We have seen an influx of condominium construction defect claims in the Pasadena and Downtown Los Angeles area. Many of the condominium projects in these areas were built by inexperienced, underfunded, and underinsured builders. These builders tend to distribute profits to their members and dissolve immediately after the condominium projects are completed. As a result, the property owners should assert any construction defects claims that they have without delay because there are statutes that restrict the time within which the profit distributions can be recovered. For example, the time to set aside the profit distribution to the members of an LLC is limited to four years after its dissolution. Because these builders are often times underinsured, setting aside their profit distributions becomes an important part of obtaining a successful construction defect recovery.
Michael Hearn has just resolved a large construction defect claim for a 16 unit luxury condominium association in Vail, Colorado. The precise dollar figure of the settlement is confidential, however, it was resolved in excess of seven figures. The association is very happy with the result as they have recovered enough money to make the necessary repairs, and avoid special repair assessments.
Cell phone usage is growingly rapidly, and so is the need for cell phone transmission equipment sites. If a cell phone service provider wants to lease your client’s property, make sure the lease contains the following: 1) escalating rent revenues as services or usage of the transmission equipment escalates, 2) the lease specifically states that it is a “lease” and not an “easement” within the text of the lease, 3) indemnification of the property owner for all claims associated with the transmission equipment usage, 4) property owner is named as an additional insured on the cell phone service provider’s insurance policy, 5) lease requires the permission of the property owner before any upgrades or additional equipment installations are made, and 6) make sure the lease clearly demonstrates with a picture or proposed set of plans what the installed equipment will look like and how it will impact your client’s property.
Do not hire unlicensed contractors. If you do, and they get hurt on your property, you will be liable for all injuries. California Labor Code 2750.5 states that a person that hires another person to perform any work that requires a contractor’s license, is responsible for any injuries sustained by that person if he does not possess said license. In essence, the person that hires the unlicensed contractor become the employer of the unlicensed worker and his co-workers, and are therefore liable for their on the job injuries. Even landscapers have licensing requirements. Unfortunately, the days of hiring your friendly neighborhood handyman are long gone.
In Liberty Mutual Insurance Company v. Brookfield Crystal Cove LLC the California Court of Appeal (the “Court”) just held that The Right to Repair Act is not the sole means of recovery for construction defect claims against a builder. If you are unfamiliar with The Right to Repair Act, it was enacted in 2003 and was believed by many to require property owners to provide the builder with a detailed notice of claim and allow the builder an opportunity to inspect and repair before the property owners could proceed to court with a construction defect claim. The Right to Repair Act is a great way to resolve minor or cosmetic construction defect issues but, is not typically an efficient means of addressing significant construction defect issues. The Right to Repair Act often times causes long delays in resolving significant construction defect issues because the builders are unwilling to pay out of pocket to make the repairs and need the property owners to file a lawsuit against the builders to trigger their insurance coverage to pay for said repairs.
The Liberty Mutual Insurance Company case involved an insurance company that paid a fire sprinkler leak claim on behalf of its insured and then sought to recover this money from the insured’s builder by suing it for negligent construction in the superior court (subrogation action). The builder challenged the lawsuit on the grounds that the claim was barred by The Right to Repair Act. The Court of Appeal rejected the builder’s argument and held that The Right to Repair Act did not intend to eliminate a property owner’s right to assert negligence or strict liability claims against a builder for actual damage. The Court of Appeal held that The Right to Repair Act was intended to create an alternative method of addressing construction defect claims against the builder for defects that were not causing damages. Since the Liberty Mutual Insurance Company decision, property owners with actual damages to improvements may now file negligent construction and strict product liability claims against builders and avoid the claims process required by The Right to Repair Act.
In our opinion, this may provide for a more efficient resolution of significant construction defect issues because lawsuits can be filed without having to first participate in the time consuming claims process. This may also lead to higher recoveries for property owners, since they will not be limited by the construction defect recovery standards set forth in The Right to Repair Act. If you have any questions regarding this new case law, please do not hesitate to contact us.
LAW OFFICE OF MICHAEL A. HEARN WILL BE AT THE CACM 22ND ANNUAL STATEWIDE EXPO AND CONFERENCE AT THE DISNEYLAND HOTEL ON JULY 25 & 26.July 16th, 2013
Michael Hearn and Robert A. von Esch IV will be at the Law Office of Michael A. Hearn booth in the exhibiting area on July 25 and 26. We hope to see you there. Please stop by and say “hi” and pick up some Mrs. Fields cookies. Mr. Hearn and Mr. von Esch will also be introducing the speakers at the July 25 2:15 session “Legal Roundtable” and the July 26, 9:00am session “Making Money in BK.”
