California Supreme Court: builders Win construction Defect Case, But Impact Appears Limited
The state Supreme Court has sided with builders in a case regarding construction defect liability. In a 5-2 decision, the court held that homeowners cannot sue for economic losses in cases where no property damage or personal injury has occurred.
The ruling was a definite victory for the development industry. Builders for years have complained about the burden of construction defect liability, and they have blamed negligence lawsuits for their inability to construct condominiums and townhouses. Associations of condominium and townhouse owners have brought many of the lawsuits.
However, few people said that the decision would result directly in increased production of shared-wall, for-sale homes, which are often seen as a "smart growth" solution to the state's housing shortage.
The decision could bring some insurance companies back to the California market because the ruling stabilizes the types of damages that homeowners can pursue in court, said Nick Cammarota, general counsel for the California Building Industry Association. The lack of insurance available to builders has depressed condominium construction, he said.
Newport Beach consumer attorney Thomas E. Miller agreed that the decision's implications for condominium construction appear limited. "I don't think it's going to change things that much. I still think they [builders] see a significant exposure there," Miller said.
Two lawsuits were filed in 1996 against developer William Lyon Company. One was filed by the owners of single-family homes in the Belle Fleur subdivision in San Diego's Carmel Mountain Ranch. The other was filed by the homeowners' association responsible for managing and maintaining the Provencal condominiums, also in Carmel Mountain Ranch. The plaintiffs in each case alleged they suffered from a wide variety of construction defects. They asserted causes of action for negligence, strict liability and breach of implied warranty. The single-family homeowners also alleged breach of contract and express warranty, and they sought damages for loss of property value.
After extensive oral arguments, the trial court dismissed the tort claims in both cases that were based on alleged defects that had not caused any actual property damage. The Fourth District Court of Appeal upheld that ruling. Now the state Supreme Court has also upheld the ruling.
Writing for the court's majority, Justice Kathryn Werdegar held that construction defects that do not cause actual harm to people or property do not meet legal criteria for negligence lawsuits, even if the defects would appear to threaten safety.
"Whether the economic loss rule applies depends on whether property damage has occurred rather than on the possible gravity of damages that have not yet occurred," she wrote.
Justices Melvin Baxter, Janice Rogers Brown, Ming Chin and Joyce Kennard joined Werdegar's opinion. But Chief Justice Ronald George issued a lengthy and sharp dissent.
"I conclude … that a homeowner may maintain a cause of action in negligence to recover the costs of correcting the most significant building safety code violations conceded in this litigation (e.g., shear walls that were improperly constructed or fastened and that put the structure at risk of collapse during high winds or an earthquake; improperly constructed fire walls that would allow a fire to spread rapidly from one part of the structure to another), but that have not yet manifested themselves in physical damage to the property or resulted in personal injury," George wrote.
Justice Stanley Mosk issued a separate dissent.
Cammarota, of the CBIA, said that the decision does not change the playing field for litigation a great deal. The decision "tends to uncover, or expose, the scam that has been going on with the trial lawyers when they file their preliminary list of defects, which is a list of horrors that can happen but have not yet happened," he said.
Miller, author of the book Handling Construction Defects in the Western States, said the case does not appear to be a major loss for consumers. Because the ruling eliminates some categories of defects, it could mean that lawsuits get settled quicker, he said. Most construction defect lawsuit are settled before going to trial.
Several independent analysts contacted by CP&DR declined to speculate on the record about the decision's impact. One analyst said it appeared to be "a rather substantial decision," and another called it "huge." Paul Tryon, of the Building Industry Association of San Diego, told the San Diego Union Tribune that this decision alone would not spur a resurgence in condominium construction.
All members of the state's high court appeared to agree on the need for state lawmakers to intervene.
"In our view, the many considerations of social policy that this case implicates, rather than justifying the imposition of liability for construction defects that have not caused harm of the sort traditionally compensable in tort, serve instead to emphasize that certain choices are better left to the Legislature," Werdegar wrote. "That body has at its disposal a wider range of options and superior access to information about the social costs and benefits of each."
Bills seeking to limit construction defect liability have become staples of recent state legislative sessions, but none has passed yet. Still, builders have vowed to lobby the Legislature again this year.
On the other hand, Miller said consumer advocates would likely press for legislation that allows lawsuits for any building code violations, regardless of damages. Builders must be held accountable for shoddy construction before someone is injured, he said.
Alan O. Aas v. Superior Court of San Diego County; Provencal Community Association v. Superior Court of San Diego County, No. S071258, 00 C.D.O.S. 9607, 2000 Daily Journal D.A.R. 12831, filed December 4, 2000.
For Aas: Steven Strauss, Procopio, Cory, Hargreaves & Savitch, (619) 238-1900.
For Provencal: Duane Shinnick, Silldorf, Shinnick & Duignan, (619) 239-5900.
For Lyon: Gregory Dillion, Newmeyer & Dillion, (949) 854-7000.