You may have recently heard that on December 11, 2013, the California Supreme Court denied the builder’s Petition for Review of the published decision in Liberty Mutual Insurance Co. v. Brookfield Crystal Cove LLC, 163 Cal. Rptr. 3d 600, Cal. App. 4th 98 (2013). For builders and contractors, this is very frustrating news and undermines the possibility of certainty that was sought in the sb800 legislation regarding the statute of limitations and potential damages recoverable after what had been specified periods of time negotiated between the plaintiffs’ bar and defense/builders’ bar resulting from the California Supreme Court’s ruling in Aas v. Superior Court of San Diego County, 101 Cal. Rptr. 2d 718, 24 Cal. 4th 627 (2000) (upholding the economic loss rule in residential construction defect claims). The immediate impact of the Supreme Court rejection to hear the Brookfield Petition is at least twofold: 1) lack of certainty for builders and contractors regarding the statute of limitations, and defect standards, applicable in a residential construction defect case; and 2) anticipated increases in premiums for builders’ and contractors’ insurance policies, ultimately resulting in fewer homes built and higher costs to homebuyers.
Briefly, one could trace in the 10 years following sb800 that builders, owners, and even the vast majority of their counsel, along with California trial courts, had followed the plain language in sb800: it was the only grounds for claims for residential construction defects, unless permitted by the statute itself, thereby precluding previously routine common-law tort claims such as strict liability and negligence. The statutory scheme also set specific periods for the end of liability under many standards set forth in the statute, graduating for example from one year (noise), and four years (steel fencing), to 10 years (structural), with goal-oriented defect standards applicable to the most commonly made defect claims. Consistent with that plain language reading of sb800, builders and contractors had planned their work and business certainty around the statute’s internal repose periods, and insurers had returned to the market after fleeing from California in the early 2000s. Liberty Mutual upended that certainty, and the California Supreme Court’s rejection of the Petition for Review has currently closed the door on what will be an ongoing conflict among insurers, builders, contractors, and homebuyers over the applicability of the decision beyond the Fourth District. The ramifications have yet to be felt, including: What is the statute of limitations where there is damage resulting from a latent defect? What is the defect standard that applies to such a tort claim that is no longer precluded by the statute? Does the tort claim have to be brought under the statute at all, including the pre-claim procedures? Can builders protect against the decision by expressly limiting their liability to contract claims that comply with at least the statutory periods and standards? With a broader exposure to be insured against, what will be the impact on the premium rates in this struggling building economy?
Yet, despite the uncertainty – except that litigation will follow and increase along with insurance rates and home buyer’s costs – one objective is clear: reasonable, thorough, and proactive risk management from project inception through course of construction and warranty remains the most cost-effective way to mitigate the losses that will increase from this ruling.