Michael Hearn has been selected as a Superlawyer for 2013, and has been consistently selected as a Superlawyer since 2009. Robert A. von Esch IV, a Junior Partner at the Law Office of Michael A. Hearn, has been selected as a Superlawyer “Rising Star” for 2013. This designation is set aside for the top attorneys in the State.
LEGAL UPDATE FOR OFFICERS OF PROPERTY MANAGEMENT FIRMS: CORPORATE OFFICERS ARE NOT PROTECTED BY THE BUSINESS JUDGMENT RULEJuly 16th, 2013
The Business Judgment Rule (Rule) is a major protection for members of a board of directors. The Rule protects board members for decisions that are reasonable exercises of business judgment, and whose actions are not an express violation of law, and whose actions are discretionary in nature. The Rule protects board members from lawsuits asserted against them by third parties claiming that their actions or decisions were negligent or otherwise wrongful. This is a powerful defense. However, its application is misunderstood.
The Rule is often thought of as a defense to protect both members of the board of directors and officers of a corporate entity. However, this rule does not apply to officers (CEO, President, Vice President, etc.) of a corporate entity. Gaillard v. Natomas Co., 208 Cal. App. 3d 1250 (1989). It only protects the members of the board of directors of a corporate entity. California Corporations Code Section 309. This distinction is often overlooked by members of the board, officers, directors, and their attorneys.
As such, if you are working with officers of a corporation, they may want to make sure that their articles of incorporation or operating agreement require the corporate entity to indemnify them for negligent discretionary business decisions. They may also want to consider the purchase of Directors & Officers Insurance Coverage for protection against third party claims.
All too often an association hires the contractor that submitted the lowest bid. This is not always the prudent choice. Sometimes the lowest priced contractors are working for less than their competitors because they do not have the same quality of insurance as the higher priced contractor.
A majority of the contractors have liability insurance and can present a certificate of insurance, demonstrating limits of $1,000,000 or more. However, the association should also ask the contractor to demonstrate that his liability insurance covers condominium, multi-family, and apartment projects. The association should also ask the contractor to demonstrate that his liability insurance covers completed operations, so the insurance is still applicable for years after the work is completed. These forms of coverage cost more than the standard liability insurance policy, which may require the contractor to charge more than a competitor that does not have this coverage.
The above referenced insurance coverage is very important. If there is a problem with the work performed by the contractor, and the contractor refuses to fix or cannot fix the problem, the association may need to file a claim against the contractor. In many cases, the association is surprised when the contractor’s insurance carrier denies the claim based upon a condominium, multi-family, and apartments and/or completed operations exclusion. The association is further surprised when they discover that the contractor does not have assets. If there is no coverage and no assets to recover from the contractor, the association may be faced with a special assessment to correct the defective work.
This is a situation that may be avoided with some simple due diligence before the contractor is hired. Ask the contractor for proof of condominium, multi-family, and apartment coverage, as well as completed operations coverage. If the contractor does not have this coverage, the association may be taking a risk in hiring him. Also, do not let the contractor tell you not to worry about this coverage because he has a bond. Most contractor bonds only cover up to $12,500 worth of damage.
In Beacon Residential Community Association v. Skidmore, Owings & Merrill LLP et al, the California Court of Appeal recently held that an association can sue an architect and engineer (hereinafter referred to as “design professionals”) as a direct defendant in a construction defect lawsuit. Prior to the Beacon decision, it was a common belief that an association (or any property owner) could not directly sue a design professional in a construction defect because typically the association did not hire the design professional (the developer hired the design professional). As a result, there was no duty of care owed by the design professional to the association. In fact, the trial Court in the Beacon case sustained the design professional’s demurrer to the construction defect claims asserted by the association (based upon this common understanding).
The Court of Appeal reversed and held that design professionals do owe residential property owners (including associations) a duty of care because SB 800 (Civil Code Section 896 et seq) specifically states that “in any action seeking recovery of damages arising out of, or related to deficiencies in, the residential construction design, specifications,….a builder…a general contractor, subcontractor….or design professional shall….be liable for violations of…..[the building standards set forth in SB 800].” The Court of Appeal further held that “the plain language of SB 800 provides that a design professional who “as the result of a negligent act or omission” causes, in whole or in part, a violation of the standards set for in [Civil Code 896 et seq] for residential housing may be liable to the ultimate purchasers for damages.”
The Beacon case is a big step forward in construction defect litigation because now the association can rectify design defects by asserting claims against the responsible design professional. The association is no longer limited to filing a lawsuit against the developer as its sole recourse. If you have any questions concerning construction defects related to conditions caused by architects or engineers, please do not hesitate to contact the Law Offices of Michael A. Hearn for a free consultation.