California Court of Appeal Opens the Door for Construction Defect Claims Outside of SB800

On August 28, the California Court of Appeal ruled that SB800 (Civil Code sections 895 through 945.5, the "Right to Repair Act") is not the only remedy for construction defect claims even when those claims fall within the scope of the Act; therefore, the requirements of the Right to Repair Act do not apply to claims brought under common law. In Liberty Mutual Insurance Company v. Brookfield Crystal Cove, LLC, the defect claim was brought after the expiration of the applicable statute of limitations under the Right to Repair Act. The court did not deny that the claim fell within the auspices of the Right to Repair Act, but it concluded that the Act does not "establish exclusive remedies for claims for actual damages for construction defects". Although time-barred by SB800, the plaintiff's claim in Liberty Mutual is still valid under common law.

Background

In 2004, homeowner Eric Hart purchased a single-family home from home developer Brookfield Crystal Cove LLC ("Brookfield"). In 2008, a fire sprinkler pipe burst and flooded Hart’s home. Brookfield agreed to pay for repairs and remediation while Liberty Mutual, Hart’s homeowners insurance carrier, paid for Hart’s relocation expenses and interim housing. In 2011, Liberty Mutual filed a complaint against Brookfield seeking reimbursement. Standing in the shoes of its insured, Liberty Mutual brought a subrogation claim after the applicable statute of limitations under the Right to Repair Act had expired.

By its terms, the Right to Repair Act applies to any action, which seeks to recover damages arising out of, or related to construction deficiencies in new residential units that are sold after January 1, 2003. The Act sets forth 45 different standards of construction in seven categories and specifies different statutes of limitations ranging from one year to ten years. The statute of limitations for plumbing systems is four years from the close of escrow date of the property.

The Court’s Reasoning in Liberty Mutual

In Liberty Mutual, Hart's new residential unit closed escrow in late 2004, and the insurer's action was filed seven years after the close of escrow in 2011. Attached to the insured's purchase and sale agreement was an addendum, which informed him of the applicability of SB800 provisions to his new property. In opposing Brookfield’s demurrer, Liberty Mutual argued that the violation of SB800 standards is just one of many construction defect causes of action available to homeowners, and common law construction defect claims are not subject to the requirements of SB800.

In rendering its decision, the court focused on the legislative intent of SB800, which it concluded was to permit homeowners to bring a claim under SB800 when no resulting damage or injury had yet occurred. The court specifically addressed Aas v. Superior Court, a 2000 decision from the California Supreme Court, where the court found that construction defects that had not resulted in actual property damage were not actionable in tort. The court in Liberty Mutual concluded that the legislature intended to abrogate the holding as in Aas by passing the Right to Repair Act. The court reasoned that by providing homeowners with a remedy for defects that have not yet caused damage, the legislature did not intend to supplant existing common law remedies for those defects that had already resulted in actual damage.

According to the Legislative Counsel's Digest, SB800 was enacted to "specify the rights and requirements of a homeowner to bring an action for construction defects" (Legis. Counsel's Dig., Sen. Bill No 800 (2001-2002 Reg. Sess.). Brookfield and amicus supporters also pointed to the plain text of the statute in arguing that, for homes that fall within SB800, the claimant's causes of action are to be limited to violations of the standards set forth in SB800. The court was not persuaded, citing the continued existence of sections 337.1 and 337.15 (governing statutes of limitations for construction defect claims at common law) as evidence that the legislature did not intend to make SB800 the exclusive remedy for construction defects.

Implications for the Development Industry

The Liberty Mutual decision has the potential to make a substantial impact on the residential construction industry. California is already a hotbed for construction defect litigation. Many of the construction projects completed during the last real estate boom have already been through or are currently facing the SB800 process. If developers, general contractors, subcontractors and design professionals cannot rely on the statutes of limitation set forth in SB800, uncertainty in the development community regarding what statutes of limitations apply to which construction defect claims may affect future development and may leave those parties vulnerable to litigation for past projects. Allen Matkins will continue to follow this case and advise its clients about how this decision may affect past, current or future projects.