A Construction Defect Damages Your Client’s Property, Now What?
by David Fisk and Anne Cook
A construction defect can mean any issue relating to the design, construction, or repair of a structure, including any physical damage to the structure caused by the defect. Even with insurance in place an owner can have a significant uninsured loss and may need assistance in understanding the claim process and initial steps to take after damage from a construction defect is discovered.
First, the owner should immediately notify its property insurer of the loss. Once notified, a property insurer typically will conduct an investigation into the cause of the damage to determine, among other things, if there is a third-party responsible for causing the damage. Immediate notification of the loss helps protect the insurer’s subrogation interest—the insurer’s right, once a payment has been made under a policy, to seek recovery of damages from a third-party. The owner also may have an interest in protecting its right to recover the uninsured loss from the responsible party.
To lessen the impact of the loss and prevent further damage, most owners want to begin repairs immediately. However, preserving evidence is of critical importance after a defect is discovered. The owner needs to balance the duty of exercising reasonable care to minimize damages with the importance of not performing repairs that destroy evidence of the construction defect. Unless there is an imminent threat to health or safety, or immediate repair work is necessary to prevent further damage, the best course of action is to hold off making repairs until all interested parties have been given notice and the opportunity to inspect the property.
Within a few days after receiving notice of the loss, a property insurer normally will conduct a preliminary investigation into the cause of a loss. Owners with high deductibles or large self-insured retentions may want to be more involved in the investigation and retention of qualified experts. If the preliminary investigation indicates a third-party may have caused or contributed to cause the loss, the property insurer will typically notify that party and give them the opportunity to participate in the investigation or observe the condition of the property. The process of identifying and notifying the interested parties can take time, but the owner can speed up the process by providing relevant information and documentation, including construction contracts, and design drawings.
Except for claims subject to the Residential Construction Liability Act (RCLA), which are discussed in more detail below, there are no set rules governing the deadlines in which a party has to respond to a notice of claim. If a legal issue arises later, the courts presumably would apply a reasonableness standard. Depending on the number of parties involved and the extent of the damage, two to four weeks or more could pass before a final inspection can be completed. If litigation becomes necessary, failing to give a defendant notice and the opportunity to inspect the defect before performing repairs or conducting tests that alter the condition of the defect could entitle a defendant to spoliation sanctions.
If the damage concerns the design, construction, or repair of a residence, the owner and its property insurer need to comply with the RCLA requirements of providing written notice, the opportunity to inspect, and offer to repair. RCLA requires a claimant to give written notice by certified mail, return receipt requested, to the builder/contractor at the contractor’s last known address, specifying in reasonable detail the construction defects that are the subject of the complaint. During the 35-day period after the contractor received written notice, the contractor must be given a reasonable opportunity to inspect the property. Within 45 days after the contractor receives the required notice, the contractor may make a written offer of settlement to the claimant. There are additional deadlines depending on whether the settlement offer is accepted or rejected. The RCLA also establishes limitations on available damages.
Other legal issues can arise in construction defect claims and should be considered early on in the process. Some of these issues include the application of provisions in contract documents, the 10-year statute of repose applicable to claims against design professionals and contractors, and the need for an expert qualified to prepare a certificate of merit affidavit if the responsible party is a design professional.
Making sure your client understands what to do when it has damages arising from a construction defect will help protect your client’s uninsured interests and its insurer’s subrogation rights.