unreasonable failure to minimize or prevent damages;
c. A homeowner’s, or his/her agent’s or employee’s, failure to follow recommended or commonly accepted maintenance obligations;
d. Defects caused by the alterations, ordinary wear and tear, misuse, abuse, or neglect;
e. Defects barred by the statute of limitations;
f. Defects subject to a valid release; and
g. The extent that a builder’s repair was successful in correcting the defect.
These Homeowner’s Rights and Developer’s Disclosure Responsibilities are further codified by this legislation, the purpose of which is to encourage further development of safe and affordable housing in California.
§16.3 Americans with Disabilities Act
One of the major developments in the past thirty years has been litigation over the Americans with Disabilities Act. After being signed by George Bush (41) on July 26, 1990, the Act has been a major force in upgrading the design, construction and retrofit of public and private buildings and pathways so they are accessible to disabled persons. In California, we also have Civil Code §§ 54-55.56.
While an exhaustive coverage of this subject is beyond the scope of this book, it is important to realize that public and private infrastructure projects are subject to the requirements of the Americans with Disabilities Act, as well as bearing liability for failure to comply. While not admitting liability, CalTrans agreed to a settlement on June 6, 2010 where it agreed to expend $1.1 billion over ten years to achieve ADA compliance. (Source: CalTrans ADA Infrastructure Program, Srikanth N. Balasubramanian.